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The cloud infrastructure challenge
Developing and maintaining world-class banking technology is an expensive undertaking. The largest banks spend billions of dollars annually on their technology, often with much of that going to just “keeping the lights on,” never mind the investment in innovation and change required to get and stay ahead. Huge data centers make modern IT departments sizable businesses with significant budgets. And every dollar spent on running that infrastructure is a dollar not spent on developing innovative software and services that attract and keep clients and grow revenue.
Economies of scale and standardization of commodity services are a key success factors in IT. The largest firms can drive scale efficiencies with their IT infrastructure, but even large-scale banks are turning to cloud service providers. The gap between national and regional banking technology scale and responsiveness was brutally exposed recently with the rollout of the federal Paycheck Protection Program. Many banks were challenged to meet the swell of incoming applications. But smaller banks fared worse, since many lack the modern technology and staff to manage surges in demand.
If scale, critical mass, and standardization are key to tech efficiency, then regional banks have a number of built-in constraints that have resulted in the status quo.
Regional bank constraints
Regional banks tend to have less profitable small business loans and a smaller overall deposit base than their larger competitors. This can constrain both their overall IT expenditure and the ratio of budget spent on run-versus-change investment. The result is aging systems, slower adoption of emerging and more effective technology, and continued use of manual processes.
Mergers and acquisitions are an important growth strategy in the regional banking market, and the space has recently undergone significant activity. While great for growth and for building economies of scale, integration or divestment can create a host of technology issues. The outcome? Regionals can have difficulty hiring the best IT talent, who want to focus on current and emerging technologies. This competition is exacerbated by maintaining IT operations outside of geographic talent hubs paired with relatively smaller compensation packages.
As if that weren’t enough, rate reductions from the Federal Reserve have created more pressure on efficiency ratios, provoking a strong desire to reduce costs. The pandemic has also driven rapid increases in the need for digital banking products at regional banks. And as remote working becomes more widespread, new strategies and technologies are needed to enhance and sustain the new distributed workforce.
Regionals should respond to these challenges by shifting from capital-intensive assets toward utility-based services, from patchworks to standards, and from spending dollars to keep the lights on to investing in tomorrow. They should use someone else’s scale instead of trying to create their own. Fortunately, there is a marketplace ready and waiting: cloud.
Benefits of cloud
Cloud service providers bring massive, ready-to-use products, enabling strategic benefits around time to market, IT migration efficiency, security, and resilience. When research and development take moments instead of weeks or months, potential new business value is more rapidly realized.
Regional bankers also have an agility advantage, allowing application developers to bring new revenue-generating products and services to market faster. The increased productivity is coupled with a decrease in providing and managing IT infrastructure. Together, these features optimize the cost base and reduce capital expenditure.
The security and resilience of data and services are critical to regional bank reputational risk, as well as legal and regulatory compliance requirements. Pre-certified solutions, automated control processes, security releases, encryption, and proactive threat detection delivered by cloud providers help to ensure the needed levels of cybersecurity.
With the challenge, constraints, and benefits clear, what sort of capabilities are there to take advantage of, and how can regional banking technology shift to cloud? Ready-made banking services are available from vendors and cloud service providers, and there are numerous prebuilt platform and technical services that assist with IT migration through ongoing operations.
There are a growing number of cloud-based capabilities to serve processes across the bank—from anti-money laundering to customer onboarding, risk analysis, and more.
Safe and secure ingestion of large data sets, rapid and scalable computing, compliant processes, and advanced analytics and insight allow banking IT functions to avoid cost-intensive requirements-gathering, process engineering, and application development or modification.
For customer service and contact centers, there are virtual customer service agents with human-like conversation capability, along with machine learning and artificial intelligence (AI) algorithms that provide improved levels of data insight and analytics. These offerings can reduce call times, increase consumer satisfaction, lower employee turnover, and inform service offerings and revenue opportunities.
Hyperscale cloud providers also have prebuilt technical platform services, such as data warehousing, analytics, and cybersecurity, on top of their compute and storage. To help integrate and manage these applications, data, and services, there are open application programming interface (API) platforms and management tools available.
All these services, platforms, and tools unlock the power of the cloud. But that still won’t solve the work required to initiate the journey, see it through, and sustain it over time. So what are some of the challenges and solutions to getting there?
Embarking on the journey
With most regional banks facing financial, regulatory, and operational headwinds, accelerating digital cloud adoption is critical to remain competitive. Here are some key aspects to consider:
Modern, current systems offer more straightforward paths to cloud targets compared with older, outdated systems. Analysis is required to understand what can or must move sooner or later, what the appropriate target-state service should be, and what gaps need to be addressed in order to get there. Developing this target-state strategy up front ensures the organization is clear and aligned on the objectives and has a firm grasp of the work and budget needed.
Effective transformation planning
The new target state might be to get everything onto the cloud and out of legacy data centers. But many opt for a hybrid model, with a portfolio of cloud services and small colocation data centers. Either approach will likely include a mix of applications. A robust transformation plan will consider not only the needed application modifications and data migrations, but also optimization of the remaining IT infrastructure to compete with large-scale banking.
Cloud operating model
The skills, processes, and organization behind in-house IT aren’t necessarily the most effective to implement cloud services. People may need to be reskilled, control processes established, and organizational structures changed.
Given that people are so critical, banks need to develop strategies to hone talent with cloud skills. Although the size of the IT organization often remains flat (or perhaps contracts with greater automation), reskilling or upskilling current staff helps retain organizational knowledge at known compensation points. However, it’s often the case that there is not enough talent inhouse to fill the required roles, and a hiring strategy would be required. Such cloud-skilled talent may come from larger banks, university partnerships, or talent alliances with cloud service providers.
With a target state to aim for, a transformation plan to get there, and an operating model to work within, the journey for regional banking technology to a cloud-based future can be successful. But how do we level the playing field?
Having embarked on the cloud journey, getting ahead and staying there is the long-term goal. Some strategic considerations include reinvesting efficiencies, increasing the adoption of platforms and services, and embedding a cloud and engineering culture.
There is an opportunity for structural change in the run-versus-change budget over the long term. Tracking and maximizing that ratio enables continual advancement and innovation and avoids the requirement of overexpenditure to “keep the lights on.”
The target-state portfolio likely includes a mixture of infrastructure and platform services. Banks should seek out opportunities for scaling technologies, robotics, and AI to have a proportion of next-generation capabilities in the portfolio mix. Regional banks can leverage the agility their size affords to keep moving forward.
Finally, embed a cloud culture throughout the organization—one that embraces change, thrives on collaboration, isn’t afraid to fail, and values new talent.
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Chris is a principal in Deloitte Consulting LLP’s global technology practice and is the US banking sector leader for Cloud. He brings 20 years of strategy consulting and hands-on transformation experience in the cloud and core technology infrastructure domain, specializing in financial services. Chris has extensive experience partnering with senior executives to develop and implement large scale technology transformations, cloud-centric operating models, strategic cost optimizations, global outsourcing programs and workforce of the future initiatives. He brings a perspective that humans and machines must develop a symbiotic relationship, each with specialized skills and abilities, in a unified workforce that delivers multifaceted benefits to the business. Chris writes frequently about emerging technologies and banking and his observations appear in Wall Street Journal’s CIO Journal, Deloitte Tech Trends, as well as financial services industry forums and technology journals. He holds a B.S. from Miami University (Ohio) and a M.S. from Northwestern University.
Richard has been a financial services industry consultant for almost 30 years and brings deep industry experience and background in disruptive technology strategy and business transformation. He has served in practice and strategic leadership roles, has international experience leading the financial services technology consulting practice in EMEA based in London, and is currently both the sub-sector leader for regional banking and the head of blockchain and digital assets solutions for financial services. During his career Richard has worked with financial services executive teams across the globe for some of the largest and most innovative regional bank and non-bank financial services companies. Approaching transformation from a technology-led perspective, he has been successful throughout his career in driving strategic technology programs from launching new products and businesses by exploiting the advantage of early adoption, to maturing core technology capabilities and transforming how services are delivered using cloud and ecosystem partners. In the area of blockchain, Richard has been delivering solutions in the space since 2015, first with an Ethereum-based bank rewards solution, and subsequently leading the expansion of blockchain solutions and digital assets to simultaneously transform full-stack processes, adopt digital assets and create new growth models.