Banks Embrace Technology But Not Fast Enough for Some Regulators, SAP Study Shows

While technology is changing every aspect of banking operations, 77 percent of participants in a recent survey say the greatest impact will be on customer satisfaction and regulatory compliance. Some regulators, however, believe banks are moving too slowly. “The Benefits of Innovative Information Technology in the Banking Industry” was conducted by the Frankfurt School of Finance & Management, New York University’s Stern School of Business and Management, the University of Applied Sciences and Arts North-Western Switzerland, the Business Transformation Academy (Basel, Switzerland) and SAP SE (NYSE: SAP).

The study uncovered various trends in banking, most notably a large disconnect between regulators’ expectations and the ability of banks to meet compliance and reporting requirements. However, many banks have plans to increase their budget for IT to invest in the necessary banking solutions to meet these changing requirements.

The study included extensive desk research, in-depth interviews with C-level representatives from banks and regulatory authorities and a quantitative survey. It also provided detailed insights into the technology areas considered as most important for the industry. More than six out of 10 participants (65 percent) said mobile is the most important trend for the future, followed by in-memory computing (48 percent) and cloud (47 percent).

Banks Address a New Era in Information Technology

A senior executive from a large U.S. bank who was interviewed for the report noted that 25 percent of mobile phone users access financial services content on their phone, yielding a significant market opportunity for banks in mobile banking application development.

Mobile banking is following a similar usage curve to online banking, with China, India and the United Arab Emirates leading in adoption. In emerging markets, mobile devices provide access to financial services to previously under-banked populations.

African Market Embraces Mobile

Until recent years, income variability and heavy transaction costs prevented many people in African countries from accessing formal banking services. Additionally, start-up costs associated with establishing new banking offerings are considerable, due to infrastructure investments and the build-up of new distribution channels. Thus, financial services provided through the mobile channel have emerged as a needed solution. The study found that four key mobile banking functionality are key in African economies:

Mobile phones can serve as a virtual bank card
Mobile phones can be used to duplicate the functionalities of point of sale terminals
Mobiles phones can be used as a substitute for automatic teller machines
Mobile devices can be used as an Internet banking terminal

Respondents also recognise the opportunity in Big Data and analytics in banking and placed a much greater emphasis on the overall comprehensiveness of information. The top two priorities in platform features noted included completeness of aggregation (84 percent) and the availability of real-time information (62 percent).

Throughout the study, banks expressed six key expectations for Big Data in process innovation. Big Data solutions are expected to:

enable banks to tailor their offerings to the needs of individual customers
improve the banks’ trading strategies
provide better insights into market dynamics and improve market research
improve banks’ ability to react to internal and external issues
speed up high-quality decision-making processes
identify possibilities for revenue enhancement and cost reduction

According to the study, in order to implement customer-centric banking offerings to deliver better services, institutions will need to enhance their back office support systems to ensure customers experience the same quality standard through traditional or new communication channels. By synchronising traditional and new banking channels, successful banks can retrieve all existing relevant information at every customer touch point. Banks will be forced to deliver better online services, including offering online chat in place of telephone services. They will also need to address data security and privacy issues in a competent and diligent manner to maintain trust amongst their customer base.

Regulators Define Requirements and Expectations

Throughout the study, a clear consensus prevailed that regulatory requirements are the primary driver of business model changes. Regulators agree that required levels of risk reporting in banks cannot be met given existing IT infrastructure. As one regulator noted, “IT budgets have to significantly increase to meet the current and future requirements.” Indeed, 61 percent of survey participants expect an increase in their IT budget of at least 25 percent in the next three years.

Regulators ranked new provisions that are regarded as the main cost drivers for the future IT infrastructure for banks. According to the study, the top cost driver is the Basel Committee’s guideline on principles for effective risk data aggregation and risk reporting (BCBS 239), followed by Basel III, Dodd-Frank, the recommendations set forth in the Liikanen Report, Markets in Financial Instruments Directive and Markets in Financial Investments Regulation, European Market Infrastructure Regulation and multi-curve valuations.

Regulators defined which features will characterise a state-of-the-art IT infrastructure from a regulatory standpoint. The ability to conduct automated ad hoc stress testing is key, as well as the ability to produce timely, complete, granular balance sheet data and counterparty data for the entire bank.

In order to achieve a sustainable infrastructure, regulatory authorities and auditors recommend banks make the following improvements:

Implementation of a central data warehouse
Improvement of data and process governance
Introduction of more automated processes
Flexible and customised modules for automatic analysis, stress scenario generation and ad hoc stress testing
Enhanced capabilities and data analytics for product valuation and bank enterprise risk management calculations
Enhanced capabilities for legal entity- and jurisdiction-specific analytics

As banks adopt advanced technologies to decrease the time lag on reporting, regulators have laid out their expectations. For reporting on regulatory and economic capital on a group level, institutions should aim for final results within 10 business days from the effective date. Interestingly, there is a common expectation that in the near future the time frame deemed acceptable for delivery of information will not exceed one day, granting near real-time visibility.

Banks are largely in agreement that their current systems need updating, according to the study. Respondents to the online survey expressed little confidence in the ability of their current systems and processes to simulate the potential effects of business decisions on various figures, including economic capital and regulatory capital, in real time.

Despite increased regulatory pressures for banks to update their IT infrastructure, banks remain largely focused on short-term success. As one auditor voiced, “To date, many banks tend to implement work-around and small scale solutions, but this will create significant issues in meeting potential future requirements.”

Methodology
The study was executed through three pillars, including extensive desk research, followed by 20 in-depth interviews of C-level managers at various global banks, regulators, auditors and consultancies from the U.S., Europe and Africa, and an online survey of more than 1,500 members of the alumni network of Frankfurt School of Finance & Management. The interviewees were restricted to the top to upper management of the respective institution or the specialized division, such as risk management, front office or information technology.