Digitization of banking functions can be traced back to the days of automated teller machines (ATMs). The digital journey for banks began early on with digitization of simple banking functions. The face of banking and financial industry has changed in the last decade. Changing consumer behavior and competitive environments have forced banks to address digital transformation processes head-on.

In the past four years, banks have transformed tremendously with the evolving technology landscape. As per EY, banks set upon a transformation journey by concentrating on 5 key transformation imperatives – the quest for profitable growth, surviving a new era of competition, defining a bank’s new core, adopting advanced technology, and defining a bank’s new structure. The imperatives were to shape the new strategies and operating models of banks over the coming decade.

The driving factor for digital transformation is the paradigm shift in business models from a product-centric strategy to a customer-centric approach. Today’s tech-savvy consumer demands better services, products, and experiences across all touchpoints. But, from an IT viewpoint, aligning customer needs to IT platforms have been a challenge owing to banks reliance on legacy systems. Owing to the cost of transformation, most banks aren’t able to move away from the monolith systems. While other banks are looking at virtualization of IT infrastructure into a cloud-delivery model (private and public).

Digital transformation enabled the development of digital banking. During the period of 2014-15, digital payments in developing markets grew 21.6 percent. By 2016, 40 percent of Americans had shifted to digital banking, reducing walk-ins at banks. Digital banking negatively impacted traditional banking’s brick and mortar centers. Large banks, such as Bank of America Corp., had to downsize and pull out 1507 branches across the US.

In the end, a new payment ecosystem emerged that was driven by increasing consumer demands, rising FinTech competition, evolving regulations, and an increase in payments-enabling technologies. The rise of mobile and digital banking allowed consumers to experience e-commerce-like capabilities with banking functions. Apart from PayPal, companies like Stripe, Dwolla, Apple Pay, Venmo and others provided a variety of payment platforms options for businesses and consumers alike. Peer-to-peer (P2P) payment systems further developed for social media networks, including Facebook, to facilitate quick and easy payment options. With digital banking, P2P payment options grew to introduce more convenient payment options to consumers. For instance, companies like Zelle offered real-time fund availability and fund transfers between bank accounts within minutes.

While technology plays a critical role in digital transformation, another factor dictating the banking sector are the carrying regulations and compliance checks. Since 2018, the EU’s General Data Protection Regulation (GDPR) and the Revised Payment Service Directive are beginning to impact the market. The directive opened up doors for third-party providers (TPPs) to build financial services using application programming interfaces (APIs). For example, YES BANK was among the first banks to build an API ecosystem to enhance its services and expand market reach.

The era of open banking facilitated digital transformation for financial institutions to create next-generation apps, nurture FinTech collaborations, and unlock new channels of revenue streams. Tech giants like Google, Apple, Facebook and Amazon (GAFA) are entering the market with innovative payment channels that are different from the traditional payment processors.

Open Banking is accelerating digital transformation across the global banking industry. Banks are focusing on delivering customer-centric solutions using new business models and open services. With the advent of improved digital banking capabilities, banks are now taking on the role of mediators or institution that supports digital banks. For example, In the US, banks are entering into data-sharing agreements while regulators in India are encouraging a Unified Payment Interface (UPI) to enable interoperability.

In 2019, technologies of artificial intelligence, voice-first banking, and cloud-based banking would gain ground and become core to banking operations. There will be a keen focus on enhancing digital capabilities with a data-driven strategy. The 2019 Retail Banking Trends and Predictions report identifies new technologies to respond to consumer expectations. 54 percent of respondents pushed the development of digital solutions of real-time intelligence data integration using AI, advanced analytics and cognitive computing as a priority.

The future of banking focuses on hyper-personalization at scale and transforming customer experiences. Importance of data and advanced analytics will continue to rise as banks build strong personalized marketing platforms. The digital transformation journey is shifting the center of banking ecosystem away from banks and toward customers. The new center forces banks to adopt a different set of strategic imperatives. As banks continue to strive to attain complete digitization, their success depends on integrating, collaborating, supporting the development of reliable and scalable digital platforms that recognize the market opportunity at every step.

We have come a long way from the first commercial use of Oculus Rift VR headset 0f 2013. Yet, most people associate the technology of Augmented Reality (AR) and Virtual Reality (VR) with the realm of gaming. However, many industries including marketing, healthcare, real-estate are accepting the immense potential of VR to improve their business. A report by Goldman Sachs group estimates the virtual and augmented reality to become an $80 billion market by 2025.

Even financial institutions like the banks are well aware of this conundrum, and many firms are aggressively experimenting with the new coming technology to enhance customer experience (CX). From basic apps that use customer location to help locate ATM branches nearby to promoting banking solutions in an engaging 3D environment. Some financial institutions are using it as a marketing tool, others are using AR to offer customer-centric apps that display real-time cost and other information associated with properties which are up for sale, offer a mortgage calculator and more.

According to a study, ‘AR/VR can transform financial data into a visual, engaging experience and can eventually bring the face-to-face experience into a customer’s home‘. The possibility of hybrid branches is also in the pipeline where physical branches use AR technology to offer self-service like chatbots, or robots to provide information. If required, customers can also connect to an actual bank-representative via video conferences.

All things said and done, the idea of banking in virtual reality is still half-baked and the road to reach that reality is daunting and surrounded by skepticism about the possibilities of virtual banking. Nonetheless, there are a few corners in the financial sector where VR and AR have already made an impact:

Immersive Experience through Data Visualization

The financial industry has a lot riding on analyzing large amounts of data on a day to day basis. Data visualization helps financial traders and advisors to get a visual breakdown of the copious amount of data and make informed decisions about wealth management. Using the modern technology of VR and AR, data visualization is quicker and easier than ever before.

Remember we spoke about Oculus Rift earlier? Fidelity labs used the technology behind the Oculus Rift to create an immersive 3D environment to analyze data accurately. They created a virtual world where people can talk to financial advisors in virtual reality to learn about the progress of their stock portfolios. Their VR assistant, Cora, will display the stock chart on a wall of her virtual office just like presenting graph on a virtual projector.

Virtual Trading Workshops

Some financial institutions are using VR to create virtual trading workshops. In April 2017, FlexTrade Systems announced the launch of ‘FlexAR’ – a virtual reality trading application that uses Microsoft HoloLens to offer an extraordinary way of visualizing and presenting trading. It uses components from the real world and allows traders to see and interact with the markets and identify the holistic patterns in the trading environment.

Virtual Reality Shopping Experience

Taking customer and shopping experience to the next level, in 2017, MasterCard and Swarovski launched a VR shopping app that allows consumers to browse and purchase items from Atelier Swarovski home décor line and immerse into a complete virtual shopping experience. They can use Masterpass, MasterCard’s digital payment service to make payments.

Security

With biometrics as part of the AR experience, financial services can offer more secure and substantial protection against cybercrime. A number of banking applications already offer fingerprint authentication for many smartphones. With AR, iris identification and voice recognition, are being introduced as well. In 2018, Axis Bank became India’s first bank to introduce Iris Scan Authentication feature for Aadhaar-based transactions at its micro-ATM tablets.

Possibilities of Virtual Branches

As more and more financial service providers are incrementally moving towards digitized banking, the idea of a virtual bank doesn’t seem too far-fetched. Imagine never having to take a break during working hours and wait in a line at the bank. Now imagine, getting the personalized banking service at the comfort of your home, when it’s convenient for you while enjoying a cup of coffee. That’s what virtual branches have to offer. To aid customer demand for contact anytime, financial institutions are already offering services like Chatbots and are developing solutions to provide banking solutions exclusively in a VR environment. This would be a win-win for both- customers will get their service anytime, anywhere and banks will be able to reduce costs as they will not need to invest in physical locations.

Living in today’s high-tech world, we all know that technology is something that has been and will keep on evolving. With each day passing, reality adjacent technologies like VR and AR are becoming mainstream, and already impacting the way financial institutions operate, manage data, interact with customers and more.

There is no doubt that the financial industry will need to integrate this new science into banking operations. Not only will this help them attract and retain customers, enrich the customer’s user experience (UX) but also help in operational cost reduction. Failing to do so, their customers are most likely to move toward non-financial institutions that offer ease of use and flexible services that they demand.

Cloud computing has made inroads into the banking sector, but adoption has been slow. Owing to the sensitive nature of data, banks have been wary of adopting cloud solutions, especially public and hybrid clouds. But with the recent introduction of EU’s Payments Services Directives (PSD2), banks are more confident in incorporating cloud solutions into their core operations. The European Banking Authority has also issued an exhaustive guidance document for the use of cloud service providers by banks and other financial institutions.

As banks recognize the potential of cloud computing their digital strategies are evolving to encompass cloud solutions. With multiple providers, a one-size-fits-all approach does not meet the requirements of this highly regulated industry. To meet the growing demands of the tech-savvy customer and facing stiff competition from Fintech, banks are looking to the cloud for improving their digital banking experience. But how can cloud enable superior digital banking? We take a look at cloud strategies to ease your cloud decisions.

Cloud for front-end and core banking products

Digital transformation has helped banks offer innovative solutions to customers through mobile banking, chatbots etc. Most banks have relied on digitizing the front-end to revamp banking applications and providing the customer varied interaction touchpoints. But in the race to digitize their services, back-end or core applications of banks have remained relatively untouched.

As we move deeper into the digital transformation era, the need of the hour for banks is to align their front-end initiatives with back office services. The major roadblock in this journey is the continued use of legacy systems. These monolith systems have to be upgraded or replaced to support computational and operational needs of the cloud.

By integrating cloud solutions into core banking applications banks can look beyond the fluff of snazzy user interfaces to create a truly superior digital customer experience. For example, Temenos recently announced the launch of two new products – Temenos Infinity and Temenos T24 Transact, both designed for cloud-native and API-first technologies. By implementing cloud for front-end and core operations, the products can be deployed on-premise or in a customer/Temenos cloud. The cloud-agnostic solution can run on Microsoft Azure, AWS, and the Google Cloud platform.

Private, Hybrid or Multi-cloud strategies

Typically, service providers deploy clouds either on a private, public or hybrid cloud. Private cloud infrastructure is a dedicated platform for a company to completely manage, maintain, operate, and secure its IT infrastructure. The ability to fully control access (physical and digital), deploy applications in minutes, and ensure security makes private cloud seem an ideal solution for financial institutions. The pain point of such a system is in achieving economies of scale. As a company expands, its servers have to scale accordingly, which can be a costly, time consuming, and labor-intensive process.

Hybrid clouds offer the features of public and private clouds for running applications and enabling data portability. Hybrid clouds and multi-cloud strategies are quickly becoming the norm for banks and financial institutions owing to the flexibility, scalability, and minimal set-up costs. Leveraging best-of-breed services, hybrid/multi-cloud strategies avoid vendor lock-in and data sovereignty across applications. Both strategies help in de-risking business decisions and offer a greater choice of platform-agnostic services.

The pitfalls of a hybrid or multi-cloud adoption come with the hidden costs of every service. It’s easy to get lost trying to keep track of multiple cloud platforms and vendors. Deploying hybrid or multiple clouds would require complex and at times expensive IT infrastructure.

Despite the challenges, banks are adopting hybrid cloud models to increase agility, quickly deliver application updates or new releases, and ease of scalability (upsize or downsize) based on enterprise requirements.

Steps to evaluate cloud strategy

Irrespective of the type of cloud service adopted, CIOs need to thoroughly evaluate their cloud strategy before implementation. While there are no set evaluation guidelines, the following are essential steps for evaluating a cloud strategy:

Choosing the right digital cloud strategy can be a daunting task. In order to enable a superior digital banking experience, organizations need to enable a rapid shift to the cloud. Meanwhile, cloud strategies are evolving with new cloud service providers entering the market. With time and appropriate regulations, banks can accelerate their adoption of cloud solutions; choosing the best fit for their organizational needs.

Cloud computing and its associated services are rapidly transforming industries across all sectors. The Banking, Financial  Services and Insurance (BFSI) sector is the most active user within cloud due to the rise of mobile banking, Fintech, and virtual transaction services of PayPal, Google, Amazon etc. As per a report by IDC, the banking sector is forecasted to spend $16.7 billion on public cloud services, growing at 23 percent CAGR.

Despite the explosive growth and multiple cloud strategies in place, cloud uptake is slow in the banking sector. We take a closer look at the three main challenges impeding cloud adoption in the banking and financial services industry

Data and Security Privacy

Dealing with sensitive data places banks at greater risk of data leaks and cyber-attacks. IBM reports the global average cost of a data breach has increased to 6.4 percent, translating to $3.86 million. The loss/theft of a single record comes up to $148.

With any technology security remains an issue, cloud is no exception. As recent as last year data breaches have been plaguing banks. Even financial services giant, JP Morgan, could not escape being hacked. In 2014, a cyberattack resulted in a massive data breach, affecting 76 million households and 7 million small businesses.

Data security incidents are inevitable, but preventable. As technology evolves, so must security protocols. Organizations have to emphasize on threat and vulnerability detection in all spheres of cloud. When considering industry-wide technology transformation customer-data confidentiality is to be placed at the core. In its new guidance, the European Banking Authority (EBA) recommends banks to address this issue before considering outsourcing cloud services to third-party entities.

Reporting and Compliance

While data and security are top priority for banks, navigating the changing compliance regulations  and reporting standards cannot be overlooked. It was only recently that the regulatory landscape for cloud computing in finance was established through the Financial Conduct Authority (FCA). A similar mandate was issued by the European Banking Authority for institutions intending to adopt cloud services. In addition, last year’s second Payments Service Directive (PSD2) and Open Banking regulations introduced new data protection laws.

With changing regulations the BFSI sector is forced to stay on its toes and catch any non-compliance issue immediately. The legal framework is not matching its pace with fast-moving technological advances. Countless reports identify the benefits of cloud computing for the financial sector but its adoption is met with resilience due to fear of non-compliance and cloud risks.

In this atmosphere, it is clear banks must take regulatory environments into consideration before widespread adoption of cloud services. Regulators continue to express concern over storing of sensitive data on the cloud, especially with non-banking companies entering the same space. Most financial institutions are advised to take a risk-based approach before implementing any third-party cloud functionalities or relationships.

Lost Productivity and Competitive Edge

Banking and financial institutions are eager to jump on the cloud bandwagon. But most organizations don’t have the expertise or financial capabilities to implement cloud solutions. Most banks are still grappling the decision of moving their monolithic legacy systems to the cloud. Running on legacy systems, organizations lose out on productivity benefits of cloud applications. In their race to cloud migrations, banks face hours or days of server downtime; affecting customers and employees simultaneously. Shadow IT is a growing concern in organizations, with employees accessing unauthorized cloud tools for completing tasks. NetEnrich’s recent cloud adoption survey identified Shadow IT as one of the top concerns for IT in 2019.

In the face of cloud challenges partnering with a vetted cloud service provider would be ideal. External cloud experts, specializing in banking and financial services industry, would be able to provide the essential tech support and implementation norms – without compromising on data security or regulatory compliance. With the right migration strategy in place, along with right cloud tools and partners, banks can look to the cloud with ease.