Published on the 27/06/2018 | Written by Heather Wright

Here comes the cloud argument, again…

Australian and New Zealand banks, already facing disruption from new payment technologies, digital currency and Bitcoin are facing new threats from platform companies – and politics.

While fintechs were seen as a key threat just 18 months ago, Likhit Wagle, IBM Asia Pacific head of financial services, told iStart the race is now on to counter the threat of platform companies, while also preparing for likely regulatory changes.

The A/NZ banking scene has been rocked in recent months with the Australian inquiry into banking and the financial services sector highlighting serious failures and a major outage of NAB’s systems leading to service loss for BNZ, causing outrage and throwing the spotlight on the Reserve Bank of New Zealand’s outsourcing policy, which requires that major New Zealand banks be able to operate on a standalone basis.

“Most banks have recognised that fintechs are engines of innovation for them and are working in collaboration with them, creating platforms with API architecture to enable them to connect into the fintechs quickly,” Wagle said.

“But if you look at the platform companies such as Alibaba and Tencent [which offer online banks and financial services including payments, lending and aspects of asset and wealth management], these companies are becoming very, very significant threats.”

In some areas of Asia, including India, Singapore and ASEAN countries, Alibaba and Tencent are becoming significant threats ‘at a very accelerated pace’. Regulators are actively encouraging the companies, which are taking stakes in payments companies and banks, as they see them as a way to very rapidly improve the economic position in the country.

Wagle said while it’s not happening to the same extent in Australia and New Zealand, it’s coming.

“Companies in Australia and New Zealand are starting to see this and recognise that while it might be a little slower, you are not going to be able to keep companies like Amazon, which has been making an aggressive play for the market in the US, out of these marketplaces.”

The threat from platform providers means incumbent banks are having to step up their game and provide ‘extreme convenience’ to customer. ‘Cool’ apps no longer cut the mustard, with banks instead needing end to end automated processes and state-of-the-art systems to ensure transactions are fulfilled immediately.

But Wagle said the changes will go beyond that, with banks needing to think beyond their own industry and provide an ecosystem of services. In the case of mortgages, that could include information on communities, schools, removal companies and real estate companies via platforms with API architectures connecting into capabilities beyond banking.

However, even if banks provide extreme convenience and valuable ecosystems, unless they can radically reduce cost structure they won’t be able to meet the price points that platform companies can provide services at, he added.

“For banks to be competitive they need to take a very substantial chunk of that cost out.

Our view is you’re looking at 25 percent to 30 percent having to come out of your cost:income ratios. And that is where cloud plays very nicely.

“A very substantial part of being a digital company is having a middle and back office set of processes and systems that have the agility and cost structure you would expect from born in the cloud companies.”

Banking’s highly regulatory environment and focus on safeguards around data privacy and needs for resiliency mean that only a very small proportion of workload within a bank – primarily public engagement and some analytics systems – can go on public cloud.

He highlights Westpac in Australia as a key example of a bank moving significant proportions of its infrastructure to the cloud in an effort to reduce costs and increase agility.

Westpac has used a hybrid platform-as-a-service model to provide private cloud both on- and off-premise, moving ’30 or so very sensitive workloads’ to off-premise private cloud, in what Wagle said is one of the first examples globally of a bank putting substantial amounts of sensitive, regulated workloads in off-premise cloud. The move has, he said, seen development times drop from 19 days to 2.5 days and significant cost reductions.

“The objective is to take 25-30 percent of their IT cost out through the migration and the associated application rationalisation.”

Lloyds of London is also in the process of putting 85 percent of its applications into a similar system.

Wagle said changes being wrought on the banking sector likely regulation could become a catalyst for A/NZ banks to up their game, noting that the act of separation required by the Reserve Bank of New Zealand – which requires that major New Zealand banks be able to operate on a standalone basis – will cost ‘a lot’ of money. A move to cloud could mitigate some of the additional expenditure.

Meanwhile, Wagle says banks in Australia are looking actively at what they’re going to have to do pre-emptively to deal with recommendations they’re expecting out of the Royal Commission.