Why banks should invest in their core

Why banks should invest in their core

Microsoft’s Peter Hazou explains how modern technologies like artificial intelligence can improve customer service, combat financial crime and increase profits  

Alice Chambers |

The traditional core activities of a bank are to process transactions, take deposits and issue loans. These activities are managed by systems and processes in the back-office of financial institutions that are decades, even hundreds of years, old though.  

“A lot of banking was designed in Victorian times and still survives to this day,” explains Peter Hazou, director of business development for financial services at Microsoft. “Back then, payments were processed overnight and across the following days, but a lot has changed now. Payments – both physical and digital – are being processed instantaneously in real time.” 

But how have banks got to where they are today? As far back as the 1970s, banks led the way in applying data-processing technology to the modernisation of their business. Over the last 10 years, though, core legacy functions quickly became outdated as individuals grew more accustomed to instant and personalised services that were readily available to them through their mobile devices. Retail banks were the first to recognise this shift in customer demand, according to Deloitte’s 2023 banking and capital markets outlook, and now look to deliver digital, data-rich solutions and tailored advice.  

“Clients began to demand more features and functionality to be provided by their banks,” says Hazou. “What we found was that as technology evolved, so too did client expectations. So, the financial services industry was forced to provide more capabilities onto their pre-existing systems, such as through online bank accounts, virtual assistants and process-automating solutions.” 

Deloitte’s research found that 87 per cent of retail merchants agreed that digital currencies have a competitive advantage in the market and 85 per cent of those merchants concluded that the use of digital currencies for everyday purchases will increase exponentially over the next five years. As such, banks and other financial institutions are heavily investing in new client service models to digitise operations.   

Hazou says: “The revolution is already underway and is focused around the concept of data banks. Traditionally, banks take deposits to make loans and achieve profitability. But now the entire model of banking is changing to include much more of a focus on data and, of course, the value that can be generated for both the bank and its clients. Banks have the richest historical data because everything flows in and out of them, and it’s this information that is the key to transforming the industry.” 

Intelligent banking 

The concept of ‘intelligent banking’ involves institutions becoming data-driven and then using the value of that data to deliver better services to clients. For example, data can be used to evaluate the customer life cycle, identify spending trends and provide personalised customer experiences such as monitoring spending patterns and making financial suggestions. Microsoft Cloud for Financial Services, which includes Copilot capabilities in Microsoft 365 and Dynamics 365, uses artificial intelligence and machine learning to process large volumes of data. This enables users to deliver personalised experiences to customers and empowers their employees to better serve clients.  

“Cloud infrastructure can be accessed from anywhere at any time,” says Hazou. “There is a tremendous amount of value-added capabilities and tools available in the cloud, including its agility and security that takes core banking processes to the next level.” 

However, Hazou argues that it’s not so much about the tools themselves but more about what those tools enable in terms of modernising the financial services industry. “The cloud enables banks to empower clients by allowing them to understand their own spending patterns,” he says. “Through a variety of tools, clients can see what’s going on in their businesses or in their lives in real time.” 

Banks with cloud technologies are also better able to assess risk by using historical and contextual data to calculate credit score and manage them as a portfolio. This improves the core banking function of providing loans by mitigating credit losses and hence, delivering more value for clients. “It’s really the clients that will benefit from this data in the long run,” adds Hazou. “It can help them understand their business, optimise working capital, reduce risk and provide better service to their own customers.”  

Cloud technology is also driving personalised customer service, with large language models acting as the basis for self-help chatbots. For example, accounting firm EY is using Microsoft Cloud and Azure OpenAI to develop a new intelligent payroll chatbot for its clients. This will ensure employees receive quick responses to their questions, regardless of barriers such as the language or the time zone they are in.  

Overcoming security breaches 

Whilst data analytics is enabling banks to provide more personalised services, it is also leading the fight against financial crime. AI and ML have revolutionised the ways in which financial services providers are combatting fraud and account takeovers.  

“A lot of bank cloud transformation strategies are centred around the use of AI and ML to combat financial crime and money laundering,” says Hazou. “These increasingly sophisticated threats necessitate the latest techniques and technologies across wide sets of data that only machines can accomplish in real time. 

“To understand the motivations of a financial criminal requires a lot of telemetry and connecting the dots in ways that are not so straightforward,” adds Hazou. “It’s something that cannot be done by people alone and requires sophisticated algorithms to understand aberrations in behaviour that can be assessed for potential criminal activity”. 

Microsoft partner BioCatch, for example, uses behavioural biometrics to understand an individual’s spending patterns and ultimately to prevent crime.  

The growth of core banking 

A 2021 study by Marketwide Research forecasted that cloud-based core banking markets will grow by 16.5 per cent between 2019 and 2024, and that the value of the global cloud-based core banking market will reach an approximate value of $13 million by 2026. As businesses invest in technologies like AI and blockchain, Hazou urges them to use intelligent solutions to improve their legacy functions, too.   

“Core banking needs to evolve the way the rest of the economy and financial services are evolving,” says Hazou. “They need to be able to accommodate to today’s world of data. Banks have been modernising a lot of their surrounding systems – they’ve certainly modernised customer experience a lot since data processing became available in the 1970s – but that leaves core banking as an area that still needs to be invested in.”  

Partner perspectives 

We asked a selection of Microsoft partners how they are using Microsoft’s cloud, AI and other technologies to help banks and insurance firms modernise their core systems, improve existing services, and deliver better customer and employee experiences  

“Our platform was born in the cloud, and partnering with leading players like Microsoft allows our customers, which include the established banks, neobanks, fintechs, lenders, and non-traditional financial players, to build and enhance their own financial cloud journeys on a global scale,” says Ricardo Ribelles, director of partnerships development at Mambu.  

“Infosys amplifies employee and customer experience with its suite of banking solutions built on Microsoft Dynamics 365, Power Platform and Viva for employee empowerment and well-being,” says Santosh Nori, go to market and marketing lead at Infosys. 

“BioCatch has been a Microsoft partner since 2012 and has been leveraging Microsoft Azure for our software-as-a-service fraud detection analytics solution for over a decade. Working together as partners, we know we can rely on the speed, reliability and scalability that Microsoft brings to its business applications and technology services to ensure our clients can fight fraud and protect their customers,” says Seth Ruden, director, global advisory, BioCatch. 

“Both our solution and platform are deployed on Microsoft Azure, which provides the robust security, scalability and compliance offerings required to help our customers succeed,” says Amelia Ruiz Heras, senior director of global solutions consulting, payments, Finastra. 

“Leveraging Microsoft’s cloud, we enable elastic on-demand scalability and robust security for our clients, ensuring their operations run efficiently and reliably,” says Balakrishnan Narasimhan, senior vice president and head of solution consulting, Americas, Intellect Design 

“We deliver credit risk capabilities that allow an in-depth risk analysis, reporting and tools to mitigate credit defaults and losses, we believe that the use of AI and ML capabilities can help institutions automatically assess clients’ creditworthiness by processing large amounts of data to detect the better risk drivers to incorporate into their scoring and ratings models,” says Bruno Faria, technology project manager at ITSCREDIT. 

Read more from these partners in the Summer 2023 issue of Technology Record. 

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