OpinionAlternative LendingDigital BankingSavings and Investment
The pandemic has been a serious wake-up call for traditional banks, says Mina Mutafchieva, Dawn Capital.
Image source: Photo by Jimmy Chan from Pexels
Type the words “covid has changed” into Google and it throws up the following autocomplete suggestions: the world, our lives, the world forever, the way we work and, simply, everything.
We tend to overestimate the impact of technology in the short term and underestimate it in the long term, as the saying goes, and the same can be said of Covid’s impact on banking and finance.
What we’ve already seen are some immediate changes in consumer habits. Among many, the rising use of contactless payments, an accelerated shift to online banking and a surprise interest in stock trading.
The latter, in particular, has arisen from a perfect storm of more time spent at home, furnished with technology, and money for those with job security and stimulus checks – there now appears to be a generation who’ve switched clubbing for stock trading.
This democratisation of finance is empowering and educational, though of course there will be some regulatory catch up to protect consumers – particularly around sophisticated financial instruments like options.
It has also been a serious wake-up call for traditional banks, who can certainly learn a thing or two from the rise of platforms like Robinhood. I only have to think back to when I tried to open an investment account with a well known high street bank. It still required snail-mailing, then paperwork to prove who I was, despite the fact I already banked with them and had already provided this information to them before. In the end, I gave up.
We’ve been talking since the financial crisis about fintechs taking a bite out of banks’ lunch, while waiting for new entrants to acquire significant numbers of customers and really take hold. But the pandemic has really forced the hands of financial institutions, exposing more than ever the clunking, creaking old mechanisms propping up the industry behind the scenes.
Working from home has starkly revealed the manual processes which have continued to cling on. For instance, certain trades still require papers couriered between HQs for wet signatures. Banks must now fundamentally overhaul ancient infrastructure to address these weaknesses, and can no longer get by making incremental improvements.
It offers an opportunity to radically rethink costs around systems like KYC and capital markets trades. We’re likely to see the rise of independent platforms enabling a different approach to how these systems work. Even further, it makes sense for banks to collaborate on this.
A network solution with a full system overview of KYC would greatly reduce cost and simplify processes across the industry.
While building in-house and having large software engineering teams made sense some years ago, the progress made in technology – from the cloud to much enhanced security – means this is not the case any more.
It’s time to recognise that the best talent and the best tech is being built outside the banks. That requires a cultural change. Billions have been spent trying to build systems that don’t quite work. And then millions more trying to maintain these, often very sub-standard pieces of software. It’s time for banks to take a hard look at what’s valuable and what’s vanity.
The number one problem facing banks now is that they have a spaghetti junction of internal systems – hundreds of them in some cases – that don’t work together, often the product of multiple mergers over the years.
It’s surprising that mistakes like the one which recently cost Citi $500m don’t happen more frequently. Its wiring of money to the wrong people has been dubbed the biggest blunder in banking history.
The more volume and volatility running through the market, as we’ve seen in recent weeks, the more these problems are likely to be exacerbated.
After the financial crisis, we saw banks take action on balance sheet risk and look more closely at liabilities and exposures with different counterparties on trades, resulting in some good work in fixing these systems.
Now, the focus is on operational risk and data. Data is fast becoming the most valuable asset of any business in the world – in great part because, for the first time, we have the tools to make it valuable, with startups innovating across the data value chain, plugging gaps in security, storage, access, governance, insights and deployment. This sea change gives the financial world the opportunity to reengineer systems proactively, rather than reactively. And survive the next decade, that is what all banks must do.
Mina Mutafchieva is senior principal at Dawn Capital. The views and opinions expressed are not necessarily those of AltFi.