By Dan Fisher and Kelsey Neisen, The Copper River Group
Today’s mobile-based environment is demanding an increasing amount of tech resources from financial institutions. Millennials drove this expectation with their mobile-centric lifestyle, and the generations following them will likely be just as attached to technology—or even more so.
Many forces of change
The financial industry faces an uphill struggle keeping pace with the rapid technology evolution and the shifting expectations of younger generations. Core computing, recruiting and retaining competent IT professionals, and offering competitive digital products and services are all growing progressively more difficult for banks of all sizes, but especially for small community institutions that don’t have the cash and human resources of their larger competitors.
The growth over many years of server-based environments hosting a myriad of applications locally at the bank also presents significant challenges. A simple glitch, such as a failure of the email application or phone system, can create a huge, prolonged disruption for the bank. So in addition to changing customer expectations, business continuity planning, disaster recovery, the growing risk of data breaches, and potential cyberattacks are forcing financial institutions to reconsider their technology choices.
Why the cloud is better
Instead of hosting services at the bank’s location on a mainframe computer—or on multiple servers—the cloud allows banks to access their core from a service bureau, for example. The significant benefits of this type of environment can outweigh the cost. For years, financial institutions wanted control, by having all the system hardware located at their data center. This strategy necessitated the need to employ staff to run the data center, maintain physical and data security, establish a backup site, and constantly monitor network connectivity. With a cloud-based implementation, the cloud provider is responsible for all this. Cloud-based applications can relieve financial institutions of significant headaches just by making it easy to stay up-to-date and competitive.
Another example of cloud-based service is a hosted Voice over Internet Protocol (VoIP). With an in-house phone system, losing power at the main branch means the entire bank’s phone system is inoperable. With a hosted VoIP system, all branch locations are operable, the voice mail system never goes offline, and when power is restored, the main office resumes full functionality. Simple, but a real example.
Cloud-based services can not only reduce the risk of failure, but they also can improve service, reduce the requirement for on-site technical support, and reduce the total cost of ownership.
For another scenario, imagine the email server has crashed and the replacement server will take three days to install. The email system is offline and will take at least two days to restore after the new server arrives. In a typical banking environment, when a phone system or email system fails, it means a catastrophic loss of business and injury to customer confidence. If the organization used a cloud-based product like Microsoft Office 365 at an Azure Data Center, single points of failure are eliminated and the likelihood of a significant service interruption is very low.
Much lower costs
Software as a Service is what the cloud is all about, and although it is not a new concept, it is a new way of managing technology for most community banks. Last year, the ICBA published a study that indicated that 37% of community banks have in-house core systems. Furthermore, we are confident that over 95% of all community banks maintain network and server infrastructure that hosts a variety of applications locally, and all of them are subject to business continuity planning, disaster recovery planning, and back-up infrastructure guidance as promulgated by the FFIEC and state banking regulators. This alone represents a costly and unnecessary duplication of cost.
The trend here is that the majority of community financial institutions understand that having an on-site data center is no longer a requirement. They realize that outsourcing their core processing systems offers many important benefits, and we are certain this trend will continue.
With a contemporary technology plan that exploits cloud-based services, a community bank can reduce the risk of a catastrophic event and compartmentalize its infrastructure, eliminating single points of failure, according to Dennis Smith, writing in Gartner Research. Furthermore, the management of the cloud-based application will be in the hands of industry and technical experts. The risks associated with hardware failure, data breach events, network monitoring, and cyberattacks can be drastically reduced, but vendor selection is critical. Not all cloud-based services are the same, so thorough due diligence is required.
How streaming impacts banking
Netflix, Hulu, Amazon Prime, Spotify, and other music and video streaming services have played an integral part in the lives of millennials and the generation behind them, Generation Z. Millennials barely remember video stores or their enormous cases of CDs and the hardware required to play them, and Gen-Z doesn’t remember a time when they couldn’t access nearly every movie made from the comfort of their own homes with the press of a few buttons.
Now, the youngest generations are expecting to stream their banks. It’s no secret they want those products and services instantly available at their fingertips. For many financial institutions, using cloud-based applications is the only way they can affordably and effectively deploy the products younger generations desire.
Millennials and Gen-Z are not just customers of financial institutions, however. Right now, they also may be employed by financial institutions as tellers, loan officers, or, perhaps, low-level managers. In another decade or two, though, some may be the best candidates for CEO of their organizations—if banks can keep them in their employ.
Many financial institutions we consult with lament their inability to attract and retain qualified young people. It’s not surprising. Millennials are known for their inherent distrust of financial institutions due to the economic environment they grew up in, and although most Gen-Zers are still receiving their education and deciding on their career paths, their opinion of the financial industry may not be much different.
Even without that inherent distrust, college graduates with compatible skills simply are not choosing to pursue careers in the financial industry. A number of top U.S. business schools are seeing fewer graduates choose to pursue careers in the finance sector, while more choose career paths in technology-related fields. For example, between 2007 and 2016, business school graduates entering the financial industry dropped from approximately 39% to 28%, while graduates entering the tech industry rose from 10% to 21%, according to The Economist.
What does any of that have to do with cloud banking?
Indisputably, technology has changed the financial industry’s landscape, and it will continue to do so for the foreseeable future. Not only will it change financial institutions’ procedures and processes, but it also will change the unique skills and talents that they require of their recruits. Instead of entrusting the maintenance of in-house applications to a large number of people who may or may not be competent or have duties outside IT, the banks can offer a handful of qualified IT professionals a competitive compensation package.
Millennials and the generations following them have embraced technology, and they will not stay long with an employer that clings to traditional practices. They don’t want to handwrite teller receipts. They don’t want to meticulously fill out line after line of customer information when they know it already exists somewhere in the organization’s database or can be scanned from a customer’s identifying documents. They don’t want to wait on lengthy updates during inopportune times of the day or deal with system glitches and downtime. They don’t want to deal with those types of inconveniences as customers, and they won’t put up with them for long as your employees either.
To many millennials, a career in the financial industry is simply not rewarding enough to keep them from considering other opportunities. So how can financial institutions leverage the new cloud banking trend to attract the talent of younger generations?
They can start by deploying technology that allows their employees to spend less time manually entering data or creating reports or developing work-arounds for system bugs and errors, and more time on projects that really matter to them or to developing relationships with customers. The continuous drudgery of fighting with uncooperative technology drives young people away, and they may decide to steer clear of the financial industry altogether.
Additionally, cloud-based banking may allow financial institutions to let go of traditions like suits and ties, disturbingly silent bank lobbies, beige walls and dark-colored desks, nine-to-five workdays. They’re going to be gone. Tradition will make way for workdays based on productivity, rather than hours worked. Employees will be able to work from home, and they won’t be regularly forced to stay late to complete a project, because the bank implemented contemporary, efficient technology. There will be more time to develop new ideas, try new things, and collaborate with colleagues.
Financial institutions may feel like they are being forced to move to a cloud banking system. Instead, they should embrace cloud banking as an opportunity to bring the financial industry out of the clutch of an antiquated tradition that is no longer attractive to customers or employees.
GETTING REAL ABOUT AI
It’s a data tool that makes humans “supersmart” —By Steve Cocheo, executive editor
Daddy, why do we need artificial intelligence when we have the real kind?”
Jeffrey McMillan’s son asked this of his father, who is chief analytics and data officer at Morgan Stanley. That’s a heavy question for someone who has headed up the firm’s efforts to bring AI to 19,000 financial advisors, comprising most of Morgan Stanley’s investment advisors.
“I’m a poster child for AI, but it is really hard to do,” said McMillan during the recent DataDisrupt Financial Services 2018. He said that the real state of AI in financial services today is quite mixed.
McMillan described a conversation he had with an AI expert who told him that he could produce a basic bot in ten minutes. And it would be a terrible bot. McMillan said that producing a robust bot can take months, even years, and requires the involvement of experts.
“We don’t have a technical problem here,” he said. “We have a business problem. The hype has passed the reality.”
Ultimately, McMillan’s presentation answered his son’s question: For what banks and financial advisors need to deliver to customers today, a partnership of human augmented by AI works best.
What does AI do today?
AI has five chief functions, McMillan said:
1. Detection—AI is good at finding anomalies in data sets for detection of fraud and other factors, for example.
2. Robotic processes—AI handles repetitive tasks well.
3. Recommendations—This represents the partnership between humans and AI.
4. Providing answers—Humans still do this task better than does AI.
5. Reasoning—“These technologies don’t reason yet,” said McMillan.
Forget “solving for AI.” Executives should be speaking of the problems they are attempting to solve, McMillan said. AI represents a tool, which is capable of handling some tasks, but not others.
Morgan Stanley has been using AI to analyze customers’ preferences and other factors to enable the technology to perform as a tireless, constantly up-to-date assistant. “I want to make the humans having conversations supersmart,” McMillan explained. Everything possible to customize is customized and personalized.
Some AI applications are engineered to place customers into groupings that generate recommendations based on behavior. McMillan resists that. “I want to sell things to you based on you and your behaviors,” he explained.
Adapted from a longer online story, tinyurl.com/GetRealAboutAI