It is evident that partnerships across the financial services ecosystem can resolve technology challenges from a business-led and a tech-led perspective. While banks have modernised core and digital engagement to meet constantly shifting customer demands, while also reducing cost and risk, process automation has improved resilience, efficiency and time to market. However, industry sentiment continues to question whether banks are truly able to innovate independently, or whether financial institutions can partner efficiently.

In conversation with Finextra, Red Hat’s Hector Arias, Bruno Domingues and Monica Sasso highlighted that banks have been leveraging technology and collaborating with organisations outside of the financial services sector for decades, but difficulties emerge because traditional organisations are unable to keep pace with their new competitors’ management of data and an inability to realise the million-dollar opportunity that data presents.

Partnerships, a tale as old as time

According to Sasso, a bank’s biggest technology problem is not the inability to innovate independently. “That is not their problem. Banks are very complex, highly regulated and for a lot of them, the bigger they are, the closer into the crosshairs they are and therefore, they’re under even more scrutiny in comparison to some fintechs, tech companies or disruptors. That has framed our perceptions around how slow we feel they might be.

Sasso continued: “Banks have always operated in an ecosystem; they have a lot of partners and in fact, have a lot of the same partners that help them on their journey and grow as technology and society evolves.” With partnerships being part and parcel of a bank’s history, Arias believes that a bank’s biggest challenge in 2023 is that they are unable to “create solutions fast and to serve customers in an inexpensive way.”

Domingues furthered that “innovation is not a technology problem. Innovation is about how you apply technology for a real business problem.” Context is key when it comes to innovation. Nevertheless, it could be argued that the perception that banks are unable to partner efficiently is a fallacy or a misconception. Perhaps in this fintech era, new competition is viewed as being more advanced. However, the fintech challenge can provide the impetus for change and new perceptions.

In 2023, we will see more technology companies transition from service providers to service partners. The success of the banking sector will be determined by qualitative measures across multiple fintech partners that operate in a particular niche, rather than quantitative.

Arias explained the reasoning behind this shift. “What we are seeing is that fintechs are getting the critical mass because some are laser focused on specific areas of payments, and they leverage cloud native technologies in an exponential and better way than is seen in previous experiences or functionalities within banks.”

Like fintech firms, traditional lenders must operate with a fail-fast mentality, especially when testing new ideas. For this to be a seamless process, banks will require access to data, technology, and cloud environments. However, with an abundance of data, what banks are failing to do is fully utilise this information in a qualitative manner, and only reaping the benefits of the high quantity of data.

Modernising core and digital engagement – getting started

Banks must mimic their digital native counterparts to transform the way they control their operations through cloud native technologies in order to serve their customers. This is at the core of the approach that is needed. Further to this, digital transformation will need to work in parallel with regulation, as explored by Sasso.

While fintech firms must also comply with regulation, they are not burdened by legacy infrastructure. Not all architecture is as relevant today as it was when it was built 50 years ago. Monolithic applications that were designed in the 1970s are still running current core banking systems and with this creating multiple layers of architecture, cloud can be implemented to ensure that new components must be reused.

While infrastructure that is optimised for market needs allows financial institutions to finetune workload requirements and business challenges, Sasso believes that the “devil is in the detail” and financial institutions must not be reluctant to see the good in the existing systems.

She added that “there are a lot of challenges around sharing data, especially if it’s a larger bank. I think there could be lots of opportunities, even now, within banks to tune their existing infrastructure without thinking about new infrastructure. A lot of these technologies have enabled containers, for example, these are a great way for banks to increase utilisation of existing infrastructure, whether that be a server or another, or even a mainframe.”

While banks can have thousands upon thousands of servers, not all are being leveraged at their full capacity. Legacy systems may still be operational, but newer technology could also be used to do more with what banks have. Tuning workload requirements can resolve business challenges, but in turn, can also enhance customer experience.

In line with this, Arias’ advice for banks is to “partner with fintechs in a way that banks are afforded flexibility, elasticity and scalability within their infrastructure to meet customer and market demands, with the ability to scale up or down. And, of course, the cloud is at the centre of this concept.”

Open cloud platforms and data, the overarching opportunity

For Red Hat, open cloud = hybrid cloud.

Hybrid, or open cloud, can be defined as a computing environment where applications are run using a combination of computing, storage, and services in different environments such as the public cloud and the private cloud, including on-premises data centres.

Sasso mentioned that “it is all about strategy.” The questions that a bank should be asking are: “what is the corporation’s strategy? How do they view technology? How do they view the products they are building, or buying, and do they want to distribute or capitalise on the platform economy?”

These questions should frame a bank’s technology strategy, but this rarely happens. Reactionary technology strategies are prevalent, rather than joined up corporate strategies. Open cloud can offer an opportunity to evolve current strategic methods. “You can’t have a technology strategy without completely understanding the corporate strategy and where and how the company wants to go to market,” Sasso added.

Data management and analysis must also be considered when establishing this holistic, all-encompassing strategy. Arias reiterated that “the amount of data is never a challenge; it is one of the biggest assets that any bank might have. What’s more amazing? The quality of data.” Extracting actionable insights from this data is crucial, as this customer information can bring value to future products and services.

Providing concluding comments, Sasso agreed that while a large quantity of data is not necessarily a bad thing, banks “haven’t yet figured out how to use it to their advantage yet. The next phase of evolution for them is to democratise it to make it available to everyone and allow innovation to go out to the entire organisation. That would be a step change for any organisation to capitalise on the volume of data that exists today.”