The Bankerless Bank

Regulatory upheaval has distracted banks from developing innovative technology. When will banks return their focus to building technology for competitive advantage?

With all of the payments technology, KYC applications, data standards, hundreds of vendor product releases and talk about cyber warfare at this year's Sibos conference, there's certainly a number of things I could cover in a column. In fact, I really should be writing about something more, shall I say, tangential.

However, in addition to the usual discussions about regulatory challenges, standards, and payments news, I had a much more interesting conversation about what the next innovation will be in the banking industry. It's not Apply Pay, or using big data to detect fraud (everyone seems to be doing that). In fact, the next big thing may not be on anyone's radar.

A big reason why banks are not looking for the "next big thing" is because the industry, collectively, has been stuck in an innovation "time out" due to regulation, shifting markets, and cost pressures, says Adam Schneider, lead client services principal and senior advisor of Center for Financial Services at Deloitte Consulting.

The "time out" is now stretching into its sixth year, as most large banks are trying to comply with the thousands of new regulatory mandates across the globe that came about as a result of the financial crisis. Most banks have spent the past few years spinning their wheels. They have gotten out of many markets, divested businesses, streamlined operations, cut staff, and trimmed budgets. The result: six years of treading water, so to speak.

The lost banking decade
If banks aren't careful, we could soon be talking about the lost decade in banking. Truth be told, today we are closer to 2018 than we are to the beginning of the financial crisis in 2007-2008, so a lost banking decade isn't that far fetched.

Meanwhile, other industries continue to plow ahead. Mobile is a part of everyone's life now and innovative apps are released daily. Silicon Valley is filled with promising artificial intelligence and data analytics startups. Today's cars have more computing power than PCs had 15 years ago. And, Google's self-driving car has driven 500,000 miles without an accident.

While technology rockets ahead in other industries, for the most part there have only been incremental improvements in banking technology. HFT continues to push the speed barrier, know your customer (KYC) tools are getting better, and risk management technology continues to improve as banks have managed to finally get a grasp on data from across the enterprise. There are numerous other advancements in banking technology too, but collectively there is no doubt the banking technology space has lost some of the flair it had before the financial crisis.

So what's next? Deloitte's Schneider says the "bankerless bank" is the next thing will change the industry. "There is real room to decrease the amount of human intervention in banking," Schneider says. Schneider acknowledges that banks have automated many back office processes, but there is much more that can be done.

"Why aren't we blowing past having hundreds of people in various parts of the business," he adds. "Forty percent of the work is something that we should be doing automatically. We need to remove the people from the back office."

Schneider points to Google's driverless car, for example. The car takes in thousands of data points to make decisions in real time. In a bank, automating complex back-office processing would often only involve digesting hundreds (not thousands) of variables. "Why aren't we even talking about this yet?" Schneider questions.

Business intelligence, data analytics and artificial intelligence tools are rapidly advancing and will help banks move to automate complex processes. These tools are becoming flexible enough to handle more and more of the outlying exceptions that currently make up most of the manual processing work.

Automating banking processes is never an easy task. But moving to more automated processes will ultimately reduce costs and improve accuracy, as humans are prone to making errors. Banks that can increase efficiency with automated processes will enjoy a competitive advantage. For instance, the bank will be able to process transactions faster at a lower cost. More importantly, banks will be able to free up resources to work on more innovative technologies and services.

The first bank that finds a way to get out of the regulatory "time out" that is diverting focus and resources away from technology innovation should, in theory, hold a competitive advantage over rivals. Right now, the question is not who will win the "bankerless bank" race. The question is, when will the "bankerless bank" race begin.

Greg MacSweeney is editorial director of InformationWeek Financial Services, whose brands include Wall Street & Technology, Bank Systems & Technology, Advanced Trading, and Insurance & Technology. View Full Bio