How Big Data has been changing banking business?

New Internet technologies and social networks are changing the nature of the banking business. Today, banks should rather think about competing with Facebook and other social networks than with each other. Imagine what could happen to the banking business, if Facebook provides subscribers with a payment service from card to card in bitcoins or even own cryptocurrency? What can banks offer in return to keep their customers transactions?

Some social networks already outnumber banks by the number of customers. They have such an amount of data about the preferences and tastes of customers, that banks can only dream of. The only question is, who will be the first to learn, how to effectively analyze and use this information.

There is information, but is there any benefit?

Big Data and Cloud Computing technologies have entered our lives and are being actively developed by leading IT companies in Western markets. The need to process and store large amounts of information forces IT service providers to constantly improve servers, storage, communication equipment, software and customer support.

According to International Data Corporation (IDC), the amount of stored data in the world since 2010 has increased by 50 times. By 2020, it will grow another 15 times and reach the level of 40 ZB (zettabytes). The growth will mainly be due to emerging markets.

What can we compare 40 ZB with? For example, all grains of sand on all beaches on Earth should be multiplied by 57. According to other estimates, the total weight of the blue-ray discs, on which these data will be recorded and stored will be equal to the weight of 424 aircraft carriers. Moreover, according to IDC, less than 1% of information in the world has been analyzed, and less than 20% has been effectively protected.

Dependence on IT partners

This trend will inevitably push banks to invest in IT infrastructure: data warehouses and information systems, management and IT-protection systems, as well as equipment, communications, and personnel.

Without developing their own IT strategy and data management strategy, without entering the online services market, without creating trustful and long-term relationships with customers, banks will lose their business, gradually turning into back-offices of social networks and IT service providers.

The first will more effectively segment customers, determine their preferences, provide a more convenient service, creating ecosystems and market places, taking part of the marginal income from banks. The second will more efficiently automate front- and back-office processes of banks, provide more convenient electronic channels for servicing and processing customer transactions. This will inevitably reduce the profitability of the banking business. Banks will give most of their margins to their IT contractors. Moreover, the dependence on IT partners will only increase.

In my opinion, choosing a reliable IT partner and ensuring effective corporate control over it, will become a key element of the IT strategy for most banks in the coming years. Bank managers will inevitably have to solve IT strategy issues: from a business model to a bank data model, from a data model to an application architecture, from an application architecture to managing and protecting information, as well as equipment, communications, and the retention of qualified IT personnel.

Otherwise, banks will stay only with supervisory functions of risk management, financial monitoring, financial management and regulatory reporting. Although, this also requires good IT support.

Regulatory requirements are another pressure

Banks not only have to compete and share margins with IT companies in order to segment and analyze the needs of their retail customers, they need to meet strong regulatory requirements. Regulators significantly complicate the life of banks, requiring greater transparency and manageability. Data disclosure requirements are being tightened to the level of single customer transactions.

In January 2013, the Basel Committee introduced the new regulation No. 239 (Basel Committee on Banking Supervision, BCBS No. 239). The lessons of the financial crisis of 2008 led to the disappointing conclusions, that the banking IT architecture and data models are inadequate and unable to support decision-making processes at the level of board.

Many banks are unable to quickly identify concentration risks at the group level, by business, by subsidiary units and by markets. Several large banks were unable to manage these risks, because they could not simply adequately aggregate them. All this led to grave consequences both for the banks themselves and for the global financial markets.

That is why the Basel Committee, which includes representatives of the world’s largest banks and regulators, adopted 14 principles of “Effective Risk Data Aggregation and Risk Reporting” as the industry standard level.

Since 2013, in addition to financial audits, European banking supervisors, in the framework of the annual audit, has been evaluating and verifying data management processes, data architecture, and IT infrastructure of banks.

How much will it cost banks?

Accenture estimates, that European small banks will have to invest up to 2 million euros per year. The budgets of large banks due to the complexity of the inherited IT infrastructure will start from 50 million euros per year.

In our markets, the cost of IT services is lower, and there are qualified developers. IT development is conducted at a high level, quickly and efficiently. However, the processes of data modelling, testing and documenting leave much to be desired. In addition, local IT companies do not have the business expertise and knowledge to build banking analytics, data warehouses and reporting systems.

At the same time, banks have few of meteorologists and do not have the function or skills to prepare good business requirements, so they often turn to external business consultants. Consulting services in the West are much more expensive than ours, and the local offices of international consulting companies suffer from the outflow of qualified specialists abroad as well as keep their focus on more profitable markets. Our markets are less priority for global consultants and IT companies. This leads to the fact that CIS banks are forced to be satisfied with low service, both in the field of consulting on business requirements, data modelling and proper IT projects management.

In addition, some large audit and consulting companies are also trying to enter the IT market and offer their own applications. For example, Deloitte offers Finevare, analytical modules for calculating of reserves on IFRS 9, an effective rate calculation, the early warning system, etc. However, the problem of such an audit companies is that, owning the methodology and business expertise, they poorly organize the adequate IT-development, implementation, support and customization of their applications. This is not their main business. If the bank gives the methodology, development and management of the IT project to such companies, this creates an additional conflict of interest and increases the project risks.

Qualified IT project management is a key success factor

Another important point, that jeopardizes the implementation of such IT projects, is the low level of project management of local consultants and the lack of experience in managing IT projects within banks. A good project manager in the West is worth its weight in gold, because huge budgets are at stake and the interests of key managers are affected. Knowledge of details of  banking business and IT, the ability to understand people, deliver information, find a balance of interests, while achieving goals are the key factors to successful project management.

At this site has been published the article “Management Information System: to be or not to be?”, dedicated to the reasons for success and failure of IT projects in the field of data warehousing and banking analytics. However, once again, I want to note the main reasons for successful IT implementations: the qualifications of the team and the project manager, the desire of key top managers to restructure a bank, and the awareness of the objectives and meaning of the project at all levels of a bank.

What to do banks in this situation?

In my opinion, banks have only one reasonable way out in this situation. They have to create their own human capital of business analysts, experts, effective project manager and relay on the internal management of external IT developers.

At the same time, it is necessary to hire outsourcing IT companies as externals contractors, which are able to retain qualified specialists, build adequate internal processes for IT development, testing and documentation. In addition, banks will have to resolve the issue of corporate control over the activities of the partner IT company, which prove their efficiency and get major IT-budgets. That’s exactly, what the majority of Western banks do, where I have worked with as a project manager and data model consultant.

Choosing a reliable software provider and partner in IT development plus developing of own human capital of business analysts, meteorologists  and dedicate PM are the key to success factors on the way to building a data warehouse, data management system and a key competitive advantage in the context of rapid growth of IT technologies.

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