Nearly every major bank in the United States traces its roots back at least a century or more. Financial institutions have historically been dominant in the payments space, but in recent years, upstart fintechs and other third-party banking service providers have shaken up the industry. While big banks have the advantage of name-brand recognition and legacy reputations, it will take more than an appeal to nostalgia to win over new customers – banks must reinforce their stake in the industry with new technology, strong infrastructure, and smart data management.
To discuss key issues concerning how banks can keep up with current trends (and even be trendsetters themselves), PaymentsJournal hosted a recent webinar titled How To Build A Better Bank With A Distributed Infrastructure. In the webinar, expert speakers Lance Homer, Global Head of Digital Payments and Banking at Equinix; Tyler Pichach, Executive Director of Worldwide Financial Services at Microsoft; and Tim Sloane, Vice President of Payments Innovation at Mercator Advisory Group, offered additional insight into specific steps banks should take to qualitatively separate themselves from the pack.
Differentiation with digital infrastructure
Any modern bank hoping to compete in the industry will be working with loads of data and should ideally have a robust and diversified digital infrastructure capable of managing all that information. Sloane identified four main points to remember about how digital infrastructure must operate:
- Digital infrastructure will need to support business critical apps, running at scale, across the world.
- Complex value chains will develop; secure, low latency data flows will be needed.
- These value chains will contain a mix of public cloud, private cloud, hybrid, data-centered, and on-premises architectures.
- Interconnection between parties will be critical.
What is required for banks to get up to speed? The first step is simply to become comfortable evolving out of archaic systems. “Legacy banking platforms have made banks successful for many years,” said Homer. “But at some point in time, as you continue to put more and more products on top of it, it becomes very cumbersome and difficult to be agile in today’s environment that demands things happen at cloud speed.”
Legacy banking infrastructure is often centralized, siloed, rigid, and slow. Equinix, an industry leader in digital infrastructure with over 220 data centers across 63 metros and 26 countries, partners with cloud providers like Microsoft Azure to bring banking infrastructure into the future. Modern banking architecture is distributed to the edge with low latency, interconnected to partner ecosystems, and agile and elastic with cloud services. “In the last 18 months, we’ve really started to see a shift towards mass adoption of a hybrid cloud infrastructure,” said Homer.
Begin with the end in mind
The switch to hybrid cloud, hyperconnected, system of intelligence from a fully on-premises siloed system of record banking technology stack will not happen overnight. Banking modernization projects are costly in both time and money to undertake. Moreover, once they are built, they are often long-lasting decisions. Therefore, banks should begin with the end in mind before choosing a colocation provider and a cloud provider who can provide them the agility, reliability, and reach, and for their modernized banking stack. Critical end state considerations could include ability to connect to current and future partners in clouds other than your own, the ability to build edge deployments for aggregating branch connectivity or end user traffic, latency between on-prem and cloud applications, how your data will be stored for your own access (AI algos) and 3rd party access (Open Banking) and the ability to take advantage of emerging technology trends. “Make sure your ladder is leaning against the right wall before you start climbing,” advises Homer.
Partner ecosystems are critical
There are a variety of characteristics that are crucial for building effective digital infrastructure: resiliency, compatibility across several platforms, scalability, security, sustainability, not to mention speed, accessibility, and adaptability that caters to the personalized needs of customers. Those are quite a lot of concerns for even the biggest banks to tackle on their own. How can banks ensure that their infrastructure meets all of their needs? By prioritizing partnerships with other organizations, service providers, and ecosystems.
“As this infrastructure is leaving the banks and data centers, they’re embracing multiple partners in that technology stack and having more vendors offer different parts of that stack to them,” Homer explained. “That’s becoming very critical in order to make sure that you have connectivity to them so that there’s a seamless digital supply chain for the end customer experience.” Banks can further differentiate themselves by using integrating API middleware suppliers, reliable networks, fraud services providers, and even social media platforms.
Banks need to find creative solutions to deal with the rise of fintechs and other businesses that can offer banking adjacent services without the same regulatory requirements. Companies like Google, Amazon, Square, and Apple are all migrating into the payments space, and using existing payment rails through banks as scaffolding. “As you flash forward over the next 5-10 years, how do banks compete with that?” asked Pichach. “You have to be the ones that are worried about the regulatory nature of any investments to maintain the regulations that continue to increase.” Building strong relationships with other financial institutions and vendors can help banks compete with banking as a service (BaaS) that meets customer needs.
It’s all about the data
Centralized networks used to be one of the most powerful tools in a bank’s arsenal. “Those networks held incredible power because they had those physical connections,” Sloane explained. “But what’s happening now is networks are becoming more common, more reliable, more secure. And we see that power shifting to the data.” Data collection is now critical to banking success, and distributed infrastructure must support the fast, easy, and safe access of that data. This, in turn, will lead to better customer relationships.
Banks have an incredible opportunity to build infrastructure that allows for real-time access to information that will help them serve their customers. “Banks sit on all of my transactional data,” said Homer. “They know where I shop, they know how much I spend on a monthly basis.” Rarely, though, do the banks reach out to provide their clients insight into spending patterns, or offer them data-driven solutions. “I think consumers are looking for that,” Homer continued. “The capability to do that personalization begins with making sure you are building infrastructure that can access the data.”
Another potential source of monetizable data comes from AI / ML (artificial intelligence / machine learning). Microsoft Azure has AI / ML capabilities, and that personalization tool can connect with Equinix on-prem and colocation data facilities. “That’s the model we’re seeing going forward,” said Homer. “The days of bringing everything back to a single centralized location and creating this giant data lake that nobody has access to are over. That’s stagnant.”
This infrastructure can build what Pichach refers to as “super hyper personalization” by putting data into a “secure enclave.” Every participant has encrypted data that is untouchable by unauthorized parties, and some of the data is on premises, while some is in the cloud. “That all gets funneled together as part of this confidential computing, which is a public cloud service from Azure,” Pichach clarified. Then automated systems from the bank can create a story that connects customers’ purchases and life events with broader economic information—without exposing private information. “Making all of that happen in a hybrid world, across multiple banks and multiple merchants is something that I think can really transform how retail banking works and is how merchants will survive in the future,” said Pichach.
Learn more about how to approach banking infrastructure
In the recent webinar hosted by PaymentsJournal, Homer, Pichach, and Sloane discuss several additional nuances of distributed infrastructure, including:
- Specific practical examples of where digital infrastructure can be used
- How distributed infrastructure can generate revenue
- Helpful steps and common missteps for renovating core banking systems