How technology will transform banking in 2017: Blockchain, cloud computing and digital challenger banks

financial district banks square mile image credit istock mikeinlondon

The banking sector is bracing itself for Brexit, but will have to contend with new technology challenges too


The last 12 months have been another period of technological change in the financial sector, with digital challenger banks launching, the development of blockchain based systems, increased cloud adoption and a growing cyber security threat. Computerworld UK takes a look at how financial firms have adapted to these challenges this year, and what their priorities are likely to be for 2017...

Blockchain evolution to continue, but real transformation is still years off

Interest in blockchain continued to grow in 2016, with some of the world’s largest banks unveiling pilot projects aimed at streamlining processes. Royal Bank of Scotland, Barclays and Santander are among those currently creating blockchain-based applications in areas such as international payments.

At the same time, there was a reining-in of expectations of what can be achieved with the distributed ledger technology in the near future. Many industry commentators predict that it will take the best part of a decade for blockchain-based systems to see widespread, mainstream usage.

Read next: Seven reasons blockchain isn’t ready for mainstream deployment

Nevertheless, IDC analysts expect that the first wave of blockchain systems to move from test stage to production will centre around trade finance, with a number of pilot projects coming to fruition next year. In its 'FutureScape: Worldwide Financial Services 2017 Predictions' report, IDC describes trade finance as an area that is “still largely paper based, commoditised, and inefficient” making it a good candidate for blockchain applications.

“It is the proverbial "low-hanging fruit" for the application of blockchain technology as it offers the potential for an immense disruption of an important financial service supporting global trade,” the report states.

The vendor ecosystem around blockchain continued to evolve this year, with IBM and Microsoft pushing products and services to support development of distributed ledger systems in the finance sector and beyond. IBM has also been calling for wider collaboration to develop blockchain technology as part of the open source Hyperledger project.

Service providers are keen to capitalise on interest in the technology, and are quickly positioning themselves to advise customers that are keen to kick off pilot projects. This has lead to the likes of Capgemini and CGI snapping up blockchain expertise to build out advisory teams.

Peter Roe, research director at TechMarketView, said that the blockchain ecosystem will continue to mature next year, with collaboration between smaller fintech startups and better-funded, more established vendors.

“Throughout 2017, we should see further major changes to the Blockchain landscape and the emergence of some key players,” he wrote in a blog post. “Although the widespread use of Blockchain is still some way off (not helped by understandable caution in the regulator community), we can still expect plenty of activity.”

Cyber crime will remain top of the agenda among senior bank execs

Cybercrime was one of the big topics across all industries during 2016, and the financial services sector was no different. One of the most high profile breaches was the theft of $81 million from the Bangladesh central bank through rogue SWIFT transfers, a heist that almost resulted in the theft of $1 billion.

In the UK it was Tesco Bank that grabbed the headlines as criminals stole £2.5 million from 9,000 current accounts in what CEO Benny Higgins described as "a systematic, sophisticated attack" that was "unprecedented" in the UK. It is unclear precisely how the hack was carried out, but the incident served to highlight the vulnerability of the banking sector and raise concerns with the UK’s regulatory body, the Financial Conduct Authority.

According to Fujitsu’s Director of Retail Banking at Fujitsu UK & Ireland, Anthony Duffy, cybercrime is a top priority for financial institution directors and there is awareness that the threat is only set to increase. "Perhaps the number one preoccupation of financial institution directors with whom Fujitsu speaks is cybercrime," says Duffy. "They know that this form of criminal activity is on the rise and of the importance of always being at least one step ahead."

Despite increased investment in prevention, the likelihood of more successful attacks next year which will encourage better information-sharing between lenders, as suggested by the global messaging system provider, SWIFT. "Such initiatives would also follow the example already set by eight of the largest American banks, who have agreed to share information with each other about threats, work together to develop and deploy comprehensive responses for when attacks occur and to conduct appropriate ‘war games’”.

Cloud computing will drive efficiencies and support delivery of new services

The financial sector has been one of the slowest to adopt public cloud computing – understandable given the tightly regulated nature of the industry. But with the publication of the Financial Conduct Authority's cloud guidance earlier this year, there are now fewer barriers in place.

While modernisation and management of legacy infrastructure remain a focus for most large banks, cloud computing will help develop and deploy new digital services faster as they compete with smaller and more agile fintech firms.

Many banks have been using software as a service tools, such as Salesforce and ServiceNow, for years now. But infrastructure as a service is increasingly becoming an option to build customer-facing applications and even to host core systems for smaller firms. During 2016 public cloud giant Amazon Web Services announced that newcomers Monzo and OakNorth are using its services in the UK, while HSBC is relying on AWS for mobile app development. JP Morgan and Capital One are among the large established US lenders working with AWS, alongside BBVA in Spain.

And with IBM, Microsoft and Google all setting up cloud data centres within the UK too, some of the concerns around data sovereignty are disappearing and providing banks with more choice.

According to IDC analysts, cloud adoption in the financial sector is increasingly common. By the end of next year “at least 65 percent of financial services institutions (FSIs) globally would have already implemented cloud solutions to support production workloads and services beyond just a few non-mission-critical systems”.

Challenger banks will sink or swim

A range of new banks launched this year with a focus on delivering services through mobile devices. This includes Atom, Starling and Monzo.

However, while banking licences have been granted for these digital challengers, for the most part their entrances into the market have been tentative thus far. For example, Monzo has launched prepaid card services linked to a mobile app, but is awaiting restrictions to be lifted on its banking licence before it can support current accounts. It is a similar situation for its competitors too, but this is likely to change next year and we will see which new lenders are successful in attracting customers. Read next: The UK’s new breed of digital challenger banks: Atom, Monzo, Starling and Tandem - Ranked

The propositions offered by these banking upstarts are certainly intriguing, with neither the baggage of legacy technology to hold them back nor the negative reputations that have hurt some of the big names in the wake of the financial crash. But questions remain. Can they overcome the well-documented inertia among customers when it comes to switching banks? Are customers willing to trust a startup bank with their money over well established companies? Should the incumbents really be worried about an ‘Uber-effect’ in the retail banking sector, given that, unlike the retail sector for example, they have had lots of time to prepare for the entrance of new digital-focused competitors?

It is likely that the answers to some of these questions will become clearer next year. In addition, it will also be interesting to see whether any of the Big Four UK banks will move to acquire digital challenger banks, just as French banking giant Groupe BCPE acquired Fidor earlier this year.

For the rest of the sector, the emergence of these new banks will place ever more emphasis on providing modern and reliable digital services to customers, at the same time as managing costs. 

Find your next job with computerworld UK jobs