High 5! The five fintech stories we’re following this week

top fintech stories

Steering the massive banking ship

There hasn’t been much talk of the paperless office lately. And the paperless bank? Forget about it. What’s frustrating is that the burden of filling things out in triplicate is shared by both customers and employees. Adding technology to eliminate paper can potentially reduce operating processing costs by 25 percent. Records management associated costs can be reduced by 60 percent to 70 percent.

Comparing internet time to banking time, though, isn’t a good comparison. Banks find it hard to modernize their IT. It’s kind of a Catch-22: even though everyone knows that systems need to be replaced, what kind of CEO would want to undergo a transformation project when his or her average tenure is just a few years in the front office? Estimates are as high as 25 percent of core banking system transformations fail without any results. That’s how you get banks like ANZ with 40 year old systems and no one willing to tackle the larger problem.

Working on the blockchain gang

Ask an industry consultant about blockchain technology and you’ll get hyperbolic description of a future financial utopia where everything works better, faster, and cheaper. Ask your average financial services person about it, on the other hand, and you’ll probably get a blank stare. That’s because the hype of blockchain has gotten quite a bit ahead of itself lately.

Our August Blockchain Hype Meter analyzes just how out-of-hand things have gotten. And that’s OK, right? You can still think that blockchain may end up transforming our current iteration of financial services and capital markets but it’ll still take time. At least that’s what VCs are betting on. Blockchain investment in the first half of 2015 accounted for half of all investment in fintech.

More fintech ETFs

PureFunds debuted its newest fund, the PureFunds Solactive Fintech ETF ($FINQ). The fund’s holdings include companies that “principally derive revenue from the sale of financial-related information, financial data analysis services, financial services software tools or platforms or web-based financial services. Each company in the fund and its corresponding index – 31 in total – has a minimum market cap of $200 million.”

For investors in fintech land, the fund joins the KBW Nasdaq Financial Technology Index ($KFTX) which launched mid-2016. There are now multiple ways for investors to invest in fintech.

Speaking of ETFs, Pershing is also muscling its way into the field with a new line of exchanged traded products aimed at advisors. They’re being piggybacked on the DoL Fiduciary Rule for advisors who want to shift their revenue models.

Telematics, yeah!

Like the paperless office, telematics is also something that sounds good but in practice, few are actually doing it. Usage based insurance, as it’s called, portends a world where insurance policies are more well-crafted to policy holders by more accurately assessing their risk. As IoT devices are now tracking our behavior, there are streams of data created in their wake that insurers can use to better hone their coverage.

So, UBI, which can look at our driving behavior and craft a policy based more on our personalized risk, should be good for everyone. The view is that risk becomes priced more accurately, which should benefit the good drivers, who have had to pay the price of their bad driving peers.

But, the thing is, they’re not really being used all that much. Less than 10 percent of people have ever held such a policy.

Designing investment strategies, launching ETFs, and building a digital advisor

Meb Faber is a self-described investing researcher, author, financial entrepreneur, and now, podcaster. Meb’s found a way to navigate his own path through investment management by building his own media platform. He’s written a handful of research papers that are some of the most downloaded papers in history and a handful of best-selling investment books.

He joined us this week on the Tradestreaming Podcast to talk about how he’s built out his investment firm through collaborative product development, the launch of his digital advisor, and how he’s promoted his work via his own in-house content.



The arduous path of bank IT modernization

Considering an overhaul of core banking systems is often likened to open heart surgery, it’s understandable why bank CIOs would want to stay on statins for as long as possible.

Bank IT failure, however, isn’t a theoretical possibility. Cases are frequent and costly.

An IT glitch on August 2015 rendered HSBC’s customers unable to send or receive funds. The system failure took 7 hours to fix and a couple of days to clear the backlog. In 2013, the bank’s branch IT in the UK failed, leaving many customers unable to access basic banking services.

The Royal Bank of Scotland has also seen a slew of IT failures in recent years. Last year, about 600,000 payments “went missing” due to a technical failure at RBS. A year earlier, the bank was fined 56 million pounds for a 2012 IT failure that left millions of customers unable to make payments. The direct cost of that IT failure was estimated at £175 million. A day after RBS paid the fine, another IT glitch prevented the bank’s customers from making payments for a window of 90 minutes.

In 2014, Lloyd’s customers were unable to make payments using debit cards and about 7000 ATMs were offline due to a server problem.

Bank IT systems are gargantuanly complex. A bank’s IT structure is like an onion, with a core and many layers around it of supporting applications. At the core is the source repository of information about customers, accounts and balances. Most banks have multiple cores for different products like Demand Deposit accounts, savings, securities accounting systems, trading, payments, and various loan products. Each core is surrounded by back and middle office systems, a corporate CRM, and are then connected to customer-facing applications.

In order to support advanced customer facing technologies like ATMs, debit cards, mobile banking or real time payments, legacy core banking systems need to be mirrored, processed on different servers and have the back end reconciled later. Multiple M&As, vendor onboarding and patchwork internal innovation through the years added layers of additional IT complexity and risk.

One large bank, for example, required 9,000 applications to keep its old core system running, as told by Mark Hurd, president of Oracle Corp., to a group of financial services executives in 2012. “Most of those applications are old and homegrown, and most of the people who developed them are gone,” Hurd said.

According to a recent survey from NTT Data, 41 percent of banks add new functionality to their core system through external and third party applications. 26 percent engage in significant changes to the core deposit system to support new functionality and 22 percent change little to their core system.

Only 8 percent are considering, or in the process of, re-architecting their core system and 3 percent are considering, or in the process of, a complete change to a new core system.

The threat of IT failure isn’t just periodic failures. It is the longer time to market for new features and products. This lag can lead to increased customer churn.

Upgrading core banking systems is a risky business, considering the huge financial commitment to the process. In 2011, AIB sued Oracle for €84 million, blaming it for the failed implementation of Oracle’s Flexcube core banking system. In July 2011, the Union Bank of California cancelled the implementation of Infosys’ Finacle Solution – almost two years after the program was initiated.

Cognizant estimates that 25 percent of core banking system transformations fail without any results while 50 percent do not achieve transformation objectives, as costs and implementation times double or triple. Only 25 percent of the transformations can be called successful.

According to Peter Olynick, senior practice lead for retail banking at NTT Data, banks looking to upgrade their core system should make sure they fully understand the business case and have a clear vision of their business goals.

A bank that wants to differentiate itself through technology and innovation should invest heavily in an agile and fast core, whereas a bank aiming to differentiate itself by being the lowest cost offering, can probably make do with mitigating the risk of an aging core system.

A main part of an IT renewal project is simplification, says Olynick. Many banks have thousands of different products, each with different IT demands, that add risk and complexity to the system.

Most banks don’t opt for a complete renewal of their core systems. Banks frequently choose to shrink the footprint of their core by moving data and applications to other, more modern databases.   

Database firm MarkLogic’s platform, for example, can capture a bank’s various data streams, including from external sources, in real time, which then allows that data to be analyzed and used in other applications. This can be done without touching the core systems.

“I don’t see appetite for upgrading core systems,” said Sinan Baksan, solutions director at MarkLogic, adding he thinks the current set up of core IT surrounded by multiple layers will continue.

The only ticking clock, according to Baksan, is a skillset shortage for core banking systems. As fewer programmers know how to work with old programming languages used in core systems, like Cobalt, the maintenance cost of legacy systems increases.

Other ways of shrinking the core includes building APIs that allow any service to get access to the core in an agile and flexible way. This, in essence, serves to isolate the core and separate it from the services the bank offers.

There have been some successful case studies of core banking renewal. BBVA Compass, Zions Bank and Commonwealth Bank of Australia are among the well-known cases.

Infosys Finacle, Oracle Flexcube and SAP Banking lead the pack of modern core banking vendors. Other top hitters include FIS, Fiserv and Temenos.

Aging core systems might not spell doom and gloom for the industry yet. But the current state of bank IT will make it hard for the industry to keep up. Whether it’s building layers around the core, a complete swap out or a partial migration to a new core, something needs to be done.

Photo from Ben Franske