Bank IT spending is on the rise. See where the money is going and how to make sure your investments can deliver ROI for the Treasury department and beyond.
Wholesale bankers are facing growing competitive pressure from one another and from fintechs. After all, most large businesses have multiple banking relationships, and fintechs catering to corporate customers are winning the lion’s share (67.1%) of venture capital funding.
Despite collectively enjoying 95% of the $490 billion in wholesale payments revenue in 2022, wholesale bankers have never been more at risk of losing customers.
Making smart technology investments to optimize operations, create cost-efficiencies, mitigate risk and improve the customer experience is critical. If you’re a wholesale banker, you can’t afford to ignore competitive threats, especially when less than half of executives rate the overall service quality of their primary bank as excellent or very good.
In this whitepaper, we’ll explore four key technology priorities for wholesale bankers. Because cybersecurity and fraud prevention could take up an entire whitepaper on their own, we focus on several other pillars of long-term competitiveness:
We’ll examine what’s driving investment across these areas and how to make sure you get the best ROI for any new software tools you buy. After all, technology can only be effective if the relevant teams use it to its full potential. We’ll also help you avoid the buyer’s remorse that plagues 60% of software buyers.
Digital transformation is a “generational opportunity” for wholesale bankers, according to PwC. More bankers (69%) view digital transformation as key to their growth than their counterparts in other industries (60%).
Of primary importance is moving away from legacy core infrastructure that’s expensive to maintain to a more nimble, API- and cloud-driven infrastructure. Digital cores help banks achieve the agility, scalability and speed to market they need to enhance their competitiveness, especially against fintech providers. At the same time, banks also need to maintain the stability and reliability that their regulators and customers demand.
Transformation brings its own risks and “unanticipated impacts on supporting functional teams, such as risk, finance, compliance and even the front office,” McKinsey & Company research shows. Many banks have experienced similar challenges in their transition to the ISO 20022 messaging standard. When trying
to manage the increasing complexity, requirements and costs of day-to-day operations, such digital transformation initiatives can falter.
Indeed, even with ample budgets at their disposal, many banks still struggle to execute their digital transformation strategies. Only about 30% report success.
Defining clear goals and metrics that reflect not only the business change but also the cultural and technical changes required can help banks increase their chances for success and reap the full potential of their digital transformations, advises McKinsey & Company.
While money alone is not enough to make digital transformation successful, there is urgency for global banks to stop pouring resources—$57.1 billion by 2028—into legacy technologies that could be better spent elsewhere.
“As you review your technology gaps and adopt new tools and industry-wide requirements like ISO 20022, it’s essential to test performance and monitor your systems effectively, so you’re ready to act if and when outages or hiccups arise,” explains IR’s Head of Global Alliances - Transact Caleb Barnum.
“Particularly with any technologies that might affect existing transaction types, such as high-value payments, or new services like instant payments or pay-by-bank, you’re going to need real-time visibility to troubleshoot potential problems well before your customers notice anything is amiss,” he explains.
In the next section we’ll take a closer look at how technology can help you manage risk.
Risk management is a hefty topic that encompasses every area of a bank’s operations. For our purposes, we’ll focus on risk management within the commercial payments space, since the latter is a key service where wholesale banks have long dominated but now risk losing customers to fintechs and big techs.
One area that doesn’t get much attention until something goes wrong is outage risk.
When payments aren’t processed in line with SLAs, banks put their revenue and relationships at risk. An hour-long outage could easily cost millions in lost revenue, and that’s only if it affected a small percentage of your transactions. Regulatory fines and enhanced scrutiny as well as considerable negative press also follow.
Most banks use transaction monitoring already, with a primary focus on flagging suspicious activity. For monitoring the health of your payment system itself, banks sometimes turn to their processors but might have a limited view, depending on their provider. In other cases, internal development teams build a solution from scratch or adapt enterprise-monitoring solutions to fit their transaction monitoring and reporting requirements. Building in-house solutions can prove difficult to scale and maintain, especially in the current environment with so many competing IT priorities. At the same time, you might be challenged by technical talent shortages or attrition of developers who understand how the system works.
Whatever transaction monitoring solution you’re using today, be sure it delivers the kind of visibility that helps you manage risks, optimize efficiency and improve team productivity.
That usually comes down to how and when (batch or real-time) the data is presented in the dashboard, you’re able to automate actions based on thresholds (expected or dynamic) and whether reporting is manual or automated. The technology should also be able to pull in that actionable data without impacting system performance.
In addition to minimizing expensive and brand damaging outages, 67% percent of IR Transact customers reported increased efficiency, and 64% say they’ve reduced operational costs. What’s more, 86% report that visualized transaction monitoring data helped them improve response and resolution time.
That means their teams spend less time hunting for data and more time acting on it.
“Through payment monitoring and analytics, financial institutions have a clear window through which to see everything within their payment systems in real time,” Barnum adds. “At the same time, monitoring helps streamline deployments and migrations, which are becoming more commonplace as banks embrace digital transformation as well as new payment types.”
Ensuring that a payment goes through may seem like table stakes, yet in a fall 2023 survey, 90% of business leaders reported significant problems with their payments operations, including 27% saying they had a high rate of payment failures.
B2B companies cited payments failures as an even bigger problem (41%), and leaders across all companies pointed to reconciliation lags, lack of real-time insight into cash balances across bank accounts, data quality errors and a low rate of accurate payment reconciliation—all of which lead to wasted time, employee frustration and greater financial risk.
You have an opportunity not just to make transactions seamless for your corporate customers but to also help streamline and automate operations, including invoicing, reconciliation and liquidity management.
In fact, the biggest disconnect between bankers and their commercial customers is what customers see as a lack of value-added services. In particular, businesses want advanced fraud management tools; real-time data dashboards for cash, client and liquidity management; automated bill payments; advanced credit checking; biometric payments; tax and accounting system integration; and industry-specific data insights. If banks don’t offer these services, either for a fee or for free, it could put $371 billion of revenue at risk, as fintechs swoop in with solutions of their own.
To improve customer loyalty, you’ll need to deliver far more than service levels. Commercial customers also want:
Artificial intelligence, including intelligent workflow automation and generative AI can help address many, if not all, of these demands. Most banks have been using machine learning or some form of AI to automate tasks or make predictions for years; however, realizing the full benefits of artificial intelligence will be difficult without a digital core.
In the next section, we’ll dig deeper into the opportunities and risks of AI.
Although only 13% of commercial bankers said they were making significant investments in generative AI as of 2023, 85% said they would be at a competitive disadvantage if they failed to invest in the technology.
Meanwhile, Gartner cautions anyone evaluating generative AI to recognize that it’s part of a broader AI toolset. By combining different AI techniques, you’ll be able to achieve more than with generative AI alone. For example, combining non-generative machine learning with Gen AI models can help with data segmentation and classification or synthetic data generation. To boost employee productivity and improve customer support, you could use optimization/search functions combined with Gen AI to develop a robust enterprise search.
Despite AI’s potential to free up employees from manual tasks or even reduce headcount, employees are likely to remain in an oversight role to ensure AI results meet accuracy, precision and compliance expectations. Known as human-in-the-loop (HITL), this approach could be critical since generative AI accuracy rates are typically around 85%. Of course, banks cannot operate with such a high error rate and will have to train any AI models to improve their performance, likely before ever deploying them.
Using synthetic data is one way to test accuracy and outcomes, which can be especially important if you’re deploying AI for tasks such as credit decisioning, where explainability is key to demonstrating fair lending compliance. Deep learning based on large language models sometimes generates hallucinations and takes place in a “black box,” which can make it impossible to explain how the system reached a particular outcome.
Of course, AI of any type can create risks, especially if new data streams are being accessed without proper authentication safeguards or if non-compliant processes are inadvertently automated and then repeated. The NIST AI Risk Management Framework can help you design, develop, use and evaluate AI systems to make sure they are meeting your standards (and your regulators’).
Technology investments can go well beyond a software purchase; however, many banks are opting to buy existing tools rather than build technology solutions in-house.
Unfortunately, most software buyers (60%) regret a purchase made in the last 12 to 18 months and 54% regret multiple purchases, according to a Gartner survey. If you’re considering software buys to bolster your technology capabilities, understanding the key drivers of buyer’s remorse can help you avoid it.
From both a product and vendor perspective, buyers are often frustrated by their post-sale experience. Disappointments typically stem from implementation challenges and mismanaged expectations, including a higher-than-expected cost of ownership. One of the core benefits of IR Transact monitoring solutions is that by delivering visibility across payment types, banks are easily able to track SLAs and hold vendors accountable.
Most companies who experience regret are ultimately saddled with problems they can’t easily overcome, including 56% who say the financial blow will have a significant impact on long-term business performance.
To make sure you don’t end up needing to search for a new vendor, be sure to ask plenty of questions around cost and value, usability and training, integration requirements and timelines, ongoing support, if and how customer feedback is used to improve the solution, and average retention.
“As a software provider, building trust with our customers starts during the sales process,” says Caleb Barnum, Head of Global Alliances - Transact. “That means we are transparent about what our capabilities can and can’t do. At the same time, we also recognize that time-to-value is critical for banks who have so many competing IT priorities. Because we have developed out-of-the-box dashboards, alerts and reports based on our payments expertise and years of customer insights, banks can get up and running quickly—not only to monitor their high-value, real-time or card transactions but to gain insights into capacity, system performance and liquidity management forecasts to help them plan for the future.”
As banks continue to increase technology spend, particularly on infrastructure and risk-related initiatives, it can be difficult to measure the return on investment.
With project delays, system outages and other day to-day issues—it is no wonder that leaders are asking, ‘What are we getting for our money?’
To help answer this question, McKinsey & Company analysts recommend that banks develop a technology management system by:
“As technological change continues to accelerate, the greatest differentiator among banks will be the speed with which they adapt,” the analysts maintain.
With the right forethought, technology management systems and alignment on goals and how to measure success across your organization and with any vendors or partners, you’ll be much more likely to have a positive experience and achieve the business benefits you seek.