IDC ANALYST CONNECTION Sponsored by: Cisco Meraki

Transformation Isn't Done Until Banks Can Manage Their Infrastructure June 2021

Questions posed by: Cisco Meraki

Answers by: Jerry Silva, Research Vice President, IDC Financial Insights

How did recent events affect the banking industry, and what are banks focused on now?

You can divide the banking industry into two camps: institutions that had invested in digital transformation prior to 2020 and those that had not. Biweekly surveys that IDC ran through 2020 found that as a consequence of the level of investment, a gap emerged between banks that saw great disruption and those that fared better but didn't necessarily escape all of the impacts. We call this the "digital divide," and it is leading to a competitive edge for institutions that were further down the transformation path. In both cases, however, the crisis forced the industry to accelerate investments in transformation to avoid future disruptions.

In a broad sense, banks are accelerating the modernization of their infrastructure, investing time and money in technologies and methodologies such as Agile development, API-based applications, microservices, cloud, and security. At a granular level of detail, every institution will be unique based on where they experienced the most disruptive impact. For some, infrastructure modernization will be about strengthening their digital banking platforms. For others, it will be a focus on account originations, particularly in consumer and small business lending. Some saw a significant rise in payments fraud as commerce went digital, and they will invest in better antifraud solutions. For many banks worldwide, the impact of social distancing restrictions has them considering how to transform the branch to be more touchless, becoming in essence a "digital branch."

How are banks considering the adoption of technologies involving cloud and security?

Cloud offers agility, resiliency, scale, and efficiency, and it helped the industry overcome some of the largest recent challenges. Cloud-native software and deployments mean projects that would normally take months to implement can be done in much shorter time frames. Platforms deployed on cloud are also scalable, and many banks around the world were affected by scalability challenges in areas such as loan processing and online banking. But we're not talking about a

The banking industry is making great progress toward transformation and resiliency. However, the work isn't done until the institution can effectively monitor, measure, and resolve disruptions.

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sudden shift to everything on cloud. For many years to come, institutions will be operating in hybrid environments consisting of public cloud, private cloud, and traditional on-premises platforms. In IDC's Worldwide Industry CloudPath Survey (May 2020), 57% of banks confirmed that they were already operating hybrid infrastructures, with another 31% planning to do so in the next 12 months.

The infrastructure is where security comes in, along with functionalities such as network and application monitoring and self-healing capabilities. As the infrastructure evolves into one that is spread out from the institution's datacenter, which in most cases is managed by cloud services providers or software companies, the bank's ability to secure such an infrastructure is challenged. Security in particular becomes a more serious threat as the number of platforms that support the institution increases and as the platforms leave the direct control of bank staff. IDC estimates that technology spending on security will grow at 12.3% over the next five years, which is almost twice the growth forecast for overall IT spending in global banking.

According to IDC's Worldwide Industry CloudPath Survey (May 2020), over 60% of banks reported that they haven't implemented or optimized consistent service-level monitoring across private, public, and hybrid clouds. This is where technologies such as Secure Access Service Edge (SASE) can play a critical role in enabling consistent service levels; customer and staff experiences; and secure web gateways, cloud access security brokers, and other services. SASE is a key component of ensuring that, regardless of the increasingly intermediary platforms between the edge and the platforms that drive functionality, service levels will always be met.

It's interesting that you talk about the "digital branch." What does that mean, and why are banks talking about it?

For as long as I've been in the industry, the market has used the term "branch of the future." However, that phrase implies an endpoint that will never be reached. The branch is an important interaction point for consumers and small businesses, and it needs to be agile enough to evolve as the market demands — to become the "next branch." In the wake of the pandemic, many branches worldwide had to close to comply with social distancing restrictions. As they reopen, banks are looking at technologies that can prevent physical contact, such as handing over identification to authenticate the customer or limiting human interaction where it makes sense by expanding interactive video and digital signage into the physical branch. These technologies have existed for years, but in aggregate, they are now part of a holistic approach to transforming branches into smart spaces on the way to becoming "the next branch." For example, using video to connect with the customer as a means to support research into and sales of more complex products such as mortgages has been adopted by some institutions, but it will become more prevalent in the branch. The opportunity also exists to drive video as an interaction channel into the home or business as a new way to engage the customer with more personalized services because consumers and businesses are used to interacting over video due to last year's pandemic restrictions.

Author Arthur C. Clarke had a famous quote: "Any sufficiently advanced technology is indistinguishable from magic." This rings true for branch transformation. Deploying biometric technologies for authentication, placing mobile devices into the hands of branch staff to increase service flexibility, and driving targeted video for account opening seem like magic when the customer experience is seamless and effective. But the underlying branch infrastructure to make all of that work is not trivial. Banks need to have an understanding of how all the technologies at the branch work together as well as ways to monitor and manage those technologies.

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Does human interaction play a role in branch transformation? And does it apply to other areas in the bank?

A major impact from 2020, and one that the industry will have to deal with going forward, is the rise of the remote workforce. Branch closures last year led to an increased reliance not only on digital channels but also on the contact center. Unfortunately, IDC surveys have shown that the bank contact center has the worst levels of satisfaction among all the channels through which the customer works with the institution. Many banks provided poor customer experiences during the pandemic because of the increased load on the contact center and the challenge of making the work-from-home environment as functionally rich, as responsive, and as secure as possible.

It is fair to say that the human aspects of branch work will be impacted as the branch itself goes "hybrid" in a combination of digital and human-led interactions. Many field workers, financial advisors, business loan officers, and others are also affected as most of them operated from home and may not go back to those physical locations. Platforms that supply network connections, collaboration capabilities, and security across the work-from-anywhere model will be extremely important as more than 90% of executives surveyed by IDC believe that at least some part of their workforce will continue to work remotely even after restrictions are lifted.

In this hybrid engagement environment, where digital and human-led engagement becomes more tightly coupled, the challenge will be to maintain high levels and quality of service regardless of the locations of the end device (mobile, chat, contact center), the user (at home, on the road), and the specific workloads supporting the interaction (on premises, cloud, outsourced). Just as in the need to maintain resilience in the infrastructure itself, SASE plays a critical role in its ability to maintain quality and security at the edge.

Do you have any advice for institutions that are in the midst of their own transformation initiatives?

The changes to the bank's infrastructure, staff, and customer channels seem like they're heading in a good direction. Cloud is being adopted at a faster pace, security is recognized as an important aspect of transformation, and banks are migrating to modern technologies such as APIs, microservices, and automation. So far, so good. The industry is making great progress toward transformation and the ability to add resiliency to the transformation strategy.

If I were to offer one piece of advice, I would advise institutions to ensure that the new, modern infrastructure is instrumented to monitor its state of health in real time. Banks should monitor the workloads stretched across a hybrid environment, the networks, and the endpoints where edge computing is growing every day. This includes ensuring that service and quality levels are met for customers as well as for the organization's staff, who may be operating from centralized locations or from home. Security must be pervasive throughout the network of channels, platforms, and locations as well. The work isn't done until the institution can effectively secure, monitor, measure, and resolve any disruptions, both in the infrastructure and at the edge, with enterprisewide tools that are consistent and common among all the support groups at the bank. At the end of the day, tracking customer service levels, ensuring digital trust through robust security platforms built into the infrastructure, and proactively managing the new infrastructure are the best ways to modernize and strengthen resiliency for the future.

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About the Analyst

Jerry Silva, Research Vice President, IDC Financial Insights

Jerry Silva is Vice President for IDC Financial Insights responsible for the global retail banking practice. Jerry's research focuses on technology trends and customer expectations and behaviors in retail banking worldwide. Jerry draws upon over 35 years of experience in the financial services industry to cover a variety of topics, from the back office to customer channels to governance in the technology shops at financial institutions.

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