U.S. regional banks are in a bind. Occupying a critical niche in the financial system, they are typically able to provide more services than a community bank or credit union, but lack the ability to provide the broader and more advanced services of a large national or global bank.
One key area we see as particularly constraining is the state of their technology infrastructure and the maturity of their IT processes. Quite simply, they’re currently playing from behind.
How can they best address some of those constraints? We will be seeing more and more regional banks leveraging cloud capabilities that offer standard delivery models, fuel innovation, deliver leading customer engagement and compete on the same level as the industry heavyweights.
The largest banks spend billions of dollars annually on their technology, often with much of that solely devoted to keeping the lights on; moving to, developing and maintaining world-class advanced technology is an expensive undertaking. Huge data centers consuming megawatts of power, housing thousands of servers, and the armies of staff to design, build, and operate all that technology make modern IT infrastructure departments sizable businesses with significant budgets.
And every dollar being spent on running all that infrastructure is a dollar not being spent on developing the software and services that attract and keep the best IT talent, clients and revenue. (This is not to say that they’re not investing in innovation and the change required to get ahead as well, of course—they certainly are).
Economies of scale and the standardization of commodity services used in differentiated ways are a key success factor in IT. The largest of firms with significant financial resources can improve efficiencies with their IT infrastructure. But these days even the biggest of banks are turning to cloud service providers with even greater scale. This gap between the regionals and nationals was perhaps best exposed with the rollout of the Paycheck Protection Program. Many banks were challenged to meet the swell of incoming applications, but some regional banks fared worse since they simply lacked scalable modern technology infrastructure, responsive configurable applications and staff to update applications and manage surges in demand.
Regional banks can best to respond to these constraints and pressures by shifting capital-intensive assets towards utility-based services, from patchworks to standards, and from spending dollars on keeping the lights on to investing in tomorrow. In short, they need to shift to using someone else’s core services, network of talent, and scale instead of trying to create their own.
The Case For Cloud
Cloud service providers bring huge quantities of ready-to-use compute and storage capacity, pre-built services, ecosystems of talent and capability complements, utility pricing models, built-in cyber features and geographic diversity. As such, cloud providers enable strategic benefits around time to market, IT efficiency, and security and resilience. When choosing a service, activating compute power, and starting to develop, takes moments instead of weeks, we see potential new business value rapidly unleashed.
The increased developer productivity is coupled with a decrease in providing and managing IT infrastructure, among other benefits. Together these features can optimize the cost base and reduce capital expenditure, freeing up spend to enhance bank margin or re-investments in new services – helping shift the regional bank “run vs. change” investment ratio. Cloud utility pricing based on unit consumption over time provides transparency to costs and cost drivers. The transparency improves alignment of IT costs to business services, helping better inform investment decisions – important inputs in support of the regional banking M&A growth strategy.
There are a growing number of cloud-based capabilities that can help banks innovate across the enterprise on both the business and technology side— from anti-money laundering and Know-Your-Customer services to payments, customer on-boarding, enhanced contact center capabilities, risk analysis and simulation and regulatory reporting. Safe and secure ingestion of large data sets, rapid and scalable compute services, compliant processes, and advanced analytics and insight are characteristics that allow banking IT functions to avoid cost intensive requirements gathering, process engineering, and application development or modification, not to mention variablizing the cost of provisioning compute and storage for peak loads.
At the customer service and contact centers, there are virtual customer service agents with human-like conversation capability, natural language processing with speech-to-text/text-to-speech services to leverage, and machine learning/AI algorithms that provide improved levels of service and data insight and analytics. These offerings can lower call-handling times and customer churn, increase consumer satisfaction, lower employee turnover in service centers, and enable new service offerings and revenue opportunities.
The major cloud providers also have pre-built technical platform services on top of their compute and storage, such as data warehousing and analytics, event-driven computing services that scale up infrastructure only when required, as well as cybersecurity tools such as data loss prevention, authentication and other security services. To help integrate, secure, unify, and manage the applications, data, and services there are open API platforms and management tools available.
Taking It Forward
All of these services, platforms, and tools help to simplify the journey to cloud by presenting readily consumable options and migration paths. But that still won’t solve the work required to initiate the journey, see it through and sustain it over time. Some of the key aspects to consider at the outset include developing a target-state strategy, effective transformation planning and implementing a cloud-effective operating model. All of this is particularly important for the future.
(An aside: One thing we particularly advocate for is that regional banks create a compelling case for talent to come to them. One way to do this would be to build a “Tech University” to train and aid in retention of cloud-skilled talent, and to continually be testing and trialling new and emerging services.)
Despite the constraints mentioned earlier when it comes to competing against other banks, regional bankers also have some advantages — being smaller can mean faster decisionmaking, less bureaucracy and an ability to execute changes of direction more decisively. This agility advantage can be super-charged when CIOs and application developers can eliminate most of the clunky infrastructure of the past and rapidly build and prototype new ideas, bringing new revenue generating products and services to market significantly faster. If not now, when?
Richard Walker is a principal in Deloitte Consulting LLP’s banking & capital markets practice and serves as the U.S. leader for regional banks. Chris Thomas is a principal in Deloitte Consulting LLP’s global technology practice and leads the professional services firm’s US banking cloud services team. Richard Pone is a senior advisor to Deloitte Consulting LLP, working with global firms on optimizing their cloud and IT infrastructure strategy and transformation initiatives.<.em>