Revolutionising financial services: The path to intelligent banking in the digital age

The emergence of new technologies is creating an exciting potential future for financial services, but banks need to have the right approach to capitalise. FStech looks at the major trends of digital and intelligent transformation identified by a new whitepaper from Huawei and examines banking's digital future.

To meet expectations of digital natives, the future of banking is increasingly evolving to be one in which customers expect to complete many of their banking functions without visiting a local branch or speak with a human agent.

This is not just the case for younger customers. A 2022 report from Bank of America found that that 71 per cent of baby boomers (adults born between 1946 and 1964) in the US used mobile banking in 2022, up from 67 per cent in 2021. The survey found that nearly all generations under age 55 now use mobile banking at a rate of 96-97 per cent, heavily suggesting that this change in consumer banking habits is here to stay.

At the same time, regulators are also becoming increasingly demanding of banks’ digital capabilities. Rules like the Digital Operational Resilience Act (DORA) and third Payment Services Directive (PSD3) require financial institutions to meet a higher bar for ICT compliance than ever before.

On the other side of the equation, banks are a prime target for cybercriminals and need to take all necessary steps to protect their data and systems from attack. Not only could a cyberattack lead to millions of dollars of losses, suffering one due to faults with legacy systems could cause potentially irreparable reputational damage.

To meet these evolving expectations from all quarters, banks must take stock of their legacy architecture and consider how they can modernise with a cloud-based setup and adopt new technologies in an effort to drive efficiencies, cut costs, and meet increasing demand from consumers and regulators alike.

In a recently whitepaper entitled ‘Striding Towards the Intelligent World’, Huawei outlines how the financial industry is progressing towards a digital future and trends within banking that will continue to develop in the coming years.

These trends include the emergence of customer groups accelerating transformation from digital connections to intelligent emotional interaction; the transformation of digital currencies by global central banks which are bringing digital payment back to the banking system; the actvitation of micro finance by the platform economy; new transaction frauds and intelligent network that are attacking and threatening fund security; the accelerated transformation and large-scale growth of IT to drive systematic construction of business resilience; and the sector’s move towards refined operations in light of the slowed-down growth of asset scale.

Against a backdrop of increased demand for streamlined, digital-first banking services, sluggish economies, and increasing interest rates, the paper elaborates on the M.E.G.A. infrastructure framework. It mentions that the four core principles of this architecture are Multi-DC-as-a-computer, E2E experience, Green and Autonomous, laying a robust foundation that allows banks to focus on innovation, business growth and deliving superior user experience.

A robust, multi-domain foundation

While it may be tempting for banks to get swept away with the promises of new technologies, failing to address legacy architecture and siloed data repositories may hinder an organisation’s digital transformation efforts.

This is especially pressing for traditional incumbents in the industry who risk being outflanked by digital native FinTechs and digital banks that are not weighed down by legacy technologies. It is no surprise then that 70 per cent of banking executives surveyed by the European Financial Management Association (EFMA) in 2022 said they were ‘concerned’ that they lacked sufficient data analysis capabilities to compete with their FinTech counterparts.

While there is no one ‘silver bullet’ by which banks can instantly catch up in this regard, a well-considered cloud migration strategy should be high on the agenda. By migrating to a multi-domain cloud-based architecture, banks can break down operational and data silos, enabling greater leveraging of data.

The importance of cloud transformation for banks is highlighted in a 2022 paper from Xi’an Jiaotong University and Aberdeen University researchers, which argues: “Cloud computing elevates how banks function; for example, it provides banks with a multichannel relationship with customers at many different levels to maintain and improve customer service.”

Awareness of the need for cloud-based architecture is spreading throughout the finance industry and this is one of the key areas identified within Huawei’s M.E.G.A. framework, stating: “Architecture innovation enables multiple datacentres to run as efficiently as a computer, and improves the performance and efficiency of financial infrastructure.”

From digital connections to intelligent emotional interaction

Beyond bank functions which see digital technologies speed up and simplify processes, they also have huge potential within customer services. One such bank which has deployed AI in this way is Morgan Stanley, which in September 2023 began the rollout of its GenAI chatbot.

The bot, which is based on OpenAI’s ChatGPT and had been tested with 1,000 financial advisers for months prior to launch, is a virtual assistant for bankers that allows them to quickly find research or forms. In the future, it will have the ability to create summaries of client meetings, draft follow-up emails, update the bank's sales database and even schedule a follow-up appointment.

While this is a more sophisticated example, more simple chatbots have seen wide adoption in financial services in recent years. As Huawei notes, leading banks have begun to use AI customer service robot assistants and branch robot assistants to identify customer emotions by analysing their tone and micro-expressions, while providing caring services for customers with the help of AI assistants.

A 2023 review by the US Consumer Financial Protection Bureau found that each of the top 10 largest commercial banks in the country had deployed chatbots as a component of their customer service. It estimates that around 37 per cent of the US population interacted with a chatbot in 2022 to simplify banking functions such as making payments.

The market is also growing internationally, it pointed out, due to increasing investments from banks in digital technologies and a rise in consumer desire for individualised financial services.

One positive example of these developments in action cited by the whitepaper is the emergence of 5G+ smart branches of the China Construction Bank (CCB).

CCB, it notes, has built smart branches that integrate experience, conversation, and entertainment spaces. The bank collects a range of data through IoT awareness, and offers more than 20 interactive games to facilitate customer acquisition and retention. The offering of these smart branches can be combined with auto banking, home banking, space capsules, and humanoid robots to enrich the customer experience.

Examples like this demonstrate how the massive amounts of customer data collected by banks can be utilised to ultimately deliver a much more compelling end-user experience while also streamlining processes.

Intelligent architecture to tackle fraud

While the methods of interacting with customers are continuing to develop, so too are the tactics of fraudsters and cybercriminals.

As technology is evolving, Huawei notes, network viruses are getting more intelligent, clustered, and lingering longer, resulting in frequent information leakage and ransomware incidents.

There is a growing market for Malware-as-a-Service (MaaS) and in particular Ransomware-as-a-Service (Raas) on the Internet. For a small fee of a couple hundred dollars per month, malicious actors can now easily buy software designed to steal data like credentials, passwords, banking accounts and crypto wallets.

But this is another area where intelligent architecture can be deployed to detect and respond to threats in real time. Digitalsecurity solutions can monitor networks, endpoints, and other devices to detect anomalies, behavioural patterns, and other indicators of compromise.

Visa, for example, has released its Consumer Fraud Risk tool in the UK, which draws on large-scale payments data to help identify scams before funds leave a victim’s account.

JP Morgan Chase, as mentioned earlier, has developed an early warning system which uses AI and deep learning techniques to detect malware, trojans, and phishing campaigns. The early warning system enables warnings to be received before an attack occurs. The system is also able to send alerts to the bank’s cybersecurity team as hackers prepare to send malicious emails to employees and infect the network.

Building a digital platform and introducing data from various departments of banks and third-party institutions with public trust through data lakes can help banks to achieve T+0 real-time risk control, Huawei argues.

One relevant example cited by the whitepaper is that of the Bank of Communications (BOCOM), which has built a comprehensive data analysis platform based on a data lakehouse for data governance. Through this technology, BOCOM’s customer conversion rate increased by 164 per cent, while real-time fraud identification reduced the number of risk incidents by 52 per cent. The real-time T+0 report search and analysis of banking services quickly support decision-making.

Another positive example is that of China Merchants Bank, which has replaced its traditional data warehouse with a new data lakehouse platform. The new platform has over 4,000 nodes, supports customer journey analysis from 4,000 dimensions, and provides real-time data services for thousands of market development and operations personnel. The platform analyses over 1.5 million transactions daily, reduces fraudulent transactions by 82 per cent, and prevents tens of millions of dollars in fraud losses each year.

Both examples show that the move towards intelligent architecture has delivered demonstrable benefits for banks that have utilised the latest technological innovations to improve efficency and customer experience while simultaneously clamping down on fraud.

Preparing for digital currency transactions

Another area of increasing maturity is in digital currencies, with central banks like the Bank of England exploring their viability.

Central Bank Digital Currencies (CBDCs) have officially been issued by seven countries, while nations such as China and India have piloted them at scale.

Recent research by Juniper forecasts that payments using CBDCs will hit $213 billion annually by 2030, with advocates for them arguing it is a matter of if, not when, they will gain mainstream traction.

To prepare for the rise of CBDCs, the Bank of International Settlements (BIS) recently published its review on how banks should approach CBDC. The member central bank-owned international financial institution said that it is currently assessing the merits of a one-tier system (in which a central bank handles all payments itself) against a pure two-tier system (where payments and client onboarding and servicing are handled largely by the private sector) or a hybrid CBDC architecture incorporating a two-tier structure with direct claims on the central bank and real-time payments handled by intermediaries.

While the nature of how CBDCs will ultimately manifest structurally is unclear, Huawei notes that banks must prepare for digital currency transactions and intelligent regulatory systems so as to handle massive volumes of encrypted transactions smoothly in a manner that ensures “accuracy, security, stability, and continuity of transactional systems.”

With this considered, Huawei said that it advocates for end to end (E2E) trusted infrastructure – the ‘E’ in its M.E.G.A. framework – to create a system which provides end-to-end experience assurance for key business. The company also calls on banks to develop digital currency transaction systems based on “trusted computing, network, and storage and isolate the system from other systems.”

The viability of Huawei’s proposed solution resonates with the points raised by BIS and its thinking around how CBDCs can best be handled by banks.

Refining operations for green finance

One aspect of the digital future that often goes under appreciated is the cost involved of operating at the bleeding edge, for example, the development of digital currencies, not just from a financial perspective, but environmentally.

But while it may be easy to argue that the energy consumed by huge cloud data centres off as contributing to the climate crisis – data centres alone are responsible for 2.7% of the EU’s electricity demand according to the bloc – the M.E.G.A. framework argues that digital technologies can enable green and low-carbon development in the industry, and that new algorithms, technologies, and architectures support energy consumption reduction and efficiency improvement of infrastructure.

In January 2024, EU banks will have to disclose their Green Asset Ratio (GAR) for the financial year 2023. Banks will need to provide quantifiable evidence that demonstrates how activities they finance meet what the EU Taxonomy defines as sustainable.

While training models on the cloudcan quickly process large amounts of data, they can also feed into sustainability aims - a factor which is set to become more prevalent with the EU’s introduction of GAR.

With a cloud-native approach, financial institutions can also reduce costs, with the pay-as-you-go models offered by cloud providers allowing banks to more effectively scale costs in line with their business needs.

Building the bank of the intelligent world

Banking has always been in a continued state of evolution, and the explosion of new technologies like cloud computing (CPU decentralisation in particular), digital currencies and more have created huge opportunities within the sector.

But in order to become the digital bank of the future, there are many factors that should be considered.

There is no ‘one-size-fits-all’ approach to digital transformation and each institution will have its own circumstances to deal with, but there are some clear steps that most banks can take that line up with the M.E.G.A infrastructure’s approach to data centre design and operation.

The adoption of multi-domain collaboration can break down the traditional silos between different data centre domains, such as computing, storage, and networking, untapping more efficient resource utilisation and better performance.

Such an approach – along with focusing on the efficiency, green finance and autonomous processing of data – can create a future-ready bank which is resilient, secure and capable of intelligent emotional interactions with customers.

As the financial sector continues to stride towards the intelligent world, it is of vital importance that key decision makers have a clear plan of action to meet the digital requirements of tomorrow.

For more information, please visit Striding Towards the Intelligent World White Paper.

Share Story:

Recent Stories

Safeguarding economies: DNFBPs' role in AML and CTF compliance explained
Join FStech editor Jonathan Easton, NICE Actimize's Adam McLaughlin and Graham Mackenzie of the Law Society of Scotland as they look at the role Designated Non-Financial Businesses and Professions (DNFBPs) play in the financial sector, and the challenges they face in complying with anti-money laundering and counter-terrorist financing regulations.

Ransomware and beyond: Enhancing cyber threat awareness in the financial sector
Join FStech editor Jonathan Easton and Proofpoint cybersecurity strategist Matt Cooke as they discuss the findings of the State of the Phish 2023 report, diving into key topics such as awareness of cyber threats, the sophisticated techniques being used by criminals to target the financial sector, and how financial institutions can take a proactive approach to educating both their employees and their customers.

Click here to read the 2023 State of the Phish report from Proofpoint.

Cracking down on fraud
In this webinar a panel of expert speakers explored the ways in which high-volume PSPs and FinTechs are preventing fraud while providing a seamless customer experience.

Future of Planning, Budgeting, Forecasting, and Reporting
Sage Intacct is excited to present FSN The Modern Finance Forum’s “Future of Planning, Budgeting, Forecasting, and Reporting Global Survey 2022” results. With participation from 450 companies around the globe, the survey results highlight how organisations are developing their core financial processes by 2030.