Digital transformation in financial services: from strategy to reality

This article first appeared in the Spring 2017 issue of The Record.

There’s a great sense of optimism within Microsoft at present, and rightly so. The company’s digital transformation strategy – set out by CEO Satya Nadella – is gaining acceptance across the business world. “Digital technology is transforming every industry in every part of the world,” said Nadella. “At Microsoft we are helping customers harness the power of technology to empower employees, optimise operations, invent new business models and transform their products for customers.” This strategy is coming to fruition in the form of customer wins, success stories and new partnerships.

At the end of February, ClearBank – the first clearing bank to enter the UK market in more than 250 years – confirmed that it is running its core operations on the Microsoft Cloud platform.

Built from the ground up on a combined public and private cloud infrastructure, the bank says that its modern platform will enable it to offer new competitive transactional banking services more cost effectively and efficiently when it opens for business this coming autumn.

“There are thousands of new fintech startups and challenger banks improving choice, but the industry will never truly move forward while it’s constrained by the challenges of legacy operational structures,” said Nick Ogden, ClearBank’s executive chairman, during the launch event on 28 February (read our interview with him here). “Figures from the Cruickshank Report indicate that, with the improved efficiency delivered by ClearBank’s ­built-for-purpose technology, between £2bn and £3bn could be saved from the annual costs that are paid for transactional banking in the UK.”

Similar success stories are being told across the financial services industry and beyond.

US life insurance company MetLife is taking advantage of Microsoft Azure to run complex actuarial simulation models, delivering high quality actuarial insights with incredible speed to decision makers around the globe. This is resulting in an improved customer experience and business decision making process, with an expected 45-55% saving in infrastructure costs.

And, thanks to the Microsoft Dynamics 365 platform, Metro Bank in the UK is able to provide employees with immediate access to information, such as branch traffic patterns or a customer’s account activity. “Technology should be used to engage people and that’s what we do at Metro Bank,” says CEO Craig Donaldson.

Speaking at the FinTech Ideas Festival in San Francisco, US, Nadella explained that Microsoft’s mission is grounded in empowering every person and organisation on the planet to achieve more, and that companies must not simply make digital products, but also look to engage their customers digitally.

“There is a broad spectrum of use cases of digital technology,” Nadella says. “Everyone is a digital company or software company today. The question is, how good are you at it? You’ve got to ask yourself what capability you’re building, whether it’s AI, machine learning, or the digital experience.”

For Karen Cone, who heads up Microsoft’s financial services division, the reason the digital transformation strategy is resonating with financial institutions is because it covers off two key areas of importance – it shows the opportunities to be had from cutting-edge innovation, but it also helps to tackle the challenges many businesses face here and now, related to modernising their legacy systems.

“I call it the ying and the yang,” says Cone. “On one front we’re working with financial institutions to create innovative customer and employee experiences. In this instance, it is critical that there is agility and innovation, and that company employees are digitally empowered. For example, we’re helping them to take advantage of advanced analytics, and push next best offers and actions that are relevant to individual customers.”

“But on the flipside, we’re also focused on issues such as risk management, ensuring compliance, modernising legacy systems and cost reduction,” continues Cone. “It’s about us helping financial institutions to rapidly adapt to the changes happening around them, with operational efficiency and agility.”

Microsoft customers are harnessing developments, including artificial intelligence (AI), the internet of things (IoT), and high performance computing as part of their digital transformation journey. Mitsubishi UFJ Securities International, for example, is using high-performance computing grids in Microsoft Azure to scale its compute power to support its risk computations and regulatory compliance. This has helped the company save millions of dollars in servers and data centre space. By using sensors (IoT) to collect preventative maintenance data from ATMs and analyse it in the Azure Cloud, Diebold Nixdorf has reduced its maintenance costs by 90%.

“I’m particularly excited about the ever-growing potential of AI and the cloud (which is fuelling AI),” Cone says. “The promise of AI is possible now because of three key factors. The first is the vast amounts of data from devices, sensors and a world that is being digitised. More than 10 zettabytes of data were generated in 2015, and this is projected to rise to 180ZB in 2025. AI will make it possible to sort through all this information. Second is that we now have almost limitless computing power in the cloud. And finally, we’re developing new algorithms that can make sense of and reason over all of this data.”

Developments around the application programming interface (API) economy are also allowing financial institutions to build exciting new digital experiences. “It’s giving rise to the opportunity for new partnerships – both within and outside of the industry – which could integrate many current common banking touchpoints seamlessly into more encompassing customer experiences,” Cone explains. “It’s ushering banks into a new battleground of integrated services, with the winners claiming the right to be a customer’s preferred digital point of entry into banking services. They will differentiate themselves based on insightful predictions of what customers need, taking advantage of seamless integration and assistive AI to build a full lifecycle customer purchase journey.”

As the industry continues to push forward with its innovation efforts, so too is Microsoft. “When we think about the future of technology, we believe the answer resides in the notion of intelligence,” says Cone. “We’re looking into how we can apply AI to help solve some of the biggest challenges in financial services. This includes areas like financial crime prediction, detection and prevention, risk management, personalising the customer experience and next best customer offers, and providing robo-advisory, chat bot and other innovative services.”

The company is also making good progress in areas such as blockchain. Many financial institutions are using the capabilities of over 30 fintechs in Azure’s Blockchain-a-as-Service to rapidly develop, test and prove blockchain use cases. This includes Microsoft’s own treasury department, which is working with Bank of America Merrill Lynch to explore uses of distributed ledger technology in areas such as trade financing. The company has also entered partnerships with the likes of R3, Tierion and AMIS. The latter to build Asia’s first consortium blockchain network on Azure.

“With our financial services industry solutions, global cloud, development and productivity platforms and strong enterprise focus, we’re positioned to help our customers build new business models and customer experiences, and navigate the new collaborative economy,” says Cone. “Together, we’re showing what’s possible when you have the capabilities in place to modernise legacy environments and embrace innovation, all while balancing the realities of risk, regulation and cost pressures.”