Many signs suggest we are drifting toward an economic crisis. Banks must weigh risk factors accurately in a period expected to be turbulent, while many technology innovations are available to assist them do so – says Gábor Strén, account director of the financial sector at Microsoft who will participate in our Banking Technology conference next week. We talked with the expert about the outlooks of IT budgets in banks, how to streamline the operation of financial institutions, the opportunities cloud technology offers, ESG-trends becoming trendy due to energy crisis, among others.
How can you make banking operation more streamlined in terms of technology? Are there any room for further cost reduction in operation, namely is it still possible to reduce costs by the development of IT infrastructure?
The business management constantly requires the IT to come up with new innovations, new technologies capable of operating systems more efficiently and with less costs. This sort of motivation for development will stay with us in the coming years and remain high on the agenda. Currently, we see a mixed picture in the banking sector. It is hard to achieve cost reduction by innovation in the rigidly regulated market of financial services, which is due mostly to the operation of existing legacy systems. There is little time and energy allocated to phasing out solutions while introducing new innovations, therefore parallel operation keeps existing for the long run. We need to approach this field with much more ambition in the near future, namely, we will need to put more focus on change management besides technological development.
What kind of role cloud technology can have in this process?
If a bank is open to new approaches, it can plan further expansions of cloud-based services in many areas, and thus can replace expenses on IT operation with modern, usage-based services, relying on cloud technology. There are plenty of opportunities ahead in the fields of cooperation and communication, such as the modernization of telephony or any other solutions helping remote work and collaboration that can be safely used even in a banking environment. Aspects of business profitability are often analyzed when those IT developments are planned. As a consequence, the migration of existing IT systems into the cloud is often considered, besides new green-field investments. If we compare the costs of onsite operation, which is expected to rise, with those of using a cloud service provider assuming a so called “lift and shift” migration (a migration that actually leave the system intact) – this can suggest a return on investment. Not to mention the opportunity opened to start a journey to a faster and more flexible modernization. If choosing a green field investment, could-first approach is of utmost importance. All the big, international software producers and solution providers in the banking market would develop their products of the future relying on cloud technology. This will soon appear as a customer requirement in the Hungarian banking sector for sure, therefore I think we must consciously prepare for these changes to come.
We have heard many things about the Hungarian core bank systems. Their support period is coming to an end, they need to be replaced, they are old but suitable for modernization. What decisions do you think banks should make about them?
Every traditional bank has its unique story, its background – no matter if they are owned by a foreign or a local proprietor – and this is what determines their approach to this question. One thing is sure, modernization can no longer be postponed in these areas because complex procedures are at stake and such basic bank systems needs many years to be updated or replaced. Outdated basic bank systems can pose an operational risk and cannot be operated safely until the end of time. An even more important aspect is the competitiveness of banks. A modern basic bank system would significantly help new financial product innovation, the introduction of new services and a more comfortable banking.
The banking sector has been levied with a considerable special tax this year, while we seem to be drifting toward an economic crisis. In such a situation, are there funds, resources to be able to implement those developments?
It is no doubt, where these problems arise, a budget must be allocated to ease them. A top management decision must be made for the long run, because this is a project of many years. All players of the market have done that or are doing it now. This is a serious responsibility, dealing with this, and investing in this is a must for future operation.
Surging energy prices will hit banks. Can they reduce their energy consumption by technology development?
Green transformation is a pressing and very complex issue. Banks usually run a large operation so the question of how to reduce their emission and operational costs is a very important one. There are a lot of opportunities out there in the market to move toward smart solutions due to office replacements or reorganizations. Being a tech company, we can show an example of how to operate efficiently and we can also show where and to what extent a company can reduce its emission by simply introducing cloud technology. However, the financial system has a huge impact on other processes of the economy as well. When dealing with clients and managing product portfolios, they can have a significant indirect influence on players of the economy. I mean, they can encourage retail and commercial clients they handle to launch similar initiatives and a green transition. Besides the primary goals, this provides banks with a very interesting new tool, and they get a much deeper insight about their clients with a lot of favorable impact on understanding credit risks. Everything that drives business development and green transformation besides companies and banks is related to data. This enables them to build a wider and richer database and so they can make decisions, develop products, moderate risks and develop business based on data. A preparation for this has begun in the Hungarian banking sector.
At what stage Hungarian banks are in pursuing their ESG goals? What areas are they focusing on and what could be their next step?
The developments of their own operations concerning direct carbon footprint falling under Scope 1 are already underway and we can already see their results. However, this is just a mandatory step. I think, various green loans and retail digital services based on green transformation will soon appear in the market. The current energy crisis has given momentum to this. International trends have already show that every multinational company, all the big players, regional or global bank have put this high on their agenda in the last one or two years. We have seen in some of the larger banks that they implement green and digital solutions through specialized fintech and spin off companies within the framework of online bank projects. We can expect this to appear in the Hungarian market too.
How much did the ESG recommendation of the central bank help banks to start their sustainability journey?
It is one of the key missions and jobs of MNB to highlight trends and risks. The recommendation underlines and lends weight to ESG, which supports business approach and strategy strongly.
To what extent do you think Hungarian banks could gain foothold in the area of non-bank services, what sort of beyond banking attempts can you detect in the market? What direction did the global bank sector take with regards to this?
Beyond banking has been a mainstream trend in the international markets for years. For example, it has appeared in the area of long-term health and property market services, and in life situations crucial for the clients from a financial point of view. Banks can enter this market through lending, mortgage loans and cash flow where client acquisition activities can be assisted by satellite companies. The next level of beyond banking pursuits will arrive when banking activities as a service will be made available. This is perfectly exemplified by risk management models developed by banks being traded in the markets of financial service providers. For example, the Standard Bank provides risk management services in South Africa, the Polish BIK Biuro (Central Credit Information Office) offers retail credit profile services via API to financial institutions. I am sure we will see similar solutions in the Hungarian banking sector soon. It is important to make sure these endeavors will not remain isolated, but a comprehensive approach and a strategy will be built on the concept of beyond banking. These endeavors will not turn profitable in the short term where these new services appear, but they will strengthen the entire ecosystem.
There are many signs in the global and Hungarian economy suggesting we are sliding into a crisis which poses serious threat to the operation of banks and the number of non-performing loans can jump high. Are there technologies today capable of predicting the trouble and where it might come from?
There are many scenarios for the next one-three years regarding both economic growth and risk factors: energy crisis, geopolitical risks and their impact on various sectors, the people and companies all have their role. One of the most important components of any preparations for this turbulent, volatile environment is the management, measurement and predicting of these risks interpreted in every possible aspect. These tendencies suggest data-based solutions are the future which support decision making relying on data coming from diverse sources. Lending can be assisted by an intelligent decision support system, but in addition, the role of credit monitoring and the active management of the credit portfolio will be highly demanded too. With AI-solutions, potential non-performing loans can be identified in advance, and there are AI-based systems to support marketing activity as well. It is a classic reaction to crises from banks that they stop providing loans to certain companies, now typically those operating in energy-intensive sectors. However, they could do this in a much diversified manner: instead of the old fashioned “one size fits all” approach, banks could rely on pre-qualifications in sectors most exposed to risks.