An “Uber-Moment” in Banking?

The Great Banking Migration to Modern Technologies

Did you know that Goldman Sachs employs more developers & engineers than Facebook? We don’t typically think of banks as technology companies, but they are. Goldman Sachs has a small army of 11,000 engineers! That’s equivalent to as many employees as Twitter (~3,700) and LinkedIn (~7,000) have on their entire payrolls combined. According to the article, “Goldman Sachs is a tech company”;

Assuming the employee mix at Facebook was something like LinkedIn’s, it becomes very easy to see how Goldman might employ twice as many programmers and engineers than Facebook.

If the war for talent is intense for tech companies, imagine what it must be like for banks. Capital One also employees thousands of developers, and plans to hire thousands more as they plan to move entirely to Amazon’s AWS cloud infrastructure. They are the first big bank that wants to migrate everything to the cloud.

Banks can no longer ignore the benefits of the cloud. Capital One isn’t the only major bank. An AmericanBanker article, “Banking Apps that Matter Will Head to the Cloud in 2016,” provides other examples:

JPMorgan Chase, Goldman Sachs, and the International Securities Exchange have begun moving applications to the cloud with the use of container software that can provide built-in security. The Federal Home Loan Bank of Chicago runs all of its internal production workloads on the AWS cloud and has cut costs 30%, according to Amazon’s website.

The move to Amazon’s AWS, or the cloud in general, is just one migration example. There are many others and they’re all being driven by necessity. Financial sector’s tech stacks have become antiquated and can no longer support the innovation required in today’s fast moving technology landscape. Luckily, banks are in the process of making these changes, and as a result, in the middle of massive technology migrations.

Banks must adopt new technologies to survive

Historically, most banking applications have run on internal infrastructure — costly systems that are written in old programming languages that lack the flexibility of today’s modern technologies, and can’t integrate with new technologies. That will change. Banks are practically being forced to adopt new technologies for the following reasons:

  1. Fast growing fintech startups are providing more innovative features and threatening to lure away customers.
  2. Technology companies such as Google & Apple that are venturing into the payment space. They’re providing easier ways to move money between people and pay for goods.
  3. Customer expectations for better experiences — people more than ever before expect digital services to be instant, convenient, and extremely easy to use.
  4. Core systems no longer support internal needs to provide new services. Many were originally built in silos and don’t effectively work with one another, or are simply provided by too many vendors.
  5. A need to innovate faster and stay relevant with modern services.
  6. Off-premise benefits can no longer be ignored — especially when it comes to cost savings associated with SaaS or cloud based services.
  7. Banks must provide omni-channel digital experiences like the rest of the web — customers expect to be able to manage their money from any device.
  8. Legacy system costs. According to a study by IBM:
The inflexibility of legacy systems costs the banking sector $200 billion annually and erodes roughly 20% of pre-tax profits. [Tweet This]

Modernization & migrations to new tech

These forces are creating a perfect storm and propelling a massive migration off legacy systems and onto more innovative technologies. This is happening across the board amongst today’s largest banks. According to a study, Invigorating Banking by Finextra:

80% of banks believe they will have to replace their core banking system in the next 3 to 5 years. [Tweet This]

This is why many of today’s largest banks are migrating to new technologies. There’s plenty of examples.

The Deutsche Bank signed a 10-year, multi-billion dollar IT outsourcing deal with HP early in 2015 to modernize it’s wholesale banking IT infrastructure:

The deal will allow the company to standardize its IT infrastructure and reduce costs, setting the stage for a broader business technology push, Henry Ritchotte, Deutsche Bank’s COO, said in a statement. “Having a more modern and agile technology platform will further improve the bank’s ability to launch new products and services and lay the foundation for the next phase of its digital strategy.

Co-CEO John Cryan of Deutsche Bank further explains how modernizing will impact it’s bottom line:

By 2020, the bank expects to pare its existing 45 operational systems to four, quadruple its use of private cloud systems to 80 percent, and increase application virtualization to 95 percent from 46 percent, at an estimated cost savings to run the bank of 800 million euros.

The following summarizes Deutsche Bank’s migrations over the next few years:

Source: “Deutsche Bank digging out of technical debt, while moving to the cloud

Another big one is Capital One, one of the largest banks and credit card companies with over 70 million accounts, plans to reduce its 8 data centers to 3 by the end of 2018 by moving to Amazon’s AWS. Rob Alexander, CIO of Capital One, gave the following AWS re:Invent 2015 Keynote on the importance of migrating to the cloud.

At Capital One, we need to model ourselves on the best technology companies out there… this year we have taken a more aggressive stance recognizing we can deploy some of our most critical production workloads on the Amazon platform.

Don’t forget Goldman Sachs and Bank of America either. They’re both in the process of modernizing their infrastructure with open source commodity hardware. Goldman Sachs acts like today’s hottest tech companies, too, by contributing to open source. In mid 2015, they joined the Linux Foundation’s Open Container Initiative and also partnered with Docker. Bank of New York Mellon is heavily investing in “a modular architecture that allows the freedom to pick and choose hardware and software infrastructure helps the company avoid vendor lock-in”, says BNY Mellon CIO Suresh Kumar.

Investment bank JP Morgan Chase & Co. has a priority in 2016 to internally adopt many of the new technologies, like Bitcoin & Big Data, that it typically invests in. Matt James, the Chief Operating Officer of JP Morgan, the biggest U.S. bank, says it spends 8% to 9% of its revenue on technology.

Finally, one of the most exiting examples is a collaboration led by R3 that has brought together 42 banks to develop distributed ledger technologies. This is the same underlying technology as the block chain that powers BitCoin. These are some of the world’s largest banks like State Street, Royal Bank of Scotland, Credit Suisse, and Barclays who are participating. According to an ars technica article:

The financial sector has long evinced a strong interest in what the block chain — essentially a decentralised ledger of verified transactions — can offer, especially since it could potentially help reduce infrastructure costs by £10–13 billion per annum.

Will Banks experience an “Uber-Moment”?

The cost of not innovating & adopting new technologies fast enough could have devastating affects on current banks, similar to how Uber impacted taxi industry. Uber has provided an order of magnitude better service, thus enabling it to steal marketshare and become almost ubiquitous over night. The same can happen in the finance industry with Fintech startups that provide easier, cheaper ways to transfer money to friends, across borders, manage investments, or provide payments.

The former group CEO of Barclays, Antony Jenkins, predicts an “‘Uber-like’ disruption from the Fintech sector to come crashing down on the current banking industry.” He gave the following speech that sums up what’s happening in the financial industry today; Approaching the ‘Uber Moment’ in Financial Services: How Technology Will Radically Disrupt the Sector:

I’m predicting that over the next 10 years, we will see a number of very significant disruptions in financial services — let’s call them Uber moments — driven by companies in the Fintech sector…

Jenkins provides a number of predictions that revolve around providing financial services at a fraction of the cost, banks no longer needing to sustain networks of physical offices, big data fueling more personalized financial advisement, and employee counts at financial firms dropping 20 to 50% over the next 10 years as the financial industry becomes digital.

Ultimately:

We will see massive pressure on incumbent banks, which will struggle to implement new technologies at the same pace as their new rivals [from the Fintech industry]. That will make it increasable challenging for them to deliver the returns and profitability that their shareholders demand.

The same way legacy systems are broken for banks, at Outlearn, we believe learning is broken for developers. Given the rise of eLearning and the continued existence of monolithic LMS systems, the learning industry also needs an “Uber-like” moment. Banks not only need new technologies, they need new ways of onboarding, training, and developing their existing talent. This is why we’re particularly focused on helping big bank engineering teams at Outlearn with our new dev learning platform.

The best content for instruction doesn’t necessarily come from off the shelf courses — it usually resides on blog posts, internal documentation, YouTube videos, speeches, existing courses, PDFs, or websites. We make it really easy to rapidly assemble learning paths by pulling in these resources, mashing them up, and contextualizing it for your unique situation. Go ahead and try for yourself — the platform is free & open to the public to use.