The traditional banks face a number of key challenges as they look to enhance their digital offering. Louise Potts, head of banking – customer advisory, SAS UK & Ireland discusses with RBI how the technology required is changing, with API-led services increasingly viewed as the key to more flexible ways of working

RBI: Is it indeed the case that the traditional banks face severe challenges when it comes to digital banking updates as a result of legacy/core issues? 

Louise Potts, SAS UK & Ireland

It’s no secret that the banking industry has transformed since the start of 2020, with in-branch interactions significantly reduced and triple the number of transactions being processed via digital channels. For traditional banks, this has created some pretty significant challenges, forcing many to upgrade their legacy core banking systems with cloud-based technologies.
These legacy systems relied upon by traditional banks create a number of obstacles, including data integrity and data quality issues that hinder decision-makers from gaining real-time insights critical for the business, as well as cumbersome and resource draining processes limiting their ability to meet customer expectations.
That’s why, to stay afloat, traditional banks must rethink the way they serve customers. After years of being supported and reworked by different IT service providers, the legacy core banking platforms that have been costly to maintain need to be replaced by more innovative solutions.

RBI: Don’t the neobanks also face challenges when they enhance their digital offerings?

Louise Potts: While neobanks are of course operating in the same marketplace, they are far more agile and able to adapt to market changes. They can efficiently modify and update their core systems as and when required.
Their greater use of advanced analytics, cloud, artificial intelligence and open banking has allowed them to transition from a reactive mode, in which they focused on how they serve clients in the midst of the change scenarios that we have been going through, to a proactive and innovative one in which the fundamental pillar is to deliver more value to these customers.

RBI: Can you summarise how the technology required is changing? Why are API-led services increasingly viewed as the key to more flexible ways of working?

Louise Potts: With the market changing at such a rapid pace, there is a real need for banks to be able to adapt without destabilising their entire system. The majority of Santander customers will remember the panic felt when all banking services went down towards the end of last year due to a system update.

Within minutes, people took to social media complaining that they were unable to access online and mobile banking services, log in or make payments.

It’s important to point out that Santander isn’t the only major high street bank to be hit by such problems. Only a month previous NatWest‘s online banking services also went down, owing to a similar situation.
For traditional banks, these events act as a fresh reminder that branching out into the digital age is not without its challenges. With their core processes tightly coupled into legacy systems, even the simplest of updates can create severe problems, as well as leading to operational inefficiencies.
An API-led approach can allow these organisations to bolt on new functions without the risk of services going down as both Santander and NatWest experienced. Similarly, integration, operational and maintenance costs are reduced.

RBI: The FCA has said that it’s ramping up scrutiny of the fintech challengers, how can banks optimise use of the latest technology to ramp up their AML and KYC processes? Is it indeed justified for the FCA to reference the challengers… are the same challenges not faced by incumbents and digital challengers alike?

Louise Potts: If N26’s recent experience with Italian regulators proves one thing, it’s how precarious a bank’s fortunes can be without robust and efficient anti-money laundering (AML) capabilities. Unfortunately, this isn’t an isolated case.

A 2021 review completed by the FCA also highlighted similar concerns with some Challenger banks operating in the UK. With more than eight million retail customers covered by six challenger banks, the ability to open bank accounts quickly and easily was countered by some of the firms failing to capture Know Your Customer (KYC) details such as income and occupation and conduct effective AML checks.

This presents a challenge – while the FCA supports challenger banks’ use of innovative technologies, the regulator also highlighted that ‘Challenger banks should consider the findings of this review and continue enhancing their own financial crime systems to prevent harm.’
Through automation, and applying multiple detection methods – including techniques such as business rules, anomaly detection and network analytics designed to spot signs of the most complex financial crimes – hybrid technology systems allow users to be confident scenarios are more accurate.
To have the most rigorous possible approach to financial crime detection, firms must first define the risks faced by each customer, company, and relationship. AI systems automate risk evaluation at an individual firm or bank level. They consider factors such as the category of transaction – be it cash or electronic, purely domestic or international – and then by the type of account activity and peer account activity taking place.

Through this automation, effective scrutiny of transactions and accounts can be achieved and it’s something challengers must consider as they continue to evolve.

Louise Potts, head of banking – customer advisory, SAS UK & Ireland