Lynn Johannson, Advisor, Sustainability and ESG
January 4th, 2024
Lynn Johannson, President of E2 Management Corporation and Catalyst for THE Collaboration
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6 Capabilities a Traditional Bank Can Gain through Finance Modernization
Aug 9, 2022
The term finance transformation is often used to denote a financial institution’s transition to new systems and databases. Today, it almost always refers to transitions to technologies that employ current-generation artificial intelligence (AI) and machine learning (ML) modules.
The use of AI in banking is nothing new. However, new ML algorithms are enabling modern finance systems to dynamically improve the accuracy and timeliness of their scenario modeling. Provided that transitions to newer systems are done effectively, traditional banks stand to gain exciting new capabilities.
Here are some of the new capabilities traditional banks may enjoy through finance transformation.
1. Superior Forecasting
Though older generations of banking software are still quite capable, one area where they fall short is in forecasting. Advanced AI and ML algorithms in new systems now permit highly accurate forecasting that changes dynamically depending on new data that comes into the system.
The ability to foresee future events with better certainty enables modernized banks and financial institutions to manage risk more effectively. In turn, they may offer more relevant products and serve a wider market. If the bank needs to, it may even leverage these new forecasting capabilities to safely pivot to entirely new business models.
2. Bespoke Banking
As mentioned earlier, improved AI and ML capabilities can empower banks and other institutions to move away from traditional mass marketing methods, where customers are served similar, if not identical, banking products. Finance modernization enables banks to tap into the potential of big data and the internet of things in determining market behavior, thus allowing for the “mass customization” of banking services.
Using modernized finance systems can greatly reduce the risk involved in serving personalized financial products to large markets. Retail banks and microlenders, for instance, can leverage new systems to offer regular customers the type of support typically given to preferred clients, but at much less significant costs.
3. Fast Product Development
Even if a bank does not want to go all-in on personalized banking, modernizing can enable them to quickly develop and validate new financial products.
Traditionally, developing new banking products was a difficult, risk-averse, and expensive process. With modern systems, not only can the effects of financial product prototypes be accurately modeled, data from real-world tests could be compiled faster, and conclusions can be drawn with more confidence.
These benefits can dramatically reduce the risk and expense involved in testing and rolling out new financial products. This added speed may even be critical in cases where the bank needs to pivot to a new direction, capture a bigger market share in their existing niche, or enter a completely new market.
4. Active Cyberthreat Protection
Today, international criminal syndicates and rogue governments operate highly sophisticated data theft and sanctions evasion operations, presenting a serious threat to governments and financial systems the world over.
Traditional banks are often prime targets, as these often lack the tech infrastructure to prevent concerted cyber attacks. Finance modernization can greatly reduce the threat presented by these malicious actors.
See: As financial institutions buy into AI, these factors will be key to successful transformations
Previously, cybercriminals could rely on the sheer volume of transaction data generated and processed by organizations to mask their actions. Now, AI and ML-enabled finance systems can quickly sift through extremely large amounts of data that would be insurmountable for human financial crime experts using older tools. These new systems can automatically flag suspicious activity, including previously undocumented types of attacks.
5 . Cost-Efficient Operations
One of the biggest benefits of finance transformation is the potential cost savings in several areas of operation. New systems enable banks to process data faster and more accurately, which brings down time and financial costs in virtually every business unit. These systems also enable banks to employ smaller, more productive teams than would be possible using older systems.
Even more savings are realized if the bank chooses to transition to a cloud-based system. Not only would they no longer need large finance IT teams to function, they would also no longer need to maintain the hardware and necessary infrastructure to support complex banking systems. Being completely virtual, these cloud-based systems could also reduce expenses associated with maintaining office space in different geographic locations.
6. Automatic Regulatory Compliance
Complying with regulations established by the government is important for banks because fines and other sanctions could seriously impede their ability to operate in a given market. However, regulatory compliance tends to evolve year after year. This means banks using older systems often have problems maintaining compliance.
Financial transformation can help banks keep up with these increasingly complex standards. Cloud-based platforms maintained by trusted vendors will update automatically to enable perfect compliance across all the geographic regions a bank operates in. In this way, modernization can allow banks to focus on delivering better financial services rather than the minutiae of regulatory compliance.
What New Capabilities Does Your Bank Need?
Finance transformation offers more than just a faster way to process more data. Updating to new AI and ML-enabled systems promises banks a significant leap in capabilities. If the transition to these new systems is properly managed, banks and other financial institutions could leverage these new tools to secure new markets and find new ways of serving existing ones.
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