Retail banks are migrating core systems and embracing the use of clouds. Travers Clarke-Walker – Chief Commercial Officer of Thought Machine – tells Ouida Taaffe what this means for the future of fintech in retail banking.
Retail banks have been talking for years about building new core banking networks. The legacy networks are complex, expensive to run and difficult to upgrade. So stripping them out sounds like a no-brainer – except for the fact that building a new core is complex, expensive and could damage the business.
Now, however, it seems that retail banks are migrating core systems in earnest.
“The tipping point is here,” says Travers Clarke-Walker, Chief Commercial Officer of Thought Machine, which provides cloud-native core banking software.
“Banks now see significant cost and development benefits in migrating. I don’t think there is any material bank not reviewing their tech stack to see how they can transform the whole thing.”
A cynic might point out that Thought Machine would say that, but its bullish outlook is shared by its investors – a number of whom are banks.
It hired an additional 100 staff in the first two quarters of 2020 and says it will be making “major” client announcements over the next few months.
Its focus is on retail banks. But Clarke-Walker says Thought Machine has had “some” conversations with corporate banks and the new generation of technology gives “a line of sight” to working with them.
Thought Machine’s core banking product – Vault – is cloud agnostic and in use on all the major clouds – Amazon Web Services, Microsoft’s Azure, and Google Cloud. It can also be used on hybrid clouds – ie partly on a bank’s own servers – though with “some restrictions”.
How retail banks could use real-time data and smart contracts
The new systems will allow retail banks to use real-time data and a library of smart contracts to develop new products.
Clarke-Walker cites one client as offering a single card that allows customers to toggle between debit, credit and foreign currencies – which requires multiple pieces of data to be streamed simultaneously. And banks will be able to maintain current products.
“We have not found a retail banking product that we can’t replicate using a smart contract,” says Clarke-Walker.
He wouldn’t specify how the subscription model at Thought Machine works, but it has a floor above which banks pay for what they use.
“It is very cost effective,” says Clarke-Walker. “And banks no longer have the maintenance burden that prevents them investing in development.”
But will the functionality that new core banking systems can support just become a hygiene factor over time?
“There is a lot of work to be done, at a lot of banks, before we get to next-generation core banking systems as a hygiene factor,” he says. “And the system gives a lot of flexibility in terms of the products and services you can create.”
Clarke-Walker is not convinced that banks will necessarily end up as utility ‘pipes’ providing banking products for tech companies. “Banks will be able to do interesting things for themselves,” he says.
But migrations are complex. How are banks introducing the new software into existing stacks?
“We are seeing the emergence of a method for migration,” says Clarke-Walker.
“Broadly, banks do it by building a digital greenfield bank. That battle tests the technology and in a sequenced manner. The old ‘rip out and replace’ strategy is over. They build, validate and then progress further into the bank.”
What will the retail bank of the future look like?
“The predominant channel for retail banking day to day is probably going to be mobile. But not all needs are day to day. And they are not all well served by mobile – for example, new mortgages. And voice may become useful and interesting for certain parts of the channel.”
Mobile banking means that Thought Machine is seeing “excellent” traction in Asia and a similar degree of market appetite in Europe. And Thought Machine will be opening an office in the US toward the end of this year.
The US “doesn’t have as many mobile challengers,” says Clark-Walker. “They don’t have the same underlying pressures in the competitive landscape.”
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