Banking is on the move. Today, the sector has turned into something that couldn’t have been pictured some 20 to 30 years ago. New regulatory frameworks such as Basel III have placed more pressure on banks to regulate and mitigate risks. Their internal structures have been reshuffled by creating whole new teams and compliance departments, putting strain on the banks’ bottom line. But it is not just international standards pushed by central banks that are driving change in the banking sector. There is an onslaught from another side: the newcomer.
Between PayPal, Google Wallet and most recently Facebook, which just announced its forthcoming free payment service through its messaging application, an increasing amount of nontraditional players are getting into the world of financial transactions. These have entered the market and have presented a very clear message to the traditional guardians of payments: adapt or die.
Whether it is an opportunity disguised as a challenge, or the dystopian end of the banking sector, one thing that is certain is that banks globally are taking the call seriously. As the specter of new and unusual competitors in financial transactions rises, banking is seeing an overhaul globally with big banks increasingly thirsting for technologies that will help them remain dynamic.
Some of these, rather than wait, have even sought an active role in funding the development of these technologies. In 2014, giant Barclays and startup accelerator Techstars launched a startup accelerator to develop financial technology — dubbed “fintech” — companies. All in all, global investment in fintech companies has tripled from $4.05 billion in 2013 to $12.2 billion in 2014, according to a 2015 report by consulting giant Accenture.
“Technology is going to hit the sector whether we like it, understand it, or not”
Fintech in Lebanon
Transformation is also making its way into Lebanon’s banking sector. “Technology is going to hit the sector whether we like it, understand it, or not,” says Tarek Khalife, chair of Creditbank. While it is impossible to predict exactly what the ‘bank of the future’ will look like, there is an understanding among some Lebanese bankers that it is important to start investing in technology for the future. Khalife explains that as of yet, Lebanese banks are just seeing the tip of the iceberg in terms of customer demands. “But that being said, you can’t push a button and have the technology ready, so you have to prepare for it, forecasting demand,” he says. “Early adopters do have an edge. We believe in adopting that edge.”
But while the impact of the transformation has yet to be seen in full, not all bankers in Lebanon share the same degree of concern or preparedness. While some banks are working behind the scenes on upgrading their online presence and IT systems, other banks still brag about technology that was novel in much of the world some 20 years ago, such as ATMs that accept checks, or the myth that their systems are unhackable.
With a glance at the alpha and beta banks in Lebanon, some banks appear to be outliers in their approach to technology investments, while some look like laggers.
Tip of the iceberg
While customers may for the most part only notice the new interface offerings on their mobile applications and e-banking, or pay some attention to security features, this is only the tip of the technological iceberg. Many other systems in banking rely on technology for internal communications, networking infrastructure, core banking systems, trading tools and algorithms. Some of these have been around much longer than trendy web and mobile interfaces. That is to say that banks have always had a strong footing in technology — from ATMs replacing some functions of the teller, to separate networking infrastructure systems.
Technological change at the level of core banking systems is perhaps more important than customer window dressing, but also a lot more difficult to implement. A transformation at this level is as messy as it is costly, to the point that large banks around the globe have delayed this type of change — opting to continue to run on legacy core banking systems that, had the banks been established again from scratch, they would have scrapped altogether in favor of newer software.
Chief information officers drool at the prospect of startup banks with no legacy issues
So much so as to make chief information officers drool at the prospect of startup banks with no legacy issues to cope with. Such was the case with Bank Audi’s venture Odeabank in Turkey. “When we launched Odea, we did not worry about legacy apps,” says Danny Dagher, group chief information officer at Bank Audi. “Now, if we get a software, we have to worry about integration with the existing systems and how it happens.”
Four years ago, the same year they put in place their new tech strategy, Bank Audi introduced middleware as part of their service oriented architecture, according to Dagher. Middleware is a layer of software that connects the core operating system to software applications, moving away from point to point architecture and making the entire system more fluid. For this job, they are using Oracle as a software vendor in partnership with local technology company PrimeWare, which is part of the ICT solutions provider ITG Holding, according to Dagher.
In addition to the middleware, Dagher claims that they are now currently in the process of switching their core banking software from IBM’s BankMate to Oracle’s FLEXCUBE, which is no small feat.
While Dagher was not able to disclose Audi’s budget on technology investments, he said it was close to, but not above, international benchmarks in spending across network infrastructure, core banking and consumer facing infrastructure. That is, they are spending most of their capital expenditures on technology geared investments, he specifies.
“At the bank we had and we still have a strong belief that technology is at the core of financial services of the future,” says Dagher. “That’s why we’re spending very sizeable amounts of money in Lebanon, in Egypt, in Turkey. And across the group.”
While they are enforcing certain group standards in terms of technology such as middleware and the Cloud, Dagher says that in some cases the software differs across branches. When speaking on the software at Odeabank, Dagher ventures “I wouldn’t say it’s more advanced, but it’s different.” After launching and setting up the bank, the Turkish management they left in command adopted a strong technology strategy in attempts to differentiate themselves in the Turkish market. “Banks in Turkey are more advanced than banks in Lebanon,” says Dagher. “More importantly, the technology ecosystem is more complex in Turkey in general. In Turkey, any application you want to develop, you have the manpower. Microsoft is there, Oracle is there. In an engineering capacity, not just in a sales capacity.”
Upgrade or overhaul?
Not all banks are making the same leap into new technology investments. For some who are treading more cautiously, software updates are just fine. While Byblos has also been running an IBM middleware since 2013, they have been a loyal customer of financial service software company Temenos since at least 1998, when their current core banking system was installed. While Semaan Bassil, vice chair of Byblos Bank, admits that they are not doing anything major in terms of technological revamping, he claims they are taking part in a continuous process of improvement such as implementing new software releases.
According to Bassil, Byblos strives to strike “the right balance” when it comes to technology investments at the bank. Though he admits that investment levels are low by international standards, he claims that “it’s not so much how much you spend; it’s how much you are optimizing what you already have.” When the bank looks at a request for a technology investment, he adds, it “make[s] sure it’s based on a strong business case before it’s developed and money is spent on it.”
Networking infrastructure — the hardware and software that pass along the data of the network — is another point where banks differ spending wise. While some Lebanese banks have not updated their infrastructure in over a decade, others are a little more bullish in their networking infrastructure updates. Creditbank changed networking infrastructure three times in the past 10 years, with Khalife claiming this was the norm and that they usually replace everything every three or four years. Their most recent switch among vendors, occurring less than a year ago, was from HP servers supplied by CIS to their current IBM machines supplied by Quantech, according to Khalife.
Creditbank’s total investment in IT in 2014 amounted to $7 million, according to Khalife. He explains that this was due to a major restructuring of the main server systems, among other things — and that average yearly investment in IT is closer to $3 million.
Creditbank is also in the process of an overhaul, in which they are redesigning the configuration of all of their branches, drawing from the concept of a ‘branch of the future’. They have a ‘larger electronic wall’ and more ATMs which Khalife describes as “new generation” — ATMs that can give and take deposits and cash cheques. One of their gleaming new star branches has already been set up in Sodeco. The customer–employee relationship has also shifted in these new branches — which are counterless, in a move to push customers into electronic servicing, and employees into focusing on sales oriented rather than processing tasks. They have so far opened three branches with the new look, and plan to have half the network refurbished by end of year and the rest of their 24 branches by the end of 2016.
On the slightly more futuristic side, Audi is in the process of introducing software from VMware, a Californian Cloud and virtualization software company, to virtualize parts of their network, according to Dagher. “So you virtualize whatever it is and have the software run it instead of relying on expensive hardware,” he says.
With an eye to better service customers as well as to improve decisionmaking, Dagher explains that Audi is also making investments on the data side. The bank is working with Microsoft as well as using data analysis product Implify developed by Lebanese technology company Roxana. “The major initiative is to virtualize the data. Wherever it resides, the plan is to invest millions of dollars to make sure it is all in one data warehouse.” This technology would ideally improve the bank’s ability to know what products to offer what customers at the right time.
Return on investment
Technology — in all its shapes, sizes and dimensions — is certainly a large investment whose full impact has yet to be seen. For the banks, increases in productivity, making processes more efficient and improving cost income ratio were high on the list of reasons why they invest in technology.
But they are also measures the banks have to take to adapt to the modern world, to make sure the institutions don’t crumble from within. Particularly in issues such as security, constant change is crucial. Dagher indicated his pride that their head of security is only 27 — perhaps age being an emblem of modernity and freshness. But even the most stringent advances and investments in security will never be foolproof in the changing world.
“I cannot, and anybody who says otherwise is a liar, I cannot guarantee that the bank will not get hacked. I can guarantee that if we get hacked, hopefully we will know in time. And I’m saying hopefully.” Indeed, with hackers on the prowl and large international banks being hacked by unknown sources, it would be a little much for a Lebanese bank to claim that having their system hacked is an impossibility, though many do. The likelihood and severity of potential attacks only depends on the quality of hackers and attackers, says Dagher. “They put the Mossad to shame, they put the NSA to shame. They can put Bank Audi to shame if they want to.”
“I’m always afraid we’re going to die … Are we changing quickly enough?”
Security is perhaps the most tangible of the tech investments: if you don’t invest, the bank is at high risk. But some bankers were of the opinion that though the full impact of more experimental technologies such as the Cloud or data were yet to be seen, adopting these technologies would, in a couple of years, be just as crucial.
“You can’t see it today. Today is the time to invest,” says Dagher. When asked about the risk of not investing in technology for banks, he retorts, “You die … Even us, us as a bank, we’re investing in technology and I’m always afraid we’re going to die … Are we changing quickly enough? Will we be capable of maintaining the assault and defending ourselves against the assault of the newcomers? It’s always tough.”