Before we get into details, as banking has at its core the provision of services for both citizens and the financing of the exchange of goods and services, in other words trade, let’s look at that first. A U.S. study showed that cross-border data flows and the business trends that they enable generate enormous value globally.
Firstly, more globally connected economies increase their gross domestic product (GDP) growth by up to 40 percent more than less connected economies.
Second, ICT usage enables growth, particularly in emerging economies, by giving new and small businesses ready access to global service delivery platforms.
Finally, removing trade barriers faced by digitally intensive firms would markedly increase GDP, wages, sales and employment. Embracing cross-border data flows reduces physical trade barriers and reduces the impact of geographical isolation from major export markets.
As the French economist Thomas Piketty observed, protectionism does not produce wealth, and free trade and economic openness are ultimately in everyone’s interest. This message however is not accepted by all politicians, even in 2018.
Anyone who has used an Over the Top (OTT) service, so called as they layer on an internet connection, is already experiencing close to zero cost for their voice phone calls and SMS. Software and hardware companies are increasingly morphing into technology service companies and are making the world’s best technology available to consumers at close to zero marginal cost; many supported by advertising.
Free voice messaging apps like Skype, WhatsApp or Allo enables people to communicate and collaborate in ways – and at price points – never possible before. Online search saves the average consumer many hours each year to find products and services. GPS enabled mapping saves even more in time: congestion, fuel and pollution are all reduced in guiding people to where they need to go. Online marketplace platforms like Alibaba.com, Global Sources, Amazon and eBay mean micro enterprises and individuals can access global markets instantly.
Cloud and clear
An increasing majority of these instances host their data and it is processed in a cloud infrastructure, where the owner of the service has outsourced the hardware and often the software and storage for their service. A cloud-enabled infrastructure uses managed data centres that may scale on demand and therefore reduce the cost per transaction.
Distance is no longer a barrier nor is the cost of communication which has dropped virtually to zero due to packet switched technology, the same technology that powers the cloud. DTCC, the main US securities clearing house, last year said cloud computing had reached “a pivotal point” because they were now more secure, cheaper and sophisticated than in-house IT systems.
But not all cloud offerings are delivered equally. Although the basic attributes may be created and hosted on smaller data centres, the cloud efficiencies really come to the fore in hyperscale deployments: literally thousands of servers in a single geographic cluster, largely belonging to tech giants and public cloud providers. This is well suited to the financial industry which needs such scale to drive down transaction costs.
The only limitation to this is really regulation: regulators that do not open to the ‘hyper-cloud’ will create a disadvantage to their national banks in being unable to scale to increase their agility to modernize ageing legacy infrastructure and to embrace change and reduce costs. This disadvantage will, over time, both limit the services available to customers in the country and competitiveness.
There will certainly be some classes of data that regulators want stored locally (although over time I believe this will be minimal), so hybrid options are okay for now. Current policy focus needs to be on data classification and management rather than on large scale data localisation if the cost and scale benefits of the cloud are truly to be realised.
It is clear then that for banks to be competitive tomorrow they need to transform today. The technology for this is available now, in particular as the blockchain provides an immutable ledger of transactions. As proven with the widespread adoption of packet switch technology, costs have dropped dramatically and by logical extension, this may extend to ultra-low payments transaction costs; what next?
- This is the first of a two-part special focus on the technologies that are disrupting financial services. Part two will be published next week.