SPECIAL REPORT: banking tech
AI and machine learning are winning new business, but bankers complain of a culture gap and legacy back-office systems that are slow to adapt
By Vinod Sreeharsha
Not long ago, Roberto Sallouti, chief executive of the Brazilian investment bank BTG Pactual, would have been out of his comfort zone attending a conference earlier this year filled with techies in Mountain View, California.
At the May event, not far from Google and LinkedIn’s headquarters, Sallouti, speaking on a panel, told attendees he used to be concerned about the ways technology could transform banking and the traditional financial sector. “I thought that technology was going to make me retire,†he recounted, partly in jest.
Rather than retire, Sallouti and his colleagues confronted head-on the challenges posed by technology and the inevitable disruption that would affect almost every aspect of BTG Pactual’s operations. “One day we sat down and I said ‘you know what guys? Let’s stop fearing it and let’s try to learn it,’ “ he told the Silicon Valley crowd. “And that’s what we’ve been doing.â€
“Probably every month, we open more new accounts than we’ve ever had in our whole life until we started the digital initiativesâ€
—Roberto Sallouti, BTG Pactual
Today, BTG Pactual has one of the most advanced digital strategies in Latin America. Among its initiatives are a digital investment platform and another that provides financial services, including loans, to small and medium-sized companies. “Probably every month, we open more new accounts than we’ve ever had in our whole life until we started the digital initiatives,†Sallouti said in a later interview with LatinFinance.
Banks throughout Latin America have come to the same conclusion as Sallouti: It’s time to stop paying lip service to innovation and fully embrace a digital strategy. Whether as a defensive strategy against the onslaught of fintech challengers, or part of a broad effort to improve efficiency and cut costs or to tap into the potential profits found in the region’s vast under-banked population, it’s hard to find a bank, big or small, that’s not undergoing some degree of technological transformation.
Many are turning to artificial intelligence and machine learning to develop new products and procedures, while integrating operations into cloud-based computing. And in a region traditionally dominated by a handful of highly competitive big banks, there’s growing discussion about open banking that allows customer financial data to be shared through application programming interfaces (APIs) with third-parties, including such non-banks as Amazon and Uber.
The transformation hasn’t been without challenges. All too often, legacy back office systems lack the agility and adaptability needed in today’s increasingly customer-centric environment. What’s more, many traditional banks struggle to create a digital culture and complain of slow decision-making and an inability to hire the necessary talent. A recent survey of Latin American executives by Technisys and the Stanford Graduate School of Business, found that more than 80% believe culture is the main barrier to digital transformation.
The digital transformation can be traced to the emergence of the first fintech start-ups. Talk of them disrupting traditional players in the region was ubiquitous. But that hasn’t been the case so far. Tatiana Brandt, an analyst with Elevation Financial Research, says the return on equity for big banks in Brazil is the highest it has been in four years. But she sees some erosion starting in 2021, in part because of increased competition from fintechs.
But these start-ups haven’t displaced brick-and-mortar institutions. “The market erred in thinking that the large banks will stay in their slumbers and not react†to the arrival of fintechs, she says.
Instead, fintech challengers redefined the marketplace and created new opportunities that were never imagined a few years ago. For example, El Salvador’s Banco Cuscatlán estimates that more than a third of bank customers in the Central American country will transact business through their smartphones by 2021.
Nowadays, most banks have deployed an array of apps and chatbots to improve the customer experience. Brazil’s Banco Bradesco went a step further by creating its own digital bank, Next, which has enabled it to reach an entirely new group of customers.
Since its launch in 2017, Next has attracted 1.5 million clients and expects to have two million accounts by the end of the year. That’s not only more than the volume projected for its parent, but 77% of those Next accounts represent first-time Bradesco customers. “The fastest growth at the bank is taking place in Next,†says Eurico Ramos Fabbri, who oversees retail banking at Bradesco. He says Next averages 10,000 requests per day to open new accounts.
Legacy banks are already working on their own next-generation digital products. For example, Panama’s Banco General is studying a trove of information on how customers interact with the bank as it searches for that new app that customers will want. “We know about people’s past behavior and perhaps their future behavior,†says CEO Raúl Alemán Zubieta.
Banco Macro in Argentina is enlisting the help of IBM’s Watson. The supercomputer uses artificial intelligence and its predictive analytics capabilities to better understand client preferences and offer new products, according to Marcelo Spaziani, vice-president of sales, IBM Latin America.
Alexandre Sawaya, a senior partner with McKinsey in Sao Paulo who advises banks on technology gives the industry high marks for their efforts. “Banks have successfully evolved in digitizing several situations of customer interaction like digital branches, online and home banking, and apps to actually control current accounts and purchase financial products, “ he says.
New digital portals to reach unbanked and under-banked households will also be a factor in future profits. Latin America is the world’s fastest growing banking market, according to a recent McKinsey report co-authored by Sawaya, in part because there’s ample room to grow. In several Latin American countries, only 30% to 50% of the population have a bank account, according to the consultant.
From 2012 to 2017 Latin American banking revenue grew at a compound annual growth rate of 12% to $418 billion, according to McKinsey, as measured in 2017 exchange rates and before excluding costs. That was six percentage points higher than the global average and exceeded any other region including China and emerging countries in Asia, the report said. McKinsey expects the region’s banking system to continue to outpace the rest of the world with revenue reaching $675 billion over the next five years as it expands its customer base.
Still, success on the customer front hasn’t been matched on the back-end. Legions of new digital customers have translated into a deluge of additional data, and legacy back-office systems often struggle to keep up. “If you look at the level of digitization of this part, this has evolved much more slowly,†says McKinsey’s Sawaya. “The banks have a huge challenge dealing with their legacy systems.â€
Traditional banks depend on massive mainframes to process information that are often more product-focused than consumer friendly. They can add up credit card charges but can take time to respond to customers who are questioning their bills. “The biggest challenge we’ve had at Bradesco, without any doubt, has been to modernize our legacy systems,†says Rogerio Camara, who oversees information technology at the bank.
Scrapping such systems is costly, but finding suitable replacements is often an even bigger challenge. “We’ve yet to find another mainframe that handles the volume of transactions we process,†says Camara. The system has already processed three billion transactions this year. That’s a volume of business that dwarfs most fintechs. “When you’re a small company, you don’t have to worry about this,†he adds.
What’s more, the standard IT organizational infrastructure found in many banks is ill-suited to cope with the speed required in a technological age. IT professionals often work in product development silos and can take one or two years before they hand off a project to another group with more consumer expertise.
“If you look at the level of digitization of this part, this has evolved much more slowly. The banks have a huge challenge dealing with their legacy systems.â€
—Alexandre Sawaya, McKinsey & Co.
“You have to change the way the whole organization thinks,†says Adriana Cardenas Acuna, vice president of payment methods at Colombia’s Davivienda. The 40-year-old bank began offering a digital wallet seven years ago and has attracted five million new customers.
At Bradesco, that change meant breaking down barriers and creating teams whose members bring different expertise to tackle challenges in real time. Fabbri says the time it takes to develop new products has been cut to three months. “When we put everyone together, the debate is every day and every hour, and in the process we fix whatever’s wrong,†he says.
According to the survey of Latin America bank executives by Technisys and Stanford, 62% said they plan to significantly increase IT investment in the next three years. The top three areas are chatbots, big data, and artificial intelligence, followed by the cloud and facial recognition.
That makes recruitment a top priority. “In the past it was very easy. We went to the best schools in economics, business, and engineering, we hired, and that was it,†says BTG Pactual’s Sallouti. “My biggest benchmark is whom are we competing with for the best engineers. If we’re competing with the top gaming companies and the top start-ups, it’s good. I don’t want to be competing with the big retail banks. I want to be competing with entrepreneurial guys.â€
Banks are also taking tentative steps toward open banking through expanded use of APIs and the cloud. This reflects the proliferation of apps and smartphone use, as well as the changing culture of consumers who want to easily manage their financial relationships with third parties. Banks, which are eager to reach a wider digital audience, also see the benefits of open banking.
Bradesco, for example, has partnerships with Uber and iFood. This month, Bradesco Artificial Intelligence also became available on Amazon’s Alexa so customers can ask questions about their accounts.
“Back in 2014 and 2015, we did not talk about open banking at all,†says German Pugliese Bassi, the lead author of the Technisys survey and the company’s chief marketing officer. But, “now open banking and cloud are big trends.â€
“We’ve yet to find another mainframe that handles the volume of transactions we process .When you’re a small company, you don’t have to worry about thisâ€
—Rogerio Camara, Bradesco
Innovation and experimentation are pushing new trends. Earlier this year, BTG Pactual offered security tokens, or STOs, that represent distressed Brazilian real estate assets. This allows global investors to participate in the market through blockchain technology.
Sallouti says developing the token was a valuable exercise in learning how this new technology can be used. BTG Pactual is now in talks with Brazil’s securities regulator to develop new regulations governing such products. “Maybe that’s the future of capital markets. I don’t know,†says Sallouti. â€But if it is, we have to be ready for it.â€
