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Accelerating AI and Innovation: The future of banking depends on core modernization

By Financial Services Cloud Community Team posted Wed September 20, 2023 05:22 PM


written by  Pal Krogdahl Fabio Cesaretti and originally published on the IBM Data and AI Blog. 4 min read

In the rapidly evolving landscape of financial services, embracing AI and digital innovation at scale has become imperative for banks to stay competitive. With the power of AI and machine learning, financial institutions can leverage predictive analytics, anomaly detection and shared learning models to enhance system stability, detect fraud and drive superior customer-centric experiences. As we step into 2023, the focus has shifted to digital financial services, encompassing embedded finance, generative AI and the migration of super apps from China into a global phenomenon. And all this while balancing the adoption of a hybrid multicloud strategy. For banks to stay relevant and competitive in this new world, it is imperative for them to adjust to new trends, understand the importance of open finance and transform their core systems. Ultimately, banks must start with modernizing their core through technologies like hybrid multicloud and AI.  

Generative AI: unleashing new opportunities 

Generative AI, exemplified by the explosion in advanced large language model solutions on the market and seen most recently via the launch of IBM watsonx, offers exciting possibilities in financial advisory and data analysis. While the unexplored future of generative AI poses opportunities in deterministic financial environments, configuring these models properly can simplify complex financial concepts and enable easier understanding for customers. Financial institutions must carefully leverage generative AI to strike the right balance between innovation and ethical usage. This is why IBM puts all of its AI technologies through rigorous processes and protocols to offer trustworthy solutions.  

In such a highly regulated industry like banking, it is that much more important for clients to have this access to the toolset, technology, infrastructure, and consulting expertise to build their own — or fine-tune and adapt available AI models — on their own data and deploy them at scale in a more trustworthy and open environment to drive business success. Competitive differentiation and unique business value will be able to be increasingly derived from how adaptable an AI model can be to an enterprise’s unique data and domain knowledge. 

Embedded finance: redefining customer experiences 

Embedded finance has emerged as a rapidly growing trend, revolutionizing the way customers interact with financial products and services. Banks now have the opportunity to seamlessly integrate financial capabilities into various contexts, such as online commerce or car buying and emerging digital ecosystems, without disrupting customer workflows. By embedding financial services into everyday activities, banks can deliver hyper-personalized and convenient experiences, enhancing customer satisfaction and loyalty. 

The rise of super apps: transforming digital ecosystems 

Super apps, popular in China, have the potential to reshape the financial services landscape globally. By consolidating multiple applications and services under a single entity, super apps offer customers a comprehensive ecosystem that seamlessly integrates digital identity, instant payment, and data-driven capabilities. As embedded finance gains traction and open banking APIs become more prevalent, the vision of super apps is becoming a reality. Financial institutions need to adapt to this emerging trend and actively participate in the evolving digital ecosystems to deliver enhanced value and cater to evolving customer expectations. 

Open finance: accelerating the API-driven economy 

Open banking has been a topic of discussion for several years, with PSD2 regulations driving initial progress. Now open finance, an extension of PSD2, is set to open up even more services and foster an API-driven economy. With open finance, banks are compelled to open up additional APIs beyond payment accounts, enabling greater innovation and competition in the financial sector. This shift toward data-driven economies places embedded finance at the core of financial services. Forward-thinking banks are not only complying with regulatory requirements but also proactively leveraging open finance to distribute their services efficiently and reach customers wherever they are. 

The critical need for modernizing core systems and the role of hybrid cloud 

In this new paradigm of AI-powered digital finance, modernizing core systems becomes imperative for banks to deliver seamless experiences, leverage emerging technologies, and remain competitive. Traditional legacy systems often lack the flexibility, scalability and agility required to support the integration of embedded finance, generative AI and open finance. By transforming core systems, banks can create a solid foundation that enables the seamless integration of new technologies, facilitates efficient API-driven ecosystems and enhances the overall customer experience. 

Hybrid multicloud plays a crucial role in facilitating the shift. It allows banks to leverage the scalability and flexibility of public cloud services while maintaining control over sensitive data through private cloud and on-premises infrastructure. By adopting a hybrid multicloud approach, banks can transform their core systems, leverage AI and machine learning capabilities, ensure data security and compliance and seamlessly integrate with third-party services and APIs. The hybrid cloud provides the agility and scalability necessary to support the rapid deployment of new digital services, while also offering the control and customization required by financial institutions. 

Modernization starts at the core 

However, transforming core systems and transitioning to a hybrid cloud infrastructure is not a one-size-fits-all solution. Each bank has unique requirements, existing technology landscapes and strategic goals. It is crucial to align the technology roadmap of fintech solutions with the overall bank strategy, including the digital strategy. This alignment ensures a competitive advantage, sustainability and a seamless convergence between the two roadmaps. Collaboration between banks, fintech providers and IBM can facilitate this alignment and help banks navigate the complexities of digital transformation. 

The financial services industry is undergoing a profound transformation driven by AI, digital innovation and the shift toward digital financial services. Embedded finance, generative AI, the rise of super apps, and open finance are reshaping customer experiences and creating new opportunities for financial institutions. To fully leverage these transformative trends, banks must transform their core systems and adopt a hybrid multicloud infrastructure. This transformation not only enables seamless integration of new technologies but also enhances operational efficiency, agility and data security. As banks embark on this journey, strategic alignment between the technology roadmap and the overall bank strategy is paramount. 

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