The Business of Efficiency

The Business of Efficiency
October 30, 2018 YellowDog Site Admin

Digital Transformation and the Need for Foundational Efficiencies

By Stephen Riley, Co-Founder, Procurity

As more and more financial institutions “digitally transform,” it has become more important for these organizations to automate their foundational technology and processes. An inadequate foundation of automation creates unsustainable processes that effects efficiency ratios, inhibits growth, and puts a FI at risk for consolidation.

If I were to say that an average financial institution spends more than 4000 hours per year testing their own systems, would that surprise you? I think that might come as a surprise to some in the the technology world, but to those in financial services, particularly banks and credit cnions, it may not.

When I speak with FIs, I often hear executives talking about the “Digital Transformation (DX).” For those not familiar, DX previously involved the realms of IT, data and information mining, and Collaboration software and process’.  

More recently, a shift has occurred where the definition of DX has moved towards Cloud, Mobile and Social Strategies, as well as the Internet of Things (IoT). For Banks and Credit Unions who are on the front lines of this transformation I typically encounter exasperated IT personnel, sheer confusion at the Executive Suite and a terror at the front lines that someone will have to manage a “new service” without additional resources.

New service offerings have become the defacto state of banking. There are no winners or losers in a technology offering as there has been in the past (think VHS vs BetaMax). There is only a constant evolution of technology that serves an ever faster evolving consumption of that technology.  

The generations coming before any one person are better able to see this evolution, thus avoiding some of the pitfalls, but for a bank to keep replenishing and growing it’s base it must think towards capturing the following generation.  

This cycle leads to an ecosystem where each FI is trying to “read the tea leaves” to determine which technologies they need to offer next. These technologies appear to be hurtling towards our industry at lightning speed.  

Every generation that comes after your own will have a new way of thinking and interacting with the world. Thus, you must continue to adapt, evolve to, and migrate towards all of them. Just like a building that is built on a faulty foundation can only support so much weight on top of it, consistently adding new services without adapting your foundation is a recipe for disaster.

All this transformation was supposed to make things easier, make your FI more accessible to a generation that is savvier using their phones, and generate more revenue because of these new services.  

Well, I think all of this could be up for dispute. I have seen one very clear message coming from almost every FI I’ve spoken to, and it goes something like this, “I know I have to offer these services, I know there is a generation that expects this, I know our future is on the line, I know I must stay relevant, I know I will fall behind if I don’t. But, how can I do this efficiently without throwing people at the problem?

I don’t want to solve a technological problem by assigning people to do the operational stuff.  How do I efficiently offer these solutions?”

In the recent Accenture “Building the Future-Ready Bank” series (2018) the authors postulated that we are not in a current Technology Revolution moment, but rather in a Technology Evolution moment.  

We can see several future technologies that could disrupt the industry, but they are not yet here.  The authors provided a series of “actions to take now to be future ready.” All of these actions were spot on, but I believe missed the overall point.  

During periods of evolution, technology organizations should step back and determine how to wring out every last bit of efficiency from their foundational systems. In the FinTech space, this is the core banking system. 

Today, efficiency equates to automation. Just like the foundational system of most computer systems is DOS (and still is), advancements have taken us to a point where the interaction with DOS is automated. You can still access the DOS Prompt, but why would you?

By creating automation at the Core Level, these organizations will create the foundation to expand and capture market share when a disruptive technology crosses the threshold of “emerging” to “ubiquitous”.  

More importantly, automation can also insulate the FI from short-term product disruptors that create layers of efficiencies within industry disruptors. An example of this would be the industry disrupting Online Banking beginning to offer Online Check reorder, or Online Check Deposit.  

So, how do you begin to automate this foundational technology. Many would say that these Financial Institutions should begin to look at Cloud Based offerings, including Cloud Core systems. I suggest you take a step even further back.  

The core banking system is one of the few systems that will touch everyone within a Financial Institution. Wholesale change creates huge disruptions. What’s more, even simple upgrades to the Core Systems often require 15, 20, 35 people to test those systems to ensure they continue to work. To begin down the pathway of automation on a foundational system such as core banking, removing the “testing” component is a great place to start.

Core and Ancillary product testing is custom built for automation. If you are a programmer, you recognize that few people work from DOS prompts, but it’s still the basis for many computer systems.

We’ve built layers of systems that interact with DOS that free up our talent to utilize more sophisticated and profitable programs to do ever more sophisticated and profitable things. Testing is the foundational process that we can nearly eliminate, allowing us to create better results through automation.  

In the FIs we have surveyed, we’ve found that an average testing team consists of nearly 25 people spanning multiple departments. This assumes that the FI is even testing, which, we’ve found isn’t always the case. Lack of testing is what caused the Equifax breach, so if you aren’t testing, you better start now, or you could potentially suffer the same fate.

The mindset for a lack of testing is also known as the vaccine theory. If everyone else around me is already testing, then I don’t need to.  I caution heavily against this mindset. Everyone’s system, their dependencies, ancillary product mix, etc. are all different. You may have the same core as the guy next to you, but it’s highly unlikely that your variables match up.  

In addition, this mindset could also put you in similar trouble that Equifax found itself in. If you don’t already have a testing mindset established at your FI, you may find it very difficult when patches and upgrades are presented that may cause issues across the organization.

Equifax had a system that had a known patch, but they didn’t install it because they didn’t know what the effect would be. They couldn’t test it adequately to know what would happen, and they got breached because of it.

If you are hacked, breached, an intruder steals data, you lose data, etc. you will need to check the box on testing. If there was an inadequate testing procedure in place, you may just lose your job over it. Boards and Executive Teams are now on the hook for ensuring the integrity of their own systems. It’s now incumbent upon all organizations to ensure that they adequately test their own systems.

Many FIs may not be able to quantify how much testing is going on and that’s OK. Many FIs don’t measure how many hours are spent testing, or they may view this as a sunk cost, “How can I save money by reducing testing, I already pay them?”

That’s true, the people cost may already be sunk, but the organizational cost is not. Efficiently using your people allows them to do more without increasing their workload.  

Take for example a lender. This lender may spend two weeks overall every year helping to test the lending system during upgrades and enhancements. How much more revenue would this person generate if they had those two weeks back?  

Your FI is paying them regardless, but the organization cost of taking a lender out of circulation for two weeks can be substantial. This is true for tellers, mortgage originators, call center, back office staff, your IT Staff, almost everyone throughout the organization can become more efficient at what they do if automation is at the core of your digital transformation strategy.

Knowing this information, does it now surprise you that FIs may spend more than 4000 hours testing? In our own surveys, what surprised us was that the 4000 hours doesn’t even include new technology. When we polled our own prospects, we found a range of 4000-7000 hours of testing is done for core and existing ancillary systems and an average of 35 people who participate in some sort of testing.  

The foundation of the systems that are necessary to support ongoing Digital Transformation are inadequately efficient. They require people to do the testing. Think about the people who do testing, often Financial Institutions will ask Tellers, Lenders, IT Staff, back office operations staff, etc. to do this testing.  

More importantly, they’re often testing the systems that are supposed to be working properly. They are testing functionality that shouldn’t have any issues with it. Why? For two reasons…that’s the way it’s always been done and if you don’t test existing functionality, you risk missing issues that could have substantial effects on your organization.

Tom Puthiyamada of PwC refers to this as the Digital IQ Gap.  Companies continue to release new technology because it’s become easier, but we have lost sight of the impact this has on their own employees.

So, how does my organization become more efficient in deploying technology, avoid becoming Equifax, deploy their people efficiently and also support the Digital Transformation that is necessary to continue to compete in this world?  

It starts with ensuring that your current systems can automatically test and identify issues without ever having person touch it. A foundational efficiency with testing can support and drive your organization forward, while reducing overall costs and increasing the speed to market. It can direct your IT Staff to the problems that need to be fixed, rather than the systems that already work.  

It will ensure that new functionality will work correctly across the entire ecosystem of your organization, not just the core systems. A foundation of automation will ensure that your organization can meet the Digital Transformation head on, rather than trying to play catch up.   We call this solution Procurity. Please check us out and if you would like to hear more, please contact us.

Stephen Riley is the Co-Founder of Procurity, a company dedicated to automated testing within the Financial Institution marketplace. He can be reached at 703-999-1656 or Steve@procurity.io. More information about the company can be found at www.procurity.io.