Financial services enterprises are under greater pressure to digitally transform. According to new Telehouse research, more than four out of ten (42%) financial service enterprises need to transform their IT infrastructure or risk becoming less competitive – a figure significantly higher than the 34% average across other sectors.
Pressure is being driven by a combination of factors, including customer demands for more connected, relevant and personalised experiences (46%), the need to simplify business and operating models to increase efficiency (46%), cyber security (44%) and the necessity to deliver new applications and services to customers (44%). The emergence of nimbler challenger banks and ambitious FinTechs has set the challenge for businesses across the sector to step up a gear and reshape their operations.
For many, a shift from traditional on-premise infrastructure to a more modern mix of colocation, cloud and ultimately, edge computing is the answer.
Scoping the challenge
Today, financial services firms need to react quickly to regulatory demands and take advantage of market opportunities. However, they often don’t have the right systems in place to manage, or effectively use data to respond as quickly as their ‘digitally native’ peers.
The problem is many are still reliant on inflexible, legacy, on-premise infrastructure. The research revealed that financial services organisations outsource the lowest proportion of IT infrastructure to colocation and the cloud of the enterprise sectors polled. So, it’s not surprising the sector also has the lowest confidence in IT maturity, with just 30% of IT decision-makers describing their organisation’s IT maturity as ‘very advanced’.
Transformation is clearly needed but it is not always an easy task. Historically, financial services firms have struggled to adopt new technologies and meet increasingly high customer expectations quickly, often limited by strict compliance and regulatory requirements, which ratcheted up after the global financial crisis of 2008. Even with the appetite to change, many have struggled to make meaningful progress, held back by legacy IT systems. But with the time of the essence and providing personalised, connected and reliable experiences now business-critical, organisations can simply no longer afford to stand still.
Why connectivity is key
As customer demand and internet consumption grow, financial services organisations need to find ways to increase connectivity between offices and countries and improve the user interface on customer-focused technology like apps and websites.
5G will offer many benefits for financial services including reduced latency, which in turn will help decrease transaction and settlement times. It will also facilitate the adoption of AI to enable greater personalisation and improvements to customer experience.
However, as with any new wireless communications technology, the volume of data used will rise significantly, putting more stress on backbone networks. A fifth of financial service enterprises surveyed in the research already say that data volumes have become a serious problem. To succeed, organisations need the ability to quickly ingest and process data and this will be dependent on having a connected, secure, reliable, scalable, flexible, resilient and low-latency IT infrastructure.
Ultimately, more connections mean more risks. So, the challenge is how to take advantage of increased connectivity without compromising security or compliance.
The role of colocation
Many are turning to colocation as the answer; providing the extra capacity and bandwidth required, while also enabling fast, secure and direct connections to cloud service providers. According to the Telehouse research, financial services organisations are already outsourcing 38% of IT infrastructure in colocation with adoption set to increase further as the use of big data; 5G and the Internet of Things (IoT) rises.
By hosting their IT infrastructure in a colocation data centre, organisations can control the migration process, keep on top of regulatory demands and keep a lid on costs. The research found that the top drivers of investment in colocation are sustainability, faster data access and improved connectivity, likely driven by the need to improve customer experience and connect disparate hybrid IT structures.
More importantly, by deploying a combination of cloud and colocation strategies, organisations can create a resilient and secure foundation for growth. This will enable them to flex and scale operations when building new services and innovations to meet future demand, while also ensuring they provide their customers with a responsive and high-performing service. And by choosing a colocation facility in close proximity to financial markets and exchanges, organisations can benefit from reduced latency and faster data processing to enable real-time big data analysis.
Moving to the edge
Despite lagging behind other sectors in most areas, financial services are leading the way when it comes to edge computing. 72% of respondents have already implemented a strategy for edge computing, driven by a need to optimise data volumes (36%), digitally transform (34%) and match competitor capabilities (34%). However, over a third say they are challenged by a lack of understanding of edge networks and their purpose as well as uncertainty over which locations to gather and manage data in.
Given that it’s now more important than ever for financial services firms to store, access and analyse and access exponential levels of data at record speeds, it is not surprising that interest in edge computing is soaring. Gartner predicts that by 2025, 85% of infrastructure strategies will integrate on-premises, colocation, cloud and edge delivery options, compared with 20% in 2020.
Demand for edge is also likely to be driven by its convergence with other technologies such as cloud and colocation and is evidenced by the fact that many firms opt for a mix of technologies. Ultimately, the key to success for organisations will be building the right infrastructure foundations and connectivity, and the right data centre partner is critical to achieving this.
Embracing the connected future
Financial service providers have a huge opportunity to provide the seamless, secure and personalised services that today’s consumers crave. But doing so requires digital transformation.
As data volumes and connectivity increase, new developments such as predictive modelling to prepare for ‘what if’ scenarios, automation of front-end sales and customer-facing environments and the enhancement of customer care by self-service functionality will become commonplace. However, success depends on having the right IT infrastructure to enable fast, secure and seamless connections. It will be those that can build a connected, secure, reliable, scalable, flexible, resilient and low latency IT infrastructure that will be winners in the race to the connected future.
As part of Finance Monthly’s brand new fortnightly economy and finance round-up analysis, Rhys Herbert, Senior Economist at Lloyds Bank, looks at some of the big issues being discussed this month.
June’s surprise drop in inflation to 2.6% – its first decline since last October – confounded economists.
The consensus forecast, and our own, was that inflation would remain unchanged at 2.9%.
The size of the miss raises the question: why did we get it so wrong? More to the point, is it possible that May’s 2.9% outturn marked the peak?
The first question is easier to answer. The fall (and miss) was largely concentrated in the prices of energy, food and recreational goods (notably toys and computers).
The latter alone deducted 0.1% from June’s inflation rate. To some extent, this was expected as it was outsized price gains in this category that was responsible for the sharp jump in inflation in May.
Over the quarter as a whole, inflation was pretty much bang in line with the Bank of England’s May forecast.
So, could consumer price inflation have peaked? It’s possible if the economy and labour market were to deteriorate sharply from here. But we doubt it.
Cost pressures continue
Retailers continue to face significant cost pressures - primarily resulting from the fall in the pound.
Over the coming months, this pressure is likely to continue. Many firms are only now starting to feel the full force of the fall in sterling, as currency hedging strategies put in place ahead of last June’s sharp drop expire.
Furthermore, changes in business rates, the rise in the National Living Wage and the introduction of the Apprenticeship Levy are also pushing up costs.
We expect these forces to boost inflation over the coming months.
A rise above 3% would require the BoE Governor to write an open letter to the Chancellor explaining the reasons for the overshoot and the measures the Bank intends to take to bring it back down.
Autumn overshoot
Mark Carney shouldn’t put his pen away just yet, as we predict the 3% threshold will still be breached in the autumn.
Thereafter, inflation should ease back a little as some of the base effects from rising import prices and other cost increases dissipate.
That said, we, and the Bank of England, predict inflation will remain above the government’s 2% target for at least another two years.
As we have noted before, the extent of the overshoot will depend on how wage growth – or more particularly unit labour costs – respond against a backdrop of weak productivity and a tightening labour market.
If wage growth and unit labour costs start to accelerate more sharply, the inflation overshoot would be far larger and more enduring.
Population pessimism
The recent release of updated UK population projections gives us the opportunity to examine an important longer-term issue, the implications of demographic trends.
While the broad themes are familiar – the population is rising and ageing – the numbers are nevertheless striking.
They also highlight the justifiable concern around the long-term sustainability of UK economic growth and the likely wider pressures on society and the public finances.
According to the Office for National Statistics (ONS), the UK population reached a record high of 64.6mn in 2016. It is projected to rise to 70mn by 2026 and to 74mn by 2039, driven by a combination of natural growth and migration.
If the rise were due to an anticipated increase in the number of young and those of working age, it would be good news. But it isn’t.
By 2036, the number of people aged 65 years or above is projected to rise from 18% to 23.9% of the total population.
Increasingly aged
In other words, around 75% of the rise in the UK’s population over the next twenty years will be driven by those reaching or exceeding retirement age.
As a result, the old age dependency ratio (OADR), which is the ratio between the number of people aged 65 and over and those aged between 15 and 64, looks set to rise sharply.
The higher the OADR, the greater the potential burden on the working population. Last year, the OADR was estimated at 28%. By 2036, it is projected to rise to 41%.
The anticipated rise in the OADR is all the more striking as the ONS’s projections allow for continued growth in net migration – which is mostly by those of working age.
Prior to the EU referendum, there seemed little reason to question this, but last year, things changed.
Immigration impact
Net migration posted its biggest annual fall for more than twenty-five years in 2016 – dropping from 334k to 249k. This reflected, in roughly equal measure, lower immigration and higher emigration.
While we would caution about reading too much into one year’s data, the direct and indirect consequences of the EU referendum result is likely to have had at least some bearing on this.
It appears to support anecdotal evidence that uncertainty over Brexit and the fall in the pound are both discouraging new immigrants and prompting some existing foreign workers to leave.
This is a particular issue for some key sectors, such as retail, healthcare and construction.
If net immigration stalls, population growth over the coming twenty years is likely to be far lower than the ONS projects.
But this may be small comfort if, at the same time, it leads to an even sharper rise in the UK’s OADR, with all the adverse implications this would bring.
