Three trends that are redefining the back office

The back office is the engine of a financial institution. Until now, that’s meant structure, reliability, and efficiency—all things that are independent of revenue. But the competitive forces bearing down on financial services are also changing the way we ordinarily think about financial operations.

Here are three examples of what I mean.

Automation

Application programming interfaces (APIs), which let software programs communicate with each other without exposing their underlying functions, have become a way to open up the financial system to outside parties. For instance, the UK’s open API standards for banking touched off similar reform efforts in east Asia and Australia. And now, as of January 13, the European Union has gone live with its Second Payment Services Directive (PSD2).   

With these developments, the pressure is on for firms to provide access to their proprietary environments. A key challenge, though, is the extensive IT infrastructure that powers banks, insurers, and other financial services. Decades of quick fixes, narrow point solutions, and homegrown workarounds have left incumbent institutions with a complex patchwork of legacy systems. As a result, it’s become harder for back offices to keep up with the industry's rapidly changing needs.

But the shift to an open model is making some degree of modernization unavoidable. Leading firms are looking at how they can tighten up their internal financial processes to enable innovative development. They’re reassessing core operating infrastructure as an asset to be reused, shared, and monetized through APIs. And, increasingly, they’re looking to fintech companies as potential partners in this endeavor.

Regulation

An open-architecture environment is likely to intensify concerns about data protection and ownership. 

Data-rich financial institutions are prime targets of cyberattack. Until recently, institutions have been relatively free to follow their own path and timeline in their cyber risk management efforts. But regulators are starting to lay down some cybersecurity rules for financial services firms. The new regulations seem designed to establish uniformity and minimum standards, increase transparency, provide accountability, and protect policyholders from privacy violations.

The obvious challenge is coping with new loss control and reporting standards. These could increase compliance budgets for those that haven’t already taken such steps. What’s more, it’s a good bet that compliance demands will multiply—not just domestically but also worldwide.

To get ahead of this issue, the industry is working with regulators to address cyber risks, including policy issues related to intelligence, coordination, resilience, and response. Firms are boosting cybersecurity budgets within their own organizations as well. Finally, they’re recruiting specialized talent to bake cybersecurity into every aspect of change, from overhauling legacy systems to adopting new technologies.

Talent

Cybersecurity isn’t the only back-office talent gap.

For some time now, financial firms have been competing with technology companies for campus hires. Fintech firms in particular can offer the excitement and upward mobility of a startup plus the resume boost of working with cutting-edge technologies. They also offer a cachet and business culture that many in financial services can find difficult to match.

Even so, business conditions point to adding change management, digital IT, and architecture development to the roster of in-house capabilities. Firms also need loss control specialists to enhance risk management, recovery, and compliance programs. Finally, given the rise of digital banking and insurance, even the back office will need some familiarity with customer and user experience.

Traditional institutions are exploring novel responses to these challenges. One is to meet technology companies head-on with a digital factory for incubating fintech-style solutions. Another is working with universities to develop qualified talent. There’s also the option of gaining talent through partnership or acquisition.

This sums up some of the thoughts I’ve had as the World Economic Forum annual meeting gets in full swing this week. I’m here in Davos, Switzerland, ready to hear more insights about the future of financial services. What do you think about the trends I’ve mentioned? I welcome your comments.