March 19, 2018.

While consumer-facing tech like real-time payments and mobile banking hold great promise for banks, updates to behind-the-scenes infrastructure could be the key to cost savings and competitive advantage.

Written by Bruce Hamilton,Equity Analyst,European Financials - Originally published at this link.

 This year, European retail banking could be on the cusp of what our team at Morgan Stanley Research is calling “an operational revolution.”

With improved regulatory clarity and the prospect of normalized interest rates, technology will be the future battleground of differentiation for both consumers and investors. As an example, most bank consumers in developed markets are expected to have access to real-time payments by the end of 2018 allowing banking transactions to be completed with a swipe of the smartphone.

Regardless of how banks screen against each other, a focus on technology and constant IT investment across the sector will be paramount.

But customer-facing applications aren’t the only differentiators that investors should be watching. Indeed as mobile banking increases customer traffic, having efficient scalable back-end systems becomes critical. Behind the scenes, digitization in banking has the potential to boost back-office efficiencies, reduce operational risk and ultimately improve profitability.

Transforming Banks into Tech Companies

Over the long term, tech advances such as artificial intelligence (AI) and blockchain will clearly play a role in the evolution of banking. However, modernizing the infrastructure backbone—that is, the core banking systems which handle the backbone of a bank’s activities, such as deposits and credits—is arguably the most important step banks will need to take.

In order to remain competitive, banks will need to update technology on the back end in order to deliver a seamless experience on the front end since customers will have little tolerance for glitchy apps no matter how sleek the user interface.

Meanwhile, investments in cloud computing and robotic process automation (RPA) should also take priority. Both of these investments offer an immediate opportunity for cost savings in the back office, while at the same time putting banks in a better position to compete with FinTechs.