Heritage Bank and the road to digital banking
Banking has not had a good press since the global financial crisis kicked in around 2008. Australia may have weathered the storm better than Europe and the USA, but it has faced similar issues. In some ways this has been of advantage to the largest customer-owned bank and one of the longest-running financial institutions in the country. Founded in 1874 as the Toowoomba Permanent Building Society, the organisation has evolved through Heritage Building Society (1981) until it became Heritage Bank in 2011. At every step it retained its customer-owned structure. Today it has assets in excess of $8bn, and remains headquartered at Toowoomba, Queensland.
The evolution described above was predominantly structural. Technology, even in the last decade, took a back seat to tradition. However, in 2016 the bank developed a strategic plan to transform the organisation, making it more member centric and providing a solid growth path forward. A key requirement to improving member services was a material improvement in the ICT function, and agreement to a technology roadmap. It engaged Queensland-based partner 451 Consulting to undertake an ICT review and to develop a roadmap for the IT department going forward. At the same time, it gained the services of a key member of the 451 team, Wayne Marchant, who moved to Heritage as CIO.
Marchant, though no banker, has vast experience in retail. Bringing him in to transform Heritage from a physical bank with a digital presence to a digital bank with a physical presence made a lot of sense. “Banking today has everything to do with retail,” he says. “It is all about customer service – I believe I am able to be more radical than someone from the banking industry would have been.”
The organisation he found in 2016 was inward looking and innovation-averse following a decade of head-in-the-sand stagnation. The IT team that he had to shape to deliver a transformation was operating in a bubble, not bringing in outside vendors, and reluctant to invest in new technology. There was actually some advantage in this, though. In the 10 years of slow progress at Heritage, though much progress had been made in banking, many people invested in expensive technologies that have been superseded. He's glad, in a way, that Heritage didn't do that because it leaves the way clear for him to turn the bank on its head in such a manner that would never have happened under the old order.
The direction Marchant has chosen is not to splash out on big box systems that would lock the bank in for decades. He wants to be able to embrace future innovations rapidly, so has chosen to base his IT on microservices stored in containers and linked by open banking APIs (application programming interfaces). “I am setting the bank up to be flexible and agile, and if something new comes along we can change direction in any part of our architecture very quickly.” For the time being the core banking system, which manages all customer and inter-bank transactions, will be stripped down, removing functions that have accrued to it over the 32 years it has been operating. “It was utilised for every purpose right down to the car booking system for our pool cars,” Marchant explains. “It does not make sense to use the core banking system for that so we are slowly getting it back to its core purpose of running the branch network and customer transactions.
The old system works well enough for now, he adds, but it is difficult to integrate with new software and hardware upgrades. It will have to be replaced once it has been trimmed back to its core purpose. “We think that will happen in five years' time and it will be the last thing we do,” Marchant adds. “Creating open banking APIs to replace a cumbersome core banking system will not be easy, but the members should be unaware of anything other than the improvements they will start to see in their interactions with the bank.
The last year has been taken up with preparing the foundations for a digital transformation. 2018 will see the development of core applications, customer applications and loan origination applications, which account for 80% of the bank's activities. “It's tricky, because when it comes to putting development into containers and using a microservices architecture, there aren't really any core banking vendors developing in this way yet,” Marchant says. “Our preference would be to have a new, digitally designed core banking system. The way we develop these days is in small packages. For a specific task I might get the team to develop three different pieces of code, or microservices, which are stored in containers and very easy to access. The code is reusable: the smaller the chunks of code the more times you can reuse it in other applications. This approach makes our lives easier because it is easier to update – and it improves the speed with which we can deliver services to the members.”
This flexible approach will simplify one of the bank's main goals for 2018 – the development of a new integrated banking system to replace the separate mobile and internet systems currently used. A vendor will be selected in the coming months to deliver this change together with branch systems, integrated with the core system using APIs.
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Heritage Bank does not try to outstrip the big four incumbent banks in Australia, but it does aim to be a 'fast follower'. To do that effectively it needs to be able to adapt quickly. For example, Australian financial institutions are in the throes of changing over to the New Payments Platform (NPP), which allows money transfers to be made instantly rather than delayed or batched payments as previously. “We are about to complete the change to NPP, which we are programming with open banking APIs that we would attach to our new mobile and internet banking system when it goes live later this year,” says Marchant. “At present if someone makes a transfer on Saturday it doesn't go through till Monday. With the new system the recipient account will be credited within 15 seconds.”
Part of Marchant’s strategy has been to retrain sections of his team in 'devops', an amalgam of software development and operations, and move them out into the different business units within the bank. To facilitate training he formed a partnership with the American open-source software company Red Hat. “I am looking at the IT operating model and adjusting it to a bimodal model where the support teams are operating one way and everyone else will be devops. We are currently re-engineering IT to work in a very different way. It is as much about the productivity of the IT department as about working with vendors. We have rolled out Cobit 5 processes to make sure that the right IT governance and IT assurance processes are being applied.”
It's becoming axiomatic that no business can realise its full potential until it has taken a grasp on the data it holds. Heritage now has a business information (BI) system managed by the analytics company SAS, enhanced by software from the customer experience management specialist Sitecore. Because of the under-resourced and highly manual systems the bank had for communicating with its members, it was losing many opportunities to keep in touch. The bank can now run a large number of highly targeted customer campaigns a week, rather than just several mass mailouts a year says Wayne Marchant: it's a really good system. We need to do more with the analytics data that we have so we are enhancing our reporting this year through changing the BI team and adding more resources.”
Marchant is always on the lookout for technology solutions that enhance customers' financial wellbeing, the underlying principle at Heritage. Not many banks would even consider closing down a customer's loan even in the event of hardship through force majeure, but if their financial wellbeing is at stake Heritage would even do that. “For us, being customer owned is not about sales but about delivering the best possible result for the customer,” says Marchant. “We are always looking into ways to improve their experience.” He has a keen interest in innovative technology being developed by 'fintechs', innovative startups in the sector among whom he likes to network at conferences and the meetups organised by the incubator hub Stone & Chalk.
Heritage is in a good position to leverage its customer-owned status. Public disquiet over large salaries and bonuses at the large banks could move customers in the direction of the mutuals. “It is our customers' money. I have to justify to them why I spend every dollar,” says Marchant, or as CEO Peter Lock puts it: “We recognise that not everything has to be digital and we have many customers who choose us because of our more traditional approach … we’re not a Bank that’s fascinated by shiny new things at the expense of our existing clients.” That said, they both agree that without its digital transformation the bank will not reach its 'Destination Best Bank'.