The challenge of reinvention

After a week in which technology and data had taken centre stage, a vibrant Sibos 2017 was brought to a close with a discussion on their role in the future of the finance sector, between Microsoft CEO Satya Nadella and SWIFT CEO Gottfried Leibbrandt .

Nadella has become synonymous with the commercialisation of cloud computing and artificial intelligence (AI), having piloted Microsoft’s successful Azure platform and services, which now plays a leading role in the firm’s strategy. Revenue from Azure – which allows firms to store, test and run applications from Microsoft data centres – rose 97% year-on-year, according to fiscal Q4 2017 results released in July, with overall revenue from the firm’s commercial cloud offerings soaring to US$18.9 billion.

As such, the Microsoft boss is well placed to comment on the potential for banks and other financial service providers to leverage new technologies, to support new business models and value propositions.

While insisting that we should not underestimate the technological or cultural challenges involved in digital transformation programmes, Nadella nevertheless suggested that renewal through the application of technology innovation is critical to the long-term future of the industry. Equally, the future of the global economy is dependent on the renewal of the finance sector.

“The ability to create more economic opportunity in the world rests on the ability of this industry to continuously reinvent itself. To quote last year’s Nobel prize-winner for literature, Bob Dylan, either you are busy being born or you are busy dying. We choose to really reinvent ourselves,” he said.

“Back to our roots”

Nadella acknowledged that Microsoft had also had to face the challenge of reinvention once it closed on the realisation of the vision of its founders Bill Gates and Paul Allen to put a personal computer in every home. To renew the firm’s sense of purpose, Nadella re-examined Microsoft’s earliest products, before reaffirming its core mission of creating technology to enable others to create more technology. “We went back to our roots, which was to think about the tools that we can put into people’s hands, so that they can go solve some of the computational problems that have not been solved,” he explained.

Alongside this sense of a core purpose or mission, Nadella added, long-term success also depends on continuous renewal by setting and reaching new targets. “One audacious goal is to build a universal quantum computer. Today, that sounds crazy, but I am sure we will get there. We are already investing in building AI and cloud, where we have audacious goals,” he asserted.

Business reinvention and renewal would not be possible however, said Nadella, without a culture that supports change and innovation. To reinvigorate Microsoft’s ‘learning’ culture, Nadella borrowed from the work of Stanford University professor of psychology Carol Dweck , whose book, ‘Mindset: The New Psychology of Success’, focuses on the central idea that someone with a learn-it-all approach will ultimately do better than someone who believes they know it all.

“We have taken that notion of growth mindset as the cultural metaphor that we use internally to at least have a discussion around how we become a learning organisation. It is a challenging one because, in some sense, this is a journey or a transformation that will never be complete,” admitted Nadella.

Hard yards ahead

The right mindset and a core vision are prerequisites for success in an uncertain and fast-moving but increasingly digital economy. They are, however, insufficient in their own right, suggested Nadella. The hard yards must still be tackled, inch by inch if necessary. Partly due to the highly-regulated nature of the industry, banks and fellow financial service providers are typically fast-followers of technology innovation rather than its very earliest adopters. This means the finance sector can leverage the work of pioneers, but much hard work remains to adapt new technologies to its own particular processes, services and customer expectations.

AI is a prime example, suggested Nadella. “The key challenge with AI is getting your data estate in order. There is no way that you can really have AI without having data,” he said. “Ask yourself: what is the ground truth you have in terms of data and the monotonic improvement that you see in your AI creation?”

Being able to understand the need for change and what it takes to execute change are critical to the development of the digital sensibility needed to thrive in the emerging environment, Nadella added. “In terms of that sensibility, there is a lot of talk around AI, but unless and until you truly understand what it means to get data in shape so that you can do AI, you cannot be cool by association,” he explained. “You have to do the hard work to build your own capability in some of these hard things.”

While innovation brings opportunity, banks know from experience it also brings risk and unintended consequences. Prompted by SWIFT’s Leibbrandt, Nadella acknowledged that cybersecurity is “the topic of our time”. In the continuous fight against cyber attacks, Nadella emphasised the importance of using the most current patches and upgrades available from vendors to keep ahead of the cyber criminals. Equally, we must assume they will always find a way in, making network segmentation and isolation crucial to efforts to detect and shut down an attack as soon as possible.

“One of the fundamental challenges of cybersecurity is not just the protection but the operational security posture that you have. It is really an intelligence game. You cannot get fit by watching others go to the gym. You have to exercise every day,” he observed.

Implementing innovation

The challenges of implementing innovation and business change in a security-conscious context were a central theme of the Sibos 2017 summary provided by SWIFT deputy chairman Stephan Zimmerman and Javier Pérez-Tasso, SWIFT’s chief executive for the Americas and UK region , ahead of Nadella’s discussion with Leibbrandt.

Whilst welcoming front-end innovation, as represented by API-based connectivity, for example, both Zimmerman and Pérez-Tasso noted the efforts of banks, market infrastructure operators and SWIFT to innovate at the underlying interbank infrastructure level, in order to leverage the industry’s tangible assets, including strong governance, security, resilience, operational expertise and global reach. “I do not think that we need to throw the baby out with the bathwater here,” remarked Pérez-Tasso.

Zimmerman highlighted SWIFT gpi as an example of the industry using existing assets – in this case SWIFT’s trusted, secure network – to support innovative new service propositions, initially in the correspondent banking space. But he also pointed to the importance of remaining secure whilst innovating and evolving services. “Risk is going to stay with us,” he admitted.

Observing that the ongoing roll-out of digital banking services inevitably increased the entry points available to cyber criminals, Pérez-Tasso warned against complacency, but applauded the industry’s many initiatives to minimise information security risks, noting in particular the growing momentum behind SWIFT’s Customer Security Programme.

But he insisted that innovation and security need not be conflicting forces in the finance sector, and could in fact be mutually reinforcing pillars of progress. Evidence of an increasingly coordinated approach among banks could be seen in the number of cybersecurity experts attending business meetings around the Sibos 2017 exhibition hall, said Pérez-Tasso.

“The growing number of startups and FinTechs leveraging new technologies, such as AI, machine learning and deception technologies, offer opportunities to help not only in prevention, but also in detection, forensics and remediation,” he added.

Age of enlightenment

Despite the security challenges of the digital age, banking is a network industry in which efficient connectivity to clients and counterparties is fundamental to the ability to deliver value and to drive down risks.

Microsoft’s Nadella complemented the “enlightened views” of banks in the payment sector in using open APIs as part of their efforts to develop digital platforms on which to build new service propositions.

“Hopefully all of you are walking away [from Sibos 2017] with the inspiration to continue the hard work of transforming yourself, knowing that this is not going to be a single-quarter or a single-year journey,” Nadella concluded. As the SWIFT community looks ahead to Sibos 2018 in Sydney, the generational shift toward a digital future is gaining momentum.