• Non-bank financial institutions play a huge role in digital revolution
• Interoperability is an easy concept but difficult to execute
• A lot of banks, even those with large legacy businesses, suffered from underinvesting in what was considered a paper-based, old-fashioned business

Siddharth Chandani (SC): We're speaking to Peter Hazou, director of business strategy for worldwide financial services at Microsoft. What are some of the current trends you're seeing in terms of moving the infrastructure to cloud services, which regions you think are initiating this and what are some of the laggards?

Peter Hazou (PH): Banking itself is going through a transformation. There's a fundamental change in business models. One of the main reasons for this is there are many drivers. There are a lot of new technologies that are available, but a digital revolution alone is not just about the technology. It's really around the changing habits of consumers, the changing needs of clients and very much about the changing role of banks. 

For one thing, a lot of the competition in banking is no longer just bank on bank. The non-bank financial institutions play a huge role in this revolution. They are themselves born in the cloud. In Asia, they're well known. There are Tencent, Alipay and WeChat. There are so many trends that are emerging, which are really changing the nature and shape of bank franchises, particularly in payments.

We’re seeing an enormous amount of change. The traditional banks are very keen to modernise. That's where the subject of the platform and the cloud really come into play, because it's a response to the changing needs of clients and banks to serve them.

The user experience is very topical. It's maybe, arguably, where the revolution began with the smartphone that came out just 10 years ago and changed everybody's understanding of how to interface. The entire user experience changed. Microsoft has been doing a lot for many years in terms of user experience, both through our partners and through our first-party solutions like Dynamics in order to help modernise the user experience.

SC: The payment space is getting crowded.

PH: Payments is changing faster than most other things. It had the most amount of competition lately from born in the cloud providers that have very new and very agile way of serving clients and breaking down old barriers. The banks as an industry are more traditional. They're highly regulated, and that's not new. Banking has always been a highly regulated industry. It's also a fiduciary industry. That's one reason it's regulated. Banks hold other people's money and need to be protective of it. 

In the traditional cross-border payments that you asked about, there have been a lot of challenges. Borders raised challenges, not just from a regulatory point of view, but the infrastructure is different in each country.

One of the revolutionary challenges for banks is a lot of the new non-bank competitors are breaking down those barriers in very new innovative ways. The banks who have been the traditional providers of these services need to modernise both the user experience, but also the entire infrastructure. That's where something like the cloud comes into play, because that can really help facilitate a lot of those changes. It's really a lot about modernisation.

The industry is causing a modernisation, and the banks also need to modernise their approach. That's a technology thing. It's also a lot about change management. You see the banks having a much more agile approach to how they develop products. Things like cross-border payments you refer to, they have to think very differently about how they approach this and how they really make this a new reality, given the fact that the franchise of making payments will go elsewhere, where it is seemingly easier or more convenient.

SC: The need to comply with those regulations will become as onerous as instant payments will become the norm. In this perspective, how are Microsoft’s cloud services helping clients meet their needs?

PH: You mentioned real time. That's one of the deeply revolutionary things about what's happening in payments these days. Payments traditionally have been a batch processing business and overnight processing in a lot of respects, even in Asia. They were designed in Victorian times, where it was a 24-hour process – you instruct a payment, it's processed overnight and the money is paid tomorrow. The processes entailed in doing that means that there's actually plenty of time to check balances, to check lists, to make sure the funds are good and do all the validations that need to happen.

That change in the world now about real time means that all of these processes have to happen instantly. That's a lot of the modernisation, where Microsoft plays a big role as well, because the cloud is 24/7, 365 days. The processes that have to be processed in real-time payments have to happen instantaneously, almost before the payment is even made because by the time a real-time payment is paid, it's gone.

Microsoft has a real focus on financial crime and cybercrime. A lot of our solutions, partner solutions and some of our first-party solutions are really focusing on how to prevent financial crime and cybercrime in order to enable the banks to process and give their customers a real-time service that's trusted, that they can rely on, with frauds being reduced as much as possible.

SC: How do you address the issues around interoperability of data between the banks and customers?

PH: Interoperability is an easy concept and more difficult to execute in the industry. That's because the world is a very big place and payment is a big complex subject. It means many different things.

Partly, your question is exactly about the fact that payments is not about the processing of the widget. It's really about the data. Some of these interoperable questions you're raising is how does that data get applied? How to get value out of that data?

Some standards need to be done. That was partly the question about interoperability. Historically, each country had their own system, their own data standards. SWIFT has been one of the great standards in financial services. That's helped enormously in terms of how this interoperability can happen.

But in terms of data, there's more to be done. For example, the ISO standards. ISO 20022 is a big standard coming that will really permit much richer use of data globally, and it'll permit things to happen. The banks have been talking for many years about the convergence of the financial supply chain and the logistical supply chain. One of the problems is how to carry the data, invoice data and all these other data in the payment.

Traditionally, payment systems really did not handle the data that went with the transactions, that gave the insight, that reduced the risk in the process and that enabled customers to reconcile. Those data elements were not part of the process traditionally. The exciting thing that's happening now, in terms of interoperability, the standards and how banks are approaching this by the use of the cloud, is actually to ensure much more of that interoperability. It's a journey. But there's so much progress being made now. That's a very interesting subject that we've been talking with banks about.

SC: Let's take a step back and look at trade finance, which is an industry that is not as catching up as fast as payments. There’s this perspective that you implemented on a notable use case with the Anglo-Gulf Trade Bank. It’s totally based on your cloud service. You're building it from scratch. Could you share that with us?

PH: In some respects, Anglo-Gulf Trade Bank is a great example of where Microsoft went in with other partners, and had very detailed conversations about what the bank was trying to achieve, what was their vision of a modern approach, because the strategy of what to do belongs to the experts at the bank. We participated in design sessions to help facilitate such an evolution, so that Anglo-Gulf Trade Bank could launch a very exciting proposition on the market and really have something to say, to really bring value. We played a role in that.

Technology is at the root of a lot of that, but it has more to do with the strategy and the desire of what needs to be addressed and changed. That's a really great example. But it will go a lot beyond that. A lot of the traditional banks are also looking at their legacy trade finance systems. And rather sadly, despite it being such an important global business trade, a lot of the banks suffered from under investing in what was considered a paper-based, old-fashioned business. A lot of the banks, even those with large legacy businesses are really thinking, “How do I modernise that?” Anglo-Gulf Trade Bank is a great example of a new bank doing that, but I think all banks are on that journey.

The really interesting thing is about supply chain. There's been a lot of innovation in supply chain. Look at reverse factoring and supply chain finance. That was almost innovation without technology. There has been a lot of innovation in trade finance, but the really great thing about what's possible now is that through technology, even things like the internet of things, which brings the physical goods and data together with the financial data. There really can be this convergence now of the physical supply chain and the financial supply chain.

The banks – I'm a former banker and I've been talking about this for years – now we're starting to see it as a journey to make this a reality. It's an enormously exciting time. It's not just for payments, but also very much for trade finance. And the root of that, of course, is in trade. There's risk, machine learning and artificial intelligence that one could apply to both streamline and modernise the processes, but also get deep insights from the data itself. Risk reduction is on top of the list, I would say.