>>from >>around the globe. It's the cube with digital >>Coverage of IBM think 2021 brought to you by IBM. >>Welcome back to IBM Think 2021 The virtual edition. My name is Dave Volonte and you're watching the cubes continuous coverage of think 21. And right now we're gonna talk about banking in the post isolation economy. I'm very pleased to welcome our next guest. Look at wag lee is the general manager, Global banking financial markets at IBM and john Degnan is the global ceo and vice president and distinguished engineer for banking and financial services. Gentlemen, welcome to the cube. >>Thank you. Yeah >>that's my pleasure. Look at this current economic upheaval. It's quite a bit different from the last one, isn't it? I mean liquidity doesn't seem to be a problem for most pecs these days. I mean if anything they're releasing loan loss reserves that they didn't need. What's from your perspective, what's the state of banking today and hopefully as we exit this pandemic soon. >>So so dave, I think, like you say, it's, you know, it's a it's a state and a picture that in a significantly different from what people were expecting. And I think some way, in some ways you're seeing the benefits of a number of the regulations that were put into into place after the, you know, the financial crisis last time around, right? And therefore this time, you know, a health crisis did not become a financial crisis, because I think the banks were in better shape. And also, you know, governments clearly have put worldwide a lot of liquidity into the, into the system. I think if you look at it though, maybe two or three things ready to call out firstly, there's a there's a massive regional variation. So if you look at the U. S. Banking industry, it's extremely buoyant and I'll come back to that in a minute in the way in which is performing, you know, the banks that are starting to report their first quarter results are going to show profitability. That's you know significantly ahead of where they were last year and probably some of the some of their best performance for quite a long time. If you go into europe, it's a completely different picture. I think the banks are extremely challenged out there and I think you're going to see a much bleaker outlook in terms of what those banks report and as far as Asia pacific is concerned again, you know because they they have come out of the pandemic much faster than consumer businesses back into growth. Again, I think they're showing some pretty buoyant performance as far as as far as banking performance is concerned. I think the piece that's particularly interesting and I think him as a bit of a surprise to most is what we've seen in the U. S. Right. And in the US what's actually happened is uh the investment banking side of banking businesses has been doing better than they've ever done before. There's been the most unbelievable amount of acquisition activity. You've seen a lot of what's going on with this facts that's driving deal raised, you know, deal based fee income for the banks. The volatility in the marketplace is meaning that trading income is much much higher than it's ever been. And therefore the banks are very much seeing a profitability on that investment banking side. That was way ahead of what I think they were. They were expecting consumer businesses definitely down. If you look at the credit card business, it's down. If you look at, you know, lending activity that's going down going out is substantially less than where it was before. There's hardly any lending growth because the economy clearly is flat at this moment in time. But again, the good news that, and I think this is a worldwide which are not just in us, the good news here is that because of the liquidity and and some of the special measures the government put out there, there has not been the level of bankruptcies that people were expecting, right. And therefore most of the provisioning that the banks did um in expectation of non performing loans has been, I think, a much more, much greater than what they're going to need, which is why you're starting to see provisions being released as well, which are kind of flattering, flattering the income, flattering the engine. I think going forward that you're going to see a different picture >>is the re thank you for the clarification on the regional divergence, is that and you're right on, I mean, european central banks are not the same, the same position uh to to affect liquidity. But is that nuances that variation across the globe? Is that a is that a blind spot? Is that a is that a concern or the other other greater concerns? You know, inflation and and and the the pace of the return to the economy? What are your thoughts on that? >>So, I think, I think the concern, um, you know, as far as the european marketplace is concerned is um you know, whether whether the performance that and particularly, I don't think the level of provisions in there was quite a generous, as we saw in other parts of the world, and therefore, you know, is the issue around non performing loans in in europe, going to hold the european uh european banks back? And are they going to, you know, therefore, constrain the amount of lending that they put into the economy and that then, um, you know, reduces the level of economic growth that we see in europe. Right? I think, I think that is certainly that is certainly a concern. Um I would be surprised and I've been looking at, you know, forecasts that have been put forward by various people around the world around inflation. I would be surprised if inflation starts to become a genuine problem in the, in the kind of short to medium term, I think in the industry that are going to be two or three other things that are probably going to be more, you know, going to be more issues. Right. I think the first one which is becoming top of mind for chief executives, is this whole area around operational resiliency. So, you know, regulators universally are making very very sure that banks do not have a technical debt or a complexity of legacy systems issue. They are and you know, the U. K. Has taken the lead on this and they are going so far as even requiring non executive directors to be liable if banks are found to not have the right policies in place. This is now being followed by other regulators around the world. Right. So so that is very much drop in mind at this moment in time. So I think discretionary investment is going to be put you know, towards solving that particular problem. I think that's that's one issue. I think the other issue is what the pandemic has shown is that and and and this was very evident to me and I mean I spent the last three years out in Singapore where you know, banks have become very digital businesses. Right? When I came into the U. S. In my current role, it was somewhat surprising to me as to where the U. S. Market place was in terms of digitization of banking. But if you look in the last 12 months, you know, I think more has been achieved in terms of banks becoming digital businesses and they've probably done in the last two or three years. Right. And that the real acceleration of that digitization which is going to continue to happen. But the downside of that has been that the threat to the banking industry from essentially fintech and big tex has exactly, it's really accelerated. Right, Right. Just to give you an example, Babel is the second largest financial services institutions in the US. Right. So that's become a real problem I think with the banking industry is going to have to deal with >>and I want to come back to that. But now let's bring john into the conversation. Let's talk about the tech stack. Look, it was talking about whether it was resiliency going digital, We certainly saw over the pandemic, remote work, huge, huge volumes of things like TPP and and and and and mortgages and with dropping rates, etcetera. So john, how is the tech stack Been altered in the past 14 months? >>Great question. Dave. And it's top of mind for almost every single financial services firm, regardless of the sector within the overall industry, every single business has been taking stock of how they handled the pandemic and the economic conditions thereafter and all of the business needs that were driven by the pandemic. In so many situations, firms were unable to service their clients or we're not competitive in serving their clients. And as a result they've had to do very deep uh architectural transformation and digital transformation around their core platforms. Their systems of analytics and their systems different end systems of engagement In terms of the core processing systems that many of these institutions, some in many cases there are 50 years old And with any 50 year old application platform there are inherent limitations. There's an in flex itty inflexibility. There's an inability to innovate for the future. There's a speed of delivery issue. In other words, it can be very hard to accelerate the delivery of new capabilities onto an aging platform. And so in every single case um institutions are looking to hybrid cloud and public cloud technology and pre packaged a ai and prepackaged solutions from an I. S. V. Ecosystem of software vendor ecosystem to say. As long as we can crack open many of these old monolithic cause and surround them with new digitalization, new user experience that spans every channel and automation from the front to back of every interaction. That's where most institutions are prioritizing. >>Banks aren't going to migrate, they're gonna they're gonna build an abstraction layer. I want to come back to the disruption is so interesting. The coin base I. P. O. Last month see Tesla and microstrategy. They're putting Bitcoin on their balance sheets. Jamie diamonds. Traditional banks are playing a smaller role in the financial system because of the new fin text. Look at, you mentioned Paypal, the striped as Robin Hood, you get the Silicon Valley giants have this dual disrupt disruption agenda. Apple amazon even walmart facebook. The question is, are traditional banks going to lose control of the payment systems? >>Yeah. I mean I think to a large extent that is that has already happened, right? Because I think if you look at, you know, if you look at the experience in ASia, right? And you look at particularly organizations like and financial, you know, in India, you look at organizations like A T. M. You know, very substantial chance, particularly on the consumer payments side has actually moved away from the banks. And I think you're starting to see that in the west as well, right? With organizations like, you know, cloud, No, that's coming out with this, you know, you know, buying out a later type of schemes. You've got great. Um, and then so you've got paper and as you said, strike, uh and and others as well, but it's not just, you know, in the payment side. Right. I think, I think what's starting to happen is that there are very core part of the banking business. You know, especially things like lending for instance, where again, you are getting a number of these Frontex and big, big tech companies entering the marketplace. And and I think the threat for the banks is this is not going to be small chunks of market share that you're going to actually lose. Right? It's it's actually, it could actually be a Kodak moment. Let me give you an example. Uh, you know, you will have just seen that grab is going to be acquired by one of these facts for about $40 billion. I mean, this organization started like the Uber in Singapore. It very rapidly got into both the payment site. Right? So it actually went to all of these moment pop shops and then offered q are based um, 12 code based payment capabilities to these very small retailers, they were charging about half or a third or world Mastercard or Visa were charging to run those payment rails. They took market share overnight. You look at the Remittance business, right? They went into the Remittance business. They set up these wallets in 28 countries around the Asean region. They took huge chunks of business completely away from DBS, which is the local bank out there from Western Union and all of these, all of these others. So, so I think it's a real threat. I think Jamie Dimon is saying what the banking industry has said always right, which is the reason we're losing is because the playing field is not even, this is not about playing fields. Been even write, all of these businesses have been subject to exactly the same regulation that the banks are subject to. Regulations in Singapore and India are more onerous than maybe in other parts of the world. This is about the banking business, recognizing that this is a threat and exactly as john was saying, you've got to get to delivering the customer experience that consumers are wanting at the level of cost that they're prepared to pay. And you're not going to do that by purely sorting out the channels and having a cool app on somebody's smartphone, Right? If that's not funny reported by arcade processes and legacy systems when I, you know, like, like today, you know, you make a payment, your payment does not clear for five days, right? Whereas in Singapore, I make a payment. The payment is instantaneously clear, right? That's where the banking system is going to have to get to. In order to get to that. You need to water the whole stack. And the really good news is that many examples where this has been done very successfully by incumbent banks. You don't have to set up a digital bank on the site to do it. And incumbent bank can do it and it can do it in a sensible period of time at a sensible level of investment. A lot of IBM s business across our consulting as well as our technology stack is very much trying to do that with our clients. So I am personally very bullish about what the industry >>yeah, taking friction out of the system, sometimes with a case of crypto taking the middle person out of the system. But I think you guys are savvy, you understand that, you know, you yeah, Jamie Diamond a couple years ago said he'd fire anybody doing crypto Janet Yellen and says, I don't really get a Warren Buffett, but I think it's technology people we look at and say, okay, wait a minute. This is an interesting Petri dish. There's, there's a fundamental technology here that has massive funding that is going to inform, you know, the future. And I think, you know, big bags are gonna lean in some of them and others, others won't john give you the last word here >>for sure, they're leaning in. Uh so to just to to think about uh something that lick it said a moment ago, the reason these startups were able to innovate fast was because they didn't have the legacy, They didn't have the spaghetti lying around. They were able to be relentlessly laser focused on building new, using the app ecosystem going straight to public and hybrid cloud and not worrying about everything that had been built for the last 50 years or so. The benefit for existing institutions, the incumbents is that they can use all of the same techniques and tools and hybrid cloud accelerators in terms And we're not just thinking about uh retail banking here. Your question around the industry that disruption from Bitcoin Blockchain technologies, new ways of processing securities. It is playing out in every single securities processing and capital markets organization right now. I'm working with several organizations right now exactly on how to build custody systems to take advantage of these non fungible digital assets. It's a hard, hard topic around which there's an incredible appetite to invest. An incredible appetite to innovate. And we know that the center of all these technologies are going to be cloud forward cloud ready. Ai infused data infused technologies >>Guys, I want to have you back. I wish I had more time. I want to talk about SPAC. So I want to talk about N. F. T. S. I want to talk about technology behind all this. You really great conversation. I really appreciate your time. I'm sorry. We got to go. >>Thank you. Thanks very much indeed for having us. It was a real pleasure. >>Really. Pleasure was mine. Thank you for watching everybody's day. Volonte for IBM think 2021. You're watching the Cube. Mhm.