IBM Z

The banking
platform for
the future

3 things required
for survival

The three things financial institutions require for their survival are the same three things senior executives want from their investments in computing systems.

1. Ironclad security

The integrity of customer data is paramount to maintaining trust across the financial ecosystem.

2. Customer fulfillment

Personalized and instantaneous experiences are the key to ensuring satisfied customers.

3. Cost and efficiency
advantage

Streamlined and cost-effective solutions are a vital part of staying ahead of competitive offerings.

The Z you know

Z®, the chosen platform for survival

  • Counted on for $7.7 trillion in annual credit card payments [i]
  • 29 billion annual ATM transactions [ii]
  • 12.6 billion transactions per day [iii]
  • 92 of the worlds top 100 banks rely on Z to host core system [iv]

The new Z

No longer just about
processing transactions

Constant improvement has transformed Z – already trusted as the major repository for managing capital – into a modern, versatile 21st century tool for sustaining banking innovation. The latest generation Z, IBM z14, can be managed in a dynamic hybrid cloud environment that allows key assets to be maintained on premises while allowing permissioned access to others within an ecosystem.

The worldwide financial services industry recognizes that for conducting business and transactions that cannot afford to fail, IBM Z is unbeatable. Z also enables a number of steps that can be taken today to quickly, incrementally and safely prepare a bank for operating in cloud-based ecosystems while keeping costs under control.

The platform for the bank
of the future

Let’s look in greater detail at how 9 of these steps can help you transform 3 key challenges into opportunities.

Opportunity #1

Maintaining
unbreakable
trust

Maintaining unbreakable trust

In the digital age, customer expectations are incredibly high with respect to security and attacks put trust at risk. Maintaining unbreakable trust is critical for a bank; once customer confidence is lost, it does not return.

In light of this threat, banks must:

  • Take aggressive steps to ensure the safety of client funds and information
  • Become more proactive about preventing fraud in-flight
  • Find ways to simplify and reduce the cost of regulatory compliance

An analysis of security incidents from 2016 revealed that the financial services sector received 65 percent more cyber crime attacks than average. [v]

Between 2013 and 2016 there were over 3,000 reported breaches in the global financial sector, of which over 40 percent led to data loss. [vi]

Keep accounts and sensitive data safe

Trust is the currency of digital relationships and is vital for banking services. Banking customers demand security and transparency in every interaction as this new currency is exchanged. One of the fastest ways to lose this trust is to put their data at risk, yet sensitive financial records continue to be compromised. Data is the new perimeter, and data security is where the foundation of trust begins – and ends.

Extensive use of encryption is one of the most impactful ways to reduce the risks and financial losses of data breaches. However, implementing encryption is a complex process on most platforms due to difficulties classifying what data to encrypt, discovering where that data resides, and deploying encryption technology. Because of these complexities, encryption is only performed selectively; of the 9 billion records breached since 2013 only 4 percent were encrypted.[viii]

The Z you know

  • Requires 69 percent less effort and 84 percent less cost to secure equivalent workloads. [vii]
  • 8 times more effective at resisting security threats. [viii]

The new Z

  • Now, the z14 is also designed to encrypt all data all the time, with no application changes, no impact to SLAs, and no interruption to business operations.
  • Explore pervasive encryption on z
For your CIO

This transparent and consumable z14 feature is integrated with dedicated cryptographic coprocessors that substantially reduce the cost of encryption, as well as certified tamper-responsive hardware security modules for protecting keys. Policy-based management makes Z pervasive encryption easy to use and lower on labor cost.

Prevent fraud in flight

Banking fraud charge-offs can account for more than seven basis points of revenue,[xi] and it’s estimated that 80 percent of consumer fraud is perpetrated by criminal organizations exploiting very short windows of execution. The only way to fight sophisticated attacks on banks is to intervene while transactions are in flight, in real time, before settlement.

When fraudulent transactions can be identified and stopped before funds are moved, a bank avoids the direct, investigative and recovery costs, the customer is not inconvenienced, and trust is maintained.

Only 16 percent of institutions are able to detect fraud as it is attempted. [ix]

Why Z

  • To protect banking customers from fraud, IBM Z is equipped with advanced analytic capabilities that interface with existing transactional systems, allowing 100 percent of inflight transactions to be scored for fraud in real-time with no SLA impact. [xiii]

Simplify regulatory compliance

Already experiencing US$99 billion in annual compliance costs, banks are expecting 300 million pages of regulations by 2020. [xiii] Rapidly expanding banking regulations dominate resources that could be better used for innovation and growth. And the penalties for noncompliance can be severe; the EU GDPR demands as much as 4 percent of global revenues for a data privacy violation.[xiv]

Regulatory compliance is becoming one of the strongest financial pressures against the bank’s bottom line, and the strains of compliance are exceeding human capabilities in even the best-run organizations. [x]

Opportunity #2

Catering to the
empowered
customer

Catering to the empowered customer

Fifty-four percent of executives say that buying behavior is shifting from product orientation to an experience orientation.[xvi] This is forcing banks to find innovative ways to make banking invisible and seamless – securely enabling processes for always-on connected devices while maintaining brand identity. Empowered banking customers demand superior service and vote with their feet; delight them, and business will grow.

Fifty-four percent of executives say that buying behavior is shifting from product orientation to an experience orientation.[xvi]

Catering to the empowered customer requires that banks:

  • Know everything necessary about their customers in order to deliver highly personalized experiences ahead of their competitors
  • Make services simpler and faster to consume
  • Ensure that access to services is never compromised

Know what your customers want before they do

Eighty-three percent of banks see providing a tailored experience as key to gaining competitive advantage,[xvii] yet 62 percent of banking leaders believe their institutions are not effectively delivering.[xviii]

62 percent of banking leaders believe their institutions are not effectively delivering tailored experiences. [xviii]

The personalized attention demanded by customers today requires more accurate behavioral models producing insights into their needs, preferences and intentions. It also adds unnecessary expense: the cost of copying 1TB of data per day over a four-year period has been estimated at approximately $10 million USD[xxi]

For your data team

More than 80 percent of data scientists consider such customer reference data, transactional data, and operational data important or very important in building accurate models.[xix] Much of this data originates on IBM Z, yet banks routinely copy it to data warehouses or cloud platforms for analysis, and data ingestion has become a process bottleneck: 51 percent of a data scientist’s time is used to locate, acquire, and prepare data for analysis.[xx] Insights are highly perishable and such latency limits the effectiveness of insights.

The new Z

  • Machine learning is an enhanced IBM Z feature that can help banks shift from product-centric to customer-centric business models by infusing continuous intelligence into banking operations.
  • Z is engineered to run transactions and machine learning simultaneously without adversely affecting the performance of either, allowing in-place analysis of core data while avoiding the latency, cost and security risk of moving this sensitive information.
  • Explore machine learning on z

Reduce friction in heavily used services

Banks are experimenting with blockchain as a means of becoming more competitive – particularly in creating new business models and entering new markets – because it helps reduce friction in banking processes and greatly improves the accuracy of the information banks rely on to make decisions.[xxii]

58 percent of study participants believe that specialized hardware is essential in addressing blockchain key management. [xxiv]

In a recent study of bankers, fear of insiders or cybercriminals gaining illicit access to a blockchain through privileged credential abuse led identity management to be cited as a security vulnerability by over one-third of respondents.[xxiii] And with assets digitized on a distributed ledger, ownership of private keys represents ownership of the asset itself – making key management another security vulnerability.

The new z

  • z14 integrates key management hardware and hardware-enforced container technology to deliver the most secure blockchain environment available.

  • Areas identified as prime candidates for blockchain – consumer lending, corporate lending, mortgages, retail payments and deposits – are core banking systems, typically deployed on IBM Z.

Be prepared to serve anytime, from anywhere

In this digital age of banking, services must be available 24/7/365 and any downtime can be a significant deterrent to growth. Banks must adopt an “always-on” posture for all customer-facing systems – not just core banking. The main responsibility for delivering always-on service falls to the infrastructure, which is why many banking systems are deployed to IBM Z.

In a recent survey of enterprise users, Z recorded less than 10 seconds of unplanned downtime per server each month and had no reported incidents of downtime greater than four hours per server per year, besting every other platform. Engineered to avoid failure, Z has the resiliency to minimize unavailability of services on those rare occasions when failure does occur. And Z at the heart of a hybrid cloud environment makes it less likely that clients will flee to a competitor because services are not available at the precise moment they are needed.

For your CEO

Resilience is critical considering that 33 percent of respondents indicated that one hour of downtime now costs between $1M and $5M US.[xxv]

Opportunity #3

Innovating your
way to higher
profits

Innovating your way to higher profits

Collaboration may be the surest way to grow revenue in an era of tight margins, yet many core banking systems currently lack the necessary agility. Digital transformation has changed the economics of banking; under pressure to reduce cost and grow top-line revenue, banks must fundamentally shift to an ecosystem-based operating model.

80 percent of US bankers would like to modernize their core systems, but only 15 percent expect to start in the next three years.[xxvi]

In order to generate higher ROI, banks must:

  • Connect with partners in an ecosystem of shared services
  • Aggressively enable developer-friendly technologies within core systems
  • Find new ways to leverage their most efficient infrastructure elements

Establish an ecosystem for buying (and selling) services

Many fintechs use digital technologies to produce innovative point solutions for specific banking needs. By partnering with such companies, incumbent banks can harvest the best knowledge in an ecosystem and deliver an integrated banking experience while retaining their core value proposition.

90 percent of executives believe ecosystems will change their organization’s primary activities or focus areas to some extent, and 55 percent believe that partnering is essential to build new capabilities.[xxvii]

Why Z

  • Exposing z-based core banking systems via APIs can deliver dramatic improvements in core systems agility, resulting in greater business value without putting current operations at risk.

The new Z

  • Externalizing information via common and standard application programming interfaces (APIs) is a smart way for banks to create new forms of value from core systems and data. It is surprisingly easy to create services from z-based core systems using APIs and microservices without requiring Z skills. Tooling allows banks to leverage and extend Z investments by automatically identifying API candidates and turning them into services.
  • Explore Cloud on Z

Make core platforms more attractive to developers

Many banking operations remain encapsulated in old code; there are an estimated 220+ billion lines of COBOL code still in active use worldwide, driving more than 70 percent of business transactions.[xxviii]

80 percent of bank IT budgets are devoted to application maintenance.[xxix]

IBM Z is now an open and connected environment, enabling developers to seamlessly participate in today’s agile and flexible banking applications without requiring specialized skills or the need to replace core banking systems.

For your CTO

Many techniques exist to take cost and complexity out of old code while maintaining a bank’s unique level of functionality and continuing to deliver the expected levels of service, such as: streamlining communications via web services and service oriented architectures; using Java to create new applications and modern, consumable front ends to older ones; connecting directly to mobile applications; producing and consuming standard APIs; and using modern tooling in an agile development environment.[xxx]

Capitalize on extreme efficiency

One analysis found organizations that made the choice to run workloads on Z are realizing an average 47 percent lower five-year cost than by moving to a distributed environment.[xxxiii] In fact, leaders of banks, insurance companies, and financial services firms say that banks must adopt more customer-centric business models, and map these models onto a hybrid cloud architecture that is agile and flexible.

80 percent of banks’ mission critical applications run on IBM Z, while at the same time, Z only makes up 20 percent of their IT cost.[xxxi]

Although the banking systems of the future will look quite different than those of today, banks cannot “close for renovations” while these changes are being made. A sensible plan is to begin from a position of strength: focusing on the core systems at the heart of banking operations and making incremental improvements without risk to current revenue streams or inconveniencing customers.

Every new generation reduces TCO by enabling fewer people to manage more capacity. The extreme efficiency of Z provides the best opportunity for driving down overall IT expense. Advances in IBM Z technology have positioned core systems to do more for banks than simply executing greater volumes of transactions.

Summary

These recommendations give you a head start on the path to the next-generation banking platform:

  • Keep accounts and sensitive data safe, and simplify regulatory compliance, using z14 pervasive encryption technology
  • Prevent fraud in flight, and deliver a customized banking experience, by utilizing Z-based machine learning integrated with core banking systems
  • Reduce friction in banking services by leveraging Z blockchain technology
  • Develop a services ecosystem with fintechs using APIs to access Z-based core systems
  • Adopt a strategy for agile application development on Z as part of a digital transformation plan
  • Improve overall banking efficiency by using Z to consolidate what is differentiating

Notes

  • [i] IBM internal analysis based on a correlation of market share volume data from The Nilson Report with IBM data on known mainframe clients
  • [ii] IBM internal analysis based on a correlation of ATM machine statistic data from ATMIA, National ATM Council with IBM data on known mainframe clients
  • [iii] IBM internal measurements
  • [iv] IBM Institute for Business Value analysis based on internal data
  • [v] Lappeenranta University of Technology (LUT), “Generalized and specific trust - Trust in business relationships 2/13”, youtube.com. 20 August 2013. https://www.youtube.com/watch?v=9qWKR08kfFQ
  • [vi] Alvarez, Michelle, “Security Trends in the financial services sector”. IBM X-Force Research. April 2017. https://www-01.ibm.com/common/ssi/cgi-bin/ssialias?htmlfid=SEL03129USEN&
  • [vii] Consult Hyperion, “GDPR: Banks, Breaches and Billion Euro Fines”. Jugit add .ne 2017.
  • http://www.bankingtech.com/872481/gdpr-banks-breaches-and-billion-euro-fines/
  • [viii] Breach Level Index. http://breachlevelindex.com/ [2017, August].
  • [ix] Solitaire Interglobal, “Cyber Crime: Keeping Data Safe from Security Incursions”.
  • https://www-01.ibm.com/common/ssi/cgi-bin/ssialias?subtype=WH&infotype=SA&htmlfid=ZSW03297USEN&attachment=ZSW03297USEN.PDF
  • [x] Ibid.
  • [xi] Davis, Wilson and David Dixon. “Winning the face-off against fraud: How the most effective financial institutions are outthinking the bad guys”. IBM Institute for Business Value. January 2016. https://www-935.ibm.com/services/us/gbs/thoughtleadership/fightingfraud/
  • [xii] Ibid.
  • [xiii] IBM internal banking POV, citing Forrester Research
  • [xiv] Bieler, Dan, “Trust Must be the Foundation of your B2B Digital Ecosystem”. Forrester Research. 29 March 2017. https://go.forrester.com/blogs/17-03-31-trust_must_be_the_foundation_of_your_b2b_digital_ecosystem/
  • [xv] Ponemon Institute, “Global Encryption Trends Study”
  • [xvi] Davidson, Steven, Edward Giesen, Martin Harmer and Anthony Marshall. “In or out? Succeeding in the ecosystem economy”. IBM Institute for Business Value. July 2017. https://www-01.ibm.com/common/ssi/cgi-bin/ssialias?htmlfid=GBE03850USEN&
  • [xvii] bizagi, “Become the Responsive Bank: How Customer Obsessed Are You?”. 2017. http://go.bizagi.com/GLOB_2017_Q1_WSC_ResponsiveBankeBook_LPAG_01_Registration.html
  • [xviii] Drury, Nicholas, Allan Harper, Anthony Marshall and Dr. Sandipan Sarkar. “Breakthrough banking: Your cognitive future in banking and financial markets”. IBM Institute for Business Value. October 2015. https://www-03.ibm.com/systems/data/flash/ae/cognitivebank/res/assets/Breakthrough_banking_Exec_Report.pdf
  • [xix] Forrester Consulting, “Blazing-Fast Real-Time Insights With Apache Spark”, May 2016. No longer available online.
  • [xx] Ibid.
  • [xxi] Clabby Analytics, “The ETL Problem Solved: The Compelling Financial Case for Running Analytics on the Mainframe”. April 2016. http://nebula.wsimg.com/be9fe8f31972a9fc8c535c0661d49412?AccessKeyId=CCAA67622F6695DC4DB7&disposition=0&alloworigin=1
  • [xxii] Ibid.
  • [xxiii] Johnson, Richard, “Addressing the Latest Trends in Distributed Ledger Technologies”. Greenwich Associates. 1 June 2017. https://www.greenwich.com/corporate-banking/addressing-latest-trends-distributed-ledger-technologies
  • [xxiv] Ibid.
  • [xxv] Information Technology Intelligence Consulting (ITIC), “IBM, Lenovo Servers Deliver Top Reliability, Cicso UCS, HPE Integrity Gain”. 12 June 2017. http://itic-corp.com/blog/2017/06/ibm-lenovo-servers-deliver-top-reliability-cisco-ucs-hpe-integrity-gain/
  • [xxvi] Olynick, Peter, “Don’t Fear Modernizing Your Core”. NTT Data Consulting. August 2016. https://us.nttdata.com/en/-/media/nttdataamerica/files/americasd2/banking/electronicdont-fear-modernizing-your-core-white-paper.pdf
  • [xxvii] Davidson, Steven, et al. “In or out?”
  • [xxviii] IBM internal estimates
  • [xxix] IBM internal banking POV, citing Economist Intelligence Unit, 2015: “Future Factors: The 3 Rs of Retail Banking”
  • [xxx] IDC, “The Business Value of the Connected Mainframe for Digital Transformation”. December 2016. https://www-01.ibm.com/common/ssi/cgi-bin/ssialias?htmlfid=ZSL03428USEN
  • [xxxi] IBM unpublished executive briefing with Bob Hoey, General Manager, Financial Services Market - IBM North America
  • [xxxii] CA Technologies, “Why the Mainframe Should be Part of Your Digital Business Ecosystem”. 2016. https://www.ca.com/content/dam/ca/us/files/white-paper/why-the-mainframe-should-be-part-of-your-digital-business-ecosystem.pdf
  • [xxxiii] IDC, “The Business Value of the Connected Mainframe for Digital Transformation



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