 From around the globe, it's theCUBE 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 Vellante and you're watching theCUBE's continuous coverage of Think 21. And right now we're going to talk about banking and the post isolation economy. I'm very pleased to welcome our next guests. Look at Wagley is the general manager, global banking financial markets at IBM John Dagonin is the global CTO and vice president and distinguished engineer for banking and financial services. Gentlemen, welcome to theCUBE. Thank you. Thank you for having us today. Yeah, it'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 banks 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, Dave, I think like you say, it's a state in a picture that's significantly different from what people were expecting. And I think in some ways you're seeing the benefits of a number of the regulations that were put into place after the financial crisis last time ran, right? And therefore this time, a health crisis did not become a financial crisis because I think the banks were in better shape. And also governments clearly have put worldwide a lot of liquidity into the system. I think if you look at it though, maybe two or three things ready to call out. Firstly, there's a massive regional variation. So if you look at the US banking industry, it's extremely buoyant. And I'll come back to that in a minute in the way in which it's performing. The banks that are starting to report their first quarter results are going to show profitability. That's significantly ahead of where they were last year and probably some of the 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, because they have come out of the pandemic much faster, their consumer business is back into growth. Again, I think they're showing some pretty buoyant performance as far as banking performance is concerned. I think the piece that's particularly interesting and I think came as a bit of a surprise to most is what we've seen in the US, right? And in the US, what's actually happened is 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 the SPACs that's driving 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 their investment banking side that was way ahead of what I think they were expecting. Consumer business is definitely down. If you look at the credit card business, it's down. If you look at lending activity that's going down, going out, it's 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 there, and I think this is a worldwide picture, not just in the US, the good news here is that because of the liquidity and some of the special measures that 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 in expectation of non-performing loans has been, I think, 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 the income. I think going forward, though, you're going to see a different picture. Is the, Rhys, thank you for the clarification on the regional divergence. Is that, and you're right on. I mean, the European central banks are not in the same position to affect liquidity. But is that nuance, is that variation across the globe? Is that a blind spot? Is that a concern or the other greater concerns, inflation and the pace of the return to the economy? What are your thoughts on that? So I think the concern as far as the European market place is concerned is whether the performance that, and particularly I don't think the level of provisioning there was quite as generous as we saw in other parts of the world. And therefore, is the issue around non-performing loans in Europe going to hold the European banks back? And are they going to therefore constrain the amount of lending that they put into the economy? And that then reduces the level of economic growth that we see in Europe, right? I think that is certainly a concern. I would be surprised, and I've been looking at, 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 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 issues. I think the first one, which is becoming top of mind for chief executives is this whole area around operational resiliency. So regulators universally are making very, very short that banks do not have a technical debt or a complexity of legacy systems issue. They are, and the UK 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 that is very much top of mind at this moment in time. So I think discretionary investment is going to be put towards solving that particular problem. I think that's one issue. I think the other issue is what the pandemic has shown is that, and this was very evident to me, and I spent the last three years out in Singapore where banks have become very digital businesses, right? When I came into the US in my current role, it was somewhat surprising to me as to where the US marketplace was in terms of digitization of banking. But if you look in the last 12 months, I think more has been achieved in terms of banks becoming digital businesses than they've probably done in the last two or three years, right? And there's a 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 FinTechs and BigTechs has exactly really accelerated, right? I mean, just to give you an example, PayPal is the second largest financial services institution in the US, right? So that's become a real problem, I think, which 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 and 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 volumes of things like PPP and mortgages and with dropping rates, et cetera. So John, how has 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 their 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 were not competitive in serving their clients. And as a result, they've had to do very deep architectural transformation and digital transformation around their core platforms, their systems of analytics and their front-end systems of engagement. In terms of the core processing systems that many of these institutions, in many cases, they're 50 years old. And with any 50-year-old application platform, there are inherent limitations. There's an 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, institutions are looking to hybrid cloud and public cloud technology and pre-packaged AI and pre-packaged solutions from an ISV ecosystem, a software vendor ecosystem, to say, as long as we can crack open many of these old monolithic cores and surround them with new digitization, new user experience that spans every channel and automation from the front to back of every interaction, that's where most institutions are prioritizing. Yeah, banks aren't going to migrate. They're going to build an abstraction layer. I want to come back to the disruption. It is so interesting. You had the Coinbase IPO last month. See, Tesla and MicroStrategy, they're putting Bitcoin on their pallet sheets. Jamie Diamonds says traditional banks are playing a smaller role in the financial system because of the new FinTechs. Look at you mentioned PayPal, the Striped, as Robinhood, you get the Silicon Valley giants have this dual 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 has already happened, right? Because I think if you look at, if you look at the experience in Asia, right, and you look at particularly organizations like Ant Financial, in India, you look at organizations like ATM, very substantial chunks, particularly on the consumer payment 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, Klarna that's coming out with this, buying out pay later type of schemes, you've got Paytm, so you've got PayPal, and as you said Striped, and others as well. But it's not just in the payment side, right? I think what's starting to happen is that there are very core parts of the banking business, especially things like lending, for instance, where again, you are getting a number of these fintechs and big, big tech companies entering the marketplace. 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 actually, it could actually be a Kodak moment. Let me give you an example. You will have just seen that Grab is going to be acquired by one of these banks for about $40 billion. I mean, this organization started like the Uber in Singapore. It very rapidly got into both the payment side, right? So it actually went to all of these mom and pop shops, and it offered QR based, QR code based payment capabilities to these very small retailers. They were charging about half or a third of what Mastercard or Visa were charging to run those payment trails. 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 others. 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 being even, right? 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 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? That smartphone is reported by arcade processes and legacy systems, like today, 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 order the whole stack. And the really good news is there are many examples where this has been done very successfully by incumbent banks. You don't have to set up a digital bank on the side 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 could do. Yeah, I mean, taking friction out of the system, sometimes in the case of crypto, taking the middle person out of the system. But I think you guys are savvy. You understand that, you know, yeah, Jamie Diamond a couple of years ago said that he'd fire anybody doing crypto. Janet Yellen says, oh, I don't really get it, you know, Warren Buffett. But I think as technology people, we look at it and say, okay, wait a minute, this is an interesting Petri dish. There's fundamental technology here that has massive funding that is going to inform, you know, the future. And I think, you know, big banks are going to lean in some of them and others won't. John, give you the last word here. For sure they're leaning in. So just to think about something that Likert 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 API 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 retail banking here, your question around the industry 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 hot, hot topic around which there's incredible appetite to invest and incredible appetite to innovate. And we know that the center of all these technologies is going to be cloud forward, cloud ready, AI infused, data infused technologies. Guys, I want to have you back. I wish you had more time. I want to talk about SPACs. I want to talk about NFTs. I want to talk about technology behind all this. Really great conversation and really appreciate your time. I'm sorry we got to go. Thank you. Thanks so much indeed for having us. It was a great pleasure. It was a pleasure. It was my pleasure. Thank you for watching everybody. This is Dave Vellante for IBM Think 2021. You're watching theCUBE.