Q&A with Peter Hazou: The time has arrived for commercial banking modernisation

Peter Hazou is a former banker who is now responsible for the corporate and commercial banking vertical at Microsoft. In that capacity, he has been instrumental in building the partnership between Microsoft and Trade Ledger. We had the chance to spend time with Peter and collect his insights on the transformation of commercial banking–what it will look like, why now and where Microsoft and Trade Ledger fit in.  

Trade Ledger: You’ve had a long and illustrious career in banking, for some of the world’s most prestigious banks. What made you join up with Microsoft?

Peter: I get asked that question a lot, mostly by bankers that want to change careers into technology. I actually had no intention of making such a change myself. I was a banker at BNY Mellon in London. Microsoft was looking for clients to come to a big luncheon on financial services and somehow they got my name. I ended up sitting next to their head of Financial Services, who had someone resign that day and was looking for a replacement.

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Trade Ledger: What did they say to lure you away?

Peter: Microsoft saw this big, strategic opportunity to help modernise banking and that was exciting. I thought I could have a more influential role on Microsoft's industry team instead of in a seat at a bank.

Technology innovation is not new to banks. Banks were some of the very first companies to use computers to do data processing, as they used to call it. They had enormous amounts of data, but they never saw the value of data itself, like the fintechs do now. It was just material that flowed in and out, like a widget going across an assembly line.

“The revolution that's been upon us for the past ten years has focused on retail banking where fintechs have been leading innovation. But corporate and commercial banking is much larger, much richer in data, more interesting, and more profitable for the banks”

The view of banking then was a two sided model. You take in deposits and make loans. You pay less on the deposits than you charge on the loans, and as long as you properly account for the cost of capital and the cost of risk, you make a profit.

Banks have come to realise that data insights lie at the heart of the data economy in which we live. The fintech revolution in retail banking was the first segment to recognize this changing dynamic.  As a consequence, banking has now evolved into a three sided model where the third side is built around getting value from data. 

I view where we are now as part of a long continuum. The underlying customer needs haven’t changed that much. The risks are different. The flows are different. But human needs have not fundamentally changed.

We have new ways to address these needs with technology, but it’s not about technology. It’s about solving fundamental problems in modern ways. Microsoft very much has a solution focus. That's how I got involved in this. That was eight years ago, when banks had not really adopted the public cloud.

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Trade Ledger: How has your role evolved since then?

‍Peter: I started as a banker explaining how people in banks use the core applications Microsoft provides, such as Office. I got right into the heart of what Microsoft does, which is modernising the workplace and people experiences.

Now I’m responsible for the corporate and commercial banking vertical, which is very exciting because that is my background. And as far as digitalization goes, it is a huge white space.

The revolution that's been upon us for the past ten years, or longer, has focused on retail banking where fintechs have been leading innovation. But corporate and commercial banking is much larger, much richer in data, more interesting, and more profitable for the banks.

It’s also filled with paper processes and very traditional ways of doing business. With retail banking, the modernization train has left the station. With commercial, I would say the train is still in the station.

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Trade Ledger: If corporate and consumer banking is bigger and more profitable, why did the transformation start in retail banking?

“You’ve also got an enormous richness of data that can help the banks with their own business model, because the more data and insights you have the better you can manage risk”

‍Peter: Because retail had the biggest problem: expensive bricks and mortar, and following the 2008 financial crisis, interest rates were zero. So you have expensive branches gathering deposits that are not earning anything. It was a crisis of profitability. And oh, there's new smartphone technology. We can do this online. We can do it through our phones for free.

A lot of the industry now is trying to crawl up from the starting point in retail banking and apply those lessons to mom and pop business banking, and commercial banking. But I don't think it's necessarily the right approach because even small businesses today are global. When you've got a hometown business and you've got a branch it's a simpler thing. When you’ve got foreign exchange rates, correspondent banks and customs officials from diverse ports overseas in the mix, it gets complex quickly.  

But you’ve also got an enormous richness of data that can help the banks with their own business model, because the more data and insights you have the better you can manage risk.

More importantly, clients would really value more insights from the data banks have. Transaction banking, where I come from, is where banks have done extremely well coming out of the 2008 crisis. They called it 'back to basics', getting away from derivatives and other fancy products and back to focusing on payments and loans. But “basics” is an enormous business that throws off an enormous amount of useful data.  

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Trade Ledger: Why is this happening now?

“There’s more data in commercial banking than can be dealt with by humans. The revelation now is how much simpler it is to democratize that data. And then you have artificial intelligence to sift through it, as Trade Ledger is doing with working capital lending”

‍Peter: Two reasons. The commercial side is facing the same pressures to reduce costs and improve efficiency. We're at the very moment actually reaching one of the repeating inflection points in the banking cycle with layoffs and organizational delayering, though the underlying drivers are invariably different because we’re in a different place economically with interest rates.

There are still a lot of manual, very un-modernized processes in corporate and commercial banking that, because it’s a more profitable part of the bank, didn't cause the same crisis of profitability as we saw in retail. But attention is now turning to addressing those cost centres.

The other part is that technology is opening up a lot of new possibilities. There’s more data in commercial banking than can be dealt with by humans. The revelation now is how much simpler it is to democratize that data. And then you have artificial intelligence to sift through it, as Trade Ledger is doing with working capital lending.

A third element is that customer expectations are growing. Millennials are becoming corporate treasurers and they're more tech savvy. Really it's a confluence of many, many, many different things.

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‍Trade Ledger: Business to business processes are notoriously slower to change, precisely because of all the data and the connections between the data. How do you see this transformation unfolding?

‍Peter: Well, it's not as easy to penetrate as with an app on a phone, but it's getting there. We see modernization coming in two fundamental vectors:

There’s changing the business models–the way that banks make money. The other is changing the operating model of how it is done.

Corporate banking operating models are still quite old fashioned. They revolve around bank relationship managers. If you want a loan for $5 million, you don't do it through an app. You go see your Relationship Manager (RM) at the bank and that person is very skilled and experienced.

The problem is that the RM sits on top of something like an iceberg of cost base. Lending is a multi-step process, with paper every step of the way. There are paper applications. You have to go to the credit committee. I used to go to the credit committee with big printouts that were bound together for us to go through.

Banks retain these legacy processes partly out of inertia but also because all this new technology and capability needs to be prioritized for roll out. There are a lot of other considerations, such as fiduciary responsibility to depositors as well as how they manage risk and compliance and cybersecurity. So there's a whole modernisation process that's going on and that has to continue.

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Trade Ledger: Can you say a bit more about the challenges of modernising legacy systems?

‍Peter: The story is that once upon a time there was a system and it was installed for all the right reasons. But the problem with corporate and commercial banking is that so many bespoke additional requests were made that there grew up an ever deepening layering, adding this functionality on top of that one. And so it turned into this spaghetti that wasn't in the original design. When you have 3 million bespoke lines of code because you've been futzing with the core system to make it sing and dance it makes IT projects more complex to migrate.

The irony is, one of the first things I learned when I joined a bank on the wholesale side was that whatever you do in terms of innovation, you don't touch the consumer side because there's too many of them. It’s just too difficult to innovate.

And then, of course, everyone got smartphones and consumer banking became the centre of innovation. Who would have thunk it?

Historically it was multinationals that wanted the most innovation. So the corporate side tended to get morphed with all kinds of other capabilities, both in terms of what the client wanted, but also in terms of what they needed to do to meet regulatory compliance requirements. So their systems grew and grew to the point where migration is very difficult.

There’s a whole litany of reasons why it's time now to bite the bullet and to figure out a way to upgrade–the need to be able to use data more effectively; the vulnerability of old technology to cyber attack; the fact that many of the people that looked after these systems are ageing out of the workforce.

It’s a very interesting time to be trying to help influence the modernisation of the very old industry of banking.