In the digital world banks can win by doing more of the same, says Marten Nelson, co-founder, Token
What is a bank?
A place to store money? Yes, but keeping cash under the mattress doesn’t make a bank of your bed.
A lender? Sure. But today you can get a line of credit from almost anywhere.
A payments facilitator? Absolutely. Yet banks need third-party tech, independent networks, processors and clearing houses to get the job done. It’s hardly a USP.
Strip away all the products and services that banks provide. What’s left?
A model of trust. A bank verifies your identity and uses it, confidentially, to enable you to securely engage with the transacting world.
Fundamentally, then, banks are two things: they are guardians of identity and enablers of commerce.
It’s commerce, Jim, but not as we know it
Commerce is changing. Heck, money is changing. Digital tech is enabling value to be expressed and transacted in increasingly diverse ways, globally, from merchant loyalty points to cryptocurrencies. Businesses and individuals are increasingly trading in – and raising investment via – tokenized assets as well as traditional currencies and securities.
These changes are here to stay. Virtual currencies are fast becoming part of regulated financial markets. Much-vaunted distributed ledger technologies are offering sustainable and unbanked ways of transacting in, well, almost anything. In Europe, PSD2 is forcing banks to surrender control of their customers’ account information to third parties. Sure, banks have customer volumes on their side but even then disintermediation looms large. Which is a worry: the rise and fall of some of the world’s biggest companies shows how quickly customer volumes can shift when market conditions change. Amazon. Uber. Netflix. And on the flipside: Kodak. Nokia. General Motors.
Banks will have to adapt but perhaps not as much as you might think. Perhaps, fundamentally, not at all.
Digital identity guardians
The world of digital identity verification, for example, needs a serious overhaul and banks – experts in highly-regulated Know Your Customer (KYC) procedures – are primed to deliver.
For years, the digital identity rule has been: ubiquity, convenience, security. Choose two.
Usernames and passwords, for example, are woefully insecure, and used everywhere. Multifactor authentication: secure and ubiquitous, but chronically inconvenient.
And what of biometrics? Sure, your fingerprints and irises are unique, but biometric authentication systems collect data via capture devices and verify that against a stored biometric image, using comparison algorithms. Both the capture device and the algorithm can vary dramatically in terms of accuracy. So, here again: Convenience – tick. Ubiquity – tick. Security? It depends.
Banking on ID
In the physical world, bank cards are widely accepted as forms of ID. They won’t get you across a border or into a hire car, but they provide enough assurance to satisfy most other services.
Why shouldn’t bank ID also apply to a similarly broad set of use cases in the digital world? One such business model is already well established. Google and Facebook take a cut every time you choose to associate a new authentication gateway with the login credentials you use for their accounts; a process known as ‘federated authentication’ or, more commonly, ‘login with Facebook’ or ‘login with Google’. The cut can come in the form of money, of course, or by way of access to the data the new service collects on you, the user.
It is flawed. Lose your root password to a hacker and you automatically gift them access to your other associated web accounts as well. Again: It’s convenient. It’s ubiquitous. But its reliance on password credentials makes it badly insecure.
Using modern, secure authentication solutions based on public-key cryptography, bank-grade digital security can sit behind the federated authentication service just as easily. Then the bank can use this service to generate new revenues or monetizable data, from either their customers or from the service providers whose gateways they secure. Maybe from both.
Let’s get phygital
Closer to home, merchants (who have a vested interest in transacting as quickly and easily as possible) have already cottoned on to the idea that they can use your bank’s digital verification to blend their physical and digital shopping experiences. Eliminating queues by accepting remote mobile payments for in store purchases is one such example. So-called ‘scan and go’ is another. But the process remains clunky. What if an instant, one-touch payment was possible, initiated by your bank, from within the merchant’s mobile app? Then it’s both secure and convenient. And soon to be ubiquitous?
Enablers of digital commerce
There have been two sticking points for banks. First there is a perception problem; banks don’t want to be seen to play fast and loose with their customers’ credentials. In Europe, PSD2 will bury this issue by enabling users to vote with their feet. The decision to use an identity-based commerce service would be taken by the customer, not the bank. As long as the delivering AISPs and PISPs obtain the customers’ permission – and can connect to the bank’s APIs – their services will be free to associate the user’s bank details without the bank’s prior agreement.
This begs an important question. What would the end-user prefer: that this service is delivered directly by their bank, or by a third party using their bank’s credentials?
The second sticking point goes back to ‘that rule’. Banks can enable ubiquity and deliver security, but what about convenience? This hasn’t exactly been their strong point to date.
Partnerships hold the (cryptographic) key here. Banks don’t need to develop these services; they can instead white label them from certified, specialist service providers, and market them as powerful products to attract new customers.
Single-click bank-grade identity verification is already available to banks as a managed service, using technology platforms developed for open banking. Once integrated, the possible use-cases for bank services proliferate: hotels won’t need to take card details when guests check-in. E-commerce sites can combine customer login and payment processes and streamline both. Refundable deposits will become a thing of the past. Authentication hacks can be thwarted, and payment card data-leaks consigned to history. Regulatory compliance will be easier to achieve – service providers will no longer need to maintain databases of card details or customer data because your digital ID can be verified instantly, from anywhere, and at a fraction of the conventional cost.
Digital ID services enable banks to turn the tables on disintermediation. Best of all? They can do it by continuing to be in the digital age what they have successfully been for centuries: the guardians of identity and enablers of commerce.
SEIZING THE OPEN BANKING OPPORTUNITY
Nick Maynard is a Lead Analyst at Juniper Research
Open Banking has made significant progress in 2020, having recently launched across much of Europe and now starting to emerge in other markets too. And there are two primary reasons why Open Banking is disrupting the banking industry so much:
- Banks have begun to discover the real competitive advantage of a more open approach to banking. Offering a superior Open Banking experience to customers can be a compelling differentiator from other competitors as part of a wider digital app experience. Open Banking also creates a level playing field in markets where regulatory intervention has led to Open Banking deployment. As all banks are required to deploy APIs in this scenario, the situation is the same and does not put any one particular bank at a disadvantage.
- Legislation – for example, in October 2015, the European Parliament adopted PSD2 (the revised Payment Services Directive). By early 2020, major banks in the EU had adopted Open APIs. There have however been many cases of late deployments of APIs and problems with the availability of APIs.
The Disruption Factor
Open Banking is a major disruptive factor for banks. The reason for this being that it opens up account data to both AISPs (Account Information Service Providers) and PISPs (Payment Initiation Service Providers), which can attempt to carve out a role in the banking area.
- AISPs: These new vendors are able to access transaction data and balance information, as well as related information. This has, in particular, led to the rise of vendors such as Emma, Yolt and Connected Money. These vendors combine information from multiple sources, adding value to the user.
- PISPs: In this case, the vendors are able to leverage Open Banking API connections to initiate payments directly from the bank accounts in question. This means that these players are able to bypass traditional payment methods, such as cards. Vendors such as American Express and PayPal have already launched solutions that have taken full advantage of this action.
Generally, the implementation of the new PSD2 European regulation for electronic payment services effectively reduces the entry barriers for new digital players. It also opens up banks to the potential for competition, enabled by their own APIs. This allows these players to compete with existing services in fields currently offered by the banks. In the case of AISPs, it is possible that third-party applications could displace the role of the apps from incumbent players, which would dilute the bank’s relationship with their users.
As with any fundamental change to markets in the banking area, there is the potential to bring a number of both opportunities and challenges to consider with Open Banking.
Open Banking Opportunities & Challenges to Consider
Source: Juniper Research
Banks and other parties that are looking to become involved in the Open Banking ecosystem must weigh these opportunities and challenges carefully. Open Banking certainly needs a more collaborative approach than traditional banking models, which will require significant effort to make them successful.
The Forecast for Open Banking
The total number of Open Banking users is set to double between 2019 and 2021, reaching 40 million in 2021 from 18 million in 2019. The ongoing Coronavirus pandemic is increasing the need for consumers to have the clarity of combining their accounts and gaining insight on their financial health, and also boosting momentum in the adoption of Open Banking.
This extraordinary growth is being driven by Europe, where the regulator-led approach to Open Banking has created a standardised market, with low barriers to entry. This contrasts with markets like the US, where a lack of central regulatory intervention is limiting growth potential.
Open Banking – Delivering Opportunities and Threats
It is worth noting that Open Banking can be both a threat and an opportunity for traditional banks. While Open Banking exposes user information and access to potential competitors, this threat has the potential to affect all players in the market equally. Consequently, established banks must create innovative Open Banking services that will provide benefits for the user, while also attracting customers from less innovative competitors.
Payments will be critical to the emerging Open Banking ecosystem; accounting for over $9 billion in transaction value in 2024. However, payments in this ecosystem are at a particularly early stage. While eCommerce is dominated by card networks, there is the potential that this role will be eroded over time by ‘direct from account’ payments. Consequently, card networks should look to offer Open Banking-enabled payment services, in order to offset the risk of future disruption.
Open Banking Users in 2021 (m), Split by 8 Key Regions: 40 Million
Source: Juniper Research
2021: THE NEW-NORMAL LIFECYCLE FOR BANKING
Laura Crozier, Global Director of Industry Solutions, Financial Services at Software AG
It would be impossible to talk about predictions for the banking industry in 2021 without mentioning the cataclysmic impact that 2020 and the pandemic has had on people, businesses and countries.
Unlike with the global financial crisis, banks have been able to step up as “good guys” this time around, rebuilding their reputations as well as accelerating digital transformation. One of the main outcomes is increasingly smart, efficient online payments.
In 2020, the banking industry innovated like never before. This is the new normal. Overall, customers and society will be the beneficiaries from the changing industry. Here are my predictions:
Reputations are reborn
Banks across the globe pulled out the stops to integrate and adapt systems and processes to help customers during the pandemic. They offered accommodations in loans, assisted governments with the distribution of financial relief, and supported consumers by upping contactless spending limits and virtual deposits.
In 2021, banks will risk losing that rosy glow as economic circumstances drive them to deal with non-performing loans, mortgage foreclosures, layoffs etc. But, beyond their role in society as providers of capital and liquidity, banks will invest to sustain their reputations as trusted and good corporate citizens and use their power to persuade their customers and providers to adopt higher environmental and ethical standards. This will be in the areas of bank carbon-neutrality, sustainable financing, serving the unbanked, diversity and gender equality (as the number of women running a major global bank will double from one (Jane Fraser at Citi) to two). It’s a start.
Coming of age in the way of working
Back in Q1, when bank employees cranked up their laptops on their dining room tables, banks that were strategically undertaking business transformation accelerated their efforts. Those that were tactical, or on the fence, now understand with painful clarity that this work must be undertaken strategically.
Cracks in process and the way of working and their resulting risks can be crippling. Especially from a back-office perspective, it is not enough to rely on “organisational memory” and collegial proximity for work to get done right. Advanced banks pushed the boundaries of remote work, and the proof of concept was successful. So, they’re doubling down on developing digital twins and moving to the cloud. They’re adopting the hybrid office/WFH approach to reduce health risks and reduce cost permanently. The watercooler will never be the same.
The death of cash
Ok, maybe the rumours of the death of cash are a bit exaggerated since there will always be the need for cash (and, to some extent checks; the USA, for example, cannot seem to live without them). But the pandemic has permanently changed the way that consumers and small businesses bank, and the demotion of cash has been accelerated by a decade by the pandemic. For example, the Norwegian central bank said that cash payments in that country have plummeted to just 4% of transactions since March.
Implications? It will be critical to continue evolving payments to be smart, safe and flexible to compete in new world, in both retail and commercial banking. Also, the permanent change in the mix of channels will see banks’ face-to-face engagement with customers fade. Branches aren’t going to go away entirely, but they will be reserved for high value activities – by appointment only. To compensate, the personal touch has to be delivered digitally and intelligently.
The role of the bank as a “financial wellness partner” is being born. Banks will use customers’ data, not just to personalise and differentiate banking experiences, but to make recommendations for products and services beyond traditional banking from across their ecosystem to serve their customers well. Just as customers own their cash (physical or digital), in the future they will demand that they own their data (and can share it with whom they choose). Then retail and commercial clients will share their data in return for value.
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