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Banking

BANKING BEYOND DIGITAL TRANSFORMATION

by Peter Matthews of Nucleus

 

Banking used to be so simple. But the boom and bust of the last twenty years has left the industry reeling, with agile, lightly regulated challengers picking off the tastiest services, while regulators’ demands ensure overheads rise for delivering core services.

 

If ever there was a time for bankers to ask big questions, it is now. I’d recommend starting with “what business are you really in?”

 

The firm foundations banks once believed they could rely on to retain customers, such as their 100 year heritage, have been crumbling. Digital transformation has struck every industry sector hard, yet some have adapted and even thrived as they have harnessed new tech and embraced new mindsets. Banking has struggled.

 

Peter Matthews

Banks are not simple businesses, though, typically combining ‘000’s of processes to aggregate their basic business model of cross-selling. Open a current account to grab the customer’s main income and then add a savings account, investments, mortgage, loans, insurance, etc, etc. Not that long-ago retention was not a problem, customers rarely switched accounts because it was too complicated. That, too, is changing.

 

Accenture’s consumer banking survey in North America shows in the past 12 months 18 percent of millennial customers switched their primary bank. Compare this with 10 percent of customers aged 35–54 and 3 percent of people 55 and older and it is clear that millennials are shaping the future. With Open Banking on the near horizon and increasing competition from challengers, neobanks and fintechs, retention is going to become an issue if it isn’t headed-off at the pass.

 

Millennial-minded brands get higher valuations

It must be galling for banks when a fintech start-up, which doesn’t even have a banking licence, goes out and acquires 1m accounts and a $1bn valuation for delivering one digital service well. Revolut, as an example, started with a very useful FX app, a pre-pay debit card and an EU e-money licence and has built a unicorn valuation on those humble beginnings. Whether they can transform into a successful, fully regulated bank is not clear, but they’ve won over a lot of millennials in the meantime.

 

Millennials’ expectations are set by Big Tech (Google, Facebook, Apple & co). They want highly personalised services and best-of-breed user experiences across all their devices, and they won’t think twice about switching to a service they deem better suits their needs. Convenience is key and brand experiences matter to them.

 

Monzo made its mark with a fluorescent card, a pre-pay account and a groovy app and is now an FCA regulated bank. Many fintechs claim to be reinventing banking, but reinventing payments is probably closer to the truth. Banking is much more complex than a mobile app or money management tool.

 

However, competing in this new landscape means traditional banks must get smart and transform their brands and cultures as well as digitise their processes. If there is any further evidence required we need only look at organisations in other sectors that failed to do this. Blockbuster, Vine and Blackberry are good examples of companies that failed to spot new trends and adapt to emerging models in time, led by companies such as Netflix, Snapchat and Apple.

 

Banks must figure out what business they are actually in and align a new vision with a clear value proposition that resonates with tomorrow’s consumers.

 

Brave new thinking

Traditional banks still have time to respond. They have scale, financial capital, regulatory approval, brand recognition, customer data, distribution and, despite their problems, a reasonable level of customer trust. Granted they are also slow, predictable, political, risk-and-change-averse; and mostly remain reliant on thirty-or-forty-year-old legacy technologies.

 

For the last few years, most financial services companies have focused on ‘digitisation’ and removing those famous ‘pain points’ or ‘friction’ in the customer journey. To drive future growth, more radical thinking is required, with a focus on ideas, propositions and stories, while identifying and solving real-time issues as they occur. It goes without saying that this includes ensuring systems don’t crash or are breached, as security is probably the key value customers still associate with banks. This must never be compromised.

 

 

Perhaps privacy and trust could be the new competitive advantages

Data is banking’s hidden gold and incumbent financial brands must learn to leverage this hugely valuable asset to better serve individual customers and share value, rather than make money out of selling it to advertisers, as Big Tech does.

 

With Open Banking soon to make its mark, financial data will become the new battleground, but questions about data privacy may result in many consumers saying ‘it’s not for me’. With GDPR shining a spotlight on explicit consent and exposing Big Tech’s freewheeling attitudes to personal data, expect data privacy to become a big topic for 2019. Fintechs will use Open Banking to challenge retail banks, but fears over financial data falling into the hands of Big Tech may inhibit adoption. Imagine Facebook combining what it knows about you from Facebook, WhatsApp, Instagram and your bank?

 

However, banks have two advantages over the fintech challengers who are salivating over the prospect of getting their hands on Open Banking data which can tell them where customers shop and what they spend their money on. The first is historic data, which is invaluable when assessing risk for loans and mortgages; and the second is trust (albeit somewhat compromised after the financial crash).

 

With trust as a core value, banks’ handling of data needs to get privacy right. To date retail banks have accumulated masses of data about us, yet barely scratched the surface of using this to improve user experiences and their own decision making, still relying largely on credit rating agencies’ – often unflattering – profiles that can penalise individuals for a single misdemeanour for up to six years.

 

If banks truly want to meet their customers’ needs and expectations and respond to their fintech challengers, they are going to have to shift their approach to personalisation and build new engagement models, based on frictionless processes, transparency and trust and, perhaps, a return to more ‘discretion’, particularly in their credit decisions. In a digital world, being treated like a human is valued more than ever.

 

There is no doubt that we are all more likely to trust a service provider who values our privacy (beyond mere legal compliance) and is transparent about how our data is used. And trust, of course, encourages loyalty.

 

 

The power of brand purpose

Changing customer perceptions of any incumbent bank requires a refreshed sense of purpose and a clearly articulated, differentiating brand proposition. A disciplined and rigorous branding methodology is key to success, particularly if leadership teams are to engage staff in the process of reinvention, which can be hugely valuable during periods of transformational change. The re-definition of purpose and the articulation of a compelling value proposition should be at the heart of every brand.

 

Tomorrow’s bank certainly needs technical transformation, but that won’t be enough in itself. A bank has to be more than its own processes. If it can deliver a secure eco-system of financial services based on a proposition of trust, transparency and privacy – in a world where everyone else is using stealth methods to access customer data – you might just have identified a good reason why your 100 year-old bank still deserves to exist.

 

 

Biography

Peter Matthews is founder and CEO of Nucleus, an independent London-based brand, digital and IP consultancy.

A designer by training, Peter continues to personally lead strategic brand creation, innovation and transformation projects for international clients, specialising in financial services, travel and luxury. His rare combination of business, design, digital and IP expertise are highly relevant at a time of digital disruption in banking and beyond.

In financial services he led the user experience team creating First Direct’s online bank as long ago as 1996 and more recently has advised Azqore, Crédit Agricole Private Banking, Indosuez Wealth Management, HSBC, NatWest, Standard Chartered, Rothschild & Co and, most recently, two new challenger banks.

 

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Banking

OPEN BANKING: ARE CONSUMERS KEEPING AN OPEN MIND?

Last September, the European Union’s regulatory requirement for banks to open up their payment accounts via application programming interfaces (APIs) came into effect. Since then, open banking has taken centre stage within European retail banking and payments. In this blog, Elina Mattila, Executive Director at Mobey Forum, shares insight into how emerging consumer attitudes may impact open banking services in the coming months.

It has been over six months since the revised Payment Services Directive (PSD2) came into full effect and with it, required banks to allow third party providers to access payment initiation and account information. While the regulation was designed to facilitate open banking, the market demand was uncertain. Would we, as consumers, choose to embrace the new services enabled by open banking? And if so, under which conditions?

To understand consumer attitudes, Mobey Forum and Aite Group partnered on a pan-European study to determine the appetite for open banking services amongst 1000 consumers in Finland, France, Germany, Spain, and the United Kingdom. The study, launched in November 2019, revealed many important consumer trends and attitudes, including key priorities and potential barriers for adoption.

 

Consumer appetite for change

The consumer benefits of open banking are largely perceived to be compelling, yet this counts for little if the providers of those services are not deemed trustworthy. This is an observation reflected in the study, which highlighted consumer confidence in service providers as critical to open banking adoption. People want clear visibility of who is managing their finances, and the overwhelming majority (88%) would prefer their primary source of open banking services to be their main bank, as opposed to other banks or third-party providers (TPPs).

Consumers also indicated high levels of trust in their current bank of choice, reflected by 77% preferring to use a financial product comparison service offered by their main bank. By enabling customers to compare the pricing and conditions of a range of financial products on the market, they feel more comfortable that banks have their best interests at heart. This is a welcome trend, and one which should be celebrated in the aftermath of the 2008 financial crisis. For the banking industry to have rebuilt trust levels in this way bodes well for consumer adoption of future innovations.

With a trusted provider, one third of consumers were then either ‘very interested’ or ‘extremely interested’ in integrating open banking services into their financial routine. This applied to specific use cases: account information services (32%), pay by bank (33%), purchase financing (25%), product comparison (35%) and identity check services (35%). Unsurprisingly, consumer willingness to adopt these services relies heavily on providers continuing to prove that they can be trustworthy stewards of personal data.

 

Consumer concerns

For those unwilling to adopt open banking, concerns largely focused on reservations around security and privacy. As open banking becomes more sophisticated, it will be interesting to analyse the nuances around how consumers engage with third parties. Established brands are perhaps more likely to be trusted by consumers than lesser-known online retailers. For this reason, consumers may hesitate to engage newer companies than brands they are already familiar with. In an industry as varied as finance, this creates additional intrigue in the ongoing battle for market share between the newer ‘challenger’ banks and the older, more established European banks.

Consumers might, however, be willing to deprioritise trust and, instead, favour convenience and usability. When questioned over their willingness to adopt a new payment method, for example, 91% of respondents indicated that they could be tempted to switch either by financial incentives or the promise of greater convenience.

 

The path forward

While open banking is still in the relatively early stages of development, it has made significant progress in a very short period of time. Not only is it allowing consumers to share financial data with authorised providers as they wish, but it is set to spark more competition and innovation within the market.

From a business perspective, open banking is expected to create lucrative new revenue streams, particularly for companies which are able to innovate quickly and react to consumer demand. It is prompting consumers to reconsider how they manage their finances and – most excitingly – it’s not even close to reaching its full potential. It should bring a whole new era of service partnerships between banks and TPPs, which will enable a new generation of innovative financial services.

For the industry to truly fulfil its potential, it is vital that stakeholders are able to explore new business models, innovations and changing customer expectations for open banking in a commercially neutral environment. Mobey Forum’s open banking expert group provides exactly this, and we look forward to supporting our members as they shape the future of digital financial services.

 

Where to find out more

The opportunity for open banking is explored in more detail in a report by Mobey Forum and Aite Group, entitled Open Banking: Open Minds? Consumer Appetites for New Banking Services. It provides banks and other financial services stakeholders with a market view on consumer appetites toward new open banking services and explores the possible roadblocks to consumer adoption. It is also discussed in a podcast featuring key representatives from Interac, Erste Group Bank and Strands Finance.

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Banking

HOW CAN PLATFORM AS A SERVICE UNLEASH COMPETITIVE ADVANTAGE FOR BANKS?

By Paul Jones, Head of Technology, SAS UK & Ireland

 

Due to both regulation and practical realities, banks spend much of their time, effort and money on activities that make zero difference to their competitive position. Processing transactions, booking trades and managing compliance for anti-money laundering (AML) and know your customer (KYC) efforts are vital tasks for any bank, but they make almost no contribution to differentiating a bank from its competitors.

According to McKinsey’s 2019 Global Banking Review, outsourcing these activities presents a huge opportunity for optimisation: “By transferring non-differentiating activities to modular industry utilities, banks could potentially improve return on equity by 60 to 100 basis points.”

Besides the immediate financial benefits, if banks can optimise their resources to spend more time focusing on developing new digital services and delivering an outstanding customer experience, it’s a clear win-win in terms of both saving costs and growing the business.

 

Dissecting your differentiators

But how far can we stretch the idea of “non-differentiating activities”? Is risk management a differentiator for banks? How about fraud detection? Or even marketing? I think the answer is it depends. Within each of those three functions, there are areas where top banks can develop competencies that give them a real edge over the competition. If you have the best risk models, you’re likely to make more advantageous trades than your counterparties. If you’re the smartest at catching fraudsters, they’ll focus on weaker prey. And if you understand your customers better than your competitors do, you’re more likely to keep them.

In fact, McKinsey estimates that the opportunities to enhance capabilities such as risk, fraud detection and marketing through artificial intelligence and machine learning could deliver up to $250 billion in value across the banking sector.

In each case, the data scientists who devise your predictive models for calculating exposure, detecting anomalies and segmenting customers are the key to your success. Their skills put them at the pinnacle of all your employees in terms of creating real business value. But data science isn’t a standalone activity, and there are other elements of risk, fraud and marketing operations that don’t add much competitive value – what we might call the “platform” elements.

 

Data science as team sport

On the scale at which most banks operate, data science isn’t just about the individual brilliance of your PhDs. It becomes much more of a team sport – and like any professional sport, it quickly develops its own back-office requirements. You need software, databases, development tools, infrastructure, processes, data governance frameworks, monitoring and analytics, auditing and compliance capabilities, and business continuity/disaster recovery strategies. That’s what I mean by “platform” – all the basic components you need to run a successful enterprise-scale data science programme and get innovation into production.

The good news is that you can absolutely outsource your marketing, fraud and risk analytics platforms, just like any other non-differentiating activity. Running analytics and data science platforms at scale is known to be a tricky problem, even for tech giants like Google, but with the right combination of technology, processes and expertise, it’s perfectly possible to let an expert partner take care of the day-to-day operations.

 

What to look for in an outsourced platform

When you are assessing analytics Platform as a Service (PaaS) offerings, there are a few key things to look for. First, your partner should provide a fully managed cloud infrastructure that enables quick onboarding and makes it easy to ramp up new projects and close down old ones.

McKinsey estimates that the opportunities to enhance capabilities such as risk, fraud detection and marketing through artificial intelligence could deliver up to $250 billion in value across the banking sector.

Second, your partner should have the right expertise to take responsibility for handling all day-to-day system administration and model management duties, as well as batch analytics tasks such as regulatory calculations. Offloading this routine work will reduce costs for the bank and also slim down the risk profile because your partner will keep the platform fully up to date with the latest security updates and patches.

A good PaaS offering will also include process automation to increase throughput for the data science pipeline. This is a well-known issue in the industry. For example, Gartner estimates that over 50% of models don’t make it to production, and a recent survey by SAS showed that it takes organisations on average three months to deploy a new model.

 

Speed production with DevOps

You should look for a PaaS with built-in DevOps procedures that help to accelerate deployment to a fraction of that time while maintaining rigorous quality controls. The ability to put models into production more quickly will make you much more agile – so you can respond more quickly to emerging market risks, counter new types of fraud, and adopt the latest artificial intelligence and machine learning (AI/ML) techniques to support your marketing campaigns.

Critically, any PaaS contract should guarantee that your data and models remain your intellectual property and that you have complete control of where your data is stored and how it is used. With the right separation of duties between you and your PaaS provider, your data science team can focus on the valuable, exciting aspects of model design and training, while your partner handles all the mundane operational work around deployment, data processing and governance.

We’re working with banks across Europe to provide exactly this type of PaaS for marketing, fraud and risk analytics. If you’re interested in how to help banks drive digital transformation with cloud-based analytics, please read my previous blog post here.

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