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BANKING ON THE FUTURE OF AI

By Carmine Rimi, AI Product Manager at Canonical

 

Modern banking is evolving. Increasing consumer demands for better technology, combined with the rise of open banking and digital-native challengers such as Monzo and Starling, mean that traditional members of financial services industry must develop new, innovative approaches to remain competitive.

AI (Artificial Intelligence) will undoubtedly have a significant role to play in this. AI and ML (Machine Learning) will enable Financial Service companies to intelligently process large-scale data to make better customer decisions, identify fraud and automate certain customer service elements through technologies such as chatbots. Many of the large banks are already doing this. However, legacy IT systems and latent security concerns means many are also stuck in the concept stage. For large organisations, becoming more agile and adaptable can be a challenge. However, as new functions and use cases for AI come to light, it’s imperative that the financial sector is able to lay strong foundations for AI which allow it to keep up with the pace of innovation.

Carmine Rimi, AI Product Manager at Canonical

 

Creating the AI Building Blocks
The first step is ensuring that the right technology is in place to enable the use of AI. Many banks are already undertaking digital transformation initiatives and have embraced the cloud for managing the large amounts of data they handle. Yet they are still not set up to optimise their use of AI. Cloud is by far the most effective method of implementing AI due to the sheer scale of the workloads that are being handled, combined with the fluctuating demand for running algorithms. However, the compute power required for AI will not always be constant. Spikes in data inflow or changing demand for AI initiatives from across the business means that the scalability of public cloud is often more appropriate for running AI efficiently, as opposed to using static on-premise solutions. Despite this, regulatory concerns have held back many banks from making more use of public cloud.

In this environment, multi cloud use is becoming ever more prevalent. Banks and other financial institutions can operate across both public and private cloud environments to ensure security and regulatory compliance, while also using public cloud to benefit from its advanced AI capabilities and workload management.

 

The humans role in AI
Alongside the hype that surrounds AI, there have also been lingering concerns regarding the impact AI might have on jobs. Ex-Barclays CEO Antony Jenkins recently predicted that AI could lead to 50% of jobs in banking being replaced. While it’s true that certain roles in bank branches and customer service could be at risk due to AI’s automation capabilities, AI also opens up a host of new roles within the industry.
AI inherently still requires human input to be effective. Naturally engineers and developers are needed to create and apply AI algorithms, as well as to manage the supporting technology stacks which enable its use.

There will also be an increase in critical strategic roles dedicated to interpreting data produced by AI in the banking industry and turning it into actionable insight. Business logic is still driven by human thought and motivations which AI can’t account for, and people need to be trained to step into this gap to ensure that we as an industry can make the best of AI.

AI can be used to bring together unstructured data on customers to create profiles which inform what sort of products or communications are best for each, but without teams trained in how to understand and apply an algorithm’s output, businesses won’t be able to extract the true value of the tools.

This opportunity to nurture new, technology-based roles is one the industry must embrace with both hands moving forwards by looking at how to reskill workers to specialise in AI.

 

The future of AI in banking is looking bright
Many financial institutions are currently engaged in the process of making cultural shifts to prepare for adopting AI on a broader scale through retraining staff and changing management structures for AI use. These organisations will also need to monitor for the potential uses of AI in the future to ensure the foundations they lay now will be scalable for future uses, such as applying automation and insight capabilities to new areas.

Looking ahead, we also expect to see the AI-enhanced cyber-security sector growing. This is one that will prove to be of particular importance for banks. AI has been used for fraud detection by banks for a while, but with banks also having to deal with malicious hacks at an increasing rate, using AI to improve and automate security will require AI-ready infrastructure.

Blockchain has also generated considerable hype within the industry over the past year, although questions remain over how effective it can currently be. Implementing a culture change now that allows for improved AI use will however mean that banks are prepared to capitalise on blockchain as the technology matures, blending the technologies together.

 

Banking on an AI future
AI is already playing an important role for banks. However, to avoid challenges from more nimble, cloud native companies, it will be critical to take stock of the current infrastructure and have a clear picture of how to create a foundation that will allow for the use of future AI technologies. With this strategy in place, the financial services sector stands to reap real benefits from an AI future.

 

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Banking

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.

 

Nick Maynard

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.

 

PSD2 Changes

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

 

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Banking

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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