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BANKING ON THE FUTURE: WHY PAYMENTS TRANSFORMATION IS THE KEY TO SUCCESS

Simon Wilson, Co-Head, Payments at Icon Solutions

 

Standardisation, regulation and technological innovation means payments are well on the way to becoming instant, invisible and free. This is good news for everybody.

Well, not quite everybody. Banks are now faced with the significant challenge of transforming business models and legacy technology systems to meet the demands of a new era in payments.

Banking is historically a conservative and risk-averse industry where the pace of change varies between sedate and glacial. But now is not the time to ‘wait and see’ and finding the right approach to payments transformation must be the immediate and fundamental priority for banks.

 

Understanding the need to transform

Firstly, we must ask: Why has payments transformation become an urgent priority?

For one thing, increased competition has seen banks’ market share of the global banking and payments industry reduce from 96% in 2010 to 72% today. Fintechs, challengers, payments companies and big tech have entered the playground and started taking banks’ lunch money, demonstrating a level of innovation and agility that incumbent banks are struggling to keep up with.

And of course, there is Covid-19. We have seen years, if not decades, of change in a matter of months. The crisis has torpedoed traditional and reliable revenue streams such as cross-border payments to accelerate margin pressure, while driving a rapid shift to online banking channels and a massive uplift in digital volumes.

 

Simon Wilson

Breaking the shackles

In the context of increased competition and unprecedented digitalisation, the banking industry is waking up to the fact that payments are about adding value, not just processing. There is increasing recognition that capitalising on the potential of emerging payment rails, monetising the standardised datasets unlocked by ISO 20022 and launching new external services are huge opportunities to diversify and retain relevance. The introduction of overlay services such as Request to Pay or the European Payments Initiative are also poised to spur on the move to digital payments.

Decades of inaction on legacy infrastructure, however, is limiting options. Banks across the globe find themselves lumbered with expensive, inflexible and unreliable technology estates. The ability to respond to marketplace innovation, let alone lead it, is constrained by the need to devote massive amounts of cash, time and ever-dwindling internal resource to simply keep the lights on.

It is apparent that doing nothing is no longer an option, but transformation is a nebulous concept. There is no one single way to effectively transform. Different organisations have unique considerations based on their technology, capabilities, resource and culture, and there are various routes to take.

 

‘Don’t outsource your heart, your soul…and your spinal cord’

One option is to make payments someone else’s problem and outsource them. This can be an appealing proposition to get a seemingly perennial cost centre off the books, particularly in the current climate. But speaking at Sibos, J.P. Morgan CEO Jamie Dimon cautioned against the risk of inadvertently “outsourcing your heart, your soul and your spinal cord.”

For it is true that payments are the beating heart and soul of an organisation. Payments represent 80% of all interactions, providing critical customer touchpoints, data and service opportunities. As for the spinal cord, not much can happen when mission-critical payment systems go down.

The big problem, as Dimon notes, is that a lot of companies who have outsourced “have no idea what they are doing.”

Banks can find themselves stuck with equally costly, complex and cumbersome alternatives, falling even further behind the innovation curve and losing control in the process. “You end up paying too much money and then you’re beholden to costs that are going up.” But most importantly, “you’re not even doing a better job serving your client.”  Outsourcing a commodity execution service may well be the right strategic approach for some, but you need to ensure you have the other pieces of the payment process running smoothly and that you really are not leaving money on the table or  developing risk longer term by constraining future choice.

Still, the alternative is not necessarily better. Modernisation needs to happen now, so it is not surprising that enthusiasm for years-long, ruinously expensive and inherently risky in-house transformation projects has dimmed somewhat.

 

Best of both worlds

Yet it is wrong to say that the only choice is buy or build. There is a middle-ground. A collaborative approach to payments transformation that allows banks to move quickly to seize opportunities, while retaining control, significantly reducing costs and adding value.

This begins with banks understanding their starting point, defining a crystal-clear strategic vision for the role that payments play within the organisation and identifying market opportunities. Indeed, as McKinsey notes, “success for banks will depend on thoughtfully assessing capabilities [and] determining the role of payments in market strategies.”

Banks should then consider low-risk and lightweight options for upgrading legacy infrastructure to meet their strategic objectives, while minimising business impact. Payment platforms based on Cloud-native, open source technology promote flexibility, scalability and independence, rather than restrictive and expensive vendor dependencies.

Collaboration also plays a critical role. Finding the right fintech and service provider partners can allow banks to simplify complexity, reduce manual heavy-lifting and lower their cost base, driving efficiencies that enable resource to be focused on delivering for customers. As Dimon explains, “If I can’t build it better than you can, I’m better off just using yours.”

This combination of strategy, enabling technologies and true collaboration provides a foundation for innovation. It can help drive new revenues, further develop existing business lines and, by moving payments from cost to profit centre, help banks thrive rather than survive.

 

Banking

MODERN BANK HEISTS: FINANCIAL INSTITUTIONS ARE BEING HELD HOSTAGE

By Tom Kellermann, Head of Cybersecurity Strategy, VMware Security Business Unit, @TAKellermann

 

The modern bank heist has escalated to a hostage situation over the past year. The new goal of attackers is now to hijack a financial institution’s digital infrastructure and to leverage that infrastructure against a bank’s constituents. As the world shifted to an anywhere workforce amid the pandemic, we witnessed attacker strategy evolve, becoming much more destructive and sophisticated than ever before.

In the fourth annual Modern Bank Heists report, we interviewed 126 CISOs, representing some of the world’s largest financial institutions, regarding their experiences with cybercrime campaigns. Given the nature of its business, the financial sector has established robust security postures and fraud prevention practices. However, they are facing an onslaught of sophisticated cybercrime conspiracies. Attacks against financial institutions more than tripled last year. This stark reality can be attributed to the organized nature of cybercrime cartels and the dramatic increase in sophisticated cyberattacks. The goal of this year’s report was to understand how offense should inform the financial sector’s defense.

 

Here’s an overview of some key findings:

  • From heist to hostage: 38%* of financial institutions experienced an increase in island hopping, escalating a heist to a hostage situation. Cybercrime cartels understand the interdependencies of the sector and recognize that they can hijack the digital transformation of the financial institution to attack their customers. They use brand trust (often times trust that’s been built up over hundreds of years) against the bank’s constituents by commandeering its assets. *Note: This excludes SolarWinds.
  • Increased geopolitical tension and counter IR triggering destructive attacks: There’s been a 118% increase in destructive attacks as we see geopolitical tension play out in cyberspace. Russia, China and the U.S. underground posed the greatest concern to financial institutions. It is also worth noting that cybercriminals in the financial sector will typically only leverage destructive attacks as an escalation to burn the evidence as part of a counter incident response.
  • The digitization of insider trading: 51% of financial institutions experienced attacks targeting market strategies. This allows for the digitization of insider trading and ability to front-run the market, which aligns with the strategies of economic espionage.
  • Cybercriminals launch Chronos attacks: 41% of financial institutions observed the manipulation of time stamps. This is occurring within a sector that’s incredibly dependent on time given the nature of its business. Because there’s no way to insulate the integrity of time once deployed in a time stamp fashion, this Chronos attack is quite pernicious.

As the threat landscape evolves, so will the tactics, techniques and procedures of cybercrime cartels, as seen in the above findings.

These groups have become national assets for the nation-states who offer them protection and power. In tandem with this, we’ve seen traditional crime groups digitize over the past year as the pandemic hampered them from conducting business as usual. This has popularized the industry of services provided by the dark web, increased collaboration between cybercrime groups, and ensured cyber cartels are now more powerful than their traditional organized crime counterparts.

 

So, how should the financial industry respond? To start, here are a few strategies for security teams:

  • Conduct weekly threat hunting and normalize it as a best practice to fuel threat intelligence. We were happy to hear from the CISOs we spoke with that 48% already conduct weekly threat hunts.
  • Integrate your network detection and response with your end-point protection platforms.
  • Apply “Just in time” administration.
  • Deploy workload security.

The game has changed, and so must the financial sector’s security strategy. Safety and soundness will only be maintained by empowering the CISO. 2021 should be the year that CISOs report directly to the CEO and be given greater authority and resources.

Bob Parisi, Head of Cyber Solutions – North America, Munich Re, echoed the importance of up leveling the role of the CISO as cyberattacks surge: “The report’s findings around an increased level of destructive attacks and island hopping makes it clear that financial institutions remain in the crosshairs. VMware’s recommendation that CISOs should be elevated to C-level aligns with the fact that cyber risk is an operational risk that needs to be managed across a spectrum of technology, process and people, including the use of financial instruments like cyber insurance.”

It’s no longer a matter of if, but when “the next SolarWinds” will occur. As a result, cybersecurity must be viewed as a functionality of business versus an expense. Trust and confidence in the safety and soundness in the financial sector will depend on it.

To learn more, download the full report.

 

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Banking

HOW IS FINTECH AFFECTING BANKS?

Introduction

Fintech technology is booming and shaping the global financial system. The finance world will no longer be investment firms working off in-person advice and as financial innovators race to reach the market demands. Many fledgling businesses continue to shape the future of fintech trends and products in the industry. With the digital transformation approach, not only fintech created innovative ideas for interacting with potential customers but also emerged as an upgraded lifestyle for most millennials today.

Fintech is no longer jargon for the banking sector but now it is a relative term in technology in general. More than 70% of bank executives recognize customer banking as one of the most likely to be deranged by Fintech.

But have you ever wondered, what if the fintech sector continues to develop at breakneck speed? Does it mean the traditional banking ends here?

In this blog, we’re going to know how do financial services impact the bank sectors. So, without any further ado, let’s get started!

How does Fintech Affect Banks?

Biometric Sensors

Fintech in the banking industry addresses many innovations and one of them is biometric sensors. Biometric sensors and Iris scanners both are technological advancements that automated teller machines are observing. Besides, these tech advancements are ground-breaking since they would simply eradicate the requirement to carry your plastic card. Moreover, you’re not required to remember your pin.

Apart from providing convenience and ease of working, these technological advancements will also create ATMs more securely and it will allow you to access your own account without entering a password. These biometric censored ATMs use desegregated mobile appliances, fingerprint scanners, and eye recognition to identify the owner of the account.

Utilizing biometric technology introduces a huge sigh of relief for all the consumers who lost their ATM cards because now they can access their funds even when they don’t have their card.

Customer service chatbots

In recent years, fintech also introduced customer service chatbots that are bits of software created using machine learning that allows them to constantly learn from human interventions. Chatbots are efficiently used to streamline customer interactions such as handling queries and guiding customers to the required departments. They can perform various tasks which provide investment advice to their customers.

The rapidly growing technological advancements and innovation, chatbots have become an integral part of the banking industry that improves customer satisfaction and call agents to focus on additional value.

Mobile Banking

The usage of smartphones is rapidly increasing and it forces the banking sectors to come up with mobile applications that provide Fintech services to its customers. Many banks have their own mobile applications which have a user-friendly interface. These mobile apps also have fingerprint recognition features for the user and the application functions without any biometric hardware.

You can quickly access funds using a mobile application and perform various banking functions such as checking account balance, check deposit, pay bills, and much more.

Artificial Intelligence

Undoubtedly, Artificial intelligence and digital transformation are booming in traditional business. It has become an integral part of the financial-banking sector. The software solutions that banking industry uses for fraud detection generates alerts when any fraudulent transaction is done in the system. After generating alerts, it is backed up by the investigation and determines whether the attack was real or fake. To prevent customer data and cookies, banks are now adopting AI technology.

McKinsey says that adopting machine learning-driven statistical modeling and process automation can transform the AML tasks by implementing new efficiencies and innovations.

For instance, various data aggregation platforms can manage data and unstructured transactions for offering a 360-degree customer view. By implementing machine learning algorithms, banking sectors can leverage historical data and determine patterns of a fraud attack which will reduce human interventional up to 50%.

Branchless Banking

Fintech services are transforming the entire banking industry from a branching process to digital channels which reduces the bank’s dependency and affected mortar branches to function.

We can see that many banks are reducing their branches by adopting omnichannel banking services. You’ll be surprised to know that more than 9000 bank branches were shut down only in the European Union by the end of 2016.

Is FinTech worth the investment?

There comes various challenges that should be taken into account while implementing fintech services. But undoubtedly, it offers excellent potential to the banking industry to lower their operating costs and offer better services to their customers. If you’re not walking with the tech trends and the rising demand for fintech, you might lack behind the advances of your competitors. The fintech industry is affecting the banking sector is imminent, it depends on the bank to decide how they’ll evolve in the advances to meet their customer needs.

Businesses specializing platform in fintechs technology are incumbents in the financial industry in many ways. Various advantages enable more innovation and deliver service to their customers more quickly compared to traditional banking sectors do.

The Bottom Line

The advances in innovations and the cutting-edge digital technologies coupled with customers’ demand for user-friendly banking experiences leads financial services to readily grasp the fintech technology. Today, fintech includes everything that we just mentioned in this blog. In the future, fintech is all set to become even bigger with retail banking software and other components coming under it. Only time can predict how fintech will affect the banking sector and the world in the future, but soon technology will rule finance. If you’re still unaware of the impact on the banking sector by fintech development, then you’re probably lagging.

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