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ETHICAL BANKING AND LEGACY FINANCIAL SOFTWARE SOLUTIONS

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Nick Ford, Chief Technology Evangelist at Mendix

 

With the UK government’s roadmap out of lockdown being recently announced, the promised land of normality draws ever closer. But COVID-19 is seemingly yet to receive the memo, with its continued shaking of mature economies in every corner of the world.

Even so, life trundles on and finance specialists still need to find new avenues to ensure they secure a return on their investments, without sacrificing on their supporting of ethical global growth.

For all the disruption of the pandemic, frontier and developing markets are set to outperform their developed counterparts in 2021. Given the volatility of economies around the world, you’d expect this to present a prime opportunity for investors.

But developing markets also bring added risk. And it’s increasingly clear that there are currently a aren’t currently enough tools for fund managers to invest in developing countries. Alternatively, it may be the case that updating existing tools for such volatile changing market conditions is too time intensive to be considered viable by investment firms. Challenges such as these are preventing many economies from reaching their potential.

Instead, hedge funds are faced by a variety of high investment barriers to these developing markets. Led, in no small part, by the fact that legacy financial software platforms and consultants have neglected to supply the solutions.

Fortunately, all is not lost and there’s a world of technology and tools out there to overcome these barriers. In this article, I’ll uncover some of the most effective means to help investors better navigate the opportunities that developing markets can provide.

 

Key barriers to investment

Of the many barriers facing fund managers, data – or rather a lack of data in relation to developing markets – is one. In this digital age, data has become one of the world’s most valuable raw materials and resources in business.

So, the scarcity of this commodity for frontier markets presents a unique challenge. For example, nearly all major market and investment news outlets don’t list interest rates for longer maturities in countries such as Myanmar.

Other issues include a lack of environmental, social and corporate governance reporting, with a failure to enable compliance on European Market Infrastructure Regulation (EMIR) and reporting requirements set by the European Securities and Markets Authority (ESMA).

Combined, these factors can lead to gaping blind spots and increased risk when fund managers are looking where best to invest, which is only amplified by political turmoil and the opacity of these nations’ financials systems .

In extreme instances – like that of Venezuela – there’s not even a guarantee that local markets will stand the test of time. This is due to factors such as extreme inflation rates, endemic corruption, economic and political instability, government intervention and a restrictive legal framework.

If you merge the above with legacy financial software woes (they can be inflexible and often costly to change), it would seem we’ve got an investment recipe for disaster – and fund managers will simply have to pass up the opportunities of these potentially fruitful markets.

Or will they?

 

Low code as a solution

Legacy systems are a thorn in the side of financial markets. Some have been around for decades which makes them difficult to do without – despite their inefficiency, increased security risks and incompatibility with new technologies. This aside, legacy systems can also be increasingly costly and time consuming to replacement – making this option less attractive.

In response, low-code addresses the needs of fund managers and funds with capability to devise or build in comprehensive functionality and specialised reporting tools that can spur investment in a growing multibillion-dollar market.

Furthermore, low-code solutions allow for platforms to be easily configured and flexible enough to address the fast-paced, rapidly changing world of frontier markets and allows anyone with limited technical skillsets to develop a business application in days.

A recent case in point that highlights the benefits of low-code is DLM Finance. Utilising the services of Mendix, the financial services provider used low-code to create Trade Manager: a purpose-built, global financial software platform for fund managers to make investments in developing countries.

Due to the relatively smaller market capitalisation in these nations, traditional financial software providers have less interest in developing market-specific tools – with the high costs and length times associated with customising legacy software not an option for many funds.

But Trade Manager is purpose-built to fulfil the needs of parties in these underserved markets.

Overall, the complete application to address EMIR reporting was devised and developed in just two months on the Mendix low code platform by Finaps, a Mendix partner specialising in financial applications, in collaboration with DLM Finance.

Today, both fund managers and developing countries have already benefitted from its creation, with its attracting of capital for emerging economies. But this is just one isolated case where low-code has contributed to emerging markets, with a wave of success stories now expected to follow.

In a pandemic-disrupted world, software, with its ability to support rapid changes in business conditions, is the new lifeblood of our daily lives and the connective tissue holding together the global economy. And owing to innovations like low-code, we might just emerge on the flipside without too many scars.

 

Banking

TO ENABLE BETTER LENDING FOR PEOPLE AND BUSINESSES, WE HAVE TO LOOK TO OPEN BANKING

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By Iain McDougall, CCO of Yapily

 

A recent FCA study found over 14 million people were grappling with financial issues at the end of 2020, representing more than a quarter of the UK adult population. The picture is similarly tough for SMEs, too, which have been impacted hugely by lockdowns, loss of earnings and more; it’s estimated the pandemic will cost SMEs an extra £173,000 in debt per year.

This is resulting in a lack of lending options for both consumers and businesses, as well as expensive or high interest loans, or worse, rejection from lenders all together. This in turn is driving unaffordable lending, and penning consumers and businesses in an ongoing and irresolvable debt cycle – at a time when they need the most support.

One of the biggest causes of this lies in lenders relying on credit scores and credit bureau data to inform their decisions, which simply aren’t accurate enough to truly get the full picture of a borrower’s financial situation.

The case for using Open Banking data in lending decisions has never been stronger.

Data accessed through Open Banking permits lenders to retrieve accurate information about the borrower’s financial history. This can provide more accurate assessments, and therefore enable fairer lending decisions.

 

Credit scores aren’t helping consumers

Take NHS workers as an example. Despite working tirelessly throughout the pandemic, NHS workers make up a sizable portion of the UK adult population currently struggling with debt.

Iain McDougall

An independent report from the University of Edinburgh Business School, in partnership with Salad Projects, found NHS workers are heavily reliant on long-term overdrafts and high-cost credit, where APR is as high as 1,333%. Almost all (93%) respondents said they use one or more types of credit or loan, compared with 75% in the wider UK population (according to the Financial Lives Survey). More than half (58%) use up to three loan providers and 68% use up to four loan providers.

This situation is the result of relying solely on credit scores. While these are the near-universally accepted method of determining credit terms, each credit reference agency has a different method for calculating a credit score. They rely solely on financial history, whether they’ve previously defaulted, or failed to get credit, and not a consumer’s actual financial position, whether they’ve recently got a pay rise or new income, to see how likely it is they will pay back any money borrowed. This can mean, no matter if a consumer’s financial position has changed, they can’t get a better loan because of a previous discrepancy.

 

The challenges facing SMEs

These issues are not just limited to consumers. SMEs, particularly those in the hardest hit industries like hospitality and travel, have struggled to access credit throughout the pandemic.

While many may have been thriving pre-pandemic, their lack of ability to turn a profit during lockdowns, meant they needed extra support. In an effort to keep these industries alive, we saw numerous government backed loan schemes launched, such as the Bounce Back Loan Scheme, to help struggling businesses survive. In total, these schemes have provided almost £180 billion worth of lending to date, supporting over a quarter of businesses in the UK.

However, the soaring demand from businesses in need of these vital funds meant lenders were unable to keep up and many businesses did not receive support quickly enough. What’s more, providers may register these types of loans with credit reference agencies, which means companies that previously had strong credit ratings may see their credit scores negatively affected by any delayed or missed repayments.

This is why it’s vital for lenders to get lending limits right the first time round, so SMEs can avoid potentially adding to their already growing list of debt and thrive in a post-pandemic world.

 

Enhancing lending with Open Banking 

Using Open Banking can add a much-needed layer of trust and loan personalisation for businesses and individuals. By basing credit decisioning on real-time financial data, lenders will be able to create a more accurate picture of their financial situation; and so make fairer credit offers.

Through adopting Open Banking principles, lenders will be able to onboard new customers and grant loans more efficiently, providing businesses with the cashflow required to maintain their workforce and support the economy.

With the borrowers’ consent, it will also give lenders oversight into how the economy is recovering, and enable them to monitor the rate at which the individual or business can expect the loan to be repaid. Meaning they can step in and provide extra support if and when required.

Open Banking provides what credit scores alone simply cannot – real-time insight into an individual’s or a businesses financial position right now, not three to six months ago. By leveraging the data that is readily available to them, lenders could achieve far better and more responsible outcomes. This will reduce the risk of loan default – for both businesses and individuals – and lead to more responsible lending decisions that can help people and businesses bounce back after what has been a difficult year.

 

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Banking

BRAND CONFIDENCE: HOW HAS OPEN BANKING EVOLVED AND DO CUSTOMERS TRUST IT?

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By Geoff Boudin, Director at Revive Management

 

The open banking industry is growing by 24% year-on-year, and is expected to be worth more than £31 billion by 2026. The implementation of the 2018 Payment Services Directive known as PSD2, was intended to boost competition in the name of open banking. The directive, which set out to make payments more secure, by requiring banks to share the data of customers who authorise it with third parties. This allows customers to share their financial information with authorised service providers such as budgeting apps and other third-party money management tools. It was initially called for by the Competition and Markets Authority (CMA) to level the financial playing field and empower consumers by giving them more ownership over their financial data.  So, two years on, what impact is open banking having on consumers? Do they trust it? If so, how can brands build on this trust to offer more a more personalised yet non-intrusive experience that delivers the data to further improve their service offering.

 

What difference has open banking made?

Prior to PSD2, which came into force on 13 January 2018, banks had full authority and jurisdiction over their customers’ financial data. The idea of a bank giving up some of that data to a third party for the benefit of their customers was unheard of. This closed ecosystem, however, runs against the drive towards digital openness, connectivity and convenience. Our digital worlds were opening up and data was becoming democratised, and banks were being left behind. Challenger banks such as Monzo and Atom, which embraced innovative new apps and features, had been making headway for years, and there was a sense that third-party customer-focused innovation was rumbling away under the surface. However, that innovation was stifled until PSD2 laid a path for it, requiring banks to open up access to customers’ data at their behest.

It’s thanks to PS2D and open banking that customers are now able to connect their bank account to a third-party app that can help them better manage their money or sign up to a platform that allows them to access all of their accounts and credit facilities in one place. This allows customers to control their finances as never before.

 

Driving innovation

Empowering and improving the customer experience is one great achievement of open banking. Another is the innovation it has prompted across the entire financial sector. Even traditional banks like HSBC prepared for PSD2 by rolling out its own ‘Connected Money’ app, which allowed its customers to view data from all of their bank accounts – as well as mortgages, loans and credit cards – all in one place. This value-add to the customer experience probably wouldn’t have seen the light of day if not for the competition spurred by PSD2 and open banking. Many other banks and financial services providers have followed suit, offering new customer-centric features based around convenience, visibility and control.

Open banking is a huge step forward in the financial world. So why do some still liken it to a sleeping giant? What’s holding it back?

 

Managing trust and data security

More than 2.5 million consumers in the UK are now happy to connect their accounts to trusted third parties in exchange for some value-added benefit. That’s up from 1.5 million in 2020, no doubt driven by the competitive innovation brought about by PS2D. However, open banking adoption across the rest of Europe seems to have been much slower, and even growth here in the UK is beginning to plateau. While some might blame this on Brexit-induced regulatory changes, such as UK firms no longer being able to use the EU’s certification standards to share customer data after June 2021, there is much more at play.

A Europe-wide survey by thinktank ING polled 13 countries – including the UK – and found that only around 30% of consumers were happy for companies to share their data even after they had given consent. What’s more, only 35% of those polled had even heard of open banking capabilities. This points to issues surrounding data security, trust and awareness – all hurdles that can be overcome by banks, financial services providers and fintech innovators.

To make the most of open banking, banks will have to innovate and forge fintech partnerships with companies using their data sets. That will enable them to enhance existing products and leverage new fintech products being created with their data which will, in turn, benefit their customers.

This process of innovation has already largely begun, but if brands are to take full advantage of all that open banking has to offer, they still need to bridge the trust gap with consumers. We see consumer education, especially in the field of security, as having a key role to play in building confidence and consequently optimising uptake of open banking.

 

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