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Banking

FINTECH VS TRADITIONAL BANKING

With customer demands and behaviours evolving quickly in light of Covid-19, Will Hurst, Head of Commercial Development at Monevo, looks at whether traditional banks are failing to keep up with their expectations and what key trends and changes have opened the door to the rise of fintechs.

The financial services competitive landscape has evolved in recent years and it’s clear that fintechs have certainly disrupted traditional banks.

Fintechs include any financial tech company that serves any of the following areas; lending, blockchain, reg-tech, personal finance, payments and billing, insurance, capital markets, wealth management, money transfer and anything to do with the mortgage process.

While digital banks are referred to as fintechs, and have certainly challenged traditional banks in terms of luring away their customers, it would be simplistic and inaccurate to identify that all fintechs are in direct opposition to traditional banks.

In many cases, fintechs are often working in tandem with traditional banks, and allow market incumbents to diversify their suite of products and further monetise their client base.

 

CASHLESS

Will Hurst

Consumer-centric approach

As with other sectors over recent years, the financial services sector has experienced rapid digitisation and a shift towards online operating models.

Traditional banks have seemingly struggled to keep pace with the ever-changing tech and resource demands of consumers, while the stellar rise of the challenger bank certainly indicates they’ve met consumer demand and they’re here to stay.

In recent years, it’s easy to identify the winners, with the likes of Starling bank voted best British bank for three years in a row, and the losers, as Natwest decides to kill their app-only digital bank Bo after just 5 months.

Not only does this serve as a cautionary tale to other incumbents that harbour aspirations to make in-roads into the digital bank space, it indicates that challenger banks aren’t just a pretty fad with cool messaging slogans, but address very real and immediate needs of consumers with innovative product offerings.

 

Partnerships for the win

In recent years, we’ve seen big tech partnerships that allow well-known names in consumer finance to partner with and harness the bright sparks of the fintech world. Whether it’s Marcus – the online bank from Goldman Sachs – partnering with Saga to offer savings accounts, or in the price comparison world, where CYBG and Go Compare partner for energy switch services, or consumer brands such as the AA partnering with the personal loan marketplace platform Monevo.

These developments come down to two things; driving down the cost of customer acquisition for banks and lenders, but more importantly, meeting the requirements of the consumer with products and solutions to the problems they face. Strategic partnerships allow both parties to achieve greater scale, and improve customer reach.

 

Open Banking

Further fuelling the drive towards collaboration and partnerships has been spurred by the onset of open banking.

We’re still very much at the start of the open banking revolution, but essentially, open banking means the use of open APIs that enable third-party developers to build applications and services around financial institutions. In layman terms, this means under new open banking rules, your bank must let you share your financial info with third party providers – should you choose to do so.

You may decide to share your spending habits, or details of regular payments, or companies you use. All of this allows consumers to access additional products and services such as personal finance apps that analyse and help manage spending, or offer a centralised overview of all financial accounts in one place.

Yolt, from ING Bank, is one such example of an app that helps centralise all of a consumer’s financial accounts in one place, set financial goals, and “spend smart”. Open banking has driven competition and innovation within the financial services sector, as it was designed to do so, and the pace of change in all areas of fintech banking will continue to revolutionise both the customer experience and financial products.

As credit providers get their head around the vast volumes of data available on their potential and current customers, intelligent product builds will help lenders and other other financial services companies to filter data into what is useful to them, and optimise revenues accordingly.

 

OK Boomer

Another factor that helps explain the heating up of the fintech banking sector in recent years is the change in consumer demographics. Since the financial crash in 2008, younger generations have had to struggle with multiple financial challenges including the increase of house prices, the rise of the gig economy and lower comparative wages.

Against this context, it’s no surprise that Millennials’ demand new and innovative financial products to help them overcome financial hurdles of plunging levels of savings and soaring debt – something incumbent banks have arguably been slow to move on.

Without the cost of physical high street branches, digital-only challenger banks such as Monzo, Revolut, Starling Bank have been able to focus investment on tech and partnerships to provide a range of products marketed specifically to the first wave of cost-sensitive “digital-natives”, pitching brightly-coloured bank cards with frank and friendly tones of voice when communicating to their customer.

Above all, Millennials value products and services that deliver convenience and simplify their lives – an element that Monzo, Revolut and Starling have all embedded successfully into their respective brands and product offerings.

Predicted trends indicate disruption to the banking sector via fintech innovation is set to continue, and indeed we see more examples of smaller fintechs springing up to serve the underbanked, or those struggling to manage their cash, or build credit scores – areas historically ignored by the major banks.

 

Banking

WHY AGILE, SCALABLE DATA MANAGEMENT IS KEY TO DIGITAL BANKING

By Jason Hand, Global Account Executive – Enterprise Sales, Commvault

 

Back at the start of 2019, before we’d ever heard of COVID-19 (hard to imagine these days, I know), mobile banking was predicted to overtake high street branch visits within two years. But the restrictions placed on daily life to get to grips with the pandemic proved to be a catalyst in speeding up adoption.

Although banks haven’t had to close during the UK lockdowns, they discouraged unnecessary visits — and many people new to online banking discovered that it could provide a quick and easy (and COVID-safe) way to manage their finances. No surprise then, that as summer came to an end, over three-quarters of the UK population were using some form of online banking and one in ten people had switched to a digital-only bank.

When it’s implemented well, online, digital and app-based banking is as easy as shopping with Amazon, booking a cab on Uber or grabbing a takeaway via Deliveroo. With so much potential to create a similar customer experience — and so much to lose if they fail — banks are under pressure to deliver on digital services. But their success (or otherwise) will depend on how well they manage their digital data and, in particular, how willing they are to adopt more agile, scalable, cloud-based solutions to underpin their new services.

 

Adopting New Technology in a Risk-Averse Sector

The UK’s financial services sector is undoubtedly slow when it comes to adopting new technology. Indeed, many UK banks continue to rely on mainframes. This cautiousness stems from the continued rise in cybercrime and the fear of non-compliance with FCA and data protection regulations.

Banks have to tread a thin line. They do want to embrace technology that will help them scale and support customer demand for digital services. But they can only do so with an IT infrastructure that keeps out cybercriminals, hackers and anyone else without explicit authorisation to view the data. So, if their legacy IT systems are secure and protect customer data from cybercriminals, banks do not want to risk implementing new solutions that could leave them exposed — even if those old systems make them less nimble and less responsive to changing customer demands.

 

Open Banking and Shared Financial Data

The increased digitalisation across the sector leaves banks facing a second security and data management challenge. Once, they only had to worry about managing their data and keeping it safe within their closed IT environments. Now Open Banking — a UK government-backed programme — encourages banks to securely share their data with trusted third-party financial services providers via an API (Application Programming Interface).

Typically, these third-party providers offer apps to assist with utility bill management, accounting and auditing, and savings (usually rounding up apps). Once a user grants authorisation, the app directly interfaces with that user’s current account. Customers — whether individuals or SMBs — love them, but for banks, they’ve meant a reassessment of security and data management strategies.

 

What Constitutes Good Data Management?

To begin with, it could mean switching to a single data management solution. Banks historically have deployed several different products to manage their data. Multiple applications add complexity and  need more people to oversee them operationally. This approach will add cost, risk, and ultimately will not align to their digital transformation agendas.

Running multiple data management solutions makes it harder to get a holistic view, understand customer behaviour and predict future trends. It also creates unnecessary security risks. Consolidating data management platforms reduces these risks and costs. At the same time, fewer inter-app data transfer points decrease the number of potential weak-link entry points for hackers and cybercriminals. From a practical point of view, using a single data management solution also enables all relevant data points in a hybrid world to be viewed on a single pane of glass — making it much easier to digest, interpret and deliver data management as a service back to their internal clients.

Automating data management components can improve security and cut costs by reducing human contact. In addition, it enables faster and more accurate data management that can accelerate cloud adoption where data management is key to success.

It’s worth saying at this point that banks have been slow on the uptake of both public and private cloud technology, and are clearly still concerned about security and privacy threats. This is despite the fact that cloud computing — particularly with a zero-trust approach to security — has become a lot safer and carries far less risk.

In the middle of 2019, the Bank of England published a report that estimated the world’s largest global banks conducted just a quarter of their activities in the public cloud or software hosted in the cloud. But change is happening, albeit slowly. Larger banks have started to recognise that cloud computing holds the key to running an agile business  — allowing them to scale their online services and safely store, process and mine vast amounts of digital customer data.

The maturation of the hybrid cloud market may have played a role in increased adoption and allayed many of the sector’s previous doubts. A hybrid cloud infrastructure combines public cloud, private cloud and on-premises architecture, giving users the flexibility to keep some applications and systems (those with particularly sensitive information, for example) within their own four walls while still being able to migrate other systems. It’s an elegant and cost-efficient way to balance security, scalability and compliance.

 

Demand for the Future

With so much change taking place across the UK banking sector, data management has never been more critical. Open Banking, consumer demand for digital banking, and app-based banks like Starling and Monzo are all shaking up the market. But the threats from cybercriminals and the risk of falling foul of FCA regulations are still very much present. And, while navigating all these challenges, banks still face pressure from shareholders and investors to make a profit, retain customers and grow the business.

For these reasons, data management strategy — and linked to that, the pace and effectiveness of cloud computing adoption — are now two of the most significant determining factors in how banks cope today, and how effectively they will operate in the future. As such, 2021 should be the year that most banks and financial organisations embrace and invest in new technology when it comes to data management.

 

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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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