By: Frans Labuschagne, UK & Ireland country manager at Entersekt
The transformation in the financial services sector has seen many people becoming a lot more reliant on digital tools to perform everything from routine to complex financial transactions. Brick and mortar establishments and personal bankers were once the go-to to guide consumers through opening a new account or applying for a loan; now, we have at our disposal a long list of self-help options: apps and portals, ATMs and kiosks, chatbots, and video and telephone banking. As the ways consumers interface with banks evolve, so too do the challenges banks face to remain competitive and customer focused.
The digital transformation drive
With digital transformation becoming a strategic focus area for banks, many experts now view it as critical for future success. However, according to Chris Skinner, only a handful of banks are “doing digital” properly. This is because “having a mobile app doesn’t mean you’ve gone digital.” Fintechs understand this and go above and beyond in the fast-paced digital innovation sphere, merging online experiences into seamless events and meeting the customer where they are.
Making it personal
Then there’s the ever-increasing demand for personalisation, which has become a buzzword across industries; a strategy recommended to “enrich customer experience and drive revenue”, as a 2019 Gartner report phrases it. Companies that heed this advice seem to reap rewards – an Extractable study found that 93% of companies report having more success in converting prospects into customers when they personalise their marketing. Banks, however, are lagging behind in this respect. 94% of banks surveyed in the recent Digital Banking Report say that they can currently only deliver basic levels or no personalisation at all.
At the same time, banks cannot ignore the need to prioritise security, in terms of their own systems as well as their customers’ data. This can be complicated by compliance requirements that often lead to extended timelines, legacy systems that can hinder innovation, and the changing demands of consumers. When banks see both security and regulations as constraints, it tends to hold them back from moving forward with more innovative offerings. This stumbling block is where the traditional bank can be surpassed by quick-moving fintechs and challenger banks.
So, why have fintechs been able to outstrip traditional banks when it comes to offering innovative banking services?
The fintech edge
Fintechs are notoriously consumer-centric and know how to leverage the customer relationship. Many use data to give them the edge over competitors: they know that every time a consumer touches a computer, searches for a store or product on their mobile device, or calls a customer service department, they leave digital breadcrumbs. This data-rich trail is a path to a more intimate understanding of that consumer and what it takes to provide them with more relevant services and offerings — the essence of contextual commerce.
These smart organisations recognise the possibilities that this open up. Instead of having a handful of interactions with consumers each month, for example, they can initiate several personalised, highly relevant interactions every day. Fintechs are experts at creating flexible, intuitive customer journeys across channels to enable a richer and more interactive experience. It also helps that they aren’t held back by the cumbersome legacy technology and myriad of complex regulations that FIs often find themselves flummoxed by.
The banking edge
Conversely, banks have an inherent advantage in place when seeking to bring new features and services to clients: trust. Visible indications of security measures combined with a sense of control over security can make customers feel safer and more comfortable in their digital interactions. Add to this consistent experience across digital channels and a personalised approach to services and offers, and banks will be able to capture great returns on their investment in trust.
Banks and fintechs can learn from each other when it comes to striking this balance between trust combined with leading edge security and personalisation combined with a convenient digital experience.
Financial institutions are becoming more comfortable partnering with fintech firms, which allows them to innovate faster. Banks feel the pressure – there are many more players on the field now, and to succeed, traditional FIs need to bring their A-game. One of the best ways to do that is to pair up with a nimble technology partner.
The synergy of strengths is the ultimate goal in any partnership. In the case of banks and fintechs, each brings something incredibly valuable to the party: Fintechs bring an innovation mindset, agility, a consumer-centric perspective and an infrastructure built for digital. Banks and other established FIs bring brand recognition and consumer trust, capital, expertise negotiating the ever-changing regulatory landscape, and established distribution networks. When combined correctly, these are the magic ingredients needed to scale up.
In addition, partnering with fintechs also allows the full potential of open banking to be realised. As more third-party services rely more heavily on open banking APIs, customers will naturally migrate to the banks that have the fastest and most featureful services. It all comes down to where you want to be on the playing field.
FIs will rely increasingly on modern data-processing techniques to enable real-time empowerment – or risk falling behind. Promisingly, it seems that FIs are starting to take note.
One of the major challenges for banks (which became all the more apparent as COVID-19 restrictive measures were rolled-out around the world) is the need to find a way to cater for their diverse range of customers; they cannot simply pander to a specific demographic. In order to evolve with changing customer needs and behaviors, they’ll need to create an offering that is intuitive and manageable for both digital natives and novices alike.
Fintechs and the future of banking
There are changes big and basic coming in the era of secured multi-channel banking. The next few years could completely change how consumers interact with their banks. They can really extend their position of trust to be at the centre of a third-party loyalty ecosystem as well. This might involve being able to place an order at Starbucks or another retailer directly from a banking app instead of having to use a phone. Or creating a space in which customers can log in with their mobile banking app in stores and collect digital offers or coupons. The options are many — and the banks’ unique set of channels to operate over, and their relationship of trust with consumers, give them an exceptional leg-up in the race if properly leveraged.
The bank’s omnichannel capabilities are a strong competitive advantage if they are used properly because they give consumers multiple ways to engage with a bank, whereas pure tech platforms can’t offer all those channels. It’s a core advantage often overlooked and underutilised.
So, the question becomes, not who is winning the race, but how can traditional banks and fintechs work together to change the face of modern banking for the better?
WHY BANKS NEED TO EMBRACE OPEN SOURCE COMMUNITIES
Nikolai Stankau, Director Business Development, EMEA Financial Services at Red Hat, the world’s largest enterprise open source solutions provider.
Banks and financial services have long been benefiting from using open source software, which is code that is developed in a decentralised and collaborative way. Open source software is cost-effective, flexible, is developed rapidly, and tends to have more longevity than its proprietary peers because it is developed by communities rather than a single author or company. According to Red Hat’s own research, 93% of IT leaders in financial services state that enterprise open source is important to their organisation.
Alongside adopting open source products, which many banks already do, there’s opportunity for these organisations to have a greater influence in the development of industry software, by engaging in ‘upstream’ open source community projects.
The advantages of engaging in upstream communities
In open source projects, code is developed as a shared process by a community of thinkers and developers anywhere in the world. Collaborating directly with these communities – what’s known as ‘upstream’ participation – can give banks a major competitive advantage on their journey to innovate. From there, software can either be downloaded at no cost, or consumed via a trusted open source vendor that secures and stabilises the software to make it suitable for an enterprise to use. This is also known as the ‘downstream’.
A company that contributes its developers’ time and resources to an open source community gets rewarded with the output of hundreds of developers working on the same code. This leads to a magnification effect, by virtue of the fact you’re expanding your team many times over while also benefiting from a much more diverse pool of talent. The result is that organisations can be captains of the product development process and work together with the community to design features and functionalities that meet their needs and keep up with customer demands.
An added benefit for banks engaging in these communities is it provides a great access point for sourcing new talent, as well as helping to retain existing talent. Developers are attracted to organisations that engage in upstream development because it allows them to be at the forefront of open source innovation and new community-led initiatives.
It’s common for multiple organisations in the industry to come together and collaborate on a project, which can drive significant benefits for the community as a whole. A good example is Fintech Open Source Foundation (FINOS), which is a community set up by banks to promote industry collaboration, by delivering software that addresses common industry challenges and drives faster innovation. The concept had its origins in Symphony, a open sourced messaging and collaboration tool that was adapted and improved upon by developers from other banks, ultimately helping the company to become a major business valued at around $1.4bn.
Where to join forces versus compete
Although the benefits of engaging in upstream communities are manifold, some organisations have concerns around intellectual property as well as the productivity of developers contributing to open source projects rather than exclusively working on the bank’s own proprietary software. To this latter point – in reality, the development of new solutions and features built inhouse often requires many months, whereas product ideas shared in a community setting can be executed in much shorter time frames. As the saying goes, many hands make light work.
Regarding the essential consideration of IP and competitiveness: a lot of where banks can differentiate is at the application layer; in the services they develop and offer, rather than at the underlying operating system or middleware foundations – these tend to be common and standard, and are what empowers organizations to get to market as fast as possible. Thus the greatest opportunity for banks lies in platforms such as Linux-based Kubernetes, which is now the industry standard for container orchestration and one of the most important technologies used in the financial services industry. Kubernetes attracts many contributors from diverse organisations all over the world.
Some IT leaders also recognise structural roadblocks: transitioning an organisation to new ways of thinking and operating is a process that isn’t achieved overnight. Not all banks have the legal or tech mechanisms in place to be able to share their code externally, and company policies can prevent their employees from engaging in open source communities. In a heavily regulated industry, it takes time for some organisations to create the necessary changes before they can harness the potential of upstream communities.
The future is open
As the software ecosystem expands, and in the face of accelerated digital transformation driven by the ‘new normal’ of the COVID-19 pandemic, banks and financial services have the opportunity to evaluate how they can get involved in open source. There are many ways to do this: they can invest financially in communities, provide technical leadership and resources, or contribute code. With organisations under more pressure than ever to gain a competitive advantage, playing a role in open source communities will help them create better products, speed up time to market and position themselves at the forefront of financial innovation.
MORE THAN REGULATION – HOW PSD2 WILL BE A KEY DRIVING FORCE FOR AN OPEN BANKING FUTURE
Ralf Ohlhausen, Executive Advisor, at PPRO
Whilst initially seen as simply a regulation exercise, the second Payment Service Directive, also known as PSD2, has been a key driving force behind Open Banking, an initiative that presents a hopeful vision for the future of the financial services sector. Thanks to the advancement of technology, the payments industry is currently seeing disruption to legacy banking systems, and a move towards a world of Open Data. With Open Banking, third-party providers (TPPs) can offer customers a wealth of new and automated services beyond their standard bank offerings, such as what products to buy or even advice on who to bank with.
PSD2 has been created to ensure that banks create mechanisms to enable third-party providers (TPPs) to work securely, reliably and rapidly with the bank’s services and data on behalf of and with the consent of their customers. PSD2 requires EU member banks to give authorised, i.e. licensed TPPs, access to customers’ accounts either via Application Programme Interfaces (APIs) or their user interfaces. It also mandates the use of Strong Customer Authentication (SCA), which requires multiple factors of authentication from a customer to initiate electronic payments and grant access to transaction data.
Despite the progress of PSD2, however, there are still challenges to overcome to achieve widespread adoption and to meet Open Banking objectives. So, what are the current roadblocks that European banks and financial services need to overcome to make Open Banking a beneficial reality for all?
Delays to API development
A crucial factor standing in the way of the acceleration towards Open Banking has been the delay to API development. These APIs are the technology that TPPs rely on to migrate their services and customer base to remain PSD2 compliant.
One of the contributing factors was that the RTS, which apply to PSD2, left room for too many different interpretations. This ambiguity caused banks to slip behind and delay the creation of their APIs. This delay hindered European TPPs in migrating their services without losing their customer base, particularly outside the UK, where there has been no regulatory extension and where the API framework is the least advanced.
A lack of awareness
Levels of awareness of the new regulations and changes to how customers access bank accounts and make online payments are very low among consumers and merchants. This leads to confusion and distrust of the authentication process in advance of the SCA roll-out. Moreover, because the majority of customers don’t know about Open Banking yet, they aren’t aware of the benefits. Without customer awareness and demand it may be very hard for TPPs to generate interest and uptake for their products.
Recently some regulators and banks, such as the Central Bank of Ireland, have made decent efforts to raise awareness of the changes with PSD2 campaigns. But it isn’t reaching the general public. When it does, it’s often because of scaremongering or fear, uncertainty and doubts around data security fuelled by incumbents to protect their business. This also isn’t the right way to approach the issue as it will lead to people being more afraid, rather than aware. Instead, it is the role of payment service providers to educate their customers about Open Banking requests or opportunities, to ensure the public are aware of the changes to payment authentication procedures when SCA comes into play and are empowered to move their data.
TPPs have a real vested interest in getting customers on board with Open Banking. They should build on their customer relationships to grow trust and raise levels of education around the changes. When customers sign up for a new service, TPPs need to tell them explicitly what to expect before they have to do it, plus what explicit consent is required to access their account information in exchange for value-added services.
Outweighing the challenges with opportunities
Although the introduction of the PSD2 regulation hasn’t been seamless for the banking and fintech industry, it is set to offer many benefits and advantages for the end-customer, and the financial industry. In fact, the regulation will create an integrated and frictionless European payments system, that will provide the customer with more choice, control and security over their finances than ever before.
One of PSD2’s primary goals is to provide greater protection against fraud for banking customers, who may have previously been open to risk through weak authentication and unregulated data-sharing practices. The new rules insist on enhanced security requirements, including the use of Strong Customer Authentication (SCA) to protect customers while making electronic payments.
Furthermore, TPPs unencumbered by legacy technology have long been able to innovate faster than traditional banks. Now, this regulation will provide regulated and secure access to customer data, allowing them to develop products even more quickly. The new regulation also promotes technology on a European level and encourages fintechs to do what they do best: innovate.
It’s also important to not forget that PSD2 regulation increases market competition allowing customers to choose a wider range of suppliers for their banking and payment services without having to switch their bank for that. The decoupling of banking services from the underlying account infrastructure will make it easier for customers to opt for the banking services that best fit their needs. It also increases the number of financial providers, services and products which customers will be able to choose from.
The future of Open Banking
The financial services landscape is becoming a firmly consumer-centric environment. Across the UK and Europe, we’ll continue to see the rollout of technologies that put control in the hands of consumers. Open Banking will be pivotal in its role, opening up new avenues and opportunities for both banks and payment service providers (PSPs).
Thanks to Open Banking, the ability to share data securely in the retail banking sector has led to a sophisticated ecosystem where the customer is in charge of their payments and choice of banking services. Over the next decade, we should expect to see the same level of transformation in our digital services and data sharing, leading to a complete rebalance of services where customers will be able to actively own their data and use it the way they like.
Europe is currently leading the Open Banking race, so the successful implementation of PSD2 and SCA is extremely important to maintain the lead and build a future with Open Finance and Open Data as well.
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