Connect with us

Banking

HOW CAN BANKS PREPARE FOR THE CLIMATE-RELATED INVESTMENT STORM AHEAD?

By Amer Khan, Managing Director Europe, Entelligent

 

The Covid-19 crash in March 2020 provided a stark illustration of the degree to which natural disasters can affect the global financial system. Stock markets plunged around the world, with London’s FTSE 100 enduring its lifetime second biggest fall, and the Dow Jones its worst quarter ever. Crude oil prices dropped into negative territory for the first time in history.

As we approach the end of 2020 stock markets have largely recovered, driven by the expectation of vaccines that will effectively combat Covid-19. We cannot however protect ourselves from the effects of unabated climate change with a vaccine. So, what can the financial services industry do to protect itself, and its stakeholders against the impending climate-related investment storm?

Interestingly, as Covid-19 caused stock markets to suffer record investor withdrawals during the first half of 2020, investment banks saw one area of the investment markets flourish: ESG funds experienced record inflows throughout the crisis.

It quickly became clear that the Covid-19 pandemic had amongst other things, caused a shift in attitudes towards investing for a more sustainable future, and an environmentally one.

Amer Khan

Alongside increased investor appetite for climate resilient investments, banks have increasingly recognised that whilst climate-related risks may only materialise over the following decades, the actions they take today will determine the extent and impact of those future risks.

The risks from climate change that banks are analysing and integrating into their operations today, can broadly be split into two types: physical and transition risk.

 

Physical risk covers issues which the world may face in the future as a result of climate change causing melting glaciers, sea level rises and increasingly frequent extreme weather events, which in turn might cause catastrophic knock on events on the operations of various businesses.

In order to protect and mitigate against the future physical risks of climate change, governments around the world have been increasingly introducing new policies that are designed to encourage the move to an economy that will less severely impact global climates – a green economy. The application of these green policies represents transition risk.

 

Enhanced Disclosure

To protect against the future physical and current transition risks of climate change, banks must perform detailed analyses of their existing investment portfolios, to ascertain the degree to which each individual investee company is exposed to each of these risk types.

The critical first step in this process is better disclosure. Banks can only make well-informed decisions if the companies in which they invest are disclosing adequately.

The Task Force on Climate-related Financial Disclosures (TCFD) was launched almost immediately upon the signing of the global Paris Agreement in 2015. Its recommendations were published in 2017 and supported by global financial institutions, including the Bank of England.

Whilst the recommendations were extensive and applicable to all companies, a key issue was that they were only voluntary. Over the past five years the TCFD’s recommendations have been adopted by an increasing number of large businesses, albeit to a varying degree.

Fast forward to 2020 and the lessons learned from Covid appear to have rapidly intensified the urgency of ensuring financial systems are resilient to natural disasters.

In November 2020, we saw the UK Government announce that climate-related disclosures would become mandatory by 2025 for large companies and financial institutions, with some companies having to disclose from as early as 2021.

Other governments are expected to follow suit.

 

Climate Scenario Analysis

Even with increased disclosure from their investee companies, banks are faced with the problem of continuing uncertainty. The extent to which climate change will affect the economy depends on the temperature pathway, on a global scale as well as local.

Leaders around the world agreed in 2015 that to avert catastrophic events in the future, climate change must be restricted to no more than 2˚C above pre-industrial levels by 2100, and ideally kept below a 1.5˚C increase. Governments collectively agreed to commit to achieving these targets.

The problem is we are currently on a failure path ([2.6]˚C)1 and nobody quite knows which temperature pathway we will be on in the future.

One way in which banks can manage these uncertainties is to use climate scenario analysis and stress testing.

By incorporating multiple scenarios that cover a range of temperature pathways from a best case 1.5˚C to a worst case of >4˚C, banks can assess the resilience of their own operations, and that of their investment companies, across a wide range of possible future climate outcomes.

By analysing the sensitivity that companies are exhibiting across the whole range of likely futures, banks can determine today which companies are best prepared for the climate related storm that lies ahead, both physical and transition.

 

[1] https://climateactiontracker.org/global/temperatures/

 

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.

 

Continue Reading

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

 

Continue Reading

Magazine

Trending

Banking1 day ago

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...

Wealth Management1 day ago

WHAT LIFESTYLE DO YOU WANT IN RETIREMENT?

By Jaco Prinsloo, Certified financial planner, Alexander Forbes Financial Planning Consultants   The answer to this question will be different...

News2 days ago

BRICKENDON STRENGTHENS SENIOR LEADERSHIP TEAM, PROPELLING FURTHER GROWTH IN 2021

Transformational consultancy appoints new Director of Financial Services, Strategy & Business Development alongside a series of senior promotions   Brickendon,...

Finance2 days ago

WHAT’S NEXT? PAYMENT TRENDS IN 2021

Philip McHugh, CEO at Paysafe   Undoubtedly COVID-19 is going to continue having an impact on us all at least...

Top 102 days ago

THE TOP 5 CRYPTO EXCHANGES IN THE WORLD YOU SHOULD KNOW ABOUT

Introduction Crypto Exchange is a very important part of the Cryptocurrency EcoSystem. Crypto exchanges are the platform where transactions take...

Finance5 days ago

FIVE TRENDS THAT WILL IMPACT THE FINANCIAL SERVICES INDUSTRY IN 2021

Ian Johnson, Managing Director Europe at Marqeta   Coronavirus has shaken things up across all industries, and financial services is no...

Wealth Management5 days ago

CHECKLISTS FOR CHOOSING A CORRECT TRADING MENTOR

The trading mentor should be proficient in the particular field and have proper cognition about the field. The duty of...

News5 days ago

FUNDS’ RUSH TO THE CLOUD MUST NOT BE A BOX TICKING EXERCISE

By Ed Gouldstone, Global Head of R&D for Asset Management at Linedata   The fund management industry has held up...

News5 days ago

MORE THAN HALF OF EUROPEAN SMES CONFIDENT IN 2021 BUSINESS RECOVERY

Finland most confident in Europe followed by France, UK and Germany – Spain, doesn’t show the same optimism Hope for...

Business5 days ago

BOUNCING BACK IN 2021: DIGITAL TRANSFORMATION IS NO LONGER A CHOICE AS DEPENDENCE ON 5G, IOT AND DATA INCREASES IN SOCIETY AND BUSINESS

Ivan Ericsson, Head of Quality Management, Expleo Group Limited   The global pandemic has put enormous strain on businesses and brought into...

Finance5 days ago

2021 IS THE YEAR FOR DIGITAL WORKFORCE MANAGEMENT IN FINANCIAL SERVICES

By Tyler Suss, Product Marketing Director at Kofax   Even before the pandemic, the UK financial services sector viewed digital...

Finance5 days ago

WHAT’S IN STORE FOR PAYROLL IN 2021?

Simon Parsons, Director of Payments, Benefits & Compliance Strategies, SD Worx UK   Payroll teams have recently faced up to the...

Technology5 days ago

DRIVING DIGITAL TRANSFORMATION IN 2020

by Andrew Foster, VP Consulting EMEA, AppZen   As organisations adapt to dramatic changes in working practices, the need for...

Finance5 days ago

PAYMENTS MODERNISATION – STRATEGIC PRIORITIES FOR FINANCIAL INSTITUTIONS IN 2021

Dudley White, SVP, General Manager, Financial & Risk Management Solutions, Fiserv   As the steady march toward payments modernisation continues,...

Business5 days ago

THE FUTURE OF SAVVY TECH PURCHASES IS KNOWING WHEN TO BUY

There’s no mistaking the impact technology has had in our lives. Once a novelty, technology has now infiltrated every aspect...

Wealth Management5 days ago

WHAT CAN WE LOOK FORWARD TO FOR EARLY-STAGE INVESTMENT IN THE COMING 12 MONTHS?

By Chantelle Arneaud, Envestors   What can business owners expect in the early-stage investment space in 2021? Having faced the...

Business5 days ago

PROPER ESTATE PLANNING IS ESSENTIAL AMIDST COVID-19 PANDEMIC

By Christel Botha, fiduciary services manager at Alexander Forbes   Paperwork and thinking about one’s death are both probably equally unpopular,...

News6 days ago

WHY BIOMETRIC CONTACTLESS CARDS WILL SOON BECOME THE NEW STANDARD

Payments should be time convenient and secure at the same. Biometric contactless cards not only meet these standards, but go...

Finance6 days ago

5 ACTIONABLE INSIGHTS FOR PRIVATE INVESTORS IN 2021

By Ben Hobson, Markets Editor, Stockopedia    COVID-19 has been a wake-up call for businesses and investors alike. Few could imagine...

Finance7 days ago

2021 PREDICTIONS: OPERATIONAL RESILIENCE TAKES CENTER STAGE

Brian Molk, Fusion Risk Management   Breaking down barriers between Risk and Business Continuity   What a year! Simply put,...

Trending