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Banking

STRANGE NEW WORLD: WHAT NEXT FOR BANKS?

SOFTWARE

Simon Wilson, Director, Payment Solutions, Icon Solutions

 

What’s next for banks in this strange new world we find ourselves in? Forget the forecasts and predictions, we are in unchartered territory and the only honest answer is that no one truly knows exactly what is coming down the line.

But what we do know is that accelerating payments transformation initiatives to be more cost effective, resilient, innovative and flexible in the face of uncertainty is key to delivering for customers and establishing a leadership position.

 

Build foundations to reduce costs and deliver for customers

An immediate and critical priority for banks is to offset the impact of squeezed revenue streams, which are under pressure from all sides.

The threat of second waves and local lockdowns means that transaction volumes will remain volatile in the short-term. As recessions start to bite, cross-selling opportunities will be limited as overall demand for banking products and services reduces. Margin pressure is compounded by historically low interest rates, and record rises in delinquency and defaults increasing exposure to non-performing loans. The global transaction business is likely to come under added pressure as trade corridors become much more local and additional disruption from US-China relations starts to bite.

Yet at the same time, banks must also be prepared to respond to rapidly changing customer requirements and provide them with greater control. Customers will need to be able to manage their money in different ways, instant access to credit and liquidity will continue to be essential, and instant data-driven decisioning absolutely critical to supporting the specific needs of individual customers at any given time.

But expensive and outdated legacy infrastructure is a roadblock to these requirements, making it hard to reduce operating costs and support innovation. Prioritising and accelerating strategic payments transformation initiatives will mitigate long-term revenue constraints and, if executed correctly, reduce total cost of ownership (TCO) by factors. It will also enable the creation of differentiated, personalised, value-added products and services for customers and protecting profitability and positioning for market share capture as growth returns.

 

Simon Wilson

The time is now to overhaul legacy infrastructure

There is little resource, and indeed appetite, for high-risk, expensive long-term migration projects in such uncertain times. This is understandable, though it is uncertainty that should make payments transformation initiatives a priority.

Consider that many banks have struggled to cope with the increased load on digital banking services, which have pushed the resilience and stability of legacy architectures to breaking point. This has crystallised the importance of an ‘antifragile’ approach to risk, with systemic contingencies and buff­ers to meet demand surges. Ensuring operational resilience will be particularly important given that we can expect renewed regulatory focus on the potentially catastrophic impact of outages during crises.

Banks must also contend with the challenges of enabling secure, efficient remote interactions at a previously unimaginable scale. This includes the huge redistribution of workforces, keeping customers safe from fraud, and enabling effective digital service provision through artificial intelligence and machine learning.

Given the sheer scale and immediacy of the challenges, over-engineered and monolithic solutions cannot deliver the flexibility required. The good news, however, is that banks don’t have to look far for a low-risk, low-cost alternative.

Cloud-native, agnostic challenger banks have been able to move quickly and flexibly through these uncertain times in a way that incumbent banks have not. This should provide a best-practice model and roadmap for the industry. Investing in open-source, Cloud-native infrastructure is how banks secure their place in the digital era, enabling them to operate and deliver in more agile, scalable and innovative ways.

 

Embrace purpose in new look economies

Banks must also prepare for radically altered economies and a new position within them. Governments across the world, regardless of political persuasion, have necessarily embraced socialist policies, with banks facilitating the distribution of massive government stimulus, relief and requisition packages directly to corporates and consumers.

With the risks of relying on global trade for essentials exposed, economies will likely become more autarkical. After many years of industrial decline in some countries, we can expect a significant uptick in investment and output to shore up supply chains. Banks, along with governments, will have a critical role in financing and supporting this domestic growth.

Conversely, there are stark questions about commercial viability. ‘Non-essential’ businesses across the hospitality, travel and beauty industries are being hit the hardest, precisely because they are considered ‘non-essential’. Yet, it is a haircut, a stiff drink and a holiday (not necessarily in that order) that many of us most looked forward to while locked down. Relaxed liquidity buffers and capitalisation requirements provide flexibility for banks to deliver economic stimulus until good times return.

In addition, to a large extent some of the lowest-paid and least-appreciated sections of society are now rightly recognised and valued as key workers. And it is often these same workers who can’t afford a mortgage deposit, for who credit is expensive and whose savings are limited. Calls for fairer, more sustainable economies may push banks to promote financial inclusion and provide access to financial products and services on better terms.

It is clear that banks cannot expect to carry on with business-as-usual approaches. Indeed, there is a generational opportunity for banks to re-shape public opinion towards the industry.

 

Leading in a strange new world

The recession we are entering, and the longer-term ‘new world’, will have nuances not seen before. While defaults on loans will unfortunately rise, unusually banks will enter the situation with rising deposits as customer struggle to spend or are simply unwilling to risk normal levels of spending. This provides opportunity for investment and change in approach. We do not know what will come next. But there are clear steps that banks can take to enhance their ability to effectively respond to the unknown. In the face of significant uncertainty, financial institutions accelerating transformation to reduce costs, deliver innovative new customer experiences, and increased agility and resilience can establish leadership positions in a strange new world.

Icon Solutions’ payments experts have compiled insights from their network to deliver key recommendations and considerations. Download the infographic to find out more.

 

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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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