Banking

THE DIGITAL FUTURE IS TODAY: WHY THE FUTURE OF BANKS’ WILL HINGE ON CUSTOMER CENTRICITY AND SMART DESIGN

Nanda Kumar, CEO of SunTec

As the financial services industry continues to tackle short- and long-term challenges brought on by the COVID-19 pandemic market disruption, banks are facing a completely digital reality powered by accelerated digitalization.

Banks, which have for years relied on legacy technology and traditional processes, will be hard pressed to survive and remain competitive as new modes of operation amongst technology-driven, agile competitors push the pack forward. Banks will eventually face two options: embrace the methodologies of innovative market competitors, or risk losing long-term customer loyalty and thereby, revenue.

To build a secure future for themselves, banks must begin designing customer-centric solutions and making smart use of the assets and partners available to them. They must champion flexibility and scale to maximise the value they deliver, as they enter a new era of competition.

Banks were already under pressure to accelerate their digitalization efforts and revitalize the customer experience pre-pandemic, and COVID has forced their hand. According to a recent survey by management consultancy firm McKinsey, the pandemic has not only accelerated client demand for digitally banking services, but clearly shown that bank customers are placing a higher reliance on their advisors during these uncertain times – bringing the importance of customer experience into sharp focus. It’s clear that banks cannot continue to make limited progress. It’s about a complete step change and an understanding that digital is now the norm, not a ‘nice-to-have’.

Customer and Competitor Pressures Mount

Especially during these disrupted times, the looming threat of customer recession and competitive challengers are catapulting banks’ technology projects – many of which are long overdue – into overdrive. As the Bank Governance Leadership Network (BGLN) recently highlighted, COVID-19 has accelerated the industry pivot to digital, and new challenger banks and FinTech providers are expected to challenge the notion of customer trust. While banks have understood the need for digital transformation for years, they now recognize the urgency to adapt so they can better manage rapidly changing customer priorities and market conditions.

With the entrance of technology goliaths like Google and Amazon, and user-centric banking and fintech platforms, like Venmo and PayPal, which leverage customer data to create not only reactive, but predictive customer journeys. Customers have come to expect bespoke and seamless user experiences, and as their expectations heighten, banks that don’t offer solutions that follow the entire customer journey will soon be left behind, ultimately forfeiting loyalty and retention in a generation of customers that values hyper-personalized experiences.

Digital is no longer an option for businesses – it’s an imperative. And none more so than banks. Most banking customers today would not even consider opening an account at a bank that did not have best-in-class digital capabilities. It is critical that banks develop comprehensive plans that will enable them to accelerate their digital transformation initiatives and deliver a new level of personalized customer offerings. To do that, they will need to reimagine their holistic systems, processes, data and people.

Transforming the Core: Risk Reduction via Redesign

Though the ever-evolving demands of customer expectations and competitor innovation seem insurmountable, banks are actually well-positioned to compete. The key to reducing business risks lies within developing a clear digital strategy and redesigning core processes, leveraging their pre-existing data assets and partnerships.

By adopting a digital core and ‘hollowing out’ customer engagement functions from the core system, and managing it as a horizontal cross-enterprise layer, banks will be able to take a low-risk, modular approach, while offering enhanced product innovation capability, sophisticated customer data management, partner ecosystem and revenue management.

The digital core, which captures and meticulously logs the data from every customer interaction, relevant personal information, purchasing patterns, and more, is integral to improving customer centricity. By tapping into customers’ data, banks can leverage their information to meet their unique needs, create and bundle products, services and offers for any customer segment, and adopt relationship-based pricing strategies and new business models.

Furthermore, by utilising partnerships that maximise economies of scale, banks can quickly adopt new technologies, add more functionality, enhance the customer experience, provide customised internal and external products and integrated services. Most importantly, they can do this whilst maintaining ownership of the customer relationship and value prop.

Cloud: here today, and here to stay

The recent pandemic disruption highlighted the need for stable, reliable technology solutions that can weather market volatility. Especially as internal and customer functions faced increased risk and disruption, banks saw first-hand the need to embrace cloud capabilities to maintain a competitive edge.

Cloud computing offers banks the ability to innovate at faster and lower costs, increase the amount of services and offerings to customers, while monitoring and preventing revenue leakage. By reducing time to market and thereby creating new revenue streams, banks have the opportunity to accelerate their customers’ digital transformation journeys at an accessible price point.

Banks have begun to recognize the value that cloud infrastructure can offer their customers, and savvy organisations will take full advantage of cloud deployment’s benefits for their digital transformation projects across pricing, billing, product, loyalty, deal, offer, partner monetization, and tax management processes.

The opportunity for banks is to leverage the cloud’s flexibility, agility, scalability, high performance, security and strong reputation in handling large volumes of transactional data and functionality to translate it into value for their customers, instilling confidence in their ability to keep up with nimble industry players.

Keeping the customer at the center of design

In order to design solutions that keep customers content, banks musts assess the value that their products are offering to customers. With customer value, comes customer trust – and with trust, comes loyalty and ultimately business longevity. When designing solutions, banks must take similar strides to their fintech competitors – the most successful of which offer not siloed, but rather experience-based products and services.

Undoubtedly, the bank of the future will orbit around the growth of Solutions as a Service – providing hyper-personalized products and services for any customer segment, adopting relationship-based pricing strategies, and optimising billing processes. For banks to survive in this hyper-competitive market landscape, reinforcing value to customers will be paramount. Banks need to understand what customers truly want, and what they are trying to achieve with every interaction. Essentially, banks will have to shift their mindset to think like a customer, anticipate their needs, and restructure their traditional process to design holistic solutions catered to those needs.

Now more than ever, it is imperative for banks to focus on agility, scale, and speed to succeed in their digital transformation journeys. Driven by market competition and increasing customer demands, banks must build the bank of tomorrow, today – embracing the flexibility and cost efficiencies of partner models, existing data assets, and cloud computing to build experienced-based designs, deliver true value and ensure customer loyalty.

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.

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