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Banking

THE END OF THE WORLD AS WE KNOW IT: BANKING’S NEW REALITY

Simon Wilson, Director, Payment Solutions, Icon Solutions

 

There are decades where it feels like nothing happens, and there are weeks where decades seem to happen. In just over 100 days, COVID-19 has swept around the planet, more than half the world’s population has been forced into lockdown, far too many lives have been lost and entire industries have shutdown. A crippling global recession seems inevitable and a clear exit strategy, for now, remains elusive.

Make no mistake, this truly is the end of the world as we know it. As we gradually emerge from this unprecedented crisis, societies and economies will have been irreversibly transformed at a pace and scale that would have been unimaginable only months ago.

For the payments industry, transaction volumes have collapsed as entire sectors have shut down and buying has ground to a halt. The impact is felt not only at the point-of-sale, but across supply chains and corporate, FX and trade finance transactions. In contrast, massive stimulus, relief and requisition packages have led to a huge increase in government payments directly to corporates and consumers.

Simon Wilson

Banks and financial institutions have critical, positive, immediate roles to play in supporting consumers and business, while facilitating the repurposing of entire economies and welfare systems. Longer-term, banks will need to address a range of challenges as they adapt to the new normal. One thing’s for sure, efficiency across every area of their business will be central to doing the best for customers and shareholders, and minds need to be on accelerating digital transformation.

 

Becoming the good guys

The reputation of the banking industry has never fully recovered from the 2008 financial crash. Public reaction to banks seen to be abandoning their customers will be severe, immediate and potentially unsalvageable. When push really has come to shove, the human race has prioritised life over money. Banks (and other businesses) that are stepping up now will be rewarded in the long-term.

Viable companies that have fallen on hard times must also be supported. Many industries such as airlines, travel and hospitality will not immediately bounce back, and finding sustainable ways to prop them up is undoubtedly a challenge. Accurate cash management to protect liquidity and reserves, for example, will be key to the survival of many businesses until better times return.

In contrast, other companies have taken off. Medical ventilator manufacturers are rapidly working to scale production, while engineering firms from other sectors are repurposing factories. Remote working means Zoom and Slack have seen share prices skyrocket since the end of January. Supporting and facilitating growth where possible will save lives and assuage ailing economies.

The unique financial circumstances and inclinations of consumers must be considered.  Diligent savers are being forced to raid rainy day funds, take on debt and risk potentially defaulting on mortgage, loan and credit card payments. Spendthrifts are all-dressed-up with nowhere to go and are transformed into frustrated misers. A one-size-fits all approach will not work, and banks must think outside the box to ensure the individual needs of customers are met.

 

Making life easier in hard times

Banks must also consider the behavioural impact across the economy. The way we transact is likely to have changed forever as we get used to new payment methods. With billions of people stuck inside and shops shuttered, online spending has soared. And when shopping in-store, consumers are opting for cashless payment options, especially contactless cards and mobile wallets, to avoid touching cash and POS terminals. For corporates, cheque use (which accounts for 40% of B2B transactions in the U.S.) will decline as banks push real-time alternatives.

Banks also need to prepare for mass channel changes and provide support to aid this transition. Consider the many (mainly elderly) customers who were reliant on branches being forcibly converted to digital banking as a result of lockdown and quarantine measures. My suspicion is that many lockdown closed branches are unlikely to re-open, accelerating an existing trend.

Digital education is particularly crucial given another predictable, and disappointing, trend. We have seen a significant increase in fraud as criminals and chancers prey on uncertainty, confusion and inexperience.

But with banks’ own internal human resources under huge pressure and strain, supporting the transition to digital channels presents challenges. Artificial intelligence (AI) and machine learning (ML) technologies, therefore, have a key role to play in service provision. AI call centres and chat bots are already seeing increased use to help deal with enquiries, while AI-based fraud prevention tools can help protect customers. However, using them in the right way at the right time is a challenge that still needs to be met.

 

Speed and scale matters

Beyond support to individual consumers and companies, huge structural shifts must be addressed. The ability to respond quickly and on a massive scale is the key to protecting lives and livelihoods. Payments are an integral part of this response.

We are therefore seeing unprecedented government intervention. The U.S. is sending $1,200 to every citizen. But welfare systems are simply not designed for this scale, and urgent support is needed to help distribute funds and relief to those who need it.

Real-time payments enable the distribution of urgent funds, such as aid, immediately rather than in a week. Value-added services built on RTP rails, such as Request to Pay, will enable data-driven action and could prove powerful.

Global supply chains have also been decimated. Protectionist instincts alongside practical necessity have taken root as governments come under increasing scrutiny. With ongoing supply constraints due to social distancing the need to source closer to home is likely to drive lower intercontinental trade.

Banks have a crucial role in supporting a rapid shift towards domestic production, whether it be food, medical supplies or PPE. For example, Singapore (which produces only 10% of its food locally) has launched a $30 million fund to incentivise innovation.

 

Payments transformation in a transforming world

It is a brave person that predicts what comes next. But what we do know is that bank profitability, already a significant pain point, will be placed under unprecedented strain from reduced transaction volume, historically low interest rates and increasing default rates.

Reducing costs, and quickly, is essential.  With the stakes now higher than ever, we can expect to see a marked acceleration in payments transformation initiatives. Outdated, fragmented and expensive legacy systems are a burden that banks can no longer afford. As McKinsey noted, ‘banks will need to reflect on how to organise themselves for change, possibly by running some of their payments businesses in a completely different way.’

Establishing a clear strategy and target architecture, outsourcing non-strategic elements of the payments value chain and leveraging cloud-based open source technology provide opportunities to reduce costs and increase resiliency, while laying a foundation to adapt to the uncertain times that lie ahead and support consumers and businesses through them.

 

Banking

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?

 

Ralf Ohlhausen

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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Banking

BANKING’S SECOND WAVE OF TRANSFORMATION: INTEGRATING THE CLOUD-ENABLED FUTURE BANK

Keith Pearson, Head of Financial Services EMEA, ServiceNow

 

The last six months have seen significant changes to the financial services landscape, with operational resilience, economic recovery, cost reduction and an acceleration of digital transformation key themes emerging from the industry.

At the start of this crisis, much of the banking industry was in a different position to many businesses. The 2008 recession spurred a need for improvements and combined with the emergence of tech-savvy fintechs, the industry has seen a major shift as customer expectations have adapted. The pandemic has forced organisations to accelerate innovation already part-underway in the banking industry.

As banking experienced its first wave of transformation, institutions focussed on customer engagement, uniting physical and digital channels for an improved customer experience. Banks invested heavily in front office digital technology, creating visually appealing mobile apps, engaging online banking experiences and technologies for bankers to personalise customer engagement.

However, this digital engagement layer is not enough. Regulations like PSD2 reinforce the necessity to remain compliant, adding additional pressure to the digital transformation process which in turn has been accelerated by COVID-19. Banking is therefore in the midst of its second wave of transformation, where financial institutions are creating and seeking out critical infrastructure to better connect underlying middle and back office operations with the front office, and ultimately, with customers.

 

Keith Pearson

A disconnected operation

Many financial organisations are still struggling because they have yet to streamline, automate and connect the underlying processes that are enabling customer experiences. Which poses the question: why is connecting operations so difficult?

In most cases, multiple systems are still glued together by email and spreadsheets to track end-to-end status. Around 80% of a middle office employee’s time is spent gathering data from systems to make a decision, with only 20% spent actually analysing and making the decision.

The disconnect negatively impacts customers. For many, experiences like opening a bank account or getting a mortgage involve clunky, manual processes riddled with paperwork and delays. When front and back office employees lack the ability to seamlessly work together, customers can be asked for the same data multiple times, elevating frustration.

Customers have little patience and can be inclined to publicly broadcast problems when left unresolved. In a world of social media and online reviews, this could be detrimental to a company’s reputation.

With digitally native, non-traditional financial services players gaining market traction by offering a seamless customer experience, maintaining satisfaction is crucial for traditional banks to ensure that customers don’t switch. Banks must focus on making it easy for customers to do business with them by offering faster cycle times with more streamlined operations.

 

The fintech effect

Fintechs and challenger banks like Starling have shown what connected operations can do, having been built with digitised processes from day one. Modern consumers expect round-the-clock service from their bank. As financial institutions look to the future, developing a model of operational resilience that is capable of withstanding unforeseen issues, like power outages or cyberattacks, is critical to minimising service disruption. Having connected internal communications between front and back office staff means customers can be notified about any problems, how they can be fixed and when they might be resolved, as well as receiving continuous progress updates instantaneously.

Automation can go a step beyond this. Today, customers expect companies to not only do more and do it faster but to prevent problems arising in the first place. With connected operations and Customer Service Management (CSM), banks can proactively fix things before they happen and resolve issues fast, enabling frictionless customer service and replicating the ‘fintech effect’.

 

What about compliance?

In the European Union and the UK, PSD2 and the Open Banking initiative are giving more control to the customer over personal account data. Digital banks such as Fidor and lenders like Klarna are seeking to reinvent banking by offering customer-centric services. But the process of streamlining underlying operations is not simply about providing customers with the fintech-esque experience. More than 50% of a financial institution’s business processes are also impacted by regulation.

Financial services leaders are focussing on streamlining and taking cost out of business operations while also placing importance on resilience. Regulators are pushing banks to have a firmwide view of the risk to delivering their critical business services.

Banks must invest in digitising processes to intuitively embed risk and compliance policies, which are generally managed separately and often manually from the business process, leading to excessive compliance costs and risk of non-compliance. With the right workflow tools for monitoring and business continuity management, banks can minimise disruption by gaining access to real-time, actionable information about non-compliance and high risk areas, encompassing cybersecurity, data privacy and audit management.

Increasing openness of financial institutions to regtech solutions, or managing regulatory processes in the industry through technology, will prove key during this second wave of transformation. Banks will increasingly move away from people and spreadsheets and toward regulatory solutions that provide a real-time view of compliance and provide an end-to-end audit trail for Heads of Compliance, Chief Risk Officers and regulators.

With a unified data environment aided by technology, financial institutions can drive a culture of risk management and compliance to improve business decisions.

 

Riding the wave

The banking industry is still in the midst of its second transformation, and the pandemic hasn’t made it any easier. But riding this wave and successfully digitising processes to connect back and front office employees will present a profound difference to customer service.

The bank of the future will be frictionless, digital, cloud-enabled, and efficient; interwoven into the fabric of people’s lives. It will continue to be compliant and controlled but will deliver those outcomes differently, with risk management digitally embedded within its operations.

Demonstrating the operational resilience of its key services will not only drive customer confidence but will also provide a greater indicator of control to regulators and the market, adjusting overall risk ratings and freeing up capital reserves to drive more revenue and increase profitability.

The institutions that will thrive in this increasingly digital and connected world are the ones that are actively transforming themselves and the way they do business now, by taking learnings from fintechs, following regulations and paving the way in defining the future of financial services.

 

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