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

HOW IDENTITY IS SECURELY UNLOCKING THE SME BANKING MARKET

By Mike Kiser, senior identity strategist at SailPoint

Have an identification card in your wallet? With a selfie and a few short minutes, you could have access to a business bank account.

Small and medium enterprises (SMEs) have long been the fuel that drives the global economy, representing around 90% of businesses and more than 50% of employment worldwide. Over the last few years, a range of financial services and platforms have arisen over the last few years to support the banking needs of these organisations. They are often digital natives and are innovating to meet the needs of their clientele.

This innovation provides great ease-of-use and rapid access to credit but also demands a careful consideration of their assumed security approach. The aforementioned scanning of an identity and a quick photo to establish a bank account demonstrates the rising importance of identity in both the consumer and enterprise arenas.

The blurring of the lines between personal and corporate identities (in this case, an individual acting on behalf of a small business) is still in its infancy. Combined with the ubiquity of mobile devices, individuals will tire of maintaining different accounts, different personas, different lives for each activity. Usability will demand that identity be reusable, portable, and secure.

This has massive implications for enterprises and the financial institutions that serve them if they seek to prevent cyber-attacks; thankfully, the same element that presents the security challenge also offers the solution: identity.

A New Vantagepoint

Just as individuals desire a single identity to unify their interaction with disparate parts of the world, organisations can use identity to grant them a single, holistic view of an individual (attributes, access, and behaviour) rather than seeing only a fragment at a time. This is particularly important for these new financial institutions—much of their technology stack is cloud-based, which often leads to splintered security approaches. An identity-based approach must be cloud-aware, and able to distil these complex environments into simple and easily governed infrastructure.

This collectivisation also allows security to use identities in the aggregate: to see what groups of similar individuals exist, what access these groups have, and what their usage of this access typically is. All of this contributes to the establishment of what normal is, whether it’s attributes, access, or behaviour. Once the “normal” is established, then the outliers—the potential threats—may be quickly triaged.

Adaptability: The New Imperative

The recent wave of change has demonstrated that financial institutions and organisations must be ready to adapt quickly to shifts in the environment. Portions of IT staff and services have been furloughed, and adjustments to new realities are essential. An identity approach that learns from the evolution of changes in the previously established areas of normality can grant enterprises the ability to see what is coming next and invest appropriately. Much like a view from an elevated position grants the ability to see beyond the normal horizon, basing a security strategy on identity makes it inherently adaptable.

Identity: Innovation and Security Intertwined

Identity, then, is a foundational consideration for financial institutions seeking to provide services for the perennially important small and medium enterprise sector. By eradicating barriers to entry that have historically kept financial organisations and enterprises apart, it is driving rapid adoption and a growing market for innovative banking. At the same time, it shows the path forward to securing those new services in a pre-emptive, adaptable way.

Now if you’ll pardon me, I must go open a bank account for my next start-up—from my mobile.

Banking

OPEN BANKING: ARE CONSUMERS KEEPING AN OPEN MIND?

Last September, the European Union’s regulatory requirement for banks to open up their payment accounts via application programming interfaces (APIs) came into effect. Since then, open banking has taken centre stage within European retail banking and payments. In this blog, Elina Mattila, Executive Director at Mobey Forum, shares insight into how emerging consumer attitudes may impact open banking services in the coming months.

It has been over six months since the revised Payment Services Directive (PSD2) came into full effect and with it, required banks to allow third party providers to access payment initiation and account information. While the regulation was designed to facilitate open banking, the market demand was uncertain. Would we, as consumers, choose to embrace the new services enabled by open banking? And if so, under which conditions?

To understand consumer attitudes, Mobey Forum and Aite Group partnered on a pan-European study to determine the appetite for open banking services amongst 1000 consumers in Finland, France, Germany, Spain, and the United Kingdom. The study, launched in November 2019, revealed many important consumer trends and attitudes, including key priorities and potential barriers for adoption.

Consumer appetite for change

The consumer benefits of open banking are largely perceived to be compelling, yet this counts for little if the providers of those services are not deemed trustworthy. This is an observation reflected in the study, which highlighted consumer confidence in service providers as critical to open banking adoption. People want clear visibility of who is managing their finances, and the overwhelming majority (88%) would prefer their primary source of open banking services to be their main bank, as opposed to other banks or third-party providers (TPPs).

Consumers also indicated high levels of trust in their current bank of choice, reflected by 77% preferring to use a financial product comparison service offered by their main bank. By enabling customers to compare the pricing and conditions of a range of financial products on the market, they feel more comfortable that banks have their best interests at heart. This is a welcome trend, and one which should be celebrated in the aftermath of the 2008 financial crisis. For the banking industry to have rebuilt trust levels in this way bodes well for consumer adoption of future innovations.

With a trusted provider, one third of consumers were then either ‘very interested’ or ‘extremely interested’ in integrating open banking services into their financial routine. This applied to specific use cases: account information services (32%), pay by bank (33%), purchase financing (25%), product comparison (35%) and identity check services (35%). Unsurprisingly, consumer willingness to adopt these services relies heavily on providers continuing to prove that they can be trustworthy stewards of personal data.

Consumer concerns

For those unwilling to adopt open banking, concerns largely focused on reservations around security and privacy. As open banking becomes more sophisticated, it will be interesting to analyse the nuances around how consumers engage with third parties. Established brands are perhaps more likely to be trusted by consumers than lesser-known online retailers. For this reason, consumers may hesitate to engage newer companies than brands they are already familiar with. In an industry as varied as finance, this creates additional intrigue in the ongoing battle for market share between the newer ‘challenger’ banks and the older, more established European banks.

Consumers might, however, be willing to deprioritise trust and, instead, favour convenience and usability. When questioned over their willingness to adopt a new payment method, for example, 91% of respondents indicated that they could be tempted to switch either by financial incentives or the promise of greater convenience.

The path forward

While open banking is still in the relatively early stages of development, it has made significant progress in a very short period of time. Not only is it allowing consumers to share financial data with authorised providers as they wish, but it is set to spark more competition and innovation within the market.

From a business perspective, open banking is expected to create lucrative new revenue streams, particularly for companies which are able to innovate quickly and react to consumer demand. It is prompting consumers to reconsider how they manage their finances and – most excitingly – it’s not even close to reaching its full potential. It should bring a whole new era of service partnerships between banks and TPPs, which will enable a new generation of innovative financial services.

For the industry to truly fulfil its potential, it is vital that stakeholders are able to explore new business models, innovations and changing customer expectations for open banking in a commercially neutral environment. Mobey Forum’s open banking expert group provides exactly this, and we look forward to supporting our members as they shape the future of digital financial services.

Where to find out more

The opportunity for open banking is explored in more detail in a report by Mobey Forum and Aite Group, entitled Open Banking: Open Minds? Consumer Appetites for New Banking Services. It provides banks and other financial services stakeholders with a market view on consumer appetites toward new open banking services and explores the possible roadblocks to consumer adoption. It is also discussed in a podcast featuring key representatives from Interac, Erste Group Bank and Strands Finance.