The time has come for banks to decide if they will be leaders or followers in Virtual Currencies. To help them take the first steps in creating their own strategic approach, Mobey Forum’s Executive Director, Elina Mattila, explores some of the most important and influential developments that banks need to know about the industry today.
Outside of the main financial services realm, a multi-billion-dollar global virtual currencies market has rapidly evolved and continues to gather pace. But, whilst virtualcurrencies have been ‘on the list’ of banks for some years, to date most have taken a hands-off approach.
This is now changing. Some of the larger financial institutions are beginning to formalize their positions. And, thanks to a combination of factors, now is a good time for banks everywhere to follow suit and move the strategic evaluation of this market higher up the priority list.
So, what are the factors at play and what do banks need to know about virtual currencies to enable them to form a clear, long-term strategy?
The crypto-crossover with traditional banking
The world now has programmable money in the form of cryptocurrencies, which are being used globally to exchange value outside of the conventional banking system. Crypto makes up the vast majority of volume in the virtual currency market but only a small percentage of the global money supply. Nevertheless, the numbers are large enough for banks to take notice and investment continues at pace.
Digital currencies may know no borders, but banks have always had perimeter control – whether they have chosen to actively engage or not – as they essentially own the transfer of ‘virtual value’ back into the conventional ecosystem, and vice versa. Now, facilities exist that support crypto trading without a wallet, for example, Bitcoin ETFs (Exchange Traded Funds), bank accounts and futures. In other words, anyone can now trade cryptocurrencies easily through banks or new entrants.
Capitalizing on this, some larger traditional players are starting to establish exchange and custody infrastructure for their clients, a trend which could see major banks exerting far greater influence and control.
Regulation is coming
Of course, there is greater risk associated with trading virtual currencies compared to conventional currencies. New regulations like Anti-Money Laundering 5 (AML5), however, are increasing medium-term clarity. The fact that virtual currencies, including cryptocurrencies, have been brought within the scope of new regulation is creating a competitive advantage for banks. A closely regulated environment plays to their deep regulatory experience and will make it easier for them to forge partnerships with other cryptocurrency stakeholders.
At the same time, new regulations are making it easier for virtual currency companies and exchanges to get access to bank services. This has been considered by crypto stakeholders to be one of the sector’s biggest hurdles to overcome, so banks may now begin to benefit from increased demand from these firms.
Regulation is, therefore, effectively priming the virtual currencies ecosystem for banks to engage by increasing transparency, reducing some of the associated risk, and lowering the barriers to entry. All of this will make it easier for banks to establish a role and to design new payment products.
ICOs and investments
An ICO is an Initial Coin Offering, also called a ‘token sale’. It is a public offering of a new token or cryptocurrency where investors typically, but not always, pay with another cryptocurrency, such as Bitcoin or Ether. ICOs are channeling venture capital investment and associated revenues away from traditional banking systems to crypto exchanges. Their growth demonstrates that virtual currencies, together with the technologies that underpin them, can provide more than just an alternative means of exchange. If jurisdictional challenges can be overcome, these have the potential to disrupt other traditional financial services.
With regulation, however, banks may now begin to evaluate ICOs as a possible investment option for customers.
Gaps are being bridged
The development of decentralized exchanges has triggered a recent surge of activity around creation of stablecoins. Put simply, stablecoins are cryptocurrencies that are either pegged directly, backed by another asset or programmed to ascertain stability against another asset. What’s exciting is that they have the potential to bridge between traditional and crypto assets, and promote stability in an otherwise volatile cryptocurrency market.
Stablecoins represent a far more familiar and serviceable industry for traditional banks, offering them the ability to unlock revenue generation from the cryptocurrency ecosystem, as well as the potential to operate traditional services with new efficiencies.
This is an emerging trend that may have implications for banks in the coming years, and so they may see their roles start to evolve quickly.
There are some credible, greenfield opportunities for banks to explore as they define their role within the virtual currencies market. Whilst the exact future remains difficult to foresee, a combination of these factors, and others, means that banks and financial institutions can now start to make decisions about how to move forward.
To support banks in their strategy creation, Mobey Forum, has released a report entitled: ‘What Banks Need to Know About Virtual Currencies Right Now’. This report, created by the Virtual Currencies Expert Group, provides detailed considerations for banks and financial institutions who are looking to get involved in the virtual currencies market.
WHY DIGITAL TRANSFORMATION IS CRUCIAL FOR BANKS
David Murphy, Managing Partner, Financial Services EMEA & APAC at digital consultancy Publicis Sapient
Over the past five years, disruptor banks such as Monzo, Revolut and Starling Bank have upended the idea of a bank and have challenged the longstanding dominance of traditional players.
Through a digital-only approach, challenger banks have grown rapidly by exploiting poor customer service and lack of innovation in many parts of the industry. They have uprooted the need for bank branches by making the very idea of queueing in a physical location to transfer money or waiting on hold on the telephone for customer support seem unusual or eccentric.
As a result, the market share for current accounts of the big four legacy banks (Barclays, Royal Bank of Scotland/NatWest, HSBC and Lloyds) has lost ground, from 92% of all bank customers a decade ago to around 70% today. Research has also found that digital-only banks Monzo and Revolut are on track to triple their customer base to more than 35 million over the next 12 months.
In the face of new competition, many banks already realise that they can no longer rely on old practices and that they must digitally transform. However, transforming an embedded culture and organisational structure is easier said than done. It requires traditional banks to completely rethink their practices in order to meet shifting customer preferences and the emergence of new technologies such as banking apps.
At Publicis Sapient, we have outlined three clear models of digital business transformation in order to help banks compete against digital-only banks.
When transforming for the digital era, banks must gradually change mindset and infrastructure, working towards a more effective structure. This is fundamental to the future success of any cultural approach, as moving too fast can produce cultural backlashes that can hold back innovation and adoption of new ideas or practices.
Moving slowly is only one part of this approach. In order to ensure that company mindset truly evolves, banks must also revisit their ethos and structure, invest in communication and training, and create a clear and comprehensible digitalisation plan. As part of this, it’s crucial to eliminate silos and develop robust strategies for employees to get behind their new plan.
Fundamentally, the evolve approach requires banks creating a “movement” that facilitates change across the wider organisation. This requires banks demonstrating the value of digital transformation to employees across multiple offices and organisations.
The jump method centres on platform modernisation. In other words, this approach is less about incremental change, and more about ‘jumping’ in feet first. It involves creating a new shell onto which the existing business can migrate. In order for this method to be successful, a step-change in cost-to-income ratio and customer experience is crucial. By adopting new strategic platforms and ways of working, with continued but reducing connections to the existing business systems, this model requires a willingness to trial new approaches and, in turn, decommission the legacy systems.
Banks that follow the ‘attack’ approach try to recreate the dynamism of fintech startups within their organisation. This can mean creating either an internal innovation lab or going into a partnership with an external technology provider to create a separate, almost rival banking platform. Initiatives such as these allocate space to incubate ideas internally with considerable time and investment. They also overcome the cultural issues that big organisations come up against by building small teams in the company to develop new, competing platforms. However, they must be customer-oriented: new, self-contained enterprises within the business should focus on addressing a unique customer need rather than delivering a specific product.
When digitally transforming, legacy banks need to ensure that they implement a strategy that works best for their organisation. However, most banks when considering where to invest their change budgets should take a “portfolio approach” looking across their business lines to see where it is most effective to Evolve and look for opportunities to either Jump a business line such as Payments to a new platform or even create separate digital enterprise through an Attack approach. Essentially, banks must take a holistic view on changing both cultural attitudes and structural problems.
THE ‘LEGO-IFICATION’ OF BANKING IT AND THE RISE OF DIGITAL FINANCE ECOSYSTEMS: FOUR PRIORITIES FOR BANKS IN 2020
Danny Healy, financial technology evangelist, MuleSoft
The advent of the open banking era and continued emergence of fintech has forced customer experience up the banking agenda. According to McKinsey, of the 50 largest global banks, three in four have now pledged themselves to some form of customer experience transformation.
Understanding the importance of customer experience is one thing, being equipped to deliver a good one is another thing entirely. As banks look to technologies such as multi-cloud and AI to support more sophisticated customer experiences, their IT teams face an uphill struggle to integrate these initiatives with their existing systems. Across all industries, more than four in five (84 percent) of IT leaders claim these challenges are putting the brakes on their organisation’s digital efforts.
To get around this challenge in 2020, banks now need to focus on re-imagining their IT departments in order to unlock their digital capabilities and empower business-wide innovation. Here are four key areas that banking IT teams will need to focus on in the year ahead to make this a reality.
Repackaging IT into reusable building blocks
IT efficiency is crucial to the success of digital transformation initiatives; it’s one of the main reasons why small, nimble fintech companies have been able to steal a march on their more established rivals. As such, banking IT departments are under substantial pressure to deliver more, faster. However, IT can no longer keep up with the demands of the business; little over a third (36 percent) of IT professionals were actually able to deliver all projects asked of them last year.
To get around this growing IT delivery gap, we’ll see IT move away from trying to deliver all IT projects themselves in 2020. The IT team’s role will evolve to changing, operating and securing the bank’s core IT assets along with building and managing reusable APIs, exposing digital functionality that the rest of the business can consume to create the solutions they need. Essentially, IT begins to create new building blocks (APIs) that can empower both the technical and the broader lines of business users to innovate and build new digital banking solutions without compromising the core IT estate. Banks have already been compelled to create API strategies to open up collaboration opportunities with third parties; this year, we should expect to see them apply the same principles internally. Rather than being the bottleneck that prevents banks from launching innovative new products, IT can empower them to digitally transform and innovate faster than ever before, shifting from being an “all doing” to an “enabling” organisation.
A wise investment in AI
Banks are investing more in AI each year, as they look to use the technology to transform traditional banking processes. In principle, AI has the potential to revolutionise everything from credit decisions through to risk management and trading platforms, alongside the capability to offer highly personalised customer experiences. Yet for most banks AI hasn’t yet reached its full potential, as data is locked up in siloed systems and applications.
In 2020, we’ll see banks unlock their data using APIs, enabling them to uncover greater insights and deliver more business value. If AI is the ‘brain,’ APIs and integration are the ‘nervous system’ that help AI really create value in a complex, real-time context.
Harnessing the power of containerisation with APIs
Despite taking a more cautious approach to the cloud than other industries, many large banks are now using multiple clouds to support the delivery of both internal and external services. But multiple clouds are difficult to manage and being able to move workloads between them remains a significant challenge.
This year, we will see banks begin to use APIs in tandem with containers to navigate multi-cloud complexity. APIs will unlock the data and unique functionalities of applications residing in multiple cloud environments, while containers will neatly package up code and all its dependencies, so the application runs quickly and reliably from one computing environment to another. For example, HSBC has built a multi-cloud application network to meet growing customer demand. Turning to the cloud to accelerate IT delivery, HSBC has built and published thousands of APIs that were deployed across multiple environments using containers to unlock legacy systems and power cloud-native application development.
Open banking and the rise of the digital ecosystem
When it first appeared, open banking gave rise to all manner of opportunities for banks to collaborate with third parties on shared services. This year, we can expect to see banks take this further, and experiment with broader digital ecosystems where their services seamlessly fit in with those from other providers across diverse industries. This is the start of a fundamental shift from traditional financial services, where banks look to ‘own’ customer engagements entirely. In the new model, each of these provider will coordinate their financial services across the same ecosystem, without ever ‘owning’ the customer.
Banks will thereby look to extend their own capabilities and customer data to other businesses via APIs. For example, Mastercard has turned many of its core services into a platform of APIs, allowing it to create the Mastercard Travel Recommender, which allows travel agents and transportation providers to access customer spending patterns and to offer customers targeted recommendations for restaurants, attractions and activities. Expect to see other financial services companies take this approach in the year ahead, along with focusing on providing an excellent developer experience around their APIs to drive competitive advantage.
The year of connectivity
Data and digital transformation are both well-established priorities for the entire financial services industry. As we continue into the new decade, attention will increasingly shift towards the connectivity that unlocks the value of data and underpins the success of digital transformation initiatives.
APIs will play the key role in meeting the banks’ new connectivity requirements. By reimagining digital assets as a set of digital building blocks, bankscan enable every stakeholder within the business to contribute to digital projects, democratising the ability to innovate. By doing so, they can transform the IT department from a cost centre into a source of value that will truly help to create the bank of the future.
WHY DIGITAL TRANSFORMATION IS CRUCIAL FOR BANKS
David Murphy, Managing Partner, Financial Services EMEA & APAC at digital consultancy Publicis Sapient Over the past five years,...
REACHING THE NOT-SO DIGITAL NATIVES
By Garry Hamilton, Group Business Development Director, Equator It’s 2020. There’s no denying that banks and financial institutions have...
THE ‘LEGO-IFICATION’ OF BANKING IT AND THE RISE OF DIGITAL FINANCE ECOSYSTEMS: FOUR PRIORITIES FOR BANKS IN 2020
Danny Healy, financial technology evangelist, MuleSoft The advent of the open banking era and continued emergence of fintech has...
WHAT TO DO WITH YOUR LIFE SAVINGS, RETIREMENT AND INSURANCE POLICIES WHEN EMIGRATING
By Renier Hugo, Alexander Forbes Certified Financial Planner With South Africans increasingly opting to live abroad, a hot topic...
MOBEY FORUM: BANKS’ BIG OPPORTUNITY IN DIGITAL ID WON’T LAST FOREVER
New report offers strategic insights for banks following in-depth review of seven prominent digital ID schemes across Europe and North...
THE END OF YEAR TAX CHECKS THAT COULD SAVE YOU THOUSANDS
Charlie Reading, Founder and MD of Efficient Portfolio After HMRC’s tax return deadline at the end of January, it can be...
RISK VS REWARD: IS AI TAKING OVER?
Xavier Fernandes, Analytics Director at Metapraxis A study by Oxford University academics into “The Future of Employment” in 2013 prompted...
HALO TRUST USES ADAPTIVE INSIGHTS FOR STRATEGIC BUSINESS PLANNING
Cloud-based financial planning helps HALO Trust deliver greater benefit to communities affected by war Adaptive Insights, a Workday company,...
IS DATA PROTECTION AND PRIVACY RELEVANT ACROSS ALL STRATA IN INDIAN SOCIETY?
A Study by Pensaar Design With CGAP Pensaar Design has been working on a research study with CGAP to better...
THE RISE OF CHALLENGER BANKS AND HOW LEGACY BANKS ARE TRYING TO KEEP UP
Jean Van Vuuren, Regional VP for UK, Middle East and South Africa at Alfresco The finance world has been...
NEW STUDY: AI HELPS ORGANISATIONS GROW PROFITS 80 PERCENT FASTER
Global research highlights how organisations are capitalising on emerging technologies to enhance finance and operations for competitive advantage Organisations...
UK START-UPS MUST MAKE THE MOST OF A SMALL WINDOW TO CAPITALISE ON INVESTMENT OPPORTUNITIES, FOX WILLIAMS WARNS
Despite rising investment, Brexit and growing interest from tech giants could cut off start-ups’ opportunities in 2020 While a...
XPEDITION UPGRADES MORE THAN ONE MILLION OPENWORK CLIENTS TO THE DIGITAL AGE
Xpedition, leader in the implementation of cloud-based business applications, has deployed a new system which has digitally transformed the customer...
ORACLE AND MICROSOFT BRING ENTERPRISE CLOUD INTEROPERABILITY TO EUROPEAN CUSTOMERS
Today, Oracle is announcing the continued expansion of its cloud interoperability partnership with Microsoft with a new cloud interconnect location in Amsterdam....
THE EMOTIONAL AND FINANCIAL COST OF WORKING WITH OUTDATED TECHNOLOGY
Slow Tech Could Waste 24 Hours of Worktime a Year In this digital age, businesses are hugely reliant on technology...
HOW TECHNOLOGY IS FUTUREPROOFING STOCK MARKET TRADING
Tony Shaw, Executive Director, London Office and Head Sales UK & Ireland at the Swiss Stock Exchange Markets are shifting,...
REVEALED: THE TOP 10 COUNTRIES THAT ARE REDUCING THEIR RELIANCE ON OIL
Ben Lobel, Copywriter at DailyFX New tool charts global commodity trading over the last decade The UK has reduced its...
‘MOVE FAST BUT DON’T BREAK THINGS’ – WHY FINTECHS WILL COME TO LOVE REGULATION
Alex Johnson, Director of Portfolio Marketing, FICO The guiding ethos of fintech is move fast and break things. It’s...
OFFSHORE COMPANY FORMATION TACTICS FOR SMEs
James Turner, Director at company formation specialists, Turner Little Starting a business brings with it its own set of challenges,...
EMV® 3DS – PAVING THE WAY FOR SEAMLESS AUTHENTICATION
Jean Fang, Product Manager, FIME The growth of e-commerce, m-commerce and remote commerce transactions is showing no signs of...