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2021: THE NEW-NORMAL LIFECYCLE FOR BANKING

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Laura Crozier, Global Director of Industry Solutions, Financial Services at Software AG

 

It would be impossible to talk about predictions for the banking industry in 2021 without mentioning the cataclysmic impact that 2020 and the pandemic has had on people, businesses and countries.

Unlike with the global financial crisis, banks have been able to step up as “good guys” this time around, rebuilding their reputations as well as accelerating digital transformation. One of the main outcomes is increasingly smart, efficient online payments.

In 2020, the banking industry innovated like never before. This is the new normal. Overall, customers and society will be the beneficiaries from the changing industry. Here are my predictions:

 

Reputations are reborn

Banks across the globe pulled out the stops to integrate and adapt systems and processes to help customers during the pandemic. They offered accommodations in loans, assisted governments with the distribution of financial relief, and supported consumers by upping contactless spending limits and virtual deposits.

In 2021, banks will risk losing that rosy glow as economic circumstances drive them to deal with non-performing loans, mortgage foreclosures, layoffs etc. But, beyond their role in society as providers of capital and liquidity, banks will invest to sustain their reputations as trusted and good corporate citizens and use their power to persuade their customers and providers to adopt higher environmental and ethical standards. This will be in the areas of bank carbon-neutrality, sustainable financing, serving the unbanked, diversity and gender equality (as the number of women running a major global bank will double from one (Jane Fraser at Citi) to two). It’s a start.

 

Coming of age in the way of working

Back in Q1, when bank employees cranked up their laptops on their dining room tables, banks that were strategically undertaking business transformation accelerated their efforts. Those that were tactical, or on the fence, now understand with painful clarity that this work must be undertaken strategically.

Cracks in process and the way of working and their resulting risks can be crippling. Especially from a back-office perspective, it is not enough to rely on “organisational memory” and collegial proximity for work to get done right. Advanced banks pushed the boundaries of remote work, and the proof of concept was successful. So, they’re doubling down on developing digital twins and moving to the cloud. They’re adopting the hybrid office/WFH approach to reduce health risks and reduce cost permanently. The watercooler will never be the same.

 

The death of cash

Ok, maybe the rumours of the death of cash are a bit exaggerated since there will always be the need for cash (and, to some extent checks; the USA, for example, cannot seem to live without them). But the pandemic has permanently changed the way that consumers and small businesses bank, and the demotion of cash has been accelerated by a decade by the pandemic. For example, the Norwegian central bank said that cash payments in that country have plummeted to just 4% of transactions since March.

Implications? It will be critical to continue evolving payments to be smart, safe and flexible to compete in new world, in both retail and commercial banking. Also, the permanent change in the mix of channels will see banks’ face-to-face engagement with customers fade. Branches aren’t going to go away entirely, but they will be reserved for high value activities – by appointment only. To compensate, the personal touch has to be delivered digitally and intelligently.

The role of the bank as a “financial wellness partner” is being born. Banks will use customers’ data, not just to personalise and differentiate banking experiences, but to make recommendations for products and services beyond traditional banking from across their ecosystem to serve their customers well. Just as customers own their cash (physical or digital), in the future they will demand that they own their data (and can share it with whom they choose). Then retail and commercial clients will share their data in return for value.

 

Banking

2022 ESG Investment Trends

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Jay Mukhey, Senior Director, ESG at Finastra

 

Environmental, Social and Governance (ESG) themes have been front and center throughout the pandemic. While the framework has been surging in popularity for several years, COVID-19 served as a period of reflection causing many companies, investors and other individuals to take these factors seriously. It’s something that we can no longer afford to ignore.

Jay Mukhey

We are witnessing drought, adverse weather patterns, hotter climates, and wildfires with more regularity, raising the profile of the climate crisis. Efforts were renewed at COP26 in Glasgow last November to help address the challenge, with the signing of the Glasgow Climate Pact and agreement of the Paris Rulebook. As a result, we are now seeing record net new inflows into ESG investing and impact.

 

Evaluating ESG criteria

Long gone are the days when ESG issues were at the periphery of a company’s operations. In just a few short years, ESG criteria have become a key metric for investors to evaluate businesses they are considering investing in.

Investor money has poured into funds that consider environmental, social and governance issues. Data from the US SIF Forum for Sustainable and Responsible Investment shows that ESG funds under management have now reached more than $16.6 trillion. It’s not just institutional investors who are embracing ESG, with Bloomberg Intelligence predicting that savers across the world will amass £30.2 trillion in ESG funds by the end of the year.

Due to the multitude of divergent factors that contribute to a company’s success on ESG, it can be tricky to pin down exactly what criteria to measure. Depending on the industry a company operates within, environmental criteria could include everything from energy usage, the disposal of waste and even the treatment of animals.

Social criteria are primarily related to how a company conducts itself in business relationships and with stakeholders. For example, does it treat suppliers fairly? Is the local community considered when the business makes decisions that would impact them? Do they have a statement and policy around modern slavery?

While governance criteria have traditionally been an afterthought, this may be changing. Everything from executive pay to shareholder rights and internal controls are relevant to investors within these criteria.

 

Tracking ESG for competitive advantage

Many experts within the financial services industry point to the power of ESG as a major competitive advantage, if used correctly. It has been noted that increasingly corporations, from big Fortune 500 companies down to small scale-ups, will communicate on their sustainability metrics to grow their business and to attract talent. However, it’s no longer enough to just pay lip service to ESG issues, with abstract commitments increasingly being seen as insufficient. Companies must now quickly progress to concrete objectives that can be measured and tracked.

A wide range of data providers now offer detailed information and tools that can measure ESG performance and effectiveness. Yet major challenges remain around bringing together what is often extremely fragmented data and transforming it into actionable insights.

 

Focus areas for 2022

The ESG criteria that investors measure is by no means stagnant. Complex societal challenges regularly emerge that require the attention of companies. Contributors recognize several topics that demand a sophisticated approach, including the COVID pandemic, diversity challenges and powerful social movements.

Companies operating within the financial services sector face several specific challenges related to ESG, with contributors believing that fintech will also continue to play a central role in finding answers to them.
For example, industry experts expect customers to be more demanding of firms in SME lending when it comes to understanding exactly what impact they are having on the climate. For many financial services firms, 2022 will be the year that they will try to reduce the time it takes to bring ESG products and services to market, such as green loans and mortgages, as well as checking accounts with sustainability and carbon tracking capabilities.

When selecting a service provider, customers are increasingly interested in the ESG credentials of their bank or financial institution. Research from PwC finds that 80% of consumers are more likely to buy from a company that stands up for environmental and governance issues. Consumers are one of the main drivers of ESG and many are putting their money where their mouth is. It’s a trend that’s not going away; financial institutions need to start implementing their strategy for ESG now.

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Opportunities for UK Challenger Banks to address AML Compliance

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Author: Gabriel Hopkins, Chief Product Officer, Ripjar

 

UK challenger banks have revolutionised the banking sector with innovative products and services,  offering greater flexibility to consumers that their legacy competitors have been unable to match. Research tells us that the value of the neo and challenger bank market will continue to grow rapidly, reaching an estimated $471 billion globally by 2027. However, the opportunities that challenger banks bring also provide new regulatory challenges, with the potential for disruptive services to  increase the risk of money laundering and other financial crimes.

Challenger Bank AML Vulnerabilities

The Financial Conduct Authority (FCA) last month raised concerns over the adequacy of challenger bank tactics in meeting regulatory requirements. The review reveals that some are falling short of effectively implementing important anti-money laundering (AML) procedures and controls, following a substantial increase in suspicious activity reports reported in 2021. The findings come as the regulator attempts to bolster its approach against money laundering, which the National Crime Agency estimates costs the UK £100bn annually.

The FCA review investigated six unnamed challenger banks that had recently entered the financial market and which together had a customer base of over 8 million customers. While the FCA commended the challenger banks’ “innovative use of technology” accelerating average customer identification and verification, it, also raised serious areas of concern stating: “there cannot be a trade-off between quick and easy account opening and robust financial crime controls.” These concerns broadly cover the following four points:

  • Failures to carry out adequate checks on customer income and occupation
  • Failures to assess customers’ risks, making it difficult to carry out due diligence measures for high risk AML alerts
  • A lack of sufficient detail in customer risk assessments
  • Unproductive management of AML alerts, hindering quick responses

The above findings as described above indicate there is a critical need for challenger banks to pair their innovative fintech capabilities with a safety-minded approach to their AML processes.

The Importance Of Customer Data

AML compliance, and the due diligence and screening processes it encompasses, may be especially complex for challenger banks since their propositions rely on swiftness, simplicity, functionality and flexibility.

The FCA’s review tells us that challenger banks’ AML issues are caused by insufficient quality of customer data with which to base precise risk-profiles and make key compliance conclusions. When challenger banks have difficulty in meeting their data collection and risk management needs, they are forced to compromise the benefits of their products and services by spending resources on AML compliance – or risking regulatory consequences.

Challenger Bank AML Solutions

Many challenger banks are able to meet their AML obligations by rolling out tailored risk management solutions, however, they may become unstuck balancing their compliance responsibilities while also delivering innovation. To keep up with the ever evolving threat landscape, the AML regulatory environment is engaged in a game of cat and mouse, often implementing new legislation to remain on the heels of new criminal tactics and methodologies.

However, rather than depending on a potentially-exposed and unproven bespoke solutions, challenger banks can instead turn to the expertise of established, industry-trusted platforms with dedicated CDD and EDD resources and multi-faceted AML and KYC screening tools.

Automated AML compliance solutions help challenger banks grapple with threats, incorporating customer data from sources across the world quickly and efficiently, and adjust in real time as the risk landscape evolves. Trusted AML solutions may include multiple language screening capabilities, helping challenger banks better manage CDD and EDD for customers around the world without producing unmanageable volumes of false positive alerts.

Financial crime is on the rise. Addressing the common weaknesses in key areas of challenger banks’ financial crime systems should be seen as a priority. Evaluating their approach to identifying and assessing the financial crime risks they are exposed to is a first step in the right direction. Extra attention should be paid to risk assessment processes to avoid running afoul of the Money Laundering Regulations. It would be especially prudent if this is carried out as the FCA has signalled they will be seeking updates from challenger banks regarding their financial crime frameworks.

 

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