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2022: The year that banks finally change for good?

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Banks finally change for good

Toine van Beusekom, Strategy Director, Icon Solutions

 

The more things change, the more they stay the same. Looking back at 2021 – which promised to be the year that the industry realised the full potential of data-driven transactions, instant payments and cryptocurrencies – it is clear that although there is consensus on the direction of travel and the opportunities, progress continues to be hamstrung by familiar challenges.

Banks remain constrained by existing infrastructure and technology, demonstrating that the time for waiting has passed. Now is the time to prioritise the long-term revenue opportunities and build the capabilities needed to realise them safely and quickly.

As we look to 2022 and beyond, seven key trends mean that potential is starting to be translated into action.

 

  1. The rise of agency banking and Banking-as-a-Service (BaaS). Strategy Director – Toine van Beusekom

In 2022, we’ll see the agency

industry start to catch up with the embedded finance market, and the realisation that payments as a service requires a banking license. At Icon Solutions, we don’t believe that technology is the answer to every question. Hiring a Silicon Valley hotshot seldom solves the root cause of why change is so slow, as tactics without strategy is the noise before defeat.  To effectively transform, the right technology must be coupled with a profound understanding of the business process that translates into a pragmatic, navigable roadmap for change.

 

  1. Strategy Director, Icon Solutions

    Toine van Beusekom

    Banks are working out the actual cost of transactions. Sales Director – Liam Jeffs

Banks don’t know their actual cost per payment transaction. 2022 will be the year they find out. And when they do, it will be too high by at least a factor of two. This means scrutiny will shift from change cost to run cost. Consequently, banks will need to understand their payments estate and build a target and transition roadmap to immediately address these unsustainable cost challenges and deliver wider value. 

 

  1. The beginning of the end for core banking. Services Director – Simon Barrows

Any bank that’s been around for 10 years or more (i.e., most) invariably has some form of legacy core banking platform that is no longer fit for purpose. Yes, transitioning to something more suitable for today’s real-time, always-on world is a marathon not a sprint, but banks have been stood pondering on the start line for many years already.

Yet, banks are finally reacting to the starting gun and it’s clear that one size doesn’t fit all. Some banks are spinning up new world architectures, often leveraging cloud-based BaaS platforms and proving it in discrete parts of the business first. Others are de-composing their existing core banking estates, breaking the ‘elephant’ into bitesize chunks to either re-create in new, domain-focussed, micro-services built in-house, or to enable third party BaaS components into a heterogeneous, API-enabled, plug-and-play architecture.

For most banks, these are long, hard, yards of change. But this could be the year that core banking as we know it really begins to change, or good.

 

  1. Impending card-mageddon. Senior Payments Consultant – Louise Shorthouse

Request to Pay has quickly become one of the most talked about initiatives in the payments industry. From Icon’s recent research, it is clear it has the potential to reduce costs, provide real alternatives to traditional payment options and increase visibility and transparency. This promises to change the way we pay.

Take merchants, who have been trying unsuccessfully for years to circumvent card rails to lower costs. Many in the industry see Request to Pay as an opportunity for merchant’s to finally reduce their dependency on payment cards, as the combination of instant payments rails, open banking APIs and Request to Pay services converge to drive consumers towards cheaper account-to-account (A2A) based payment options at the point-of-sale.

Could this be the sign that card-mageddon is heading our way? For banks, aligning technology with a clear strategy will be critical for Request to Pay services to realise their huge potential.

 

  1. Time for some action on leveraging payments data. Senior Payments Consultant – Andrew Ducker

For UK and EU banks, 2022 will see the go-live of ISO 20022 upgrades for the Bank of England’s RTGS, the Eurosystem’s Target2 RTGS, and SWIFT’s platform for cross-border payments. While critically keeping focus on the infrastructure programmes, banks also now need to raise their sights to consider how they can achieve valuable business benefits by making use of the richer and more timely data, alongside open banking opportunities.

Inaction is not an option, with investment is urgently needed just to retain existing business and relevance, let alone generate new revenues or cost savings. The potential use cases for the data are many and varied, spanning improvements to a bank’s own operations and processing, as well as new or enhanced products and services for corporate, SME and consumer customers.

 

Banks will need to create prioritised plans for developing and launching data-enabled services, supported by an effective operating model, new skill sets, and secure availability of the clean data sources to feed the analytics.

 

  1. Money launderers actually getting caught. Anti-Financial Crime Centre of Excellence Lead – Tom Cleaton

The inconvenient truth is that banks are losing the war on financial crime. Criminals are exploiting increasingly sophisticated tactics, customer behaviours are more complex and demanding, regulatory scrutiny is increasing. With the threat of huge fines and reputational damage looming, banks must work smarter to keep up, let alone get ahead.

There are advancements that we expect to see making a significant difference in 2022 enabling banks to find more criminals, faster. For example, machine learning detection algorithms alongside rule-based controls across both fraud and AML have huge potential to cut down on noise and facilitate better identification of potentially suspicious activity. Sourcing and continued management of data will continue to be a key area of focus to drive a more joined-up approach across ‘FRAML’. Cloud deployment architecture and the ability to leverage cross functional data stores will be an enabler for better data management. Improving data quality and currency moving from a periodic batch model to an event-driven approach will support the detection of suspicious behaviour closer to real-time.

This will not only reduce losses and meet compliance obligations, but also better protect end customers and the wider public from the terrible effects of financial crime.

 

  1. Banks embracing low code approach as middle ground. Pre-Sales Consultant – Matt Piper

Banks have become increasingly frustrated with the inflexibility of change and the constrictions that heavy-code platforms put on them, stifling their ability to innovate and serve their customers properly. This is exacerbated by the war for engineering talent which has reached boiling point.

The advent of the ‘low-code’ approach offers an alternative, wherein deployables (such as payment flows, business functions, rules, you name it…!) can be defined and moulded in a highly intuitive, non-code language, often coupled with dynamic graphical representation, and where the code itself is automatically generated, reducing the reliance on engineer resources. This approach has been catalysed by the adoption of domain specific languages (low-code languages that pertain to a specific domain, such as payments).

What does this mean in practice? Well, change is simplified and accelerated. Banks are less dependent on engineering resource. There is increased alignment and transparency between business and IT in what is being built. And banks have the right tools at their disposal as well as the time to focus on differentiating their offering.

 

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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Banking

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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