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2022: THE YEAR THAT BANKS FINALLY CHANGE FOR GOOD?

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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 banking 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. 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

Cloud technology in banking: Why adoption is on the rise

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By

Alpesh Tailor, Executive Director at digital transformation specialist GFT

 

The banking sector has never shied away from innovation, whether it is new products to improve customer savings habits or new ways of interacting with people and business, but embracing new technologies such as cloud has, until recently, been relatively slow. However, leading global financial institutions such as Goldman Sachs and Deutsche Bank have accelerated their adoption of cloud, which can provide insights for efficient technology transformation across the sector.

We conducted research to measure 21 medium-size and large banks’ sentiment and operations regarding cloud technology. Examining the relationship between cloud technology and banking professionals, our research provides an insight into the overall finance sector’s perception of cloud technology and how its application can improve banking procedures and efficiency.

 

Scale-up abilities

A significant trend showed that the way people use their finances and banking systems has changed, particularly when it comes to payments and transfers. Our research revealed that 86% of bankers have adopted cloud services to harness its virtually unlimited scalability, citing a definitive change in transaction behaviour as the main reason for moving to the cloud.

In the world of retail banking, buy-now-pay-later, open banking, and contactless payment systems have revolutionised the way people use their bank, making financial management easier and more efficient. However, despite these evolutions, high street banks are playing catch-up to the challenger banks who possess fewer legacy processes and, therefore, an easier migration to new technologies, such as the full utilisation of cloud and artificial intelligence.

The cloud provides a dependable, scalable, and flexible data system that allows traditional banks to modernise quickly and stay abreast of the innovations that ‘born-in-the-cloud’ challenger banks are bringing to the market. An increasingly popular way of doing this is by adopting a hybrid and multicloud approach.

Most organisations are considering diversifying their cloud technology, with 76% of bankers now agreeing with the importance of implementing multicloud systems in order to benefit from resilience and security improvements made by the main cloud providers. These cloud ‘hyperscalers’ also provide regular updates and continue to release exclusive new services and platforms as they continue to innovate.

 

Optimising costs

Our research indicates that cost optimisation is a primary reason that banks are looking toward the cloud for their future storage needs, with 81% of bankers confirming they have adopted cloud technology to save costs.

Installing and maintaining on-premise IT systems is lengthy and costly for financial institutions. When using the cloud, however, purchasing and installing hardware is no longer required as the cloud service provider hosts all the required infrastructure. The management of the hardware is included within this, reducing the overall cost of IT support further.

 

 Organisational inertia

Technological innovations are usually heralded for their ability to streamline operations, making them quicker and more secure. Our research illustrates that 62% of bankers believe organisational culture and inertia to be a key challenge within the sector. Besides being flexible for scalability and cost, adopting cloud technology can bolster organisational efficiency, since banks can spend fewer resources managing the relationship between trading volumes and payment infrastructure. Bankers acknowledge this opportunity, with 95% of organisations understanding that cloud technology can reduce time-to-market.

 

Overcoming misconceptions with cloud technology

Misconceptions usually exist around any emerging technology and our research found that this theme continues with cloud technology.

43% of the bankers we spoke to admitted that security concerns have impeded full cloud migration – a concern that has frequently been confirmed when speaking to financial services institutions. However, cloud providers invest heavily in the security of their cloud infrastructure which, as a result, makes it almost always safer than its on-premise, client-owned counterpart.

One aspect of adopting the cloud that continues to cause concern, is that which is commonly termed the ‘digital skills gap’. More than half of banks claim a lack of cloud-savvy employees internally has slowed down adoption. At GFT, we understand that this is a major issue for the adoption of cloud technology in all sectors, including banking, and have committed to training and encouraging young people to learn the required skills and enter the sector. We recently launched our Manchester Innovation Hub – a dedicated location to support the upskilling and growth of tech roles in the north.

Going forwards, cloud technology is the primary option for banks seeking to evolve and scale their business, whilst minimising risk, time and cost. Bankers recognise these benefits and the overall findings of our research suggest they will continue to grow their investment in cloud technology. Whilst evolving traditional legacy systems is very challenging, cloud technology continues to advance and we believe that over time it will become a powerful mainstay within the financial services industry.

 

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Banking

Bringing Automation to Banking

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By

Ron Benegbi, Founder & CEO, Uplinq Financial Technologies

 

Automation is everywhere you look these days; from supermarkets to warehouses to automobiles. This prominent trend shows no sign of abating anytime soon. However, some sectors remain behind others when it comes to adopting automated technologies. Banking is one such segment, but there’s now evidence to suggest that this could be about to change.

 

What do we mean by automation?

There are a lot of ways to define automation, but broadly the term applies to any technological application where human input is minimized through design. Over the years, automation has evolved from a basic level, which took simple tasks and automated them, all the way to advanced automation powered by Artificial Intelligence (AI). In general, automated solutions work to increase productivity and efficiency within businesses and often result in a reduction in costs associated with human capital.

 

Ron Benegbi

Why has the banking sector been slow to adopt automation?

The banking sector has been built on a number of long-standing, tried and tested processes and protocols, which have been continually fortified and refined over time. This is one explanation as to why the sector has been so slow in adopting new, automated methods within its operations. Additionally, many major financial institutions have spent decades building their own internal legacy computer systems, which are often incompatible with modern automated solutions.

When combined, these two issues have caused a significant lag in the banking sector with regards to the adoption of automated technologies. This lag has created a market opportunity that a number of fintech providers have been able to exploit in recent years. Offering a more responsive and tech-first user experience, many fintech providers are leveraging the power of automation to better meet the banking needs of their customers. However, there is still time for the banking sector to start bridging this gap.

 

Does automation have a place in the banking sector?

The opportunity for automation to play a role within banking can be transformational.

To achieve this, it’s important that legacy organizations begin to learn from their more tech-savvy, smaller counterparts. If used effectively, automated financial solutions can greatly improve the experience of banking customers, both on a personal and business level. So, what exactly does this change look like, and how far away are we from seeing it become a reality?

A good place to start is the small business credit lending process, where not much has changed since the 1980’s. Over that period, the world has greatly transformed, but the methods used to assess credit worthiness have remained somewhat static. For the most part, banks assess data related to businesses’ accounting and banking records and from credit scores. For many businesses, especially the newer and less established ones, this antiquated approach is having a detrimental effect. In fact, it’s often cited as a contributor to the huge funding gap between SMBs and their larger counterparts.

 

How can automation benefit the banking sector?

By adopting more automated technologies, lenders in the banking sector can begin to assess more comprehensive information when making credit decisions. Notably, new methods exist, which enable additional data sets to be evaluated, in order to build a more accurate financial depiction of a business’ overall position. This data can come from sources like external market attributes, economic indicators, demographic data and exogenous shocks.

By leveraging additional data sets through new methods of financial automation, banks are now in a position to respond more effectively to small businesses, including those in emerging and evolving markets where there is a lack of conventional sources of information.

With more ways to access funding, facilitated by alternative data and automated processes, small business owners can improve their operational efficiencies and accelerate their growth efforts. In doing so, legacy oriented financial institutions can now better equip themselves in protecting against new, nimbler tech-based disruptors.

 

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