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BANKING ON AI TO SUPPORT SME RECOVERY

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Hani Hagras, Chief Science Officer, Temenos

 

COVID-19 has accelerated trends across the spectrum and nowhere has this been more evident than in banking. The shift towards digital banking, which was already in motion, has proven to be unstoppable with its capabilities being stretched to cater to increased and changing customer demands.

While much attention has focused on exciting developments in digital services for consumers, its businesses, particularly small businesses, where there is perhaps a greater opportunity for banks to shine.

It is often said that small businesses are the lifeblood of our economies and communities. At the start of 2020 there were 5.94 million small businesses in the UK alone, that’s 99.3% of the total business. Combined they account for 99.9% of the business population (6.0 million businesses), three fifths of the employment and around half of turnover in the UK private sector.

But these small business have been hit hard by the pandemic with many facing financial hardship and reliant on banks and relief programs to provide urgent support. We’ve seen many great examples of where banks have stepped up through distribution of emergency loans, loan repayment holidays and fee free lending. But there is more that needs to be done.

Small businesses require financial products and services that are tailored to their individual needs. This fact is reinforced by the recent formation of the Banking Competition Remedies Ltd, which will administer access to £775mn of funding for those that can demonstrate they will address their needs.

Properly servicing this market segment is mutually beneficial to banks too. Banking revenue from the SME sector is set to grow over c.7% p.a.  the next seven years making the small business sector one of the largest, lowest-risk profit pools in the entire industry.

Banks have typically serviced the SME market with a blend of retail and corporate solutions, but it is widely recognised that this no longer fits the evolving needs of SMEs. Instead, there is a need for SME banking services to move “beyond banking” to address the front-of-mind needs of SME owners. As a result, holistic solutions involving collaborations with other, digital service providers can work together to address these challenges.

At Temenos, we see this moment as a rare opportunity to fundamentally reimagine how banks serve the SME sector. By leveraging the technology that is now available, banks can implement innovative design centric and data driven products, and services that can transform the customer experience of SMEs in areas such as on-boarding, lending, cash flow management and trade finance. It is the digital experience and utilisation of data that will be at the heart of the next wave of SME banking services.

This is where Artificial Intelligence comes to the fore. It allows banks to leverage data from multiple sources to make faster, and more accurate decisions and provide individualised, frictionless customer experiences.

Explainable AI or “XAI” takes this one step further, by addressing one of the key issues for banks using AI applications; which is that they typically operate as ‘opaque boxes’ offering little if any discernible insight into how they reach their decisions. At Temenos we are the first to bring transparency and explainability of AI automated decision making to the banking industry.

Take lending as an example. By looking at a small business holistically across a lot of attributes, not just a credit score, banks can make better, more nuanced and fully explainable decisions that lead to 20% more positive credit decisions and fewer false positives. All this can be done in real-time using APIs to connect to third party data sources.

If a loan is refused, the bank will be able to use XAI to explain why the decision was made and offer alternative products or suggest ways to improve their chances of getting a loan approved in the future.

With the current increase in small business loans, including those underwritten by government to support small businesses, right now, the need to digitise and make smarter decisions to alleviate underwriting pressure and drive efficiency has never been more important.

Banks can also carve out new revenue streams through XAI. Customers who may have had a service negated can instead be rerouted towards others that are more suitable for them, or for which they would qualify.

We’re only just scratching the surface of what XAI can do, but as banks look at how they can leverage its capabilities it will become integral of product development. The transformative abilities of XAI could truly revolutionise banking for the SME sector.

 

Banking

Poor software testing puts banks at high risk of IT failures

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 Sune Engsig, VP Product at Leapwork

 

IT failures have plagued the banking industry for several years. From the TSB computer systems meltdown in 2018 costing the bank £330m and causing 80,000 customers to switch to a competitor, to Lloyds, Halifax and Bank of Scotland suffering an IT glitch on payday this year with customers’ faster payments and transfers being delayed.

Despite MPs calling for regulators to act, condemning the number of IT failures in the financial services sector as ‘unacceptable,’ the industry continues to let them happen leaving more and more irate customers locked out of their accounts. But with bank branches disappearing fast, customers are now far more reliant on online and mobile banking, so ensuring technology systems function correctly is paramount.  When you consider the complex compliance and regulatory setup of banks and other financial institutions, and the fact that they are dealing with incredibly sensitive customer information, those that do experience outages can face irreversible consequences such as loss of customer loyalty, severe reputational damage and regulatory fines.

A critical step in mitigating IT failures is having effective testing capabilities in place to find and fix any errors before new software is rolled out to market or new IT migrations take place. This lowers the risk of software failures and outages occurring after launch. Yet, 70% of software testers in banking and financial services think it’s acceptable to release software that hasn’t been properly tested, so long as it’s patched later, according to research by Leapwork. Furthermore, only 40% think software failures are a big risk to their company. But when the impact of an IT failure is so severe, why do banks still take risks?

 

Software testing challenges

Despite the swathes of software businesses now rely upon, 85% of software testing is still done manually. When it comes to the banking sector, as these institutions continue to develop new digitised products and services with increasingly sophisticated and customised software, it is clear that manual testing can no longer be the default. It is time-consuming, cannot scale amidst a skills crisis, and leaves companies open to human error.

There is a huge amount of pressure on IT teams to develop and release new software or manage new IT migrations. A critical step on this journey is having effective testing capabilities in place, like test automation, to find and fix any errors and bugs before new software is rolled out to market. This lowers the risk of outages and failures occurring after launch, which can negatively impact a company’s reputation and bottom line.

However, while some organisations recognise the value of automation tools, many continue to rely too heavily on code-dependant tools which, while an improvement on manual testing, are incredibly complicated to use and thus require specific skills and experience to operate. This means they too are impossible to scale, as they often depend upon developer skills.

 

Skills shortage forcing banks to take risks

Ensuring you undertake proper software testing seems like a no-brainer, but 40% of software goes to market without sufficient testing. The reason why; one in five (21%) of banking and financial services testers say ‘lack of available skilled developers.’ As companies transition from manual to automated testing, which typically requires coding skills, the major global developer skills shortage is creating bottlenecks, increasing costs and delaying project delivery times as development teams try to upskill manual testers, hire new talent or lean on existing developers.

As a result of the skills shortage, only 30% of testers in banking and financial services say they’re using some element of automation (i.e., an automation tool or a combination of manual and automation). In fact, 40% of CEOs across all industries think the fact that their company still relies on manual testing is the main reason why software isn’t tested properly, with 58% of testers in banking and financial services saying ‘underinvestment in test automation’ is the reason sufficient testing does not occur.

 

Testing issues not on CEOs’ agenda until too late

Across all sectors, 69% of CEOs think it’s acceptable to release software that hasn’t been properly tested, so long as it’s patched later, but 68% of testers claim their teams spend five to 10 days per year patching software. While nearly all testers express concern that insufficiently tested software is going to market, the overwhelming majority (75%) of CEOs say they’re confident their software is tested regularly. These numbers show a huge disconnect between CEOs and testers indicating that testing issues are falling under the radar and not being escalated until it’s too late.

 

Moving toward an automated future

Banking and financial services have been thought of as slow-moving and lacking innovation in the past. That isn’t the case anymore, as we’ve seen the industry take great strides towards digitalisation in recent years. However, with that digital transformation and integration of software comes outages, the consequences of which mean millions of pounds lost.

UK banks are at high risk of IT failures due to insufficient software testing, and a reliance on manual testing. On the current trajectory, more and more banks will struggle with failures and outages which could cost them a significant amount in financial and reputational damage. To minimise risk, they need to transition from manual to automated testing and explore testing options that don’t require coding skills so it’s easier to hire in talent or upskill existing team members, whether that be testers or everyday business users. Only then can they increase productivity and time to market while decreasing risk and costs.

 

 

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Banking

How banks can increase customer acquisition and user engagement with sustainability

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By Karolina Szweda, Head of Growth Marketing at Connect Earth

Young people are demanding more innovation from traditional financial institutions, and are primarily in favour of lower costs and more flexible digital customer experience promised by challenger banks and other FinTech providers. The future of banking is digital, and traditional financial institutions are well aware that they need to embrace innovation to remain competitive in the digitalised market.

In order to win over the younger generations, especially Millennials and Gen Z, banks need to invest in their digital transformation and deliver more customer-centric solutions. One of the affordable low-hanging fruits is sustainability.

As the public’s attention to the climate crisis grows, consumers and businesses are increasingly interested in reducing their negative impact on the planet. BCG reports that as much as 73% of consumers are altering spending habits because of climate change, and, according to PwC, 88% of consumers want brands to help them live more sustainably. As far as businesses are concerned, they are increasingly aware of the mandatory disclosure regulations set to take effect within the next years in major economies, and the need for carbon emissions reporting.

The problem is that the vast majority of consumers and businesses do not have access to actionable data on their carbon emissions. We believe that this is where banks can step in.

Increasing customer acquisition and retention

According to Deloitte, 71% of customers are more likely to choose a bank with a positive environmental impact. In addition, Global Risk Regulator reports that 93% of people expect sustainable financial services to become the norm, and according to Tink, 62% of consumers want their bank to show them an overview of their carbon footprint.

Banks are in a unique position to respond to this increasing demand by embedding climate data in their financial services offerings, which can help attract new customers and improve brand loyalty on a large scale.

With a carbon tracking API solution integrated into a digital banking app, financial institutions can be a catalyst for change and enable their customers to understand how they can reduce their emissions. By providing carbon emissions data for each financial transaction, banks can support and encourage their retail banking clients, corporate clients and/or retail investors to act more sustainably, while also increasing customer acquisition and digital engagement.

Most importantly, banks can also measure how their customers’ spending behaviours are changing as a result of being exposed to climate-related information, which they can use to segment and understand their customers better.

Increasing digital engagement

According to EY, 61% of consumers want to access more information that can help them make better sustainable choices. Banks are in a position to empower customers to do exactly that, whilst increasing user engagement with their digital banking apps.

Educating consumers on how to make more sustainable choices can be achieved through gamification, personalised recommendations and rewards to encourage behavioural change. The analysis of spending data along with tailored educational content can enable consumers to analyse, learn and improve their consumption habits and empower them to act on this knowledge.

Before accessing their carbon emissions insights, users can enter their custom information about their lifestyle habits, such as diet (meat-based vs. plant-based), daily means of transportation (car vs. bus) and more. Machine learning models improve as users input data over time, making carbon emissions estimates more granular. The model is trained to support thousands of different user types based on their profile and enables the bank to customise the experience and gamify the emissions reduction process for users.

How banks’ customers can benefit from accessing carbon emissions data

As far as climate action is concerned, having a real-life overview of one’s carbon footprint can be a true game changer for millions of consumers worldwide. Access to carbon data increases climate change awareness and empowers people to make a real difference.

Earlier this year, our team at Connect Earth confirmed the partnership with KBC Bank in Bulgaria to help them drive customer engagement and provide their retail banking clients with climate insights into their spending. We aimed to bolster KBC Bank’s corporate sustainability strategy, whilst meeting increasing demand from climate-conscious clients.

The financial sector has historically lacked the infrastructure to support sustainable finance in a tangible way. We are happy to report that the green transition has begun.

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