Eelco-Jan Boonstra, Managing Director EMEA at Mambu
Time is running out for traditional banks. Consumer behaviour is changing and the rising tide of digital challengers is serving and accelerating that change.
Demand is growing for utility-led banking services, flexible payment options and mobile-first banking: features that digital banks have made the core of their business, but which incumbent players are still struggling to provide.
If traditional banks want to drive post-pandemic growth and stop their customers jumping ship, then they need to act fast – and launch a speedboat.
The digital opportunity
Digital banks have swiftly changed the financial landscape. The Inside Financial Services report shows more than 250 challenger banks currently operate worldwide, with the likes of Monzo, N26 and Revolut joining Europe’s elite group of fintech unicorns.
According to Finder.com, over a quarter of UK adults have at least one account with a digital bank as of January, with this number expected to reach 23 million in just five years.
Convenience is the key driver of this growth, although better rates, real-time spending notifications and low transaction fees abroad are also attracting consumers – especially younger audiences. In the UK, almost half (46%) of Gen Z-ers, a demographic with growing purchasing power, have a digital bank account.
Of course, the pandemic has played a key role in setting these new tech expectations. With physical banks closed for safety, shopping moving online and a climate of economic instability leading to a desire for more control over personal finances, the use of digital banking services has grown exponentially.
According to Mastercard’s Global State of Pay report, over half (53%) of the world’s population now use banking apps more than before the pandemic and 64% say they will use cash less following COVID-19.
This increased demand for digital may be challengers’ gain, but it risks being incumbent banks’ loss. A Mambu report suggests that, over five years, a bank with a customer base of 5 million could see nearly one in three customers defect to a digital bank.
It’s clear incumbent players need to adapt to retain accounts. But digital transformation programmes can take years and, by the time they’re finished, a huge chunk of their customer base could have walked out the door.
The speedboat advantage
The solution? Launch a speedboat.
This doesn’t mean greater maritime investment: it involves incumbent banks creating a digital banking spinoff that operates like a fintech and mimics their digital challengers. Established banks are like cruise ships: large, expensive to operate and incredibly process-driven. This makes them slow to manoeuver and adapt to changing consumer needs.
But traditional banks can create their own cost-effective ‘speedboats’ which can be launched within months, remain unrestricted by geography and penetrate new markets. In doing so, speedboats enable incumbents to address current market demand, while retaining their core customer base for steady revenue.
There are many advantages to this approach, and speed to market is one of the biggest. A SaaS spinoff, powered by open APIs and an ecosystem of fintech partners, can be launched within just 8 to 10 months of inception, and then start competing directly with challenger rivals.
Their independent nature means they aren’t snarled up by the bureaucracy of traditional banks and don’t have to spend time wrestling with outdated legacy systems. This minimises the risk of customer attrition, while banks build the new solutions that consumers want to see.
Launching a speedboat also helps banks manage the risk of digital transformation. Overhauling and updating IT systems inevitably leads to IT down-time and in today’s digital, always-on world, any lapse in service does great damage to a business’ reputation – and bottom line.
Take TSB in early 2018, when their brand new IT system went down and locked out 1.9 million customers, costing the bank £360 million (or €420 million) in fines and customer compensation. TSB’s reputation took a critical hit, with the bank subsequently losing 80,000 customers.
Speedboats sidestep the risk of outages by simplifying IT so it’s easy to update. By running SaaS for all functions and managing discrete functions separately, speedboats can quickly and seamlessly update their core infrastructure. Likewise, any issues that arise can be easily contained and the source instantly identified.
Running the technology on a modern, composable architecture allows for easy testing, greater flexibility and improved development speeds, so banks can give customers cutting-edge tools without cutting out service.
Finally, a digital banking spinoff allows traditional banks to move flexibly and embrace innovation. Speedboats give banks the freedom to pioneer new technology and push the boundaries of banking.
By prioritising APIs, cloud technologies and mobile-first thinking, speedboats can deliver results quickly for incumbent players and prove that digital challengers don’t have a monopoly on the new and exciting.
Speedboats don’t just sound great in theory, they work in practice. Mambu helped Dutch banking giant ABN AMRO launch New10, the firm’s digital lending spinoff, to keep pace with competitors and empower their SME customers with fast, transparent financial tools.
ABN AMRO used best-of-service cloud technologies to build their speedboat and create a spinoff that supported a transparent, 15-minute credit decision, fast onboarding and a seamless user experience – allowing funds to be made available within two working days.
Within six months of launching, New10 signed up more than 2,000 accounts, with over 65% of customers new to ABN AMRO, and increased its Net Promoter Score to 60+.
Turning the tide
In this digital-driven, post-pandemic world, consumers favour banks that make their lives easier, provide a smooth customer experience and offer them the best tools to manage their finances.
So far, digital challengers have been winning this battle for the customer, as traditional banks struggle to evolve to changing consumer needs and the growing threat to their business. But incumbent players don’t have to get left behind.
Launching digital banking ‘speedboats’ gives established financial institutions the opportunity to quickly embrace innovation, dynamically explore new markets and unlock additional revenue streams. The financial tide may be changing but traditional banks can still change their course.
COMBINED RISE OF M&A AND CYBER RISK CREATES STORMY SEAS FOR INVESTORS
UK organisations carrying out merger and acquisition (M&A) activities must improve pre-acquisition due diligence of software vulnerabilities
By Philippe Thomas, CEO at Vaultinum
At present, the UK is seeing a sharp rise in M&As. Indeed, in the first quarter of 2021, the UK saw a £1.1 billion increase in domestic M&As when compared with the same period in 2020 (Office for National Statistics). This trend is set to continue, with 57% of UK executives reporting that their companies intend to pursue M&As in the next 12 months, and 65% of these respondents focusing on cross-border acquisitions (EY). As such, UK businesses have given a clear vote of confidence in moving forward with M&As, making them a focal point for accelerated organisational growth and development.
Traditionally, organisations and investors have conducted due diligence covering financial, legal, operations, and human resources. Comprehensive software due diligence is not always carried out systematically, which has significant adverse consequences given that a company’s technology is increasingly its primary asset. As non-tech organisations use more and more tech for their day-to-day operations, and as the number of tech-forward companies grow, new issues have arisen which are overlooked in traditional due diligence.
A crucial time for tech security
Data breaches during M&As have become infamous during the last few years, with more than 1 in 3 executives surveyed by IBM reporting data breaches associated with M&A activity during the period of integration. This figure could be set to increase, as statistics highlight that cyber-attacks are rising sharply in the UK. According to Sophos data, 51% of UK organisations were affected by ransomware attacks in 2020, with criminals successfully encrypting data in 73% of these attacks. Cybercriminals are increasingly targeting organisations in ransomware attacks with the eventual goal of large-scale business interruption. Carrying out comprehensive due diligence that assesses both software and source code during the pre-acquisition phase enables the early identification of data breach risks, providing the acquirer with a full view of the financial and legal consequences at this stage of negotiations.
Acquiring or merging with a secondary company that has hidden data vulnerabilities can impact the primary company’s business operations, investor relations and reputation. The most well-publicised example of this occurred in 2017, when Verizon revealed a pre-merger data breach at Yahoo!. During negotiations of the merger, it was revealed that Yahoo! had experienced a data breach during which a hacker stole the personal data of at least 500 million users, followed by a second data breach in which 1 billion accounts were compromised and users’ personal information and login credentials stolen. In this instance, Verizon had done their due diligence, and were able to make an informed decision about going ahead with the deal. If Verizon had not carried out any tech due diligence, and this data breach had not been revealed during the negotiations, Verizon could have overpaid for Yahoo!, as well as experiencing long-term legal and reputational damage. Instead, both companies understood the liabilities before entering into an agreement.
Other companies have not been so lucky. In 2016, Marriott International purchased Starwood Hotels & Resorts for $13.3 billion. Two years following the merger, Marriot revealed a huge data breach in Starwood’s reservation system that occurred pre-merger in 2014, in which 400 million guest records were exposed through a security flaw. This resulted in a $123 million GDPR fine by Britain’s Information Commissioner’s Office, as well as reputational damage for both Marriott and Starwood. This is an example of an instance in which insufficient software due diligence prior to the merger has catastrophic consequences for both the acquirer and the target company later down the line.
Software due diligence highlights risks and weaknesses in digital assets. This can bring to light data security issues, as well as other vulnerabilities such as intellectual property risks linked to the use of open-source software (OSS) licences and maintainability complications. All of these risks can affect the overall quality of the asset, and thus its value for the acquirer and so uncovering them through comprehensive due diligence at the pre-acquisition stage is essential.
Understanding open-source software (OSS)
For any M&A activity in which the target company’s software is a significant asset of the deal, which is now the case in most start-ups which have AI or algorithms at the heart of their offer, the issues do not end with hidden data vulnerabilities. Today, software developers often rely on public code repositories available on websites like GitHub or Stack Exchange, as OSS has a number of significant benefits, most notably that it appears to be free at the point of use. However, many OSS licences are often offered subject to conditional restrictions. When using OSS to create derivative products or linking source code to OSS, the integrated product becomes subject to these conditional restrictions, which can include making all or part of the code public or paying a fee for its use. In other words, a company may not have full rights to their product or software.
This is problematic for any tech-enabled company in general, but can be uniquely catastrophic during M&As. If acquirers carry out comprehensive due diligence in the pre-acquisition phase and discover any such OSS embedded in the target’s software, they may walk away from the deal entirely, or at the very least adjust its value and/or terms. If acquirers do not implement comprehensive due diligence, they become liable for the target’s previous use of OSS, and any terms relating to its licencing.
Algorithms add robustness to tech audits
Carrying out comprehensive software due diligence is essential during the pre-acquisition phase, to avoid the aforementioned issues associated with data breaches and software licencing. Today’s advances in AI technology enable these audits to be thorough, analysing every line of code to identify possible cyber vulnerabilities, intellectual property issues (usually linked with the use of open-source code) and maintainability risks. These methods enrich traditional tech due diligence, by making audits more objective and less susceptible to human error.
Ultimately, this approach protects the acquirer’s reputation, ensures business continuity, and helps avoid possible legal liability for the target’s previous vulnerabilities.
THE GROWTH OF DIGITAL BANKING: WHY COLLABORATING WITH FINTECHS IS CRUCIAL TO ADAPT TO CUSTOMER DEMANDS IN LIGHT OF THE PANDEMIC
The growing customer demand for a seamless digital banking experience looks set to transform how the entire banking industry operates. Traditional banks have been left playing catch up with the emergence of new fintech players and challenger banks. The demand for slick digitally finance solutions is led by the digital native generations, the millennials and Gen Z. However, the coronavirus pandemic accelerated the uptake of online shopping and remote working for whole swathes of the population. Even the older generations have been left wondering why accessing banking services online remains so cumbersome.
Consumers’ growing desire to access financial services through digital channels has already led to a surge in various new banking technologies which are reconceptualising the banking industry. Consumers have rapidly moved to adopt payment solutions such as those offered by apps like Revolut.
Retail banks continue to launch platforms in the Banking as a Service (BaaS) space, in an effort to remain competitive. An example of this in the UK is how NeoBank (Starling) used to only offer business to consumer (B2C) retail banking services. However, once it launched its BaaS platform, Starling was able to rapidly diversify to include consumer services.
New technologies like blockchain and artificial intelligence (AI) continue to evolve, and look set to have an enormous impact on banking over the next three to five years. The type of cryptocurrencies that we have seen to date look set to be far more tightly regulated, given significant governmental concerns about their potential for misuse in cybercrime and money laundering.
In the blockchain space, the transformative development which will accelerate the rise of digital finance is the advent of central bank-backed digital currencies. The US Treasury has described the creation of a digital dollar as a high priority project. China is already trialling its digital Yuan. Meanwhile, the ECB is actively pursuing its plans to launch a digital Euro. The launch of stable, highly secure digital currencies, underpinned by major central banks, looks set to ensure that digital finance will permeate every area of our lives in the not too distant future.
How we use digital finance is also set to change radically. We are used to seeing new technology emerge from Silicon Valley. However, an analysis by KPMG Australia suggests that a new breed of apps which prefigures the future of digital finance has already emerged in the East. The report notes that “super apps” are “already encroaching on traditional financial services territory”.
Super apps are defined as apps which “essentially serve as a single portal to a wide range of virtual products and services. The most sophisticated apps – like WeChat and Alipay in China – bundle together online messaging (similar to WhatsApp), social media (similar to Facebook), marketplaces (like eBay) and services (like Uber). One app, one sign-in, one user experience – for virtually any product or service a customer may want or need.
“Due in large part to their versatility, super apps have quickly become ingrained into users’ daily lives. It is not unusual for a WeChat user in China to set up a date with a friend via instant messaging, make dinner reservations, book movie tickets, order a taxi and pay for every transaction along the way, all using one single app.”
We are already beginning to see trends in this direction in the Western world, with Facebook launching a marketplace and even a dating service within its social network. Facebook also attempted to launch its own digital currency, Libra, but this move stalled when it ran into significant governmental opposition. However, Facebook hasn’t given up, and it is determinedly pursuing the launch of a revamped stablecoin, Diem, which has been redesigned to address regulatory concerns.
A group of Citi analysts recently wrote an interesting research paper, which predicts that “the story of digital money in the 2020s will be the growth of tokenised money”. Noting that both Big Tech and Central Banks “are building new payment formats and rails,” they say that “while stablecoins such as Diem await regulatory approval, they could benefit from the huge network effects of their Big Tech sponsors. In fact, Diem could be an effective tokenised payment format inside the Facebook universe.” The paper predicts that “Stablecoins, such as Diem, could benefit from the huge network effects of their Big Tech sponsors”. With 3.3 billion monthly users, Facebook certainly has remarkable global reach.
The idea of an integrated tech platform which enables people to interact and purchase goods and services – including financial services – is now being pursued by many major players.
Amazon has long been rumoured to be planning to launch its own bank. Yet, research by CB Insights concludes that, “from payments and lending to insurance and checking accounts, Amazon is attacking financial services from every angle without even applying to be a conventional bank.” This is perhaps not surprising. After all, tech companies rarely replicate existing models. They usually find disruptive new ways to achieve the outcomes that consumers want. Even the messaging service, WhatsApp, has recently moved into financial services with the launch of WhatsApp Pay.
As money becomes digitised and tokenised and ever more areas of our lives move online, the distinction between an online marketplace, a social network and a financial services provider will continue to blur. How traditional financial services companies react to these developments remains to be seen. Some may partner with tech companies in creating new services. For example, Visa and Mastercard were involved with Facebook’s Libra stablecoin project. Visa also responded to the popularity of peer to peer payment services such as Revolut by launching Visa Direct, which enables users to make payments directly to another account in 30 minutes. Most major banks now support Apple Pay, which enables users to authorise payment by scanning their face or thumb.
Banks can also collaborate with tech companies in terms of data sharing, in order to better understand what their customers want. A company like Amazon knows what books people like, what music they listen to and what they purchase. By combining such data with wider financial data, remarkably predictive Big Data models could be created. Some banks might increasingly pursue opportunities to monetise data, while others might make privacy their unique selling point.
The banking sector fundamentally deals with money. Yet, the very nature of money is set to change, as it becomes digitised. Banks are no longer merely competing with each other, but they are both competing and collaborating with tech companies and social networks. Looking ahead, the only certainty we have is that we are in for a period of remarkable change.
FINTECH COMPANY PAYEN CHOOSES AQILLA FOR ITS LIMITLESS SCALABILITY AND SUPERIOR MULTI-CURRENCY FEATURES
Payen is a fast-growing FinTech company that provides gateway Payment and FX services to online merchants. Having launched in 2010,...
THE ACCELERATION TOWARDS A MOBILE FIRST ECONOMY
By Brad Hyett, CEO at phos Over the last year, we have seen a big shift towards contactless payments....
NEW RESEARCH REVEALS KEY ROLE OF KYC COMPLIANCE IN DRIVING CUSTOMER LOYALTY, ADVOCACY AND NEW BUSINESS
The impact of financial crime for institutions goes beyond crippling fines A piece of original research conducted by RegTech...
HOW MERCHANTS CAN IMPROVE THE ONLINE PAYMENTS EXPERIENCE
By Alan Irwin, Senior Director of Product at Global Payments UK The dramatic increase in online shopping over the...
JUMP-STARTING PROCUREMENT TRANSFORMATION WITH A CLEAR AND REALISTIC PLAN
by Alex Klein, COO at Efficio Consulting Following a period of ongoing economic uncertainty, business spend has risen high...
NAVIGATING FINANCIAL SERVICES IN 2021: LOW-CODE TO THE RESCUE
Nick Ford, Chief Technology Evangelist, Mendix Financial services are the poster child of great digital transformation: today, Britons can...
PAYSAFECARD AND NEO EXTEND THEIR SUCCESSFUL PARTNERSHIP
paysafecard, a market leader in eCash payment solutions, and NEO, one of the most successful FIFA teams in the world,...
WHY THE NORDICS WILL CONTINUE TO LEAD THE WAY IN DIGITAL PAYMENTS
Kriya Patel, CEO, Transact Payments While the recent introduction of PSD2 — the second iteration of the EU’s Payment...
COMBINED RISE OF M&A AND CYBER RISK CREATES STORMY SEAS FOR INVESTORS
UK organisations carrying out merger and acquisition (M&A) activities must improve pre-acquisition due diligence of software vulnerabilities By Philippe Thomas,...
PPRO CLAMPS DOWN ON FINANCIAL CRIME RISKS, PARTNERING WITH AND INVESTING IN AI-DRIVEN TRANSACTION MONITORING STARTUP SENTINELS
PPRO, the leading local payments infrastructure provider, has today announced a strategic partnership and minority investment in Sentinels, Europe’s leading transaction...
EMV® IN TRANSIT: WHY AND HOW?
Taoufik Sakhi, Smart Mobility Technical Advisory Director at Fime Today, contactless cards provide a fast and frictionless payment experience,...
INSTANDA ENTERS THE MIDDLE EASTERN MARKETPLACE
INSTANDA expands global footprint by working with new client, NewTechMe First product distributed in the Middle East Announcement signals INSTANDA’s understanding of NewTechMe’s vision to drive digital transformation in UAE...
RGU LEADS EUROPEAN INTER-REGIONAL NORTH SEA PARTNERSHIP TO HELP HOMEOWNERS IMPROVE ENERGY EFFICIENCY
NB: Image from left to right includes: Mike Bauermeister, Kishorn Insulations, Jamal Alabid, RGU, Amar Bennadji, RGU, Richard Laing, RGU,...
JUMIO APPOINTS JENNIFER N. HARRIS TO BOARD OF DIRECTORS
Addition of veteran CFO comes amid period of record growth and product expansion at Jumio Jumio, the leading provider...
WISE LAUNCHES ASSETS, YOUR WISE ACCOUNT INVESTED IN THE WORLD’S LARGEST COMPANIES
Assets offers current account flexibility, with the potential for investment returns Wise, the global technology company building the best way...
A CHECKLIST FOR RETRENCHMENT READINESS
By Shelley van der Westhuizen, head of financial well-being strategy & applied research at Alexander Forbes Your health may not...
EQUIDUCT LAUNCHES TRADING IN EXCHANGE TRADED FUNDS FOR RETAIL INVESTORS IN EUROPE
Equiduct will offer 436 ETFs and ETPs for trading through Apex Equiduct, the pan-European retail exchange, announced today that...
THE IMPORTANCE OF MANAGING DATA RISK IN THE FINANCE FUNCTION
Written by Steph Charbonneau, Senior Director of Product Strategy, Vera by HelpSystems CFOs and financial controllers play a pivotal role in how organisations evaluate and manage...
THE DEMAND FOR BETTER B2B PAYMENTS
By Brandon Spear, CEO, TreviPay Business-to-consumer (B2C) payments started adapting to digital processes when consumer shopping habits began shifting...
HOW TO BUY USDT AND AVOID THE HIGH VOLATILITY OF CRYPTO
Understanding and breaking down all the different types of crypto can feel like a huge task—there are so many variations...