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Banking

DIGERATI VS. BANKS: HOW CAN BANKS BEST COMPETE?

Bill Murray, senior researcher and advisor at Leading Edge Forum, discusses how the digerati have become competitors to banks and what to do about them.

 

The digerati are taking bites out of the banking sector, offering payment services, loans and credit, cash and savings products to the under-banked.  Amazon is increasingly referred to as a ‘tech banking’ firm. Amazon Pay has evolved to include a digital wallet for customers and a payments network for both online and brick-and mortar merchants. With Amazon Go’s “Just Walk Out” technology – It will grant access to the store and allows customers to grab-and-go without needing to physically check out to pay for products.

 

Amazon Cash fits neatly into Amazon’s strategy of appealing to underbanked and unbanked populations, allowing users to deposit to their

Bill Murray

Amazon.com balance by showing a barcode when paying cash at checkout locations, so they can shop at stores without a bank card. A partnership with Coinstar kiosks will extend Amazon Cash’s reach into rival stores. Amazon Lending offers its online sellers loans to cover working capital at rates that are typically less than a credit card. It also services the consumer market with store, debit and credit cards.  The Amazon Reload digital debit card has features that challenge credit cards. Amazon is offering Finance-as-a-Feature.

This rapidly growing phenomenon of “tech banking,” where eCommerce giants provide financial services, was born of three effects. First, the financial crisis, which had an adverse impact on trust in the banking system. Second, the spread of mobile devices, which reduced the advantages of physical distribution that banks previously enjoyed. Third, the demographic shift to millennials, who are more open than the older generation to financial services from non-traditional financial services firms.

Established banks make small or negative margins on serving most small businesses, so they cherry-pick customers, creating an under-banked market. Now that sophisticated analytics is mainstream, lending and payment opportunities are moving to the firms that have the best data on customers. That used to be banks, but now it is eCommerce companies – digerati – like Amazon, Alibaba and PayPal, whose payment processing capabilities can underpin ‘tech banking’. Their customer data is more relevant, granular and timely. They can see minute-by-minute metrics, cash flows, shipping profiles, product accuracy and customer satisfaction. Best of all, clients who have credit lines with these firms spend more than those who don’t, so even low-margin tech banking is worth it.

The Digerati are cleaning up

The digerati are eating into the traditional banking market at a scale any fintech organization would die for. Net interest income constitutes the majority of revenues in the banking sector, and this is where Amazon stands out compared to most of its tech counterparts.  From launch in 2011 to June 2017, Amazon reported it issued $3B across 20,000 business in the US, Japan, and the UK. The bulk of growth in the last year has been to businesses in the US, where the company originated $1B in loans in 2017 alone. Amazon Loans has enabled SMEs to grow sales by an estimated $4 billion. More than 20,000 small businesses have received a loan, and more than half of those have taken a second loan from the company. Loans range from $1,000 to $750,000 with interest rates between six and 14 percent. Amazon Payments, with 33 million users in 170 countries, is catching up to credit cards, and PayPal is already ahead of Apple Pay, Google Wallet and the rest. Patents indicate that Amazon is thinking about the future of payments in terms of facial identity and selfies as a means of quickly paying. Payments is an efficiently served market, but not to a challenger with Amazon’s superior levels of efficiency, product integration and customer engagement.

 

But the Asian digerati are ahead of Amazon. Ant Financial, the finance arm of Alibaba (and formerly known as Alipay), is valued at around $60 billion. It offers payments, personal lending, banking products, savings products, and peer-to-peer lending.

Alibaba’s four-year-old Yu’e Bao fund, a repository for leftover cash from online spending, is the world’s largest, with $165.6 billion under management. Ant Financial moved into fund management when it spotted the growing piles of cash in its customers’ accounts that are used to pay for everything from coffee to taxis to fridges. By sweeping the money into a money market fund, Ant Financial is able to offer a return on surplus funds better than the banks. Customers have responded by taking their money out of bank accounts and placing it in their Alipay digital wallets.

 

In theory, the next step for any of these organizations would be to acquire a banking license, and the quickest way for them to do that would be to buy a traditional bank. Not only would they get the license, but they would be buying a customer base that could bring a significant credit card portfolio. Owning more of the card payment’s value chain would provide them with an opportunity for cost reduction and even more data about customer behaviour – a vertical integration play in card payments. They would also get the capability to manage the deposit base they have already accumulated. However, it is less likely that Amazon is building a bank than focussing on building financial services products that increase participation in the Amazon ecosystem.

 

Banks do not need to fear being different

Banks have significant advantages over would-be competitors. A bank is highly regulated; it holds a grip on credit issuance and risk taking; banks are by far the biggest repository for deposits (which customers still mostly identify with their primary financial relationship); they are still the gateways to the world’s largest payment systems; and they still attract the bulk of requests for credit.

The tech bankers know how to win in a digital world, but traditional banks with their legacy loan books, branch networks and systems can win, too.  It’s about how to utilize those assets alongside advanced digital capabilities to outmaneuver the tech bankers: product innovation, technology innovation, relationship change, incubate, partner, venture, acquire. These are all possibilities, but only by taking a measured approach to understand the value that exists within those assets already.

 

Banks and other financial services firms are systemically important to society, which is one of the reasons they are regulated so highly. However, they fall short of meeting the financial services needs of the underbanked, which are whole sections of business and society. The ‘tech bankers’ are increasingly meeting those needs, albeit to drive up participation in their own ecosystems. As banks look to shore up profits by diversifying they will inevitably compete with the tech bankers, but they can’t do that by copying them; they will have to out innovate them.

About the Author

Bill Murray is a Senior Researcher and Advisor for Leading Edge Forum. His IT career spans over 30 years, with 16 years as a Founder and Partner of Differentis, providing strategic IT consulting services to many industry sectors. Bill has experience of developing Digital and business technology strategies, business cases and change programmes involving technology disruptions such as consumerization, analytics and cloud-based services. Most recently, Bill has been helping clients develop IoT enabled business propositions and services in Connected Health, Connected Insurance, FMCG and supply chains, and advising on IoT platforms.

Bill is a chartered engineer by background and started his career with Arup in high energy impact analysis in the nuclear and automotive industries.

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Banking

WHY AGILE, SCALABLE DATA MANAGEMENT IS KEY TO DIGITAL BANKING

By Jason Hand, Global Account Executive – Enterprise Sales, Commvault

 

Back at the start of 2019, before we’d ever heard of COVID-19 (hard to imagine these days, I know), mobile banking was predicted to overtake high street branch visits within two years. But the restrictions placed on daily life to get to grips with the pandemic proved to be a catalyst in speeding up adoption.

Although banks haven’t had to close during the UK lockdowns, they discouraged unnecessary visits — and many people new to online banking discovered that it could provide a quick and easy (and COVID-safe) way to manage their finances. No surprise then, that as summer came to an end, over three-quarters of the UK population were using some form of online banking and one in ten people had switched to a digital-only bank.

When it’s implemented well, online, digital and app-based banking is as easy as shopping with Amazon, booking a cab on Uber or grabbing a takeaway via Deliveroo. With so much potential to create a similar customer experience — and so much to lose if they fail — banks are under pressure to deliver on digital services. But their success (or otherwise) will depend on how well they manage their digital data and, in particular, how willing they are to adopt more agile, scalable, cloud-based solutions to underpin their new services.

 

Adopting New Technology in a Risk-Averse Sector

The UK’s financial services sector is undoubtedly slow when it comes to adopting new technology. Indeed, many UK banks continue to rely on mainframes. This cautiousness stems from the continued rise in cybercrime and the fear of non-compliance with FCA and data protection regulations.

Banks have to tread a thin line. They do want to embrace technology that will help them scale and support customer demand for digital services. But they can only do so with an IT infrastructure that keeps out cybercriminals, hackers and anyone else without explicit authorisation to view the data. So, if their legacy IT systems are secure and protect customer data from cybercriminals, banks do not want to risk implementing new solutions that could leave them exposed — even if those old systems make them less nimble and less responsive to changing customer demands.

 

Open Banking and Shared Financial Data

The increased digitalisation across the sector leaves banks facing a second security and data management challenge. Once, they only had to worry about managing their data and keeping it safe within their closed IT environments. Now Open Banking — a UK government-backed programme — encourages banks to securely share their data with trusted third-party financial services providers via an API (Application Programming Interface).

Typically, these third-party providers offer apps to assist with utility bill management, accounting and auditing, and savings (usually rounding up apps). Once a user grants authorisation, the app directly interfaces with that user’s current account. Customers — whether individuals or SMBs — love them, but for banks, they’ve meant a reassessment of security and data management strategies.

 

What Constitutes Good Data Management?

To begin with, it could mean switching to a single data management solution. Banks historically have deployed several different products to manage their data. Multiple applications add complexity and  need more people to oversee them operationally. This approach will add cost, risk, and ultimately will not align to their digital transformation agendas.

Running multiple data management solutions makes it harder to get a holistic view, understand customer behaviour and predict future trends. It also creates unnecessary security risks. Consolidating data management platforms reduces these risks and costs. At the same time, fewer inter-app data transfer points decrease the number of potential weak-link entry points for hackers and cybercriminals. From a practical point of view, using a single data management solution also enables all relevant data points in a hybrid world to be viewed on a single pane of glass — making it much easier to digest, interpret and deliver data management as a service back to their internal clients.

Automating data management components can improve security and cut costs by reducing human contact. In addition, it enables faster and more accurate data management that can accelerate cloud adoption where data management is key to success.

It’s worth saying at this point that banks have been slow on the uptake of both public and private cloud technology, and are clearly still concerned about security and privacy threats. This is despite the fact that cloud computing — particularly with a zero-trust approach to security — has become a lot safer and carries far less risk.

In the middle of 2019, the Bank of England published a report that estimated the world’s largest global banks conducted just a quarter of their activities in the public cloud or software hosted in the cloud. But change is happening, albeit slowly. Larger banks have started to recognise that cloud computing holds the key to running an agile business  — allowing them to scale their online services and safely store, process and mine vast amounts of digital customer data.

The maturation of the hybrid cloud market may have played a role in increased adoption and allayed many of the sector’s previous doubts. A hybrid cloud infrastructure combines public cloud, private cloud and on-premises architecture, giving users the flexibility to keep some applications and systems (those with particularly sensitive information, for example) within their own four walls while still being able to migrate other systems. It’s an elegant and cost-efficient way to balance security, scalability and compliance.

 

Demand for the Future

With so much change taking place across the UK banking sector, data management has never been more critical. Open Banking, consumer demand for digital banking, and app-based banks like Starling and Monzo are all shaking up the market. But the threats from cybercriminals and the risk of falling foul of FCA regulations are still very much present. And, while navigating all these challenges, banks still face pressure from shareholders and investors to make a profit, retain customers and grow the business.

For these reasons, data management strategy — and linked to that, the pace and effectiveness of cloud computing adoption — are now two of the most significant determining factors in how banks cope today, and how effectively they will operate in the future. As such, 2021 should be the year that most banks and financial organisations embrace and invest in new technology when it comes to data management.

 

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Banking

SEIZING THE OPEN BANKING OPPORTUNITY

Nick Maynard is a Lead Analyst at Juniper Research

 

Open Banking has made significant progress in 2020, having recently launched across much of Europe and now starting to emerge in other markets too. And there are two primary reasons why Open Banking is disrupting the banking industry so much:

  • Banks have begun to discover the real competitive advantage of a more open approach to banking. Offering a superior Open Banking experience to customers can be a compelling differentiator from other competitors as part of a wider digital app experience. Open Banking also creates a level playing field in markets where regulatory intervention has led to Open Banking deployment. As all banks are required to deploy APIs in this scenario, the situation is the same and does not put any one particular bank at a disadvantage.
  • Legislation – for example, in October 2015, the European Parliament adopted PSD2 (the revised Payment Services Directive). By early 2020, major banks in the EU had adopted Open APIs. There have however been many cases of late deployments of APIs and problems with the availability of APIs.

 

Nick Maynard

The Disruption Factor

Open Banking is a major disruptive factor for banks. The reason for this being that it opens up account data to both AISPs (Account Information Service Providers) and PISPs (Payment Initiation Service Providers), which can attempt to carve out a role in the banking area.

  • AISPs: These new vendors are able to access transaction data and balance information, as well as related information. This has, in particular, led to the rise of vendors such as Emma, Yolt and Connected Money. These vendors combine information from multiple sources, adding value to the user.
  • PISPs: In this case, the vendors are able to leverage Open Banking API connections to initiate payments directly from the bank accounts in question. This means that these players are able to bypass traditional payment methods, such as cards. Vendors such as American Express and PayPal have already launched solutions that have taken full advantage of this action.

 

PSD2 Changes

Generally, the implementation of the new PSD2 European regulation for electronic payment services effectively reduces the entry barriers for new digital players. It also opens up banks to the potential for competition, enabled by their own APIs. This allows these players to compete with existing services in fields currently offered by the banks. In the case of AISPs, it is possible that third-party applications could displace the role of the apps from incumbent players, which would dilute the bank’s relationship with their users.

As with any fundamental change to markets in the banking area, there is the potential to bring a number of both opportunities and challenges to consider with Open Banking.

Open Banking Opportunities & Challenges to Consider

Source: Juniper Research

Banks and other parties that are looking to become involved in the Open Banking ecosystem must weigh these opportunities and challenges carefully. Open Banking certainly needs a more collaborative approach than traditional banking models, which will require significant effort to make them successful.

 

The Forecast for Open Banking

The total number of Open Banking users is set to double between 2019 and 2021, reaching 40 million in 2021 from 18 million in 2019. The ongoing Coronavirus pandemic is increasing the need for consumers to have the clarity of combining their accounts and gaining insight on their financial health, and also boosting momentum in the adoption of Open Banking.

This extraordinary growth is being driven by Europe, where the regulator-led approach to Open Banking has created a standardised market, with low barriers to entry. This contrasts with markets like the US, where a lack of central regulatory intervention is limiting growth potential.

 

Open Banking – Delivering Opportunities and Threats

It is worth noting that Open Banking can be both a threat and an opportunity for traditional banks. While Open Banking exposes user information and access to potential competitors, this threat has the potential to affect all players in the market equally. Consequently, established banks must create innovative Open Banking services that will provide benefits for the user, while also attracting customers from less innovative competitors.

Payments will be critical to the emerging Open Banking ecosystem; accounting for over $9 billion in transaction value in 2024. However, payments in this ecosystem are at a particularly early stage. While eCommerce is dominated by card networks, there is the potential that this role will be eroded over time by ‘direct from account’ payments. Consequently, card networks should look to offer Open Banking-enabled payment services, in order to offset the risk of future disruption.

Open Banking Users in 2021 (m), Split by 8 Key Regions: 40 Million

Source: Juniper Research

 

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