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Digital banking: A necessity, an option or a risk?

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By Jonny Williams, partner, and Emma Radmore, legal director, at law firm Womble Bond Dickinson

 

Banks are at the forefront of constant technological innovation to offer bigger, better and more user-friendly services to their customers. But with innovation and change comes risk. And with cyber-criminals ever adapting to the opportunities they see to benefit from any security loopholes, consumers are right to worry. Regulation is also constantly evolving, in an attempt to minimise the risks and maximise good customer experience. Jonny Williams and Emma Radmore of Womble Bond Dickinson look at the pace of change and current initiatives.

Jonny Williams

Why so much change?

Online banking is obviously not new, with many customers using it regularly for quite some years.  However, the pandemic undoubtedly led to existing customers using the service more, new customers signing up, adjustments to the way the services operated and, perhaps more crucially, the rise in mobile banking apps.

Surveys have shown gradual increased usage over recent years, and that the ease and quality of the online experience is critical when selecting a bank. And, it seems, the younger the consumer, the more likely they are to bank using their smartphones or even smart watches rather than their computers – older customers have been slower to convert to banking by smartphone, maybe because of concern over scams and other financial crimes.

What are the regulatory risks?

Any customer experience that does not happen face to face involves a number of regulatory risks. Key among these are:

  • impersonation risk – that an account is opened in the first place using a false identity or that login details and passwords are stolen
  • transaction risk – that the legitimate account holder is tricked into making payments
  • cyber risks – that data breaches and cyber attacks reveal secured details
  • theft risk – that the device will be stolen and manipulated before the customer can alert their bank
  • harmful links being clicked on, whether in messages purporting to be from the customer’s bank or otherwise and how banking apps can respond to this

While consumers are of course responsible for being sensible, the regulators, particularly the Financial Conduct Authority (FCA) and Payment Systems Regulator (PSR) are constantly striving to make the digital experience as safe as it can be, and to ensure consumers don’t lose out when they have not been at fault.

What are the regulators doing?

Emma Radmore

The UK regulatory requirements on the onboarding of customers, in particular on identifying them, verifying their identity and understanding the likely patterns of their transactions are stringent. But, concerningly, we continue to see FCA imposing large fines on banks whose procedures and systems have failed to spot the potential for, or actual, money laundering. Additionally, although so far falling short of published regulatory action, FCA’s review of the financial crime controls at challenger banks, particularly digital banks, highlighted serious shortcomings of some business models including in the onboarding process. This is particularly concerning considering the popularity of digital banks especially among younger consumers.

Separately, regulatory initiatives around authorised push payment (APP) scams and frauds have been ongoing for some time. The Government is now looking to use the Financial Services and Markets Bill, currently going through the legislative process, to require mandatory repayment to customers who have lost out.

Increasingly, banks are introducing as many safeguards on payments as possible, and many payments now require two-way or multi-factor authentication. Again, the requirement stems from legislation – in this case the Payment Services Regulations 2017, but banks are left to work out the best way of implementing controls to enhance the security of payments.  For many customers, though, this now means authenticating via an app – whether the payment is initiated by the app, by online banking or otherwise. It makes the smartphone an accessory which is both powerful and potentially dangerous.

FCA is also taking great account of consumer behaviour in its initiatives. It will be aware that younger consumers expect to be able to do everything quickly, and that banks wanting new customers will not want to risk losing them through overly complicated onboarding and transaction approval processes.  Yet it is crucial for consumer protection that banks carry out proper due diligence and that safeguards are in place so that consumers understand and agree the payments they are making.

What next?

We can expect to see more changes in future.  As mentioned above, the Financial Services and Markets Bill is looking to address APP fraud, as is the Online Safety Bill in respect of scams stemming from use of online platforms and social media.  FCA will continue its close inspection of banking models and its engagement with firms who do not meet its standards. The Consumer Duty, which must be implemented by all regulated firms by the end of July 2023, will require banks to take yet another look at how they provide their services. They must comply with the new overarching principle to act to deliver good outcomes for retail customers, which requires a deep dive into every element of products, pricing and customer service. Digital banking will only increase in popularity, and FCA also set up a  “digital sandbox” to enable firms to test digital products and solutions. While in testing phase, it looked at solutions to address the prevention of fraud and scams.

So the future probably holds an uncomfortable mix of more prescription for banks, more clicks and taps for consumers, and continued consumer education, all continually battling against new criminal techniques.

Banking

Are SaaS platforms challenging banks for a piece of the payments pie?

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4 common myths about the role of open source in financial services

Attributed to: Ralph Dangelmaier, Global CEO of BlueSnap

 

The finance industry is at a tipping point with software firms on the brink of becoming banks. This may seem like a farfetched idea, but now that software platforms come equipped with payment capabilities, their SME customers may want to receive more financial products from these platforms.

This is part of the wider trend of ‘embedded finance’ – when companies which aren’t banks incorporate financial services such as lending, insurance, and payments into their product.

Software firms are particularly leveraging ‘embedded payments’ – where the ability to accept and process payments comes with the software itself. Think of a school consolidating all the payments a parent would make for their children – tuition, books, extracurricular activities – in one software platform. This trend has exploded in popularity because there’s a desire among companies, and their customers, for everything from products to payments to happen under one roof.

With the market value of embedded payments expected to reach £2.08 trillion by 2026 and customers becoming increasingly married to their software, let’s look at how we ended up at this turning point in payments.

How chasing convenience puts money in platforms’ hands

Ralph Dangelmaier

The growth of embedded payments is propelled by the need for ease, trust, and convenience. As platforms are selling payments hand-in-hand with their software, customers don’t need to integrate with additional service providers just to accept payments. And they’re already bought into using the platform for its other functions.

Not only is this kind of back-end reconciliation easy and convenient but it helps software platforms generate revenue too. That’s because software companies that embed payments become Payment Facilitators (a.k.a PayFacs) – allowing them to monetize transactions that happen within their platform.

By selling payments, software firms can see up to a fivefold increase in value per client. Rather than depending on software subscriptions alone, these platforms now receive a cut of every transaction that’s facilitated using their software too. This provides them and the businesses they serve with a mutual incentive – shared profits.

Software platforms are passionate about helping their customers create the most easy-to-use experience to drive a higher volume of transactions. Of course, there are many ways to launch new revenue streams, but why leave money sitting on the table when all you have to do is become convenience-obsessed?

Why finance teams want software and payments in one  

As a payment expert who’s worked in a bank’s back office, I know how important a financial software stack can be. In its highest form, it can steer a business’ entire financial strategy.

Often these stacks are well curated, but the biggest drawback is the manual collection of data across platforms. Trying to build a financial picture of a business using your ERP, CRM, human resource and billing system can involve hours of laborious data entry.

For everyday finance teams, this isn’t an efficient use of time. They need to be able to pull data swiftly to advise their executives on financial strategies. CFOs are also under pressure to choose the right software stack to streamline processes and ensure payments ROI.

That’s why payment technology that removes the manual work for finance teams – to get from A to B more quickly – is growing in popularity.

Software firms using embedded payments are saving them hassle and time. Not only that, it helps the key financial decision makers of SMEs stay in a constant state of financial planning, where they can change their strategy whatever the market conditions may be.

The end of traditional banking for SMEs?

Increasingly, SMEs are struggling to get the payments support they need from traditional banks. The ‘higher risk, lower return’ view of the small business market among banks leaves software platforms in a ripe position for a takeover.

There are over 90,000 software companies in the UK alone. With nearly half of software platforms (48%) turning to embedded payments to gain a source of competitive advantage, this figure could represent a threat to corporate banking as we know it.

SMEs don’t have the deep pockets that multinational businesses have. The Amazons and BMWs of the world have long reaped the benefits of a corporate account with a large bank – and the round the clock support this offers.

But SMEs face high conversion fees and often receive minimal support chasing late payments, leaving them between a rock and a hard place. If these businesses can save money by moving from banks to software platforms, then banks are at risk of losing their position over the middle market.

Looming regulation

Until now banks have been able to defend their position because safety and security is key. Once platforms become regulated, then what? It won’t be long before regulators eye up the software industry as their next big focus.

But regulatory bodies like the FCA, PRA and more favour ‘controlled innovation’, so this will take time.

Currently, to process transactions in Europe, businesses must go down the lengthy and costly process of becoming Payment Service Providers (PSPs). That’s why many software platforms are choosing to partner with a licensed payment provider which sells the payment package to them, instead.

In fact, 89% of software platforms choose to work with PSPs rather than become a PayFac themselves. It makes sense when it’s taken more than a year for some platforms to begin processing payments on their own.

Given the sizable financial risk of processing your own payments and the administrative burden this brings, it’s no wonder software firms are looking to fintech for a better way.

After all, it’s not just about processing the payments. A partnership with a payment technology partner comes complete with support in onboarding, underwriting, compliance, risk, payouts and customer support.

In short, software platforms see the benefits of selling payments and are primed to become the next big financial players.

Not only is there revenue for the taking but their customers benefit as well. With software platforms ready to offer SMEs a banking alternative and a superior customer experience, they’re offering a truly win-win solution for all involved. And it’s payment technology partners that can help them make this vision a reality.

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Banking

Emerging technology will power long-term sustainability within the UK banking industry 

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By Peter-Jan Van De Venn, VP Global Digital Banking at Hexaware Mobiquity.

 

Sustainability has been a big focus for the banking industry in recent years, with the issue becoming increasingly important for consumers. It’s no wonder that sustainability has become baked into the purposes of almost every bank, from Natwest to HSBC.

However, the economic uncertainty of the last year has led to many banks putting it on the back burner. Challenging market conditions have forced financial institutions to change their priorities to concentrate on protecting the bottom line. Our research found there’s been a significant drop in the number of UK banks saying that sustainability remains a key business strategy. 12 months ago it was a major priority for 100 per cent of banks, but now that number has shrunk to 60 percent.

Whilst it’s understandable that banks are feeling the pressure at the moment, there’s a risk that they will miss out if they hit the pause button. From cost savings brought by innovative digital products and services, to improved brand reputation and increased profitability, there are a lot of longer-term benefits they could be failing to unlock. So how can they keep moving forward?

Losing momentum

Emerging technology holds the key to their success, with the power to disrupt current behaviours and promote a more sustainable culture. Banks are already aware of this, with 76 percent using digital transformation to drive sustainability, but a lack of leadership has made it difficult to build momentum in the last 12 months. Currently just over half (54 percent) of banks have tasked an executive at board level with overseeing sustainability – way down from 83% just 12 months ago.

This lack of board authority means banks are struggling to engage the entire organisation to move ahead with sustainable initiatives. As a result, almost two-thirds of banks are seeing progress slow, admitting they are not actively taking steps to foster more sustainable behaviours throughout the organisation. Those that have taken their foot off the gas need to find a way to move forward again.

No time for standing still

Banks know that technology can drive sustainable behaviour. For instance, many of them are already encouraging their workforce to work remotely, as a way of reducing travel. This has two benefits – not only does it cut the costs of running physical offices at full capacity, but also reduces the bank’s carbon footprint. There has never been a better time to invest in technology to drive more sustainable behaviours.

New digital products and services can also extend the benefits beyond employees to encompass the wider customer base. A fair number of banks are already investing to make this happen. More than a third (35 percent) of banking organisations are using Machine Learning (ML), Artificial Intelligence (AI), cloud and analytics to make digital services more easily accessible. Investment in these technologies will be critical as the number of physical bank branches continues to decrease, with figures from Which? showing this is taking place at a rate of 54 branch closures each month.

Hitting environmental and social responsibility goals

Emerging technologies can also help banks keep pace with tightening ESG rules and regulations. Banks are faced with demands for increasingly granular reporting and transparency on ESG – demanding a new approach. In line, 41% of them are developing data visualisation tools to improve stakeholder engagement and understanding of ESG risks and opportunities, while 37% are using machine learning and artificial intelligence to identify and track ESG risks and opportunities across a wide range of data sources.

More than one in three are also using the blockchain to improve transparency and traceability in supply chains, and implementing digital tools and platforms to collect, analyse, and report ESG data and metrics in a standardised and consistent manner. All these applications of emerging technology will put banks on track to address global environmental challenges and unlock a greener future.

Long-term sustainability

As the economic pressures hopefully start to subside, increasing numbers of banks will start investigating how they can use emerging technologies to provide engaging experiences and value-added services for customers, to drive greater revenue and efficiencies.

Whilst banks are right to focus on their revenue under difficult trading conditions, it’s important they don’t miss out on the long-term benefits that sustainability can bring. To capitalise on this, banks must keep pushing the boundaries and invest in emerging innovations to drive more sustainable banking behaviours, benefiting the planet and driving great digital experiences for customers.

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