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Do banks need to foster a ‘Big Tech’ mentality to remain competitive?

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By Julien Traversini, Head of Financial Services, Valtech

 

Today’s banks and financial institutions are at a crossroads. They are no longer able to write their own destinies – a thought that would have seemed inconceivable even just a few years ago – and are quickly having to come to terms with a tangible and significant power shift within the industry.

Historically, banking services has been a supply-driven market. Institutions have decided what they are prepared to offer customers, establishing a fixed set of core services, and then convinced customers of the value of those services. This enabled them to generate goodwill on their own terms and largely dictate how the market evolved.

But those days are over. The industry is changing, driven by the increasingly digital nature of financial services. The rise of neo-banks and innovative fintech companies has appealed to the digital-first mindset of modern banking customers who now demand the speed and convenience of online/mobile banking. Indeed, consumers are most likely to switch financial institutions due to issues around mobile banking (43%), online banking (35%) and customer service (33%) rather than fees or physical accessibility.

But this isn’t the only concern for traditional banks. ‘Big tech’ companies such as Apple, Google and Amazon are now also showing an interest in payments, lending, and insurance. So, will this put traditional providers at a disadvantage, or stimulate traditional financial services firms to embrace digital technologies more quickly?

Julien Traversini

Tackling a new wave of competition

A larger proportion of banks’ existing and potential customers now judge all brands through the lens of digital prowess, and they expect digital offerings in abundance. As a result, ‘all digital, all the time’ is becoming the new banking mantra, putting the onus on banks to shift focus from merely being providers of financial services, to being customer-driven, client-care focused hubs. This, of course, is an area in which big tech brands have the upper hand.

In fact, fears that big tech companies could harm competition in the UK’s financial services sector recently prompted the Financial Conduct Authority (FCA) to announce that it will examine how to regulate them. Although they could provide many benefits for consumers, the worry is that these companies could end up becoming “gatekeepers” to financial services given their scale and the quantity of customer data they possess.

These tech giants, along with digital-first neo-banks, are adept at delivering the experiences that customers are looking for. Given that 40% of U.S. banking customers see the bank of the future as having more in common with a technology firm than with the financial institutions of old, the onus is on banks to transform into technology companies and start fostering a big tech mentality – or quickly become irrelevant.

As such, they must look to the customer for inspiration and caution. If an explosion in eCommerce fuels a demand for buy-now-pay-later services, for example, this is an opportunity for modern banks to act as facilitators. This strategy could involve closely monitoring developments in cryptocurrency markets, which could present opportunities for banks to offer services such as digital wallets. They may even be able to one-up the neophyte fintechs by touting things like security and scalability.

Most importantly, banks must realise that a change of mindset is required – one that correctly informs the subsequent renewed commitment to infrastructure investment. They must make moves to lower costs to ensure that new offerings are viable when they reach the market. And when strategising, they must understand the world in which they now operate. The customer must be at the centre of all IT investments, with every move designed to enable superior customer interactions and deliver omnichannel customer experiences that differentiate them from the competition.

To achieve this, banks must learn from established tech players. By focusing every digitisation effort on streamlining some existing aspect of the business, integrating workflows, or analysing customer data more effectively, they will put themselves in the best position to remain competitive.

Build and they will come

Amidst today’s evolving financial landscape, banks must rethink their IT architecture. Legacy systems such as core banking, trading and payments may be important, but modern institutions need to build agility into their operations. This can be achieved by layering infrastructure. As well as helping them become less reliant on the legacy stack, they’ll be empowered to branch out and deploy new products and services that delight their customers.

Banks should consider embracing open banking and microservices architectures and developing a fintech ecosystem around (for example) Defi payment solutions, data analytics and AI. On the one hand, this will engender innovation. At the same time, it will reduce time to market, and lead to the creation of more customer-centric services fed by frequent POCs and shorter feedback loops.

Again, this requires a change of mindset. Banks have traditionally been extremely risk-averse, but like their big tech competitors, they must give themselves license to release offerings that are not fully polished. Ensuring that they are secure and relatively easy to use is most important. Customers can then act as the ultimate arbiters of useability and quality, providing feedback that can be used to improve the product.

Ultimately, the pandemic changed everything, forever. Customers aren’t looking to interact with banks that try to tell them what they should want. The digital native wants quality digital services that meet their evolving needs. That’s what will turn them into brand ambassadors. Banks across retail and commercial markets must see this as an opportunity to transform in a way that makes sense to their business capabilities while also bringing value to customers. Those that are prepared to embrace a big tech mentality will be most likely to position themselves as the bank of the future and establish a leading position, rather than let big tech send them to their grave.

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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