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Future-proof payments infrastructure: The role of agent banks in the quest for modernisation

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The shift to a ‘marketplace’ model, rise of fintech companies and arrival of new players in the payments value chain have had a profound impact on market dynamics within the financial services sector. In response, banks must reconsider how payments infrastructure fits within their long-term strategy. In this blogToine van Beusekom, Director of Strategy at Icon Solutions makes the case that for many banks, agency banking partnerships represent the best path to future-proof payments

The rapid transformation of the payments industry over the past decade has brought banks worldwide to a crossroads. Balancing growing consumer demand for instant payments and emerging digital services against the spiraling complexity of maintaining efficient retail payment infrastructure places significant pressure on banks, particularly smaller ones, to keep up. The proliferation of real-time payments systems and new service layer innovations, such as Request to Pay and payments tracking, put the capabilities (and limitations) of legacy payments infrastructure under the spotlight.

Toine Van

Payments modernisation is no longer optional, it’s imperative for survival. Despite this commercial imperative, very few payments innovations occur without the right infrastructure environment in place. Regulators in the payments industry do increasingly view innovation as a crucial pillar of activity and advance considered regulations to drive innovation, at least in part, by creating the right conditions. At the same time, competition in the retail payments market is front and center of regulators’ minds as they grapple with new players in the ecosystem and the mushrooming of new licensed entities

So, given the very real pressures and complexities of an increasingly diverse payments ecosystem, how should banks future-proof their payments infrastructure to remain profitable and relevant long term?

It might seem counterintuitive, but for some banks the best way to futureproof payments infrastructure is to offload the service entirely—to other banks. Let me explain.

In the industry, there’s a phrase that describes the constant tension between innovation and regulation: To comply with regulations, fintechs need to act like banks. To fend off encroaching competitors, banks need to act like fintechs. As new digital payment instruments, including central bank digital currencies (CBDCs) and cryptocurrencies, emerge and open banking and application programming interfaces (APIs) unlock access and connectivity options, banks must invest in technology that provides infrastructure to meet rapidly changing requirements and on-demand scalability. These are not small upgrades.

While bigger banks have the resources to modernise infrastructure and invest in payments technology, smaller banks often don’t have the deep pockets needed to keep pace with technological shifts. Try as they might, they will never be able to truly compete with nimble, unregulated fintechs or with larger Tier 1 banks that can throw large amounts of cash at the problem.

Instead, smaller banks must think strategically about which parts of their value chain they should keep in-house and which non-competitive services they can outsource to a partner to free up resources for true innovation. Fintechs may seem like an appealing choice, but since they’re not regulated, they can’t handle the full range of services that small banks need to offload to stay agile. At the end of the day, customers want to know their money is safe.

Take Single Euro Payments Area (SEPA) payments for example. Small UK banks that offer SEPA payment services cannot be competitive from a cost perspective but offloading the responsibility to a fintech will not change the volume or regulatory responsibilities, so a stand-alone business case is very difficult to make. However, if you add indirect access to faster payments and correspondent banking to the equation and realise that there are banking partners offering this today (and decades before today), interesting options emerge.

The onus is on the Tier 1 banks to be able to offer that one-stop shop experience for any payment type (plus value added services like FX and liquidity) from an organisational as well as a technological angle; this does not work if the payments processing ecosystem is old, costly, and dispersed across the organization. Most Tier 1 banks are in transformation cycles, so this offering should be front and center to their thinking.

By allowing the small banks to free up resources where it matters to compete (front end) and adding volume to the commodity processing of the large banks (back end), effectively lowering the cost per transaction, the ecosystem as a whole will become more efficient.

A truly vibrant payments ecosystem—that benefits both consumers and the financial services sector—depends on building a flexible real-time payments infrastructure that promotes access, competition, co-operation, and innovation. When small banks partner with bigger banks that have already upgraded their technology platforms, they can offer, via third party, tech-based services like payments that still comply with regulations and don’t require costly capital outlays for infrastructure modernisation. By sidelining themselves in some capacities, they set themselves up to go the distance in their areas of strength.

Banks that are serious about creating a future-proof payments strategy (both big and small) must evaluate their current offerings, their long-term goals, and their legacy infrastructure with a critical eye. Only then can they determine if the best way to compete is by withdrawing from the infrastructure modernisation race altogether, protecting their ability to innovate in other ways—and their bottom line.

Banking

Augmented automated underwriting and the evolution of the life insurance market

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By Alby van Wyk, Chief Commercial Officer at Munich Re Automation Solutions

 

It’s almost inevitable. Spend your working life identifying, analysing, quantifying and ascribing monetary value to risk, and you’re likely to have a fairly strong aversion to it. Or more accurately, an aversion to undertaking new endeavours with inadequately understood consequences. The insurance industry is, on any number of levels, the very definition of risk-averse.

And yet, for all the commentary suggesting otherwise, insurance still has an appetite for innovation. If the insurtech sector is any indication, then an interest in and requirement for new solutions is being recognised and slowly addressed.

Declan O’Neill

It may not employ the language of disruption that runs through the wider fintech market, it may be short a few unicorns and unable to boast some of the record-breaking funding rounds, but a quiet tech evolution has been building in insurance nonetheless. Hence the advent of automated underwriting facilitated by more advanced algorithms and data analysis.

Where insurtech does overlap with its more vocal fintech counterparts is in the greater use of artificial intelligence (AI) and machine learning to solve age-old problems around data analysis and interpretation.

It’s about five years or so since AI first became a topic of conversation in insurance. Since then, despite the intensity of the debate, it has often felt like a reality that is always just over the horizon – a destination that kept moving even as more and more efforts were directed towards it.

But recent research suggests that the journeys made so far have not been in vain. We are at a point where embracement of AI is about to step up a gear. The global value of insurance premiums underwritten by AI have reached an estimated $1.3 billion this year, as stated by Juniper Research; but they are expected to top $20 billion in the next five years. As a destination, it is closer and more attainable than ever before.

However, AI is not an island. Its promise of $2.3 billion in global cost savings to be achieved through greater efficiencies and automation of resource-intensive tasks will not be achieved in isolation.

AI remains part of a more complex ecosystem of data gathering and analysis. It can apply new technologies to get the best out of the already established and still-emerging data sources that feature in underwriting offices around the world. It emphatically does not require these existing investments to be ripped out, replaced or downgraded.

It is more helpful therefore to see AI as the differentiating factor in the latest generation of insurance IT: augmented automated underwriting, or AAU for short.

AAU gives underwriters the ability to spot patterns and connections that are, frankly, either invisible to the human eye or which take normal, human-assisted processes unfeasible amounts of time and resource to identify.

Whereas earlier generations of automation were able to pick up the low-hanging fruit of insurance markets – the individuals whose driving history fit into clearly delineated boxes, for example – AAU can take into account all of the rich complexity of the human experience. It can spot the nuances and individualities that populate the life market, for example, and translate those into accurate policies.

That’s good news for both underwriters and their customers. AAU can significantly reduce the need for separate medicals, repeated questions, lengthy decision-making processes, and drastically increase the speed at which a potential insurer can get a quote and cover – while continually improving the way risk is calculated and managed.

It can make sure the decision-making process remains in the hands of underwriters rather than IT departments, enabling them to set and update the rules and parameters as befits their preferred business model. It consequently makes advanced, complex and precise decision-making available to a broader range of underwriting businesses – which is good for those businesses, good for customers and ultimately good for the entire industry.

AAU – augmented automated underwriting – is an example of the realisation of AI’s promise. As such, it’s set to become one of the key talking points and disruptive technologies of the insurance industry. And this time, AAU is both a journey and destination that all progressive insurance organisations need to be considering for their future operations.

 

 

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Banking

ESG in the finance and banking industry – are you ready?

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By Julian Moffett, CTO BFSI, EDB

 

Environmental, Social and Governance (ESG) has soared towards the top of banking, financial services, and insurance (BFSI) and other boardroom interests. Organisations everywhere know they need to take ESG and greenhouse gas emissions (GHGs) seriously not only because it is the right thing to do for the future of the planet or because it can help attract and retain talent, but also, because failing to do so may pose a risk to the economic value of their businesses and encourage probes by governments, watchdogs and non-execs. However, complying with complex reporting and going the extra mile to actually deliver on the goals of the rules is a challenge in many ways, not the least of which is in achieving the required excellence in data management to underpin strong reporting on ESG.

 

What is ESG? 

Julian Moffett

ESG is an umbrella term that covers a broad gamut of activities. Gartner defines ESG as “…a collection of corporate performance evaluation criteria that assess the robustness of a company’s governance mechanisms and its ability to effectively manage its environmental and social impacts.”

The CFA Institute describes the environmental element as focusing on “the conservation of the natural world” and includes measuring “climate change and carbon emissions,” “air and water pollution” and “biodiversity” among many other measures. Social considers “people and relationships” looking at areas including “customer satisfaction,” and “gender and diversity.” Governance covers “standards for running a company” and analyses factors such as “board composition,” “audit committee structure” and “audit committee structure.”

 

Status of the current regulatory environment

There are many bodies proposing rules to formalise ESG monitoring and seeking to ensure corporate compliance. Some example groups, frameworks and bodies:

  • The Task Force on Climate-related Financial Disclosures (TCFD)
  • Streamlined Energy and Carbon Reporting (SECR)
  • The International Regulatory Strategy Group (ISRG)
  • The Sustainability Finance Disclosure Regulation (SFDR)
  • The International Sustainability Standards Board (ISSB)
  • The Sustainability Accounting Standards Board (SASB)
  • Sustainable Development Goals (SDGs), the Global Reporting Initiative (GRI) support efforts such as the US SEC’s Climate and ESG Task Force.

Financial services organisations are very aware that the current regulatory landscape is far from mature (and will continue changing) both in terms of alignment between bodies and also with regard to when the new rules will come into effect. At the of time of writing:

  • The requirement for Scope 2 disclosures (see below for description) for the Sustainable Finance Disclosure Regulation (SFDR) will likely come into effect in 2023
  • A proposed Corporate Sustainability Reporting Directive (CSRD) should be agreed by the European Parliament this year for implementation in 2024 to report on performance in 2023.
  • Meanwhile, the SEC has just released its proposed rules for climate-related disclosures, which,if passed in legislation, may come into effect as early as year end 2022.

 

Reporting Obligations 

Reporting can cover a wide range of areas covering energy consumption, GHG emissions, water consumption and waste management to health and safety, labour rights, diversity and inclusion to ethical conduct, and even areas such as appropriate executive compensation.

While the regulatory reporting obligations are not yet finalised, the expectation is that compliance may prove to be an onerous task. For example, organisations are under pressure to monitor carbon emissions but even so-called Scope 1 emissions (those that come from owned or controlled emissions) can be hard to track. Factor in Scope 2 (indirect emissions such as purchased power) as well as Scope 3 emissions from up and down value chains, and the reporting task at hand is difficult indeed.

To measure, monitor and manage in addition to staying on the right side of rules, organisations need to have excellent data management fundamentals, strong reporting tools and a new class of applications, which also have the agility to adapt to rapidly changing regulatory demands. Data will be used both to support decarbonisation measures but also to identify where there are disclosure gaps. It was telling that when the SEC issued a press release on its Enforcement Task Force, it specifically referred to data:

“The task force will also coordinate the effective use of Division resources, including through the use of sophisticated data analysis to mine and assess information across registrants, to identify potential violations.”

Having reliable data comply with emerging rules isn’t the only essential requirement for organisations. Institutions need such data to understand where they are in their journey to sustainability, so that they can set sensible targets and track progress against them. Organisations will have to cover the data trifecta of availability, management and transparency. Many organisations may be stuck in the early stages of managing ESG, overly relying on manual processes, spreadsheets and email. But their target should be to get to real-time data insights that are easily visualised, understood and shared. As a foundation, BFSIs need to capture, manage and securely share data reflecting consumption and safety to emissions, financials and data from surveys measuring results against ESG targets. Data emanating from ERP and other back-office systems, performance data from third-party associates, media and social network coverage, spatial/geolocation systems and beyond should also be factored in.

 

Actually reducing GHGs

Organisations are using a wide variety of ways to reduce emissions and improve their footprints from using renewable energy sources to making secondary use of energy; for example, in the case of one university, this is done through capturing data centre heat in hydroponics. For IT, making broader use of multitenancy in cloud computing and hosting services is a popular way to reduce emissions. Not only do these large data centres offer an economy of scale, they also tend to be state of the art in their use of renewables and highly efficient hardware and other infrastructure. Gartner, in an article titled The Data Centre Is Almost Dead, says it expects 80 percent of enterprises will close in-house datacenters by 2025. For me, the jury is out on this one but an interesting one to monitor going forward.

 

Conclusion

We are at the start of a very significant inflection point in regulatory and consumer expectations around ESG. BFSIs should be under no illusion that momentum is building rapidly in terms of having to address strict reporting requirements and implement strategies to reduce GHGs.

However, we also see this as a time of positive change. As the leading provider of Postgres, EDB is excited to help organisations further their ESG goals as the journey unfolds. We are closely monitoring the implications of ESG regulations as they will give rise to a new class of applications and drive adoption of green data centres. We see OSS, including Postgres, as playing a key role in this shift as often the movement to private and public cloud helps accelerate application modernisation and enables displacement of outdated incumbent technology (including database) platforms. As the leading provider of Postgres, EDB is excited to help organisations further their ESG goals as the journey unfolds.

 

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