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NO SAFE HARBOUR FOR DIGITAL BANKING

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by Konstantin Bodragin, Business Analyst and Digital Marketing Officer at Bruc Bond

 

At the beginning of 2020, the future of digital banking was pretty clear. Between Open Banking initiatives, regulatory frameworks like the PSD2, and growing customer demand for more advanced digital services, bank-watchers the world over felt confident in their predictions. The course was set for full digitisation, likely brought about by victorious challenger banks replacing stuffy and lumbering traditional banks. Then the winds changed and ongoing disasters shook the world’s seemingly endless confidence in fintech and the bright future it promised to the core.

COVID-19 dropped on us like a sudden thunderstorm on a birthday party. Sure, experts, analysts, prognosticators (and perhaps even meteorologists) all warned of an inevitable pandemic event. But the rest of us, including most leaders and financial giants, were taken almost entirely by surprise. A majority of us managed to get drenched, even though the forecast predicted stormy weathers. Now, leaders and investors are scrambling to reach high ground and keep whatever they can from being swept away in the torrential floods.

Konstantin Bodragin

In practice this means redirecting funds from aspirational projects towards more immediate goals, and shedding as much unnecessary weight as possible, in case the water rises higher. In the year of COVID, who gets what is not so much a question of wants, but of pure necessity. Unless you’re a government with bottomless pockets, superb credit rating, and a deep desire to stave off a Great Depression-style downturn by means of public works, chances are you too are cutting costs. Big Business is doing the same. Autonomous car projects will be put on hold (if they haven’t been frozen yet), status symbol product launches will be postponed until customers feel confident to spend their extra cash again, and ambitious digitisation projects will be slowed unless their worth can be demonstrated even for the current times.

As they say, when it rains it pours, and this year is particularly wet for fintech. Even if Hurricane Covid hadn’t battered the shores of the global economy quite to so hard, the void left by the sinking of the titanic WireCard would suck much of the industry down beneath the water with it. Just last month, WireCard served as the main provider of banking infrastructure for much of Europe’s Non-Bank Financial Institution industry. NBFIs, tautologically, are not banks. As a rule, until they grow large enough to acquire a bank or banking licence of their own, NBFIs rely on financial and banking facilities provided by another. This is by design, with frameworks like PSD2 regulating access and relationships between various institutions.

Such relationships, under the watchful eyes of local and international regulators, are meant to best serve the interests of customers and consumers. And for the most part they do. Failing or unscrupulous institutions get sidestepped and the system heals around them. Unless, of course, the problem actor is too large. WireCard is one such giant dud, and the sinking of this fintech suppliers will have repercussions that will be hard to mitigate.

WireCard served so many financial institutions that many millions of customers have been affected. Many of these institutions will not be able to survive, and one can only hope that end consumers will be protected from the fallout. On the business end, such hopes for salvation could be too optimistic. Many companies don’t have the resources to withstand several weeks or months of inactivity while they work to replace their financial infrastructure, especially not with extremely depleted budgets due to the ravages of COVID-19.

Those institutions that do survive will face a new reality of confused and likely higher costs, which will almost necessarily have to be passed on to consumers. The more savvy of WireCard’s survivors will try to shore up their defences against the recurrence of such a disaster by spreading the risk and their activity between several providers. This will hopefully lead to a normalisation of costs and a reduction in fees, but by then consumers could once again be too wary to take the risk with digital services whose fees could seemingly spike at any moment.

Loss of confidence won’t be limited to the consumer side, either. Regulators, wary of being made the fool again, are likely to treat fintech and the NBFI sector with much harsher gloves than it did so far. Increased scrutiny, stricter regulatory requirements, and a general lack of cooperation from regulators could sink any hopes of quick recovery for the battered industry. Not to mention the increased costs from such requirements, that are, again, liable to be passed down to the consumers.

Regulators and authorities are not the only power brokers digital banking suppliers will have to contend with. Partners in the banking industry were already eyeing fintechs with suspicion, not least thanks to the egregious claims of the latter to replace the former. Little wonder then, now that the seemingly unbeatable leviathan of WireCard has sunk to the bottom of the deep, that banks will loath to lend a helping hand to NBFIs struggling to find replacement providers.

So what will happen? In this climate, with demands for justice at their peak, some funds will surely be diverted from risky digitisation projects to PR-friendly investment in diversity. Behind the scenes, certain players will carry on their digitisation projects, but their approach is bound to change. The three Ss – slow, steady, stable – are likely to reign supreme, at least until Hurricane Covid passes, and the economic seas are calm once again.

 

Banking

Bringing Automation to Banking

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Ron Benegbi, Founder & CEO, Uplinq Financial Technologies

 

Automation is everywhere you look these days; from supermarkets to warehouses to automobiles. This prominent trend shows no sign of abating anytime soon. However, some sectors remain behind others when it comes to adopting automated technologies. Banking is one such segment, but there’s now evidence to suggest that this could be about to change.

 

What do we mean by automation?

There are a lot of ways to define automation, but broadly the term applies to any technological application where human input is minimized through design. Over the years, automation has evolved from a basic level, which took simple tasks and automated them, all the way to advanced automation powered by Artificial Intelligence (AI). In general, automated solutions work to increase productivity and efficiency within businesses and often result in a reduction in costs associated with human capital.

 

Ron Benegbi

Why has the banking sector been slow to adopt automation?

The banking sector has been built on a number of long-standing, tried and tested processes and protocols, which have been continually fortified and refined over time. This is one explanation as to why the sector has been so slow in adopting new, automated methods within its operations. Additionally, many major financial institutions have spent decades building their own internal legacy computer systems, which are often incompatible with modern automated solutions.

When combined, these two issues have caused a significant lag in the banking sector with regards to the adoption of automated technologies. This lag has created a market opportunity that a number of fintech providers have been able to exploit in recent years. Offering a more responsive and tech-first user experience, many fintech providers are leveraging the power of automation to better meet the banking needs of their customers. However, there is still time for the banking sector to start bridging this gap.

 

Does automation have a place in the banking sector?

The opportunity for automation to play a role within banking can be transformational.

To achieve this, it’s important that legacy organizations begin to learn from their more tech-savvy, smaller counterparts. If used effectively, automated financial solutions can greatly improve the experience of banking customers, both on a personal and business level. So, what exactly does this change look like, and how far away are we from seeing it become a reality?

A good place to start is the small business credit lending process, where not much has changed since the 1980’s. Over that period, the world has greatly transformed, but the methods used to assess credit worthiness have remained somewhat static. For the most part, banks assess data related to businesses’ accounting and banking records and from credit scores. For many businesses, especially the newer and less established ones, this antiquated approach is having a detrimental effect. In fact, it’s often cited as a contributor to the huge funding gap between SMBs and their larger counterparts.

 

How can automation benefit the banking sector?

By adopting more automated technologies, lenders in the banking sector can begin to assess more comprehensive information when making credit decisions. Notably, new methods exist, which enable additional data sets to be evaluated, in order to build a more accurate financial depiction of a business’ overall position. This data can come from sources like external market attributes, economic indicators, demographic data and exogenous shocks.

By leveraging additional data sets through new methods of financial automation, banks are now in a position to respond more effectively to small businesses, including those in emerging and evolving markets where there is a lack of conventional sources of information.

With more ways to access funding, facilitated by alternative data and automated processes, small business owners can improve their operational efficiencies and accelerate their growth efforts. In doing so, legacy oriented financial institutions can now better equip themselves in protecting against new, nimbler tech-based disruptors.

 

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Banking

MYTH BUSTING THE ROLE OF OPEN SOURCE IN FINANCIAL SERVICES

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Nigel Abbott, Regional Director North EMEA, GitHub

 

There is no denying the financial services (FS) industry is under pressure to innovate. Not only have customer and consumer expectations for digital experiences surged in recent years, but the emergence of nimble and ambitious fintechs have disrupted the market. Yet, despite striving for innovation being table stakes across the industry, FS organisations inevitably face familiar hurdles that slow their progress, including concerns surrounding security, compliance, and the ability to act fast.

Open source is increasingly seen as a route to drive innovation and create new value. The FS sector’s utilisation of open source and the transformative role it can play is accelerating – on paper, at least. According to the recent Fintech Open Source Foundation’s (FINOS) 2021 State of Open Source in Financial Services survey, as many as 80 percent of FS leaders said that innovation, reduced time-to-market and total cost of ownership are factors for FS businesses to consume open source.

Nigel Abbott, Regional Director North EMEA -GitHub

But the reality is these positive adoption figures don’t tell the whole story. The survey also revealed that 75 percent of FS technology leaders said their businesses are either not “open source first”, or that they did not know if they were. Tellingly, less than one in ten (eight per cent) said that their business has put in place policies to encourage open source contribution.

The statistics point towards disparity between uptake of open source and the ability to use it to its full potential. But why?

For me, it comes down to some common myths about the role of open source that need demystifying:

 

Myth #1: There are limits to the innovation that open source can deliver

This could not be further from the truth. All enterprises, including FS companies, rely on open source software to build the best software for their customers, improve infrastructure, and unlock the potential of their engineering teams. Nationwide, for example, has completely redesigned its DevOps processes to respond faster to market changes and keep pace with customer expectations to remain relevant. The impact is transformative when they actively embrace it and participate fully in the open source community, creating a win-win situation for end-users. 

 

Myth #2: Data can be shared without consent 

Quite the opposite. Open source does not require FS businesses to share all their secrets and give away their competitive advantage. Instead, taking an “innersource” approach allows financial institutions to take the skills of developers who are accustomed to using open source tools and brings these inside the company firewall, providing a secure internal platform for working collaboratively on projects.

 

Myth #3: Open source is not secure

The most common misconception is that higher security risks are associated with code being openly available to anyone who uses it. But the open concept is, in fact, one of the biggest security strengths of open source. This is because of the collaborative nature of how code is built. The open source community has a shared responsibility for developing and maintaining secure code, and there is a vast global pool of developers identifying and fixing security issues. Supported by the right tools and processes, open source makes it easier for developers to code securely throughout the entire software development lifecycle, reducing the amount of time and financial investment in delivering secure products. Research from Red Hat found that security is regarded as a top benefit for enterprises using open source.

 

Myth #4: The open source community lacks finance sector contributors

This is untrue. Financial enterprises of all shapes and sizes are prominent participants in the open-source community and lead by example, sharing meaningful code contributions. Challenger banks and institutions such as Goldman Sachs contribute to open source initiatives via FINOS. By opening their code and ideas, FS companies can share lessons and support the whole community – helping them deliver better services and more value to their customers. And crucially, they are advancing a community that they can systematically tap into and benefit from.

Open source is already delivering innovation in the FS sector. But the bottom line is that there is so much extra value it can bring. Unlocking the full potential of open source to effect change does not just require buying DevOps tools. Open source requires organisation-wide understanding and support, a culture of collaboration and a progressive DevOps and governance process to thrive. Only then can it deliver its true value and accelerate innovation.

 

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