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.
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.
WHY BANKS NEED TO EMBRACE OPEN SOURCE COMMUNITIES
Nikolai Stankau, Director Business Development, EMEA Financial Services at Red Hat, the world’s largest enterprise open source solutions provider.
Banks and financial services have long been benefiting from using open source software, which is code that is developed in a decentralised and collaborative way. Open source software is cost-effective, flexible, is developed rapidly, and tends to have more longevity than its proprietary peers because it is developed by communities rather than a single author or company. According to Red Hat’s own research, 93% of IT leaders in financial services state that enterprise open source is important to their organisation.
Alongside adopting open source products, which many banks already do, there’s opportunity for these organisations to have a greater influence in the development of industry software, by engaging in ‘upstream’ open source community projects.
The advantages of engaging in upstream communities
In open source projects, code is developed as a shared process by a community of thinkers and developers anywhere in the world. Collaborating directly with these communities – what’s known as ‘upstream’ participation – can give banks a major competitive advantage on their journey to innovate. From there, software can either be downloaded at no cost, or consumed via a trusted open source vendor that secures and stabilises the software to make it suitable for an enterprise to use. This is also known as the ‘downstream’.
A company that contributes its developers’ time and resources to an open source community gets rewarded with the output of hundreds of developers working on the same code. This leads to a magnification effect, by virtue of the fact you’re expanding your team many times over while also benefiting from a much more diverse pool of talent. The result is that organisations can be captains of the product development process and work together with the community to design features and functionalities that meet their needs and keep up with customer demands.
An added benefit for banks engaging in these communities is it provides a great access point for sourcing new talent, as well as helping to retain existing talent. Developers are attracted to organisations that engage in upstream development because it allows them to be at the forefront of open source innovation and new community-led initiatives.
It’s common for multiple organisations in the industry to come together and collaborate on a project, which can drive significant benefits for the community as a whole. A good example is Fintech Open Source Foundation (FINOS), which is a community set up by banks to promote industry collaboration, by delivering software that addresses common industry challenges and drives faster innovation. The concept had its origins in Symphony, a open sourced messaging and collaboration tool that was adapted and improved upon by developers from other banks, ultimately helping the company to become a major business valued at around $1.4bn.
Where to join forces versus compete
Although the benefits of engaging in upstream communities are manifold, some organisations have concerns around intellectual property as well as the productivity of developers contributing to open source projects rather than exclusively working on the bank’s own proprietary software. To this latter point – in reality, the development of new solutions and features built inhouse often requires many months, whereas product ideas shared in a community setting can be executed in much shorter time frames. As the saying goes, many hands make light work.
Regarding the essential consideration of IP and competitiveness: a lot of where banks can differentiate is at the application layer; in the services they develop and offer, rather than at the underlying operating system or middleware foundations – these tend to be common and standard, and are what empowers organizations to get to market as fast as possible. Thus the greatest opportunity for banks lies in platforms such as Linux-based Kubernetes, which is now the industry standard for container orchestration and one of the most important technologies used in the financial services industry. Kubernetes attracts many contributors from diverse organisations all over the world.
Some IT leaders also recognise structural roadblocks: transitioning an organisation to new ways of thinking and operating is a process that isn’t achieved overnight. Not all banks have the legal or tech mechanisms in place to be able to share their code externally, and company policies can prevent their employees from engaging in open source communities. In a heavily regulated industry, it takes time for some organisations to create the necessary changes before they can harness the potential of upstream communities.
The future is open
As the software ecosystem expands, and in the face of accelerated digital transformation driven by the ‘new normal’ of the COVID-19 pandemic, banks and financial services have the opportunity to evaluate how they can get involved in open source. There are many ways to do this: they can invest financially in communities, provide technical leadership and resources, or contribute code. With organisations under more pressure than ever to gain a competitive advantage, playing a role in open source communities will help them create better products, speed up time to market and position themselves at the forefront of financial innovation.
MORE THAN REGULATION – HOW PSD2 WILL BE A KEY DRIVING FORCE FOR AN OPEN BANKING FUTURE
Ralf Ohlhausen, Executive Advisor, at PPRO
Whilst initially seen as simply a regulation exercise, the second Payment Service Directive, also known as PSD2, has been a key driving force behind Open Banking, an initiative that presents a hopeful vision for the future of the financial services sector. Thanks to the advancement of technology, the payments industry is currently seeing disruption to legacy banking systems, and a move towards a world of Open Data. With Open Banking, third-party providers (TPPs) can offer customers a wealth of new and automated services beyond their standard bank offerings, such as what products to buy or even advice on who to bank with.
PSD2 has been created to ensure that banks create mechanisms to enable third-party providers (TPPs) to work securely, reliably and rapidly with the bank’s services and data on behalf of and with the consent of their customers. PSD2 requires EU member banks to give authorised, i.e. licensed TPPs, access to customers’ accounts either via Application Programme Interfaces (APIs) or their user interfaces. It also mandates the use of Strong Customer Authentication (SCA), which requires multiple factors of authentication from a customer to initiate electronic payments and grant access to transaction data.
Despite the progress of PSD2, however, there are still challenges to overcome to achieve widespread adoption and to meet Open Banking objectives. So, what are the current roadblocks that European banks and financial services need to overcome to make Open Banking a beneficial reality for all?
Delays to API development
A crucial factor standing in the way of the acceleration towards Open Banking has been the delay to API development. These APIs are the technology that TPPs rely on to migrate their services and customer base to remain PSD2 compliant.
One of the contributing factors was that the RTS, which apply to PSD2, left room for too many different interpretations. This ambiguity caused banks to slip behind and delay the creation of their APIs. This delay hindered European TPPs in migrating their services without losing their customer base, particularly outside the UK, where there has been no regulatory extension and where the API framework is the least advanced.
A lack of awareness
Levels of awareness of the new regulations and changes to how customers access bank accounts and make online payments are very low among consumers and merchants. This leads to confusion and distrust of the authentication process in advance of the SCA roll-out. Moreover, because the majority of customers don’t know about Open Banking yet, they aren’t aware of the benefits. Without customer awareness and demand it may be very hard for TPPs to generate interest and uptake for their products.
Recently some regulators and banks, such as the Central Bank of Ireland, have made decent efforts to raise awareness of the changes with PSD2 campaigns. But it isn’t reaching the general public. When it does, it’s often because of scaremongering or fear, uncertainty and doubts around data security fuelled by incumbents to protect their business. This also isn’t the right way to approach the issue as it will lead to people being more afraid, rather than aware. Instead, it is the role of payment service providers to educate their customers about Open Banking requests or opportunities, to ensure the public are aware of the changes to payment authentication procedures when SCA comes into play and are empowered to move their data.
TPPs have a real vested interest in getting customers on board with Open Banking. They should build on their customer relationships to grow trust and raise levels of education around the changes. When customers sign up for a new service, TPPs need to tell them explicitly what to expect before they have to do it, plus what explicit consent is required to access their account information in exchange for value-added services.
Outweighing the challenges with opportunities
Although the introduction of the PSD2 regulation hasn’t been seamless for the banking and fintech industry, it is set to offer many benefits and advantages for the end-customer, and the financial industry. In fact, the regulation will create an integrated and frictionless European payments system, that will provide the customer with more choice, control and security over their finances than ever before.
One of PSD2’s primary goals is to provide greater protection against fraud for banking customers, who may have previously been open to risk through weak authentication and unregulated data-sharing practices. The new rules insist on enhanced security requirements, including the use of Strong Customer Authentication (SCA) to protect customers while making electronic payments.
Furthermore, TPPs unencumbered by legacy technology have long been able to innovate faster than traditional banks. Now, this regulation will provide regulated and secure access to customer data, allowing them to develop products even more quickly. The new regulation also promotes technology on a European level and encourages fintechs to do what they do best: innovate.
It’s also important to not forget that PSD2 regulation increases market competition allowing customers to choose a wider range of suppliers for their banking and payment services without having to switch their bank for that. The decoupling of banking services from the underlying account infrastructure will make it easier for customers to opt for the banking services that best fit their needs. It also increases the number of financial providers, services and products which customers will be able to choose from.
The future of Open Banking
The financial services landscape is becoming a firmly consumer-centric environment. Across the UK and Europe, we’ll continue to see the rollout of technologies that put control in the hands of consumers. Open Banking will be pivotal in its role, opening up new avenues and opportunities for both banks and payment service providers (PSPs).
Thanks to Open Banking, the ability to share data securely in the retail banking sector has led to a sophisticated ecosystem where the customer is in charge of their payments and choice of banking services. Over the next decade, we should expect to see the same level of transformation in our digital services and data sharing, leading to a complete rebalance of services where customers will be able to actively own their data and use it the way they like.
Europe is currently leading the Open Banking race, so the successful implementation of PSD2 and SCA is extremely important to maintain the lead and build a future with Open Finance and Open Data as well.
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