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Over 50% of customers now have a finance relationship with a non-bank

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Philipp Buschmann, Co-Founder and CEO, AAZZUR

 

Technology has impacted pretty much every part of our lives, and with this change we as consumers have now come to expect a digital layer across everything we interact with. It comes then as no surprise that we now expect our banks to offer a seamless and engaging experience with everything we need at our fingertips.

But for many of the traditional banks digital transformation has been a slow process and consumers are now looking elsewhere for better banking solutions. Embedded finance, challenger banking and open banking has helped drive this consumer demand and looking ahead it’s going to completely disrupt the traditional banking system.

Technology has impacted finance in such a big way that it is now possible for nonbank organisations such as large retailers, to offer financial products to customers. This seamless integration of financial services adopted by non-financial companies is revolutionising the way we interact with money and business.

 

So what is embedded finance exactly and how will it benefit the end customer?

In its simplest form, it means offering financial and banking products into traditionally non-banking spaces. i.e. retail and e-commerce businesses, at the point of need. An example of this would be short term buy now pay later loans from brands such as Klarna.

What embedded finance can achieve at its peak, is offering an ecosystem of personalised services based on spending data. Insurance. Loans. Investment. Wealth management. All offered exactly when a customer needs them, maximising uptake and engaging consumers.

What this means for banks, is that those that do not embrace embedded finance, will be left playing catch up as consumer demands continue to change, and those that do will need to keep developing and improving the services to keep up with the non-banks and challenger banks that can offer a more specialised range of products for their customers.

It poses the question, what does it actually mean to be a bank nowadays?

Traditional banks are being challenged to reinvent themselves, after years of market domination and archaic tech systems.  During 2010, the rise of challenger banks like Starling, Monzo and Revolut, had banks desperately trying to play catch up in a bid to hold onto their customers.

Now we have reached the 2020s and we can see the world’s biggest banks spending a lot of money to compete with more agile challengers. Customer-friendly, innovative and tech-first banking has become the norm, and banks must thrive in this space in order to compete.

The majority of banks have now implemented strategies to compete with the challengers, their infrastructure is being developed. Mobile and online banking is front and centre and the features available put the customer first.

However, the 2020s have been a game-changer once again as fintech started evolving and integrating systems with each other, which has led to a much bigger ecosystem of products available to the end customer.

One example of this is Starling offering the services of fellow fintech Pensionbee to their users. This partnership means the customer gets access to the best products in one place, and the companies can share audiences and broaden their appeal, all while simultaneously offering out their own services and payment rails.

Additionally, these organisations are offering those services to non-banking businesses such as e-commerce and retail companies.

One report has revealed that 52% of financial relationships for all consumers were with non-bank providers. For Gen- Z, this rises to 69%.

Ultimately, this is not good news for traditional banks. They obviously want these relationships for themselves but on top of that, embedded finance enables those challenger banks to make some money, which can mean a loss for traditional banks. With so many customers switching to more convenient platforms to manage their money, the banks must position the customer at the centre of everything.  In reality, the customer cares about convenience and services, not where their accounts or services come from.

 

Personalisation is now the focus in banking 

The first fintech revolution was to improve banking operations for the average customer. Now the focus is on making it personal. Not only when the customer is using their bank, but also whenever they are using their cards.

To understand this, first think about how Google monetises searches and social media platforms monetise relationships. Financial service providers can now do the same thing but with spending data. This is all thanks to Open Banking and the ecosystem of services and products that embedded finance can offer customers.

While previous cross-selling initiatives have failed due to a slow selling process, this hyper-personalised service when needed is more likely to be adopted. Take our partner bsurance for example. They build specialised insurance into banking and retail travel. With spending and geolocation data, you’ll get a very impressive 10% closing rate in your cross-selling policy.

Offering other travel products to customers after they have booked a holiday is just one of the options. Think of a card that pays for its own parking tickets. A digital ski pass vendor that offers its own short-term insurance for extreme sports. Wealth management services triggered by high-value purchases. This is what hyper-personalisation is. Providing solutions at the point of need.

Salesforce conducted a survey among consumers and found over 51% expect banks to now anticipate their needs and make relevant suggestions before even making contact. Because of this, banks are now competing but also collaborating in building these huge ecosystems of services.

The entire banking supply chain is now racing to add these services.

 

The shift in the banking supply chain

Prior to the fintech revolution over the last decade, banks traditionally managed almost every step in the supply chain. They had their own payment rails, monitored their own customer spending, and provided their own accounts and services.

Banking-as-a-Service and embedded finance have completely disrupted that traditional system. Today, most financial services rely on huge infrastructure providers such as Railsbank to provide payment rails, provide data to data service providers (DSPs), and provide additional services to companies such as Tinq and Solarisbank.

But this is also changing. Banks are building networks that can compete with infrastructure providers such as Railsbank as they seek to take advantage of the opportunities offered by embedded finance. The vast amount of data collected by these ecosystems sets it to truly challenge existing DPSs.

 

The race is on for innovation and reinventing the wheel

However, even with this huge impact embedded finance is evidently having on banking, there are many in retail and even banking itself still ignoring it.  This will prove to be a huge mistake.

The projected embedded finance market size is estimated to be worth €230bn revenue by 2025 and with over 50% of customers choosing non-banks, the race is already underway.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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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