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STRANGE NEW WORLD: WHAT NEXT FOR BANKS?

SOFTWARE

Simon Wilson, Director, Payment Solutions, Icon Solutions

 

What’s next for banks in this strange new world we find ourselves in? Forget the forecasts and predictions, we are in unchartered territory and the only honest answer is that no one truly knows exactly what is coming down the line.

But what we do know is that accelerating payments transformation initiatives to be more cost effective, resilient, innovative and flexible in the face of uncertainty is key to delivering for customers and establishing a leadership position.

 

Build foundations to reduce costs and deliver for customers

An immediate and critical priority for banks is to offset the impact of squeezed revenue streams, which are under pressure from all sides.

The threat of second waves and local lockdowns means that transaction volumes will remain volatile in the short-term. As recessions start to bite, cross-selling opportunities will be limited as overall demand for banking products and services reduces. Margin pressure is compounded by historically low interest rates, and record rises in delinquency and defaults increasing exposure to non-performing loans. The global transaction business is likely to come under added pressure as trade corridors become much more local and additional disruption from US-China relations starts to bite.

Yet at the same time, banks must also be prepared to respond to rapidly changing customer requirements and provide them with greater control. Customers will need to be able to manage their money in different ways, instant access to credit and liquidity will continue to be essential, and instant data-driven decisioning absolutely critical to supporting the specific needs of individual customers at any given time.

But expensive and outdated legacy infrastructure is a roadblock to these requirements, making it hard to reduce operating costs and support innovation. Prioritising and accelerating strategic payments transformation initiatives will mitigate long-term revenue constraints and, if executed correctly, reduce total cost of ownership (TCO) by factors. It will also enable the creation of differentiated, personalised, value-added products and services for customers and protecting profitability and positioning for market share capture as growth returns.

 

Simon Wilson

The time is now to overhaul legacy infrastructure

There is little resource, and indeed appetite, for high-risk, expensive long-term migration projects in such uncertain times. This is understandable, though it is uncertainty that should make payments transformation initiatives a priority.

Consider that many banks have struggled to cope with the increased load on digital banking services, which have pushed the resilience and stability of legacy architectures to breaking point. This has crystallised the importance of an ‘antifragile’ approach to risk, with systemic contingencies and buff­ers to meet demand surges. Ensuring operational resilience will be particularly important given that we can expect renewed regulatory focus on the potentially catastrophic impact of outages during crises.

Banks must also contend with the challenges of enabling secure, efficient remote interactions at a previously unimaginable scale. This includes the huge redistribution of workforces, keeping customers safe from fraud, and enabling effective digital service provision through artificial intelligence and machine learning.

Given the sheer scale and immediacy of the challenges, over-engineered and monolithic solutions cannot deliver the flexibility required. The good news, however, is that banks don’t have to look far for a low-risk, low-cost alternative.

Cloud-native, agnostic challenger banks have been able to move quickly and flexibly through these uncertain times in a way that incumbent banks have not. This should provide a best-practice model and roadmap for the industry. Investing in open-source, Cloud-native infrastructure is how banks secure their place in the digital era, enabling them to operate and deliver in more agile, scalable and innovative ways.

 

Embrace purpose in new look economies

Banks must also prepare for radically altered economies and a new position within them. Governments across the world, regardless of political persuasion, have necessarily embraced socialist policies, with banks facilitating the distribution of massive government stimulus, relief and requisition packages directly to corporates and consumers.

With the risks of relying on global trade for essentials exposed, economies will likely become more autarkical. After many years of industrial decline in some countries, we can expect a significant uptick in investment and output to shore up supply chains. Banks, along with governments, will have a critical role in financing and supporting this domestic growth.

Conversely, there are stark questions about commercial viability. ‘Non-essential’ businesses across the hospitality, travel and beauty industries are being hit the hardest, precisely because they are considered ‘non-essential’. Yet, it is a haircut, a stiff drink and a holiday (not necessarily in that order) that many of us most looked forward to while locked down. Relaxed liquidity buffers and capitalisation requirements provide flexibility for banks to deliver economic stimulus until good times return.

In addition, to a large extent some of the lowest-paid and least-appreciated sections of society are now rightly recognised and valued as key workers. And it is often these same workers who can’t afford a mortgage deposit, for who credit is expensive and whose savings are limited. Calls for fairer, more sustainable economies may push banks to promote financial inclusion and provide access to financial products and services on better terms.

It is clear that banks cannot expect to carry on with business-as-usual approaches. Indeed, there is a generational opportunity for banks to re-shape public opinion towards the industry.

 

Leading in a strange new world

The recession we are entering, and the longer-term ‘new world’, will have nuances not seen before. While defaults on loans will unfortunately rise, unusually banks will enter the situation with rising deposits as customer struggle to spend or are simply unwilling to risk normal levels of spending. This provides opportunity for investment and change in approach. We do not know what will come next. But there are clear steps that banks can take to enhance their ability to effectively respond to the unknown. In the face of significant uncertainty, financial institutions accelerating transformation to reduce costs, deliver innovative new customer experiences, and increased agility and resilience can establish leadership positions in a strange new world.

Icon Solutions’ payments experts have compiled insights from their network to deliver key recommendations and considerations. Download the infographic to find out more.

 

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Banking

HOW BANKING IS USING AI TO PROCESS CUSTOMER FEEDBACK

By Dan Somers, CEO of Warwick Analytics

 

More banks are turning to practical AI to rapidly analyse customer conversations for sentiment and emotional intent to get the insight and automation they need to transform their customer service and operations.

Here we look at 5 ways in which banks are using AI to process their customer feedback more effectively:

 

Processing incoming queries more efficiently

AI can remove the need for manual review of each incoming query and enables banks to handle them effectively from the outset.

The analytics can facilitate a much smoother omni-channel experience for the customer by: identifying which channels your customers are best suited to – and which work best for specific types of interaction; understanding the causes of channel failure and what drives customers to switch; and reducing customer effort by delivering service in the customer’s preferred channel first-time.

As a recent example, at one bank we were able to reduce the maximum time to respond to a customer from 3 weeks to 5 days. The solution used AI and machine learning to automatically analyse and prioritise all customer emails in near real time and routed high-priority cases to a dedicated work queue for fast action.

 

Automatically identifying customer intent and emotion

When different people are voicing different issues, they will use different words and sentiments. Vital data is often missed with traditional models and manual processes. For example a customer at a bank might say ‘by the time they called back, the bank was closed’. The keyword would be flagged as ‘closed’, when in fact the main issue was the call back. There are also other limitations with using just keywords such as sarcasm, context, comparatives and local dialect/slang. The alternative is to analyse text data using ‘concepts’ instead of ‘keywords’. This can be done effectively with AI.

 

Fast tracking customer complaints and issues

With AI you can send complaints straight to the relevant team for a faster resolution. We’ve helped banks reduce resolution time by up to 3 days which really boosts customer retention.

Dealing with specific complaints manually involves using more and more case handlers. Routing complaints automatically and prioritising by issue and category is also difficult due to the nature of complaints i.e. unsolicited, long and sometimes multi-topical. As a result, manual classification is often impossible within an acceptable time frame for the unhappy customer.

Using the latest AI however, banks are now automatically classifying unstructured data to provide an early warning of issues that need resolving fastest. This can lead to better and quicker outcomes at a much lower cost.

 

Spotting vulnerable customers early

Under the Financial Conduct Authority (FCA) front-line staff need to be able to spot different types of vulnerability in customers and support them accordingly. However, the volume of communication is just too much to carry this out manually.

The latest in AI speech transcription and text analytics is able to automatically detect hints at vulnerability from conversations with customers. The conversations are automatically analysed by to detect emotionally-driven comments that indicate vulnerability such as a basic lack of understanding, likelihood of a disability and circumstances. These vulnerabilities are flagged to the relevant members of staff for action. Regulated firms can also accurately understand the drivers behind the vulnerabilities so products, services and communications can be reviewed accordingly.

 

Banks using AI during Co-vid 19

During Co-vid 19 many banks have customer service agents working from home and/or in strict shifts. There has been a move from voice to webchat for many to cope with these changes which brings its own challenges and opportunities. Post-C19, many of these situations are expected to stay in place or at least not revert 100% back.

AI is helping to serve customers better focusing on taking cost out whilst keeping CSat up and channel switching down by improving chat optimisation, email, complaint handling and chatbot supervision.

 

Case study: Improving customer loyalty

A major UK bank was looking to improve its customer loyalty. It was already using the latest

analytical tools including social listening, sentiment analysis and a large data science team

but they were experiencing limitations and not making enough progress. They were also interested to see what online feedback their main competitors were receiving.

 

A number of key recommendations for the bank were identified using AI analysis:

  • A 10% increase in CSat (c. £200m pa revenue) from operational improvement
  • Comparable best-in-class churn e.g. Nationwide is 25% lower
  • Online and mobile banking is a key issue, and is causing direct churn
  • Drivers of churn are mostly customer service, branch closures, marketing offers, interest rates and vulnerability issues
  • Early warning can help predict churn tactically and intercept likely churners
  • 28% of Tweets and potentially all non-voice queries can be automated. This could be a £20m pa saving
  • Business banking, current accounts and ancillary services have the highest churn, and insurance the highest negative advocacy
  • Mortgages, current accounts, savings and overdrafts cause the most attritional set-up
  • There are distinct patterns and opportunities to adjust customer services resources to reduce churn and costs

With AI, this level of insight can be set up in a matter of days, delivered in near real time and without the need for a data scientist to maintain the model.

 

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Banking

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.

 

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