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Banking

TRADITIONAL BANKS THREATENED BY DIMINISHING CUSTOMER LOYALTY

Traditional Banks

By Amit Dua, President & Global Head of Client Facing Group, SunTec Group  

 

Solution: Creating the Enterprise of Tomorrow through Hyper-personalization, Legacy Transformation, Open Banking

 

Harry Gordon Selfridge, who founded Selfridge’s department store in London more than a century ago, is given credit for the saying “the customer is always right.” He instilled the mantra in his employees and built a hugely successful business by personalizing the retail buying experience of his customers.

Today, the term “customer service” is regarded by many consumers as an oxymoron. Customers still want and expect a personalized experience. Yet, everyone has a story of a bad experience trying to correct an error on a bank statement or question a suspicious transaction on a credit card (some even do a rudimentary cost-benefit analysis of the time they expect to waste in calling the customer service department: is it worth an hour on hold to fix a $5 error?)

Bad experiences lead to diminishing customer loyalty to brands. Add to this, the entry of BigTechs like Amazon, Apple, Google,etc (who in fact are known for their customer-centricity) foraying into the banking industry along with the many agile& nimble FinTechs that can disrupt the last mile payments  and other functions, the current banking market scenario is quite interesting.  According to Business Insider, 73 percent of US consumers are open to considering a new brand in at least one shopping category –  “This doesn’t mean that consumers are constantly looking to abandon the brands they’re loyal to, but it does suggest brands are always at risk of losing customers.” Many businesses have resorted to loyalty programs offering rebates, prizes, etc. in often-desperate attempts to keep their customers from defecting.

Amit Dua

In the retail banking sector, traditional banks have spent billions of dollars over the past decade on online banking, mobile deposits, bill payment platforms, instant money transfer systems and more. At the same time, businesses like Transferwise, PayPal, Venmo and others are chipping away at traditional banking. As a result, digital transformation for many banks has become more reactive as high-tech, non-bank competitors emerge.

 

The fundamental problem: traditional banks are siloed

The challenges facing banks today are much deeper than finding the right technology to enable digital transformation. Traditional banks must focus on the synergy between their often-siloed, front-end channels, such as mobile, app or web and their often-forgotten middle and back-end systems. This is easier sketched on a whiteboard than achieved to the satisfaction of today’s bank customers.

The middle and back-office transaction processing systems are critical to banks, serving as the backbone of the entire organization. They have been built over many years with a combination of systems and applications. These middle and back-office layers are where the banks’ business logic, financial products, core processes, metadata and many other business-related assets are stored in its core systems. It is within these layers that banks run their auditing, monitoring for risk and compliance, as well as their business decision algorithms. Given the critical nature of the day-to-day operations of a bank, the growing complexity and size of these layers make transformational change an extremely risky endeavour. Customer experiences with banks are separated, often hard to streamline.

Meanwhile, bank customers want customized products to follow their journeys and meet their specific needs. For example, a bank’s customer wants a holistic a home-buying experience versus shopping for a mortgage, hiring a lawyer, setting up utility services and/or finding contractors for needed improvements. Cookie cutter products will no longer cut it. Banks need to move up their customers’ perceived value chains or they risk their customers moving elsewhere.

 

The solution: Banks must modernize and hyperpersonalize

The solution does not need to be infinitely complex. Deploying a digital core middle layer allows orchestration across the silos within the bank. This eliminates any disconnect to the back-office layer, without a fundamental overhaul of the entire system. This headache-free transformation provides the agility required for modern banking by progressively transitioning the business logic out from the complex legacy core to the middle digital core layer. It also has the advantage of letting banks run digital transformation at the pace that best suits their customers.

A big opportunity for banks to achieve profitable digital transformation is through the concept of “Open Banking.” Banks have often viewed new government regulation with a deep skepticism. Now, however, perhaps the most technologically significant regulation is emerging in open banking regulations like PSD2 for Europe, similar regulations in the UK and Hong Kong, and upcoming ones in Australia and Singapore. These new regulations look to fundamentally disrupt banking by requiring banks to open their customer data and payments infrastructure to third parties. Traditional banks’ most valuable asset, customer data, is now available for all to see. Where once this was proprietary bank information, now the customers and competitors can assess its value too.

Open banking challenges traditional banks to “hyperpersonalize” the customer experience. Banks can now offer products and services from external ecosystem partners who complement existing offerings, thereby enhancing the holistic experience for the customer. For traditional banks, open banking is a blessing and a curse. What it takes with one hand, it gives back with the other – but only for banks willing to innovate to retain the customers they know and have a larger wallet share of those customers’ transactions.

 

Conclusion

In today’s banking environment, a lack of agility is the recipe for dissatisfaction and bank customer churn. There is a better way. To build the bank of tomorrow, banks need to start by being digital native and the safest way to be do that is by moving all the business logic and product variation design into the middle layer. This frees up the core back-end product processor systems from the weight of storing multiple products and allows the front-end to be adaptable. It actually enables banks to hyperpersonalize the customer experience and move along with technology updates without actually being disrupted.

Customers are not difficult to please if a trusted brand offers them a relevant and well-packaged range of core offerings. Offering anything less allows more innovative competitors to steal the day. This is the new frontline of banking.

 

Banking

WHY AGILE, SCALABLE DATA MANAGEMENT IS KEY TO DIGITAL BANKING

By Jason Hand, Global Account Executive – Enterprise Sales, Commvault

 

Back at the start of 2019, before we’d ever heard of COVID-19 (hard to imagine these days, I know), mobile banking was predicted to overtake high street branch visits within two years. But the restrictions placed on daily life to get to grips with the pandemic proved to be a catalyst in speeding up adoption.

Although banks haven’t had to close during the UK lockdowns, they discouraged unnecessary visits — and many people new to online banking discovered that it could provide a quick and easy (and COVID-safe) way to manage their finances. No surprise then, that as summer came to an end, over three-quarters of the UK population were using some form of online banking and one in ten people had switched to a digital-only bank.

When it’s implemented well, online, digital and app-based banking is as easy as shopping with Amazon, booking a cab on Uber or grabbing a takeaway via Deliveroo. With so much potential to create a similar customer experience — and so much to lose if they fail — banks are under pressure to deliver on digital services. But their success (or otherwise) will depend on how well they manage their digital data and, in particular, how willing they are to adopt more agile, scalable, cloud-based solutions to underpin their new services.

 

Adopting New Technology in a Risk-Averse Sector

The UK’s financial services sector is undoubtedly slow when it comes to adopting new technology. Indeed, many UK banks continue to rely on mainframes. This cautiousness stems from the continued rise in cybercrime and the fear of non-compliance with FCA and data protection regulations.

Banks have to tread a thin line. They do want to embrace technology that will help them scale and support customer demand for digital services. But they can only do so with an IT infrastructure that keeps out cybercriminals, hackers and anyone else without explicit authorisation to view the data. So, if their legacy IT systems are secure and protect customer data from cybercriminals, banks do not want to risk implementing new solutions that could leave them exposed — even if those old systems make them less nimble and less responsive to changing customer demands.

 

Open Banking and Shared Financial Data

The increased digitalisation across the sector leaves banks facing a second security and data management challenge. Once, they only had to worry about managing their data and keeping it safe within their closed IT environments. Now Open Banking — a UK government-backed programme — encourages banks to securely share their data with trusted third-party financial services providers via an API (Application Programming Interface).

Typically, these third-party providers offer apps to assist with utility bill management, accounting and auditing, and savings (usually rounding up apps). Once a user grants authorisation, the app directly interfaces with that user’s current account. Customers — whether individuals or SMBs — love them, but for banks, they’ve meant a reassessment of security and data management strategies.

 

What Constitutes Good Data Management?

To begin with, it could mean switching to a single data management solution. Banks historically have deployed several different products to manage their data. Multiple applications add complexity and  need more people to oversee them operationally. This approach will add cost, risk, and ultimately will not align to their digital transformation agendas.

Running multiple data management solutions makes it harder to get a holistic view, understand customer behaviour and predict future trends. It also creates unnecessary security risks. Consolidating data management platforms reduces these risks and costs. At the same time, fewer inter-app data transfer points decrease the number of potential weak-link entry points for hackers and cybercriminals. From a practical point of view, using a single data management solution also enables all relevant data points in a hybrid world to be viewed on a single pane of glass — making it much easier to digest, interpret and deliver data management as a service back to their internal clients.

Automating data management components can improve security and cut costs by reducing human contact. In addition, it enables faster and more accurate data management that can accelerate cloud adoption where data management is key to success.

It’s worth saying at this point that banks have been slow on the uptake of both public and private cloud technology, and are clearly still concerned about security and privacy threats. This is despite the fact that cloud computing — particularly with a zero-trust approach to security — has become a lot safer and carries far less risk.

In the middle of 2019, the Bank of England published a report that estimated the world’s largest global banks conducted just a quarter of their activities in the public cloud or software hosted in the cloud. But change is happening, albeit slowly. Larger banks have started to recognise that cloud computing holds the key to running an agile business  — allowing them to scale their online services and safely store, process and mine vast amounts of digital customer data.

The maturation of the hybrid cloud market may have played a role in increased adoption and allayed many of the sector’s previous doubts. A hybrid cloud infrastructure combines public cloud, private cloud and on-premises architecture, giving users the flexibility to keep some applications and systems (those with particularly sensitive information, for example) within their own four walls while still being able to migrate other systems. It’s an elegant and cost-efficient way to balance security, scalability and compliance.

 

Demand for the Future

With so much change taking place across the UK banking sector, data management has never been more critical. Open Banking, consumer demand for digital banking, and app-based banks like Starling and Monzo are all shaking up the market. But the threats from cybercriminals and the risk of falling foul of FCA regulations are still very much present. And, while navigating all these challenges, banks still face pressure from shareholders and investors to make a profit, retain customers and grow the business.

For these reasons, data management strategy — and linked to that, the pace and effectiveness of cloud computing adoption — are now two of the most significant determining factors in how banks cope today, and how effectively they will operate in the future. As such, 2021 should be the year that most banks and financial organisations embrace and invest in new technology when it comes to data management.

 

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Banking

SEIZING THE OPEN BANKING OPPORTUNITY

Nick Maynard is a Lead Analyst at Juniper Research

 

Open Banking has made significant progress in 2020, having recently launched across much of Europe and now starting to emerge in other markets too. And there are two primary reasons why Open Banking is disrupting the banking industry so much:

  • Banks have begun to discover the real competitive advantage of a more open approach to banking. Offering a superior Open Banking experience to customers can be a compelling differentiator from other competitors as part of a wider digital app experience. Open Banking also creates a level playing field in markets where regulatory intervention has led to Open Banking deployment. As all banks are required to deploy APIs in this scenario, the situation is the same and does not put any one particular bank at a disadvantage.
  • Legislation – for example, in October 2015, the European Parliament adopted PSD2 (the revised Payment Services Directive). By early 2020, major banks in the EU had adopted Open APIs. There have however been many cases of late deployments of APIs and problems with the availability of APIs.

 

Nick Maynard

The Disruption Factor

Open Banking is a major disruptive factor for banks. The reason for this being that it opens up account data to both AISPs (Account Information Service Providers) and PISPs (Payment Initiation Service Providers), which can attempt to carve out a role in the banking area.

  • AISPs: These new vendors are able to access transaction data and balance information, as well as related information. This has, in particular, led to the rise of vendors such as Emma, Yolt and Connected Money. These vendors combine information from multiple sources, adding value to the user.
  • PISPs: In this case, the vendors are able to leverage Open Banking API connections to initiate payments directly from the bank accounts in question. This means that these players are able to bypass traditional payment methods, such as cards. Vendors such as American Express and PayPal have already launched solutions that have taken full advantage of this action.

 

PSD2 Changes

Generally, the implementation of the new PSD2 European regulation for electronic payment services effectively reduces the entry barriers for new digital players. It also opens up banks to the potential for competition, enabled by their own APIs. This allows these players to compete with existing services in fields currently offered by the banks. In the case of AISPs, it is possible that third-party applications could displace the role of the apps from incumbent players, which would dilute the bank’s relationship with their users.

As with any fundamental change to markets in the banking area, there is the potential to bring a number of both opportunities and challenges to consider with Open Banking.

Open Banking Opportunities & Challenges to Consider

Source: Juniper Research

Banks and other parties that are looking to become involved in the Open Banking ecosystem must weigh these opportunities and challenges carefully. Open Banking certainly needs a more collaborative approach than traditional banking models, which will require significant effort to make them successful.

 

The Forecast for Open Banking

The total number of Open Banking users is set to double between 2019 and 2021, reaching 40 million in 2021 from 18 million in 2019. The ongoing Coronavirus pandemic is increasing the need for consumers to have the clarity of combining their accounts and gaining insight on their financial health, and also boosting momentum in the adoption of Open Banking.

This extraordinary growth is being driven by Europe, where the regulator-led approach to Open Banking has created a standardised market, with low barriers to entry. This contrasts with markets like the US, where a lack of central regulatory intervention is limiting growth potential.

 

Open Banking – Delivering Opportunities and Threats

It is worth noting that Open Banking can be both a threat and an opportunity for traditional banks. While Open Banking exposes user information and access to potential competitors, this threat has the potential to affect all players in the market equally. Consequently, established banks must create innovative Open Banking services that will provide benefits for the user, while also attracting customers from less innovative competitors.

Payments will be critical to the emerging Open Banking ecosystem; accounting for over $9 billion in transaction value in 2024. However, payments in this ecosystem are at a particularly early stage. While eCommerce is dominated by card networks, there is the potential that this role will be eroded over time by ‘direct from account’ payments. Consequently, card networks should look to offer Open Banking-enabled payment services, in order to offset the risk of future disruption.

Open Banking Users in 2021 (m), Split by 8 Key Regions: 40 Million

Source: Juniper Research

 

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