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WHO ARE BANKS COMPETING AGAINST IN PAYMENTS NOW?

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Simon Wilson, Co-Head, Payments at Icon Solutions

 

For several decades, incumbent banks have held a comfortable leadership position in payments. But the rapid growth of digital payments has signalled opportunity for new market entrants to attack this status quo.

To develop effective strategies to stay ahead, incumbents must understand who their competitors are now, and assess how their strengths and weaknesses compare in the key competitive battlegrounds of data, trust, cost, innovation, scale and alternative payment methods.

 

Who are incumbent banks competing against?

Incumbents are facing increasing competition from card networks, payment platforms, challenger banks and big tech players, which is upending the payments ecosystem.

Incumbent banks’ market position is underpinned by strong consumer trust and massive scale, but these historic advantages can no longer be taken for granted.

            Simon Wilson

Take trust. This is a layered concept, ranging from transactions being reliably processed, responsible data use and, increasingly, an expectation that organisations are acting in their customers long-term interests. And demographic trends are showing that consumers increasingly trust non-bank and alternative providers to deliver financial services.

A recent Oracle digital banking survey focused almost exclusively on Gen Z and Millennial customers showed that 64% would recommend their bank for various spending, savings, borrowing, and investing products, but 56% said they would be willing to switch to banking solutions offered by one of the big tech companies. And at the end of 2020, 15% of Gen Z and millennial consumers considered their ‘primary’ account to be with a challenger, up from 4% at the start of the year.

Elsewhere, banks are sitting on a goldmine of customer data but must start using it more effectively to gain an advantage. In itself, data has no real value, so it is the ability to effectively organise, translate and leverage this data as meaningful customer insight and value add products and services that has emerged as a key competitive differentiator.

Legacy infrastructure also makes it difficult for banks to compete on cost, which is more important than ever as margins evaporate, and payments become instant, invisible and free. This hampers the ability to realise partnerships to drive innovation and limits the opportunity to explore alternative payment methods.

And as incumbents look to bolster their strengths and address these challenges, they must also recognise the areas where the competition excel.

 

Card networks – moving beyond ‘just’ cards

Card payments are trusted by millions of consumers and businesses worldwide, with card networks managing massive volumes to realise huge scale advantages. This is combined with recent mergers and acquisitions to support end-to-end payment services and multi-rail offerings. Take Visa’s Crypto APIs, for example, which enable banking clients to access and integrate crypto features more easily and demonstrates the innovation that is happening in this sector. Mastercard has also confirmed it will enable crypto flow across its network in the near future.

 

Payment platforms – creating ecosystems

As the payment ecosystem has expanded and digital volumes have increased, organisations like PayPal, Stripe and Square have evolved from single specialised propositions into comprehensive payments platform businesses, providing previously bank-led offerings such as SME lending, corporate treasury services and credit.

Payment platforms are effective at managing high volumes and have the capacity to scale and drive innovation in specific market segments. Platforms are fast to adopt new payment methods such as digital currencies, and their use of data is improving consistently, offering some personalisation to customers.

 

Challenger banks – the new(ish) kids on the block

Challenger banks can best be described as banks without the baggage, unburdened by 50-year-old legacy infrastructure, sprawling bureaucracies and siloed departments.

Challengers have built market momentum and presence through their reputation for customer-centric products and services, having made consumer behaviour and experience their focus. Revolut for example offer in app investment in stocks, crypto and commodities, as well as vaults allowing you to save money in any currency or commodity.

Challengers also benefit from a low-cost infrastructure to bring products to market quickly, and have been more willing to explore alternative payments than traditional institutions. Again, take Revolut for example, who offer free and instant transfers in 28+ currencies, crypto and commodities. AndFirst Boulevard neobank will be among the first to pilot Visa’s Cryto APIs to enable their customers to buy and sell bitcoin through their digital accounts.

 

Big tech – the wild card entrants

The big tech GAFA (Google, Apple, Facebook, Amazon) players are the ‘wild card’ entrants that represent potentially the greatest competitive threat to incumbent banks. One look at China, where Tencent and Alibaba have established dominant positions and massive payment volumes through WeChat and AliPay, is enough to keep bank executives up at night.

Big tech enjoy massive scale but, so far, have been content with relatively limited plays, such as overlaying services through their mobile wallet platforms or partnering with financial institutions on limited offerings. We can expect continued investments and acquisitions to support data-driven, experiential products and services.

A potential roadblock is that regulation will make it difficult for big tech to undercut the competition by subsidising services below cost. Regulators have also shown their teeth in blocking Facebook’s considerable crypto ambitions, forcing a rebrand from Libra to Diem.

 

How can banks compete in payments?

It is clear that incumbent banks are under significant and sustained attack from various competitors and the reality is, this competition is only going to intensify. As J.P. Morgan CEO Jamie Dimon notes, incumbent banks should “expect to see very, very tough, brutal competition in the next 10 years.” When asked why JP Morgan intended to focus on buying FinTech and tech firms, Dimon noted, “our new competition is Apple, Amazon, Google, WeChat and AliPay” – rather than other banks.”

Incumbents must therefore focus on combining a clear, executable strategy with flexible technology solutions and expert partners to improve data-driven propositions, promote trust, reduce costs, realise scale advantages, drive innovation and support alternative payment methods.

 

Banking

LEGACY INFRASTRUCTURES MUSTN’T HOLD BACK INNOVATION IN FINANCIAL SERVICES

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Ian Perry, Principal Solution Architect at Zscaler

 

We are living in a changed world; one of hybrid home/office work and customers who may never return to bank branches and the services of the high street. According to RFi Group, 73 per cent of UK consumers interact with their main bank via digital banking at least once a week, and only 23 per cent believe nothing can replace what they get in a branch. Meanwhile, institutions including JP Morgan, HSBC and Nationwide have all indicated an intention to retain new higher levels of homeworking.

Now that employees work from a multitude of locations and customers bank and manage their money online the race is on to adapt processes, systems and support structures for safe, secure and productive homeworking and digital access for customers. Inevitably, this calls into question legacy infrastructures in financial services and how they might impact digital progress.

 

New tools, old systems?

The question is, how can banks and other financial institutions securely provide a higher level of remote access to their systems and applications when incumbent infrastructures were developed for an entirely different time?

Of course, the first thing to note is that banks aren’t coming at the problem from a standing start. Oft-cited legacy infrastructures have been added to over time so that many set-ups are now an on-premise/cloud-hosted hybrid. In fact, the finance sector has invested heavily in cloud infrastructures and cloud-based office applications.

The issue is how to harmonise this set-up so that it works for users and organisations as a whole. Here, there is work still to be done. It’s often the case that core banking applications remain in mainframe on-premise networks, whilst other operational tools reside in the cloud. Cloud-based Office 365 is a case in point. It supports digital working, as organisations need it to, but a range of its benefits and functions are at odds with legacy network setups.

Inevitably, when a product or service innovation reaches implementation planning stage, the starting point is the existing network, its systems and processes. The hard part is flipping this approach to assess what the resulting experience will be from the user point of view, but that is exactly what’s needed. It’s an approach that competing market disruptors have been ideally placed to adopt from day one.

However, that needn’t mean that financial institutions must completely overhaul their legacy infrastructure – something that would be expensive and complicated. They can still fully capitalise on the benefits of cloud-based services, among them flexibility, productivity, business continuity and the right customer and user experience.

 

Zero Trust without friction

One way is to take a ‘Zero Trust’ approach. As a result of recognised risks, 72 per cent of companies are prioritising the adoption of such a security model. This resets a data security approach from one that traditionally secured the perimeter to one that protects users, devices and business resources.

It’s a shift in emphasis from securing the network to securing each access and doing so without introducing friction into processes for users. We can think of legacy digital protection methods as a visitor getting a key from reception and being allowed to wander around the building, and compare that to a frictionless cloud experience in which a security guard shows the visitor directly to the room they need.

The Zero Trust model lends itself to high levels of remote access, which is exactly the situation organisations are now in. Employees work from anywhere, from a range of devices, and customers access services previously provided in-person online. Applications are no longer exclusively within the data centre, they are outside the network perimeter meaning that traffic must be enabled to run securely through the internet, rather than through corporate IT. Doing so not only equips organisations for the way things are today, it can also reduce the cost of individual site maintenance and enable the full benefit of cloud-based tools.

The technology now exists to make high levels of security completely invisible and so, with a growing number of security processes now taking place in the cloud, educating customers will be key. The industry must come together to improve user interfaces to signal what’s taking place behind the scenes.

With the right security approach, financial services can deliver on new access priorities to support their workforces and serve customers. Convenience, as well as security, should be the aim along with a strategy that ensures legacy doesn’t hold back innovation. That way, banks and other finance institutions can begin to fully capitalise on the benefits of cloud, adapt to meet customer demands as they evolve and compete in a disrupted market.

 

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Banking

BANKS OF THE FUTURE WILL BE ASSEMBLED, NOT BUILT: HOW BANKS CAN EXPAND AND INNOVATE BY RETHINKING THEIR PARTNERSHIPS

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Author: Kelly Switt, Senior Director, Financial Services Strategy, Ecosystem and Strategic Partnerships, Red Hat

 

The financial services business ecosystem has been radically reshaped in recent years and is arguably more dynamic and ripe for innovation than it has ever been. Banks that take bolder steps to build strategic partnerships have the potential to dramatically transform themselves and the industry. While open banking reforms have encouraged organizations to open up their architectures to each other, there is much potential still to be unlocked: beyond the minimum of meeting regulations by the deadline and exposing the APIs required for aggregation services, there is a vast untapped opportunity for creativity in joint business models. The kind of opportunity that has long since been grasped by web-scale companies and fintech startups.

 

Deutsche Bank, BBVA, and neobank bunq are examples of banks that have understood the value of creating open finance communities. However, the majority of financial organisations are yet to embrace deeper collaborations that truly take advantage of external parties’ ready-built solutions, which would save time and resources and enable inhouse teams to focus on differentiating their business where it really counts. So how can an organisation break free of legacy structures and attitudes to better integrate and engage with partners?

 

Step 1: Adopting a growth mindset

Establishing deeper strategic relationships with partners requires a mindset shift for much of the industry. Traditionally, banks have tended to see third parties as vendors, treating the relationship as a transactional exchange, in the context of legal agreements that set forth the provisions and conditions of the services to be provided. Instead, banks need to adopt a growth mindset that encourages organisations to look beyond their own four walls, and embraces participation in a wider community. By engaging with an ecosystem of partners and treating them as a valuable additional set of experts, banks can accelerate problem-solving and reach their business goals faster.

 

Step 2: Aligning internally as an organisation

Before bringing in a partner to tackle a business problem, an organisation needs to conduct an internal assessment. It’s important for all departments within an organisation (IT, sales, marketing, etc.) to contribute their perspective on unpacking why a problem exists across the organisation: what are compliance and risk issues? What are the technical challenges? In what ways is the business impacted? Once everyone is grounded on why the problem needs fixing, it is a much clearer path to identify both the business and technology capabilities needed to solve the problem – i.e. the tools as well as the people skills. If different departments aren’t set up to engage with each other, it’s time to dismantle barriers and build bridges to ensure everyone is included in this discovery phase.

 

Step 3: Be open with partners

When the business has galvanised around its key objectives and the capabilities it needs to move forward, the organisation can look at engaging partners that have experience and expertise in the right areas. The more information that is shared with a partner about the company’s challenges, opportunities and goals, the more empowered and committed the partner will be to help meet the desired outcomes. Armed with insights, partners can help connect the dots and invite further parties to a project, leading to a network effect that benefits both the organisation and the wider ecosystem. To ensure that everyone continues moving in the same direction every step of the way, it is crucial to have transparent discussions in which ideas can be exchanged freely, and to make decisions in an open and collaborative way. Disagreement and constructive feedback must be encouraged – partners should be empowered to speak up with concerns – as this is an important part of mitigating risk.

 

Step 4: Humanise business relationships

Business relationships are personal relationships. The most successful ones are built on mutual understanding of what makes each other tick, what motivates someone to behave the way they do and what drives their performance. Getting to know people on a more personal level can create deep-seated relationships where everyone feels fully invested in driving the project forward. The banking sector may not be known for encouraging vulnerability, but revealing a bit more of the human in us is a key ingredient for building trusted relationships. The pandemic has added urgency to the need for greater empathy to lead people through difficulties, and has shown how people can come together through shared emotional experiences to better manage adversity.

 

Step 5: Build on a consistent technology platform

The technical foundation for engaging in any new partnership is a strong integration strategy. An organization may need to rethink its system architectures and shift towards open platform models. In the case of using containers to take advantage of cloud scale, establishing a common platform at the base of the technology stack that runs consistently across an organisation can provide more control, security and stability. A common application management layer that is agnostic to the underlying technology and based on open APIs gives internal teams together with partners greater freedom to collaborate, accelerating innovation. It helps avert the risk of ending up with many custom integrations, which can lead to cost overruns, outages or services-related issues for customers.

 

Unleashing future possibilities

Progress is able to happen much faster when people and teams work together. As more and more businesses in banking and adjacent industries wake up to the opportunities inherent in a move towards greater openness, we will start to see unprecedented innovation in financial services, and myriad other areas of our lives, creating better and more inclusive customer experiences for societies globally. Banks of the future will be assembled, not built.

 

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