By Mike Kiser, Senior Identity Strategist, SailPoint
Splitting the bill is the mundane ending to many a delightful dinner. Who had that extra drink? How much should you tip for service? In the not-so-distant past, tables of people would load up the calculator functions on their phones to make dizzying computations to settle these question – and eventually, settle the bill. But splitting the bill today is now a much smoother procedure: a few quick taps on mobile devices can settle everything. Multiparty transactions have become an effortless experience, facilitated by the development of modern technology.
This scenario is a prime example of the impact of innovation in the financial sector. New methods for individuals to govern and access their money are emerging monthly, and a new mode of banking continues to evolve. The new banking landscape is one where innovation is powered by collaboration and the pooling of tech skills. However, could the dawn of the open banking era be exposing the industry to cyber-attacks? According to PwC’s Global FinTech Report 2019, the majority of respondents confided that getting security, compliance and data privacy right is their organisation’s biggest challenge. Arguably, this is the biggest challenge of the next decade.
When the Financial Services Act of 2012 came into force, the barrier to entry into the banking industry was lowered significantly. Over the past eight years, this has enabled various challenger banks and fintech companies to provide more nimble alternatives to the larger banking groups. These nascent entities have changed the way many utilise personal financial services; in-person (especially in-branch) interaction has been replaced by the ubiquitous mobile app, and new technologies such as digital currency and payments on the go are being rapidly introduced as ease-of-use demonstrates its importance to younger generations. Now, big tech is joining the action too, with the likes of Alipay and Google Pay now an expected, if not ‘compulsory’, payment option in businesses small and large alike.
However, this convenience does not come without a cost. Collaborating with more partners to facilitate services has become a ‘sink or swim’ issue for many challenger banks looking to expand quickly. The opportunity for such fintechs is to evolve their IT and security infrastructures in line with the increasing complexity of their operations – without impacting their productivity or customer service. Maturing — either as a human or as a financial institution — is not easy. Compliance with regulations is proving difficult for many of these new entrants into the market. Further, unexpected challenges may emerge as success could make them a target for cyber-attacks such as phishing and ransomware. For these new enterprises to grow past their initial user base, they will have to develop capabilities to address these challenges.
Compliance with consumer protections, both great and small, has long been a task for any business that serves the general public. The regulations placed on financial institutions are showing themselves to be formidable for newcomers to the market, and that’s even with an extension for certain portions of regulations such as the strong customer authentication (SCA) portion of PSD2. And as customers place a higher premium on security as a core value, proper cybersecurity features will become essential to successful institutions.
This continued emphasis on cybersecurity is a natural consequence of growth. As these new entrants into the banking market gain more market share, they become consequently more attractive for cybercriminals. Not only are they responsible for more customers and more total capital, but also their attack surface increases in line with their growing numbers of employees, systems, and services. Capabilities such as two-factor authentication (2FA), high-grade encryption for data (both in transit and in storage), identity-proofing, and a zero-trust security strategy based on identity will need to be woven into the very fabric of the financial solution. Ideally, these facilities would have been part of the base offering from the beginning. Regardless, consumers are increasingly focused on security. The ongoing surge in financial innovation can only be sustained by a continued demonstration that new technology is safe — and that it can be trusted with valuable assets. These measures will reduce the risk to the consumer and demonstrate that these new banking institutions are taking their responsibilities of the duty of care seriously.
With the rising numbers of innovative challenger banks and fintech companies, established banks have been forced to compete by continuously developing their products. However, a more mature security strategy should be pursued to keep up with their ambitious growth and profitability goals. By promptly preparing their security tools and infrastructure, founded on their twin principles of collaboration and compliance, it won’t be such a shock when the bill arrives for challenger banks.
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.
BANKING’S SECOND WAVE OF TRANSFORMATION: INTEGRATING THE CLOUD-ENABLED FUTURE BANK
Keith Pearson, Head of Financial Services EMEA, ServiceNow
The last six months have seen significant changes to the financial services landscape, with operational resilience, economic recovery, cost reduction and an acceleration of digital transformation key themes emerging from the industry.
At the start of this crisis, much of the banking industry was in a different position to many businesses. The 2008 recession spurred a need for improvements and combined with the emergence of tech-savvy fintechs, the industry has seen a major shift as customer expectations have adapted. The pandemic has forced organisations to accelerate innovation already part-underway in the banking industry.
As banking experienced its first wave of transformation, institutions focussed on customer engagement, uniting physical and digital channels for an improved customer experience. Banks invested heavily in front office digital technology, creating visually appealing mobile apps, engaging online banking experiences and technologies for bankers to personalise customer engagement.
However, this digital engagement layer is not enough. Regulations like PSD2 reinforce the necessity to remain compliant, adding additional pressure to the digital transformation process which in turn has been accelerated by COVID-19. Banking is therefore in the midst of its second wave of transformation, where financial institutions are creating and seeking out critical infrastructure to better connect underlying middle and back office operations with the front office, and ultimately, with customers.
A disconnected operation
Many financial organisations are still struggling because they have yet to streamline, automate and connect the underlying processes that are enabling customer experiences. Which poses the question: why is connecting operations so difficult?
In most cases, multiple systems are still glued together by email and spreadsheets to track end-to-end status. Around 80% of a middle office employee’s time is spent gathering data from systems to make a decision, with only 20% spent actually analysing and making the decision.
The disconnect negatively impacts customers. For many, experiences like opening a bank account or getting a mortgage involve clunky, manual processes riddled with paperwork and delays. When front and back office employees lack the ability to seamlessly work together, customers can be asked for the same data multiple times, elevating frustration.
Customers have little patience and can be inclined to publicly broadcast problems when left unresolved. In a world of social media and online reviews, this could be detrimental to a company’s reputation.
With digitally native, non-traditional financial services players gaining market traction by offering a seamless customer experience, maintaining satisfaction is crucial for traditional banks to ensure that customers don’t switch. Banks must focus on making it easy for customers to do business with them by offering faster cycle times with more streamlined operations.
The fintech effect
Fintechs and challenger banks like Starling have shown what connected operations can do, having been built with digitised processes from day one. Modern consumers expect round-the-clock service from their bank. As financial institutions look to the future, developing a model of operational resilience that is capable of withstanding unforeseen issues, like power outages or cyberattacks, is critical to minimising service disruption. Having connected internal communications between front and back office staff means customers can be notified about any problems, how they can be fixed and when they might be resolved, as well as receiving continuous progress updates instantaneously.
Automation can go a step beyond this. Today, customers expect companies to not only do more and do it faster but to prevent problems arising in the first place. With connected operations and Customer Service Management (CSM), banks can proactively fix things before they happen and resolve issues fast, enabling frictionless customer service and replicating the ‘fintech effect’.
What about compliance?
In the European Union and the UK, PSD2 and the Open Banking initiative are giving more control to the customer over personal account data. Digital banks such as Fidor and lenders like Klarna are seeking to reinvent banking by offering customer-centric services. But the process of streamlining underlying operations is not simply about providing customers with the fintech-esque experience. More than 50% of a financial institution’s business processes are also impacted by regulation.
Financial services leaders are focussing on streamlining and taking cost out of business operations while also placing importance on resilience. Regulators are pushing banks to have a firmwide view of the risk to delivering their critical business services.
Banks must invest in digitising processes to intuitively embed risk and compliance policies, which are generally managed separately and often manually from the business process, leading to excessive compliance costs and risk of non-compliance. With the right workflow tools for monitoring and business continuity management, banks can minimise disruption by gaining access to real-time, actionable information about non-compliance and high risk areas, encompassing cybersecurity, data privacy and audit management.
Increasing openness of financial institutions to regtech solutions, or managing regulatory processes in the industry through technology, will prove key during this second wave of transformation. Banks will increasingly move away from people and spreadsheets and toward regulatory solutions that provide a real-time view of compliance and provide an end-to-end audit trail for Heads of Compliance, Chief Risk Officers and regulators.
With a unified data environment aided by technology, financial institutions can drive a culture of risk management and compliance to improve business decisions.
Riding the wave
The banking industry is still in the midst of its second transformation, and the pandemic hasn’t made it any easier. But riding this wave and successfully digitising processes to connect back and front office employees will present a profound difference to customer service.
The bank of the future will be frictionless, digital, cloud-enabled, and efficient; interwoven into the fabric of people’s lives. It will continue to be compliant and controlled but will deliver those outcomes differently, with risk management digitally embedded within its operations.
Demonstrating the operational resilience of its key services will not only drive customer confidence but will also provide a greater indicator of control to regulators and the market, adjusting overall risk ratings and freeing up capital reserves to drive more revenue and increase profitability.
The institutions that will thrive in this increasingly digital and connected world are the ones that are actively transforming themselves and the way they do business now, by taking learnings from fintechs, following regulations and paving the way in defining the future of financial services.
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