By Adam Prince, Vice President Product Management, Sage
A seismic and positive change is coming for the financial and accounting industries with the introduction of the European Union’s (EU’s) Payment Services Directive 2 (PSD2) regulation. The future of banking and payments is digital, and this regulation marks a shift towards creating a more secure and streamlined digital space for customers to make transactions. At its core, PSD2 heralds two major benefits; firstly, it will push innovation for today’s digital consumers, and secondly, it will give them more control over their data.
The benefits for banks are obvious: higher-quality banking data, faster responses to customer feedback, higher levels of security and reduced fraud. The picture is similarly positive for their customers: increased privacy rights and greater competition among financial-services providers leading to reduced costs and more flexible ways to bank and make payments.
PSD2 will help bring financial regulations up to date for a world that has gone fully digital. The many benefits of digital technology are long overdue in the finance and payments industry—and, indeed, we’ve already seen the rise of highly effective tools such as online banking and in-app management. PSD2 goes deeper, though—changing the fundamental culture that governs interactions between banks and their users. PSD2 is meant to make finances work for business, rather than the other way around. With that in mind, how will the regulation change working practices—and what do small and medium-sized enterprises (SMEs) need to do to ensure they reap the benefits?
How can PSD2 help SMEs?
Under the new rules, systems will be developed that will help SMEs to get a much clearer view of where their money is moving to. Cash flow is widely regarded as the biggest cause of insolvency among SMEs in the United Kingdom—the Federation of Small Businesses (FSB) recently noted that “80-90 percent of failures in the sector are due to poor cash flow”. As a result, it’s essential that they can track where their money is going and ensure that outstanding invoices are followed up. At present, tracking payment and banking details is a hefty administrative task, which means that it either drains valuable resources out of the business or, worse, ends up being left undone.
To address that issue, PSD2 mandates banks to provide APIs (application programming interfaces—essentially sets of interfaces that make it easier for one system to interact with another) to make deeper, automated integration possible. When SMEs’ information-technology (IT) systems can track payments on their own, providing reports on demand to keep their finance teams informed, staff can get on with pushing the business forward rather than chasing payments.
The UK’s Open Banking framework, which runs in parallel to the PSD2 regulation, also mandates that the nine largest banks must provide a single standard of APIs, so that if a company can interface with one institution, it can interface with them all.
SWIFT (Society for Worldwide Interbank Financial Telecommunication), the global banking-standards body, also announced in September 2019 its intention to mandate that all banks implement common standards under ISO 20022. This unified approach will reduce the number of technical and economic barriers stopping businesses from operating in the ways that work best for them—whether they want to work with a challenger or a retail bank.
Security is a priority.
This API-driven approach to banking will make life much easier for businesses, but it does come with its risks. Financial-data sharing must be done securely, or it could cost companies a lot more than admin time. To ensure the required level of security, PSD2 includes a set of Secure Customer Authentication (SCA) rules to guarantee that users can be authenticated and that APIs can be accessed securely via common standards. Essentially, this means that SMEs will need to use two-factor authentication to access their data.
The UK’s Financial Conduct Authority (FCA) has announced an 18-month migration period or “soft landing” for this part of the regulation to ensure banks and payment-services providers have the time they need to comply. So long as there’s a clear plan in place to achieve compliance, no fines will be levied if the APIs and SCA rules are not yet in place.
Interestingly, that need for security in digital banking across the globe can be seen in the differences between the ways in which the EU and Australia have approached their regulations. PSD2 is based on the premise that payments must be regulated to provide APIs—in other words, that banks need more supervision to ensure quality service. By contrast, Australian regulators are working on the premise that financial data is personal data, and customers should be able to access it free of charge—so banks must provide open APIs to make that access possible.
Both approaches end up at the same point from different ends of the scale. In both cases, the customer is at the heart of the regulatory change. As a result, SMEs stand to benefit hugely from increased control over their data and more connected, flexible services—but they must have the right tools in place to access those services.
Banking without the cloud is no longer an option.
If businesses are to get the most out of the new PSD2 regime, there is a clear need for cloud-based software to ensure that they can access all of the integrations available. If they don’t have the ability to import financial data, they’ll completely miss the benefits. The alternative is to carry on doing everything manually—spending lots of time completing reconciliation by hand, always working on cash-flow data that is out of date, missing customers who fail to pay and making avoidable manual errors.
Businesses that work with an experienced financial software provider also stand to benefit from assistance as the industry goes through the final rollout of PSD2. Most large banks have been ready for API integration and secure customer authentication from the September launch date, but some banks are a bit behind the curve, which may cause some businesses functional problems in the short term. It’s essential to work with a partner that can continue to make access to essential financial data available despite these growing pains.
PSD2 was developed for the benefit of businesses and individuals across Europe. We live in an era of unprecedented information exchange, and regulations such as PSD2 point the way to a more connected, user-friendly, flexible and intelligent way of working. Compliance with PSD2 will ultimately bring a host of benefits so long as the correct security measures are put in place—far from a burden, this is the start of a brave new world.
The future of finance
Such sweeping change always has its teething problems, and as a result, there are some practical issues that need to be addressed to ensure smooth running during the first months after the PSD2 deadline. For UK businesses that are working out how the changes will impact their processes, it’s essential to work with the right partners to ensure data transfer continues to happen as smoothly as possible.
It’s important that businesses don’t have to take on the full administrative workload of changing the way their systems work and comply with PSD2. By working with an experienced technology partner, companies can get full access to their usual functionality during the change and keep up to date with any further changes—without having to get into the nitty-gritty of APIs and authentication measures.
That partnership is something we take very seriously. At Sage, we have been working to ensure our customers are compliant with this regulation for a long time. Our priority is to help them navigate the changes, understand the impact on their businesses and guarantee that they can thrive as a result.
Although businesses are often reluctant to enact change, PSD2 will ultimately prove itself to be a positive piece of legislation. This change needs to happen given the prevalence of digital services in payments and banking, as well as the increasing demand from consumers for more bespoke and comprehensive services. If banks are quick to put plans in place, then the payoff will quickly be realised in terms of money saved and improved customer service.
RISK VS REWARD: IS AI TAKING OVER?
Xavier Fernandes, Analytics Director at Metapraxis
A study by Oxford University academics into “The Future of Employment” in 2013 prompted apocalyptic headlines which stated that in the future 40% of jobs will be automated thanks to advancing technology.
The researchers subsequently claimed that the truth was in fact a little more prosaic; rather than facing complete automation, the research found that 40% of jobs faced some aspect of automation in their activity. So with new ‘AI processes a likely reality for almost half us, what does that mean for our current roles and should we be worried?
The fourth revolution?
The first industrial revolution saw machines replacing muscle, both human and animal. The second and third saw electrical power, mass production and computerisation revolutionise the job market. Now, with daily headlines of AI as an employment superpower, there is some concern that AI is bringing a fourth revolution, and with it, unknown circumstances.
This ‘fourth industrial revolution’ is defined by replacing brain power with machines. Our thinking capacity is what inherently sets us apart from other species, so it’s not surprising that any encroachment on it triggers some existential angst.
Evolve to reap the rewards
While many businesses still don’t fully understand the capabilities of AI, those who fear its development are, instead of embracing it, missing all the benefits that it can bring to the workplace. Businesses that utilise AI appropriately are seeing vast improvements across their entire value chain; better customer experience, reduced costs, and more insightful analysis to support management decisions.
AI is particularly useful for supporting tasks with repetitive activity, for example, performing financial checks and assessing large sets of data within financial services firms. AI performs particularly well within this context, spotting outliers before a human expert would notice them, allowing impending problems to be flagged and avoiding costly mistakes.
There is also an increasing focus on maximising customer lifetime value through the use of AI. Being able to predict existing customers’ needs as well as track trends in their financial circumstances is supercharging the old cross-selling approach with testable, predictable outcomes.
With potential benefits like these on offer, management teams of innovative financial services are increasingly relying on AI to help them with some of the heavy-lifting of analysis. Using advanced data capabilities and learned behaviours, AI analyses market trends to provide predictions of future performance. This insight is invaluable and allows management teams to change direction and correct any problems accordingly. This offers a huge advantage over those that have not adopted such tools.
Supporting the workplace
Algorithms and AI are typically ‘smart’ at doing one, tightly-constrained task, but they can be less helpful with many of the activities that humans find straightforward. In most white-collar jobs, automation tends to replace certain tasks in the job, rather than the role in its entirety, as the need for human intelligence is still highly necessary. In particular, we still need human input to first challenge, and then synthesise, this information before taking action. Employees should therefore work with the business to proactively identify what areas of their role could be automated, so that they can focus on the areas that add real value to the business’ commercial goals.
Challenging AI is certainly still important. We know that algorithms can be much better than humans on certain, bounded tasks. However, many algorithms rely on existing data sets to build their understanding. As a result, when a business unit has ‘symptoms’ that fall outside of that body of knowledge, the algorithm may suggest the wrong course of action with costly results.
Indeed, even with plenty of data, algorithms will reflect any biases the data set contains. We’re seeing this with some legal sentencing algorithms where there is evidence that they are treating disadvantaged people more harshly. Getting the answers to why and how far we should trust our algorithms should therefore become an everyday part of any job affected by AI.
Rather than depending entirely on AI for all decisions, workers should be taking all these new, AI-generated insights and using them to complement the human decision-making process. No manager of a complex business ever has enough time to sieve through all the analysis available, but with AI driven algorithms able to flag up any issues and indicate where action needs to be taken, we may find that we have some AI ’colleagues’ who will cover our backs and suggest innovative options. Yes, there will be times when the algorithms get it wrong, but as long as we’re watching out for those, the future is bright.
HOW TECHNOLOGY IS FUTUREPROOFING STOCK MARKET TRADING
Tony Shaw, Executive Director, London Office and Head Sales UK & Ireland at the Swiss Stock Exchange
Markets are shifting, there’s no doubt. Amid all the disruption and volatility from the past year, the Swiss Stock Exchange asked traders about what they expected in 2020 and beyond in our industry survey. The findings point to a rise in digital to help traders content with external forces.
First and foremost, traders are enthusiastic about what digital assets can offer.
Two thirds of traders polled said they’d had a marked rise in interest from their clients for digital assets and crypto-products. Given the interest, traders are increasingly bullish about the potential of these products – so much so that 80% have predicted an increase in overall demand in the long term. Market users believe these assets will help generate cost synergies and streamlining trading and settlement processes by creating efficiencies and ultimately reducing costs.
Our 2019 results reflect what traders have told us when it comes to digital assets and products. Last year, we saw significantly higher trading volumes from products with crypto currencies as underlyings. Overall volumes grew by +8.5% over 2018, but the increase in crypto products alone was +17%, reaching CHF 518.2 million ($534.54 m). There was a year-on-year increase in the number of transactions, as well (+21%): 19,636 trades in total.
The potential digital assets hold is clear – evidenced by the building of the SIX Digital Exchange (SDX), a fully integrated issuance, trading, settlement and custody infrastructure for digital assets.
According to traders, artificial intelligence (AI) is expected to bring further benefits to market operations.
Two thirds of our survey respondents anticipate AI will create more opportunities for the traditional equities business, while a similar number expect it to reduce the cost of trading. Innovation in AI is already – and will continue to be – a key driver in making our industry more effective at withstanding future risks and challenges both within and beyond the market itself.
In Europe, there is growing momentum behind calls for shorter trading hours – this trend was reflected in our survey as well.
Industry groups such as the Investment Association are advocating for stock market trading hours to be cut from 8.5 to 6.5 hours to open the industry to working parents and women who cannot commit to such long workdays. We found traders were largely supportive of this, with many saying that it could even facilitate operational benefits. The roll of AI is clear here in improving efficiency while minimising time wastage: 36% of traders said the introduction of shorter trading hours would prompt greater market liquidity.
Beyond the market itself, geopolitics continue to shape wider market sentiment.
It comes as no surprise that four fifths of traders said their strategies have been – to some extent – influenced by Donald Trump’s tweets. Interestingly, only 39% of those polled viewed Brexit as an influencing factor in trading activity, while three quarters believe the US election will drive trading activity in 2020 and 65% acknowledged trade wars would also have an impact.
More broadly, traders are split on the state of the global economy – 58% are bracing for a global recession while 42% predict stable macro-economic conditions over the next three years. What seems clear is that whatever happens in the wider economy, traders are making headway with new technologies that can improve their strategy, efficiency, and overall market health.
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