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WILL COVID-19 ACCELERATE THE TRANSITION TO BANKING ALTERNATIVES

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Gael Itier – CEO & Founder at Akt

 

What will the world look like once the pandemic is over? At present, no one can be sure given the rapid pace of change experienced over the past year. However, there are signs to suggest that our social and economic structures are shifting, and what is certain is that the world will undoubtedly appear very differently than it did pre-COVID.

For example – the five-day working week – a staple of modern society – now appears to be under threat due to advancements in workplace technology and an enforced successful period of working from home.

Instances of such change are happening across the entire breadth of society, and the world of financial services hasn’t escaped this. Over the past few years, Europe’s fintech sector has boomed as entrepreneurs have worked to provide an alternative to the traditional banking system. Generally smaller and more agile than the incumbents, fintech companies have been able to create services that mesh better with a hectic modern lifestyle. However, given the changes that are likely to result from COVID-19, will we soon see consumers switch at an even greater rate?

 

The changes brought forth by COVID-19

The financial sector was already undergoing significant change before the pandemic. Regulatory evolution and advancements in technology had already brought forward measures such as open banking, and as previously mentioned, changing customer demand had led to increased competition and a number of new entrants to the marketplace.

Gael Itier

COVID-19 has acted as a catalyst, rapidly intensifying the pace of some of these changes. For example, from the perspective of financial institutions, many found themselves having to promptly shift to a model of working from home after having been previously pessimistic to its benefits. This effected the delivery of both front and back end services, as organisations needed to invest time and resources into adapting to the new normal.

The move toward home-work also changed the outlook of the consumer. Now spending less time in busy town centres, the average consumer will spend more time managing their finances using digital and mobile channels, rather than traditional in person services. Furthermore, with the global employment market on especially unsteady ground, many consumers are looking for flexibility in the services that they use to able to adapt to any unforeseen change.

 

Why the fintech sector has been perfectly placed to take advantage

Whereas traditional banks needed to drastically adapt their ways of work to not being in the office, for many new fintech companies this was already the standard. As such, some customers of traditional banks will have found themselves receiving comparatively worse service than they did pre-pandemic. Many customers will have managed their finances in traditional brick and mortar locations. As such, with consumers having to rapidly shift to using websites, mobile apps, or over the phone – a number of the incumbents may not have had the necessary capacity in these services to deal with the increased demand, and this will have resulted in bottlenecks. Newer fintech’s will often have no physical presence at all, instead having built up their services with digital outlets in mind. As such, they were perfectly placed to adapt to this shift.

A similar pattern will be witnessed should a customer or business try to open a new account or access additional finance. Traditionally, this will require the applicant to produce physical documents to verify their identification, and their credibility as a borrower. With brick and mortar locations either remaining closed or operating at a severely reduced capacity, this inhibits the ability of many traditional banks to process these new applications, again resulting in a backlog. Some fintech’s meanwhile have used technology which allows for this process to be done digitally, utilising automation to ensure that the process is smoother.

Many consumers – having been forced to employ technology to manage their finances – will have also been impressed with the greater convenience, and will seek to switch to using digital forms more permanently. This means that what they look for from their financial service provider may change. For example, this shift will see aspects such as the app user experience, digital account opening, and remote claims become more important in determining what service to use. While the traditional banks can and do provide these services, in many cases they are hindered by having to build on top of legacy software, and a lack of expertise when compared to newer fintech’s, many of whom will have been established with these features in mind. This will mean that they’ll be well placed to take advantage of the newer consumer demands due to the higher quality of their features provided.

 

Making money go further

The average consumer will now be seeking ways to make their money go further. With the global economic outlook looking precarious to say the least, most people will look to sure up their finances. This is as the pandemic has made many people realise that it isn’t viable to live paycheck to paycheck, and has shown the importance of having a financial backup plan and the benefits of having another source of income, such as owning income producing assets. Even though more people are now looking to involve themselves in their finances and investing, the barrier to entry is still very high for those starting out as investors when it comes to accessing and effectively managing investments. As such, a banking platform which allows consumers to manage all their financial assets in a single place, utilising technology such as automation to grow the value of these assets will be very well placed to capture market share.

COVID-19 has already redressed the world in a fashion that was once unthinkable. We’ve seen mass upheaval to the way we live, work and spend our money, and the financial sector has had to scramble to meet expectations as society changes around it. This has led to the growth of a number of new companies who’ve risen to the challenge by offering greater flexibility and a better standard of service to consumers. While for now this appears to be the start of a revolution, only time will tell whether this will continue as we emerge from lockdown.

 

Banking

Augmented automated underwriting and the evolution of the life insurance market

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By Alby van Wyk, Chief Commercial Officer at Munich Re Automation Solutions

 

It’s almost inevitable. Spend your working life identifying, analysing, quantifying and ascribing monetary value to risk, and you’re likely to have a fairly strong aversion to it. Or more accurately, an aversion to undertaking new endeavours with inadequately understood consequences. The insurance industry is, on any number of levels, the very definition of risk-averse.

And yet, for all the commentary suggesting otherwise, insurance still has an appetite for innovation. If the insurtech sector is any indication, then an interest in and requirement for new solutions is being recognised and slowly addressed.

Declan O’Neill

It may not employ the language of disruption that runs through the wider fintech market, it may be short a few unicorns and unable to boast some of the record-breaking funding rounds, but a quiet tech evolution has been building in insurance nonetheless. Hence the advent of automated underwriting facilitated by more advanced algorithms and data analysis.

Where insurtech does overlap with its more vocal fintech counterparts is in the greater use of artificial intelligence (AI) and machine learning to solve age-old problems around data analysis and interpretation.

It’s about five years or so since AI first became a topic of conversation in insurance. Since then, despite the intensity of the debate, it has often felt like a reality that is always just over the horizon – a destination that kept moving even as more and more efforts were directed towards it.

But recent research suggests that the journeys made so far have not been in vain. We are at a point where embracement of AI is about to step up a gear. The global value of insurance premiums underwritten by AI have reached an estimated $1.3 billion this year, as stated by Juniper Research; but they are expected to top $20 billion in the next five years. As a destination, it is closer and more attainable than ever before.

However, AI is not an island. Its promise of $2.3 billion in global cost savings to be achieved through greater efficiencies and automation of resource-intensive tasks will not be achieved in isolation.

AI remains part of a more complex ecosystem of data gathering and analysis. It can apply new technologies to get the best out of the already established and still-emerging data sources that feature in underwriting offices around the world. It emphatically does not require these existing investments to be ripped out, replaced or downgraded.

It is more helpful therefore to see AI as the differentiating factor in the latest generation of insurance IT: augmented automated underwriting, or AAU for short.

AAU gives underwriters the ability to spot patterns and connections that are, frankly, either invisible to the human eye or which take normal, human-assisted processes unfeasible amounts of time and resource to identify.

Whereas earlier generations of automation were able to pick up the low-hanging fruit of insurance markets – the individuals whose driving history fit into clearly delineated boxes, for example – AAU can take into account all of the rich complexity of the human experience. It can spot the nuances and individualities that populate the life market, for example, and translate those into accurate policies.

That’s good news for both underwriters and their customers. AAU can significantly reduce the need for separate medicals, repeated questions, lengthy decision-making processes, and drastically increase the speed at which a potential insurer can get a quote and cover – while continually improving the way risk is calculated and managed.

It can make sure the decision-making process remains in the hands of underwriters rather than IT departments, enabling them to set and update the rules and parameters as befits their preferred business model. It consequently makes advanced, complex and precise decision-making available to a broader range of underwriting businesses – which is good for those businesses, good for customers and ultimately good for the entire industry.

AAU – augmented automated underwriting – is an example of the realisation of AI’s promise. As such, it’s set to become one of the key talking points and disruptive technologies of the insurance industry. And this time, AAU is both a journey and destination that all progressive insurance organisations need to be considering for their future operations.

 

 

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Banking

ESG in the finance and banking industry – are you ready?

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By Julian Moffett, CTO BFSI, EDB

 

Environmental, Social and Governance (ESG) has soared towards the top of banking, financial services, and insurance (BFSI) and other boardroom interests. Organisations everywhere know they need to take ESG and greenhouse gas emissions (GHGs) seriously not only because it is the right thing to do for the future of the planet or because it can help attract and retain talent, but also, because failing to do so may pose a risk to the economic value of their businesses and encourage probes by governments, watchdogs and non-execs. However, complying with complex reporting and going the extra mile to actually deliver on the goals of the rules is a challenge in many ways, not the least of which is in achieving the required excellence in data management to underpin strong reporting on ESG.

 

What is ESG? 

Julian Moffett

ESG is an umbrella term that covers a broad gamut of activities. Gartner defines ESG as “…a collection of corporate performance evaluation criteria that assess the robustness of a company’s governance mechanisms and its ability to effectively manage its environmental and social impacts.”

The CFA Institute describes the environmental element as focusing on “the conservation of the natural world” and includes measuring “climate change and carbon emissions,” “air and water pollution” and “biodiversity” among many other measures. Social considers “people and relationships” looking at areas including “customer satisfaction,” and “gender and diversity.” Governance covers “standards for running a company” and analyses factors such as “board composition,” “audit committee structure” and “audit committee structure.”

 

Status of the current regulatory environment

There are many bodies proposing rules to formalise ESG monitoring and seeking to ensure corporate compliance. Some example groups, frameworks and bodies:

  • The Task Force on Climate-related Financial Disclosures (TCFD)
  • Streamlined Energy and Carbon Reporting (SECR)
  • The International Regulatory Strategy Group (ISRG)
  • The Sustainability Finance Disclosure Regulation (SFDR)
  • The International Sustainability Standards Board (ISSB)
  • The Sustainability Accounting Standards Board (SASB)
  • Sustainable Development Goals (SDGs), the Global Reporting Initiative (GRI) support efforts such as the US SEC’s Climate and ESG Task Force.

Financial services organisations are very aware that the current regulatory landscape is far from mature (and will continue changing) both in terms of alignment between bodies and also with regard to when the new rules will come into effect. At the of time of writing:

  • The requirement for Scope 2 disclosures (see below for description) for the Sustainable Finance Disclosure Regulation (SFDR) will likely come into effect in 2023
  • A proposed Corporate Sustainability Reporting Directive (CSRD) should be agreed by the European Parliament this year for implementation in 2024 to report on performance in 2023.
  • Meanwhile, the SEC has just released its proposed rules for climate-related disclosures, which,if passed in legislation, may come into effect as early as year end 2022.

 

Reporting Obligations 

Reporting can cover a wide range of areas covering energy consumption, GHG emissions, water consumption and waste management to health and safety, labour rights, diversity and inclusion to ethical conduct, and even areas such as appropriate executive compensation.

While the regulatory reporting obligations are not yet finalised, the expectation is that compliance may prove to be an onerous task. For example, organisations are under pressure to monitor carbon emissions but even so-called Scope 1 emissions (those that come from owned or controlled emissions) can be hard to track. Factor in Scope 2 (indirect emissions such as purchased power) as well as Scope 3 emissions from up and down value chains, and the reporting task at hand is difficult indeed.

To measure, monitor and manage in addition to staying on the right side of rules, organisations need to have excellent data management fundamentals, strong reporting tools and a new class of applications, which also have the agility to adapt to rapidly changing regulatory demands. Data will be used both to support decarbonisation measures but also to identify where there are disclosure gaps. It was telling that when the SEC issued a press release on its Enforcement Task Force, it specifically referred to data:

“The task force will also coordinate the effective use of Division resources, including through the use of sophisticated data analysis to mine and assess information across registrants, to identify potential violations.”

Having reliable data comply with emerging rules isn’t the only essential requirement for organisations. Institutions need such data to understand where they are in their journey to sustainability, so that they can set sensible targets and track progress against them. Organisations will have to cover the data trifecta of availability, management and transparency. Many organisations may be stuck in the early stages of managing ESG, overly relying on manual processes, spreadsheets and email. But their target should be to get to real-time data insights that are easily visualised, understood and shared. As a foundation, BFSIs need to capture, manage and securely share data reflecting consumption and safety to emissions, financials and data from surveys measuring results against ESG targets. Data emanating from ERP and other back-office systems, performance data from third-party associates, media and social network coverage, spatial/geolocation systems and beyond should also be factored in.

 

Actually reducing GHGs

Organisations are using a wide variety of ways to reduce emissions and improve their footprints from using renewable energy sources to making secondary use of energy; for example, in the case of one university, this is done through capturing data centre heat in hydroponics. For IT, making broader use of multitenancy in cloud computing and hosting services is a popular way to reduce emissions. Not only do these large data centres offer an economy of scale, they also tend to be state of the art in their use of renewables and highly efficient hardware and other infrastructure. Gartner, in an article titled The Data Centre Is Almost Dead, says it expects 80 percent of enterprises will close in-house datacenters by 2025. For me, the jury is out on this one but an interesting one to monitor going forward.

 

Conclusion

We are at the start of a very significant inflection point in regulatory and consumer expectations around ESG. BFSIs should be under no illusion that momentum is building rapidly in terms of having to address strict reporting requirements and implement strategies to reduce GHGs.

However, we also see this as a time of positive change. As the leading provider of Postgres, EDB is excited to help organisations further their ESG goals as the journey unfolds. We are closely monitoring the implications of ESG regulations as they will give rise to a new class of applications and drive adoption of green data centres. We see OSS, including Postgres, as playing a key role in this shift as often the movement to private and public cloud helps accelerate application modernisation and enables displacement of outdated incumbent technology (including database) platforms. As the leading provider of Postgres, EDB is excited to help organisations further their ESG goals as the journey unfolds.

 

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