2023

Cloud is the answer – what was the question?

Against the backdrop of the FinTech boom, technical innovation and turbulent post-pandemic markets, up to 90% of global bank workloads are estimated to be moving to the cloud in the next decade.

by Craig Beddis, CEO and Co-Founder, Hadean

Varying demand in compute power was one of the core motivations for moving to the cloud. Dr Michael Gorriz, CIO of Standard Chartered, recently described how the geographical spread of the multinational bank’s trading resulted in ‘varying compute need, dependent on the presence of different countries and regions at different times of day and the pattern of the activities’.

This pattern often creates an unpredictable compute load, meaning that infrastructures need to be able to scale to ensure reliable provisioning. Some cloud providers are solving this through a load balancing feature. This is where processing power is scaled across several machines dynamically, providing an overall much more reliable IT platform.

Goldman Sachs, HSBC and Deutsche Bank have all recently announced major partnerships with cloud platforms. It’s a move indicative of a broader industry trend towards cloud adoption, one initiated in part due to the emergence of containerisation. With traditional banks wary of hosting large quantities of sensitive information in a singular, outsourced location – containers have paved the way for a multi-cloud solution.

Containers enable the repackaging of applications for different cloud environments. This provides much needed flexibility in data abstraction and processing. Different cloud providers offer advantages for specific tasks, where for example one might offer greater upload speed, another might offer more security. Overall, being able to scale IT functions across these different clouds can help a financial organisation achieve greater agility in its services. Multi-cloud also represents a positive move for the industry as a whole. By allowing businesses and consumers to choose from a greater range of multi-cloud providers, these providers in turn compete on both price and delivery of service, improving the choice for the user. In essence, we have the recreation of competition that existed previously between banks but now in a more digitalised environment.

This migration however is no easy feat and while tech companies might have succeeded in convincing financial institutions of the merits of cloud computing, namely reduced overheads and a faster time to market, true success will lie in mapping out feasible cloud strategies. Decisions will need to be made on what to migrate, when and where.

Navigating the pitfalls that come with this change is difficult, particularly with the number of different options and choices that multi-cloud strategies offer. Taking a ‘cloud native’ approach has been popular among a number of financial institutions; for example, Standard Chartered’s digital bank Mox launched in Hong Kong as a cloud-based banking platform, while Capital One moved its entire service to run on AWS, saying that: “The most important benefit of working with AWS is that we don’t have to worry about building and operating the infrastructure.”

Wider economic effects, trends and hardship are also demanding change, with the pandemic putting on pressure to cut unnecessary costs. While changes of infrastructure have large initial costs, the move to cloud ultimately represents a more efficient mode of service delivery and will save money in the long run. The serious reduction of demand for in-person services that banks offer has also led to branches closing and the increased importance of digital services.

Open banking has been one of the most disruptive developments in finance of recent years with the customer’s information no longer exclusive to the one bank. It led to both an increase in exchange of data as well as a wave of innovation in banking services.

Increasing financial inclusion has also been a driving force on the consumer side, with FinTech start-ups forming to meet the demands of the rising number of people looking to increase ownership of their finances. This has put further pressure on accessibility in financial services, with the cloud’s flexibility primed to fill the gaps. It is cloud-native and scalable systems that will provide the ultimate platform for financial services and the various applications required to provide future innovative functions.

IBS Intelligence is partnering with Sopra Banking Software to promote the Sopra Banking Summit, which takes place 18-22 October 2021. The summit is tackling the biggest issues in the financial sector. This weeklong festival of FinTech will touch on the hottest topics in financial services, including developments in retail banking, and highlight the new paths industry leaders are taking.

The following article was originally published here.

Retail banking was one of the sectors most affected by Covid. Nation-wide lockdowns, sanitary measures and social distancing shook the day-to-day practice of banking to its core, with brick-and-mortar branches closing and digital demand skyrocketing.

by Bettina Vaccaro Carbone, Head of Research for SFP at Sopra Banking Software

And yet, despite this, there may be a silver lining for the incumbents in retail banking moving forward. The impacts caused by Covid-19 have forced them to accelerate their digital transformation strategies, while also damaging many of their challenger bank competitors, therefore levelling the playing field to some degree.

Legacy banks now have an opportunity to become the digital torch bearers for the financial services industry in the years, and perhaps even decades, to come. But it’s an opportunity they have to take now, because it won’t last long.

The decline of digital-only banks

The pandemic, to some degree, hit the reset button for the industry. Before 2020, incumbent banks were somewhat on the run from new, more agile competitors. There are swathes of statistics that highlight the success gained and ground covered by industry entrants during the last decade. Here are three that summarize their success and the reasons that incumbent banks were feeling the heat:

• European challenger banks gained more than 15 million customers between 2011 and 2019
• In a report published in February 2020, just before the pandemic hit, Accenture found that U.K. challenger banks were growing at a rate of 150 percent, year on year, compared to 1 percent by incumbent banks
• The global challenger banks market was worth $18.6 billion in 2018 and was predicted to grow to $394.6 billion in 2026

However, 2019 feels like a lifetime ago. Challenger banks and their ilk have taken a massive hit since the beginning of the pandemic. UK challenger bank Monzo, for example, laid off hundreds of employees and lost 40% of its valuation during the height of the pandemic last year; and others, such as Simple and Moven, called it quits altogether on their consumer activities.

Received wisdom would suggest that customers are more risk averse during risky times, and that even though the traditional banks are not soaring in terms of trust among end consumers, they have emerged as a preferred and stable choice.

Curious, given that challenger banks were supposed to be on the frontline of a digital revolution, and the impact of Covid demanded more digital banking services and bandwidth than ever before. But rather than flock to new digital-only banks during the pandemic, customers instead chose to stick with the traditional industry players.

Digitisation of banking services during the pandemic

Risk averse or not, there’s no doubt that customers want – and even need – digital banking services. This was true long before the pandemic, hence the rise of challenger banks last decade. A growing generation of digital-native consumers, a burgeoning digital ecosystem and the availability of new banking products and services all combined to ensure that the future of the financial services industry would be digital.

Conversely, traditional banks largely struggled to deal with this exponentially growing trend. Burdened with legacy systems unfit for purpose, rafts of regulations (from which their challenger bank counterparts were largely exempt) and reluctant-to-change cultures, the industry’s incumbents were falling behind fast. Indeed, 45% of banks and credit unions had not even launched a digital transformation strategy before 2019, per 2021 research by Cornerstone Advisors.

How things change. Catalysed by the pandemic, traditional banks – from big names like Bank of America and Chase through to regional incumbents – now boast of how digitally adept they are. In a period of intense digitisation, legacy banks have added a host of new and/or improved services, including video KYC, higher contactless payments and chatbot services, just to name a few.

Many of these technologies were in the pipeline for banks before Covid hit, but there’s no doubt that the pandemic accelerated plans. Speaking at the 2020 Bank Governance Leadership Network, one director said: “Suddenly the impossible became possible. Solutions that used to take 18 months to deliver are now happening in 18 days.”

Digital challenges for banks post-Covid

Despite this sudden surge, however, the traditional retail banking players may not have made the progress that the market demands. In some cases, far from it. A deeper look at some of the figures around the current state of legacy banks’ digital transformations makes for somewhat grim reading.

• Approximately 40% of banks which state they are more than half-way through their digital transformation strategies, have not deployed cloud computing or APIs
• Only a quarter of these banks have implemented chatbot technology
• Just 14% have deployed machine learning tools

It seems that many legacy banks have not made as many inroads into the digital future as some might claim, and certainly not as many as they need to, to be seen as progressive digital players. That will have to change, as customer expectations are becoming increasingly digital focused, and that’s reflected in their attitude toward retail banking. Many end-customers expect their banking habits to change over the long term because of Covid.

Worse than the supposed lack of progress, however, is an apparent lack of awareness from some incumbent banks at where they need to be on the digital roadmap. According to the same Cornerstone Advisors study that cites the aforementioned developments, over a third of banks believe they are more than half-way through their digital transformation.

Incumbent banks have made digital strides during the pandemic, edging closer toward being a bank that appeals to a digital generation of consumers. Suddenly, they are no longer playing catch-up and facing imminent disintermediation across the board, at least not to the same intensity as before.

However, the job isn’t done. One could even argue that because of the ever-evolving nature of digital technology, the job will never be done; rather, digital transformation is a state of constant change and adaptation. For now, though, traditional players in retail banking can take a moment to reflect on just how far they’ve come since the beginning of 2020 and pause on what could be considered a sector reset in their favor.

But it’s a moment that should be taken quickly. Technologies will continue to develop; existing challenger banks will regroup, and new ones will be launched to challenge the status-quo. Any complacency or naval gazing will quickly see legacy banks lose ground to a new wave of resurgent digital players.

As the trend of digital transformation continues to impact the financial services industry, progressive Credit Unions in the US understand that to keep up, they must re-evaluate their digital platforms and convert to a new system that will offer their members a better banking experience.

by Michael Collins, Associate, Credit Union Practice, Qualitest Group

When we think about enhancing members’ digital banking experience, we often think about adding new features and capabilities, and making the system easier to use. But what about simply making sure the new system can run without any slowdown in response times, or worse crashing completely? After all, what could be a poorer experience for members than not having access to their money when they want it? This is where performance and stress testing is crucial for digital banking systems.

When undergoing a complex digital banking conversion, there needs to be rigorous testing of the system to ensure it is functioning properly and free of any bugs that will impact the user. Most Credit Unions understand how critical it is to test functionality and ensure all the data has been migrated over successfully to the new system, but they often overlook the performance and stress tests that ensure the system’s availability, responsiveness, and scalability. Performance and stress testing ensures that a new system can handle the expected usage of Credit Unions’ members and is well-equipped to scale as membership grows.

The need to ensure the availability and responsiveness of a digital banking system is more important now than ever before, as the pandemic has led more and more people to abandon in-branch transactions and to choose to do their banking digitally.

Why Is performance testing so important?

Everyone can relate to the frustration caused when trying to use an app or website that is running slowly or crashes altogether. This frustration is amplified when dealing with our money. People have an expectation that their right of access to their own money is a given and are rightly very upset when they lose this access or cannot perform transactions in a reasonable timeframe. These situations can ultimately damage your Credit Union’s reputation and lead members to lose faith in their banking system. To ensure that members never run into these issues, Credit Unions must run performance tests on their banking platforms.

Configuration is key

When slow response times or crashes occur, it is often due to the system not being able to handle the volume of usage it is experiencing. There are simply too many people trying to do the same thing at the same time. Performance tests are meant to simulate the usage a Credit Union can expect its system to encounter, and then measure the response times to ensure they are up to standard and being executed quickly. They allow for the creation of scripts that will run and mimic the workflows Credit Union members carry out when banking. A well thought out performance test will account for the factors below to accurately represent the actual usage by members:

• Choosing the right workflows – A Credit Union will want the workflows being run in the performance tests to be around the activities and transactions its members carry out the most frequently. For example, paying a credit card bill, opening an account, transferring money, etc. A performance test can simulate many users performing these different types of transactions concurrently.
• Establishing a baseline for average expected usage – It’s important to accurately determine the average number of members who are accessing the system at the same time. Performance tests allow for the simulation of this amount of activity to provide an accurate representation of the number of concurrent users trying to perform similar transactions at the same time.
• Generating traffic from the right location – Another nice feature of performance tests is that they can simulate user activity from a specified location. If most of a Credit Union’s members reside in a particular geographical region, the performance tests will generate activity from the area specified.

To accurately capture all of the above factors in performance tests, a Credit Union will want to examine activity data from its old system and use it as a baseline for the activity a new system will face. If the Credit Union has plans for growth, that should also be accounted for, and the activity level simulated should be even higher than average.

Once tests have been configured appropriately, it is time to run the tests and see how the new system stands up to the type of activity it can expect to face. The goal is to confirm that the new system has not suffered any degradation to end user response times and can handle the amount of activity expected from members, allowing them to carry out their banking transactions quickly. The response times that are measured can then be used as a baseline standard for the system moving forward. If the system has suffered any degradation to response time, this is an issue that should be fixed immediately.

Running performance tests will give a Credit Union the confidence that its system will be able to handle the expected usage from its members, but what happens when facing uniquely high levels of traffic? Will the system crash, leaving members scrambling for answers?

Stress test for success

Unlike a performance test, which aims to replicate the average amount of activity a system will face, a stress test looks to simulate and establish a baseline for the peak activity level the system can withstand before crashing. The method for configuring the test is the same, but this time with a much larger number of users being simulated. A good way to come up with the activity level is to look at the peak usage level the system has faced historically, run the test using that amount, and see if the new system is able to handle that load without any outages. If it is, then the usage level should be increased, until the system ultimately reaches the peak level it can withstand.

Stress testing is not only a valuable way to mitigate risk and ensure the stability of a Credit Union’s digital banking system under unusually high activity levels. It can also give an institution confidence that its system will continue to perform as the business grows and the number of members using the system increases.

In conclusion, while it is important for Credit Unions to test their digital banking systems to make sure all of the features and functionality are working properly, it is equally important to confirm that the system is ready to withstand the traffic it will encounter from members. Running these performance and stress tests will provide confidence that members will be able to carry out their banking transactions quickly and without disruptions to service.

When seeking perfect data quality firms often look for a golden source of truth, what are the pitfalls to this approach? The fact that a golden source of data has historically been celebrated doesn’t make it right. How can firms successfully lay the foundations for true data integrity?

by Neil Vernon, CTO, Gresham Technologies

A golden source of data – a single source of truth to supply a business with all the information that it needs to rely on – has historically been seen as the pinnacle of data quality. But while financial institutions have long strived towards a utopia of data perfection, this approach does present some drawbacks. What’s more, just because a golden source of data has long been sought after, it doesn’t necessarily make it the best option.

Today, in an era of waning tolerance for poor data integrity, more complex regulatory reporting requirements, and increasingly tight margins, we ask: how beneficial is a golden source of data in the current environment, and is there another path to take us to the top?

Enhancing reporting across multiple counterparties

The original focus of golden sources of data centres around a financial institution’s internal data repositories. However, the ability of firms to report accurately, on time, and in full, is often bound up with that of their counterparties – as is the case in the recently introduced Consolidated Audit Trail regulation.

This has led to questions over whether there should be golden sources developed across the industry which each firm can access as needed for regulatory reporting and other requirements. It is easy to see the appeal of this – one single source of truth, properly managed, would reduce error rates in transaction reporting dramatically, as well as decrease or eliminate time spent on counterparty communication. If you and your counterpart report from the same repository, how could you possibly report differently?

An innovation roadblock

However, creating such a golden source has a major drawback: it would significantly limit the abilities of financial institutions when it comes to innovation – another current ‘hot topic’ area. Coming with strict usage and management requirements, a true golden source would inhibit the kind of ‘fail fast’ experimentation with processes and products which the industry has been so at pains to encourage.

And of course, there’s the unavoidable fact that everyone’s truth is different. The questions that you are using your data to answer will determine the lens through which you should view it. For example, analysing data for product purposes will require you to consider accurate product hierarchy.

Practical realities: Why accuracy holds the key

But if creating a true golden source is neither practical nor desirable, what should firms do instead?

As far as internal data goes, firms should certainly still strive towards a reliable data source – but they should also recognise that a general-purpose solution is not always possible.

Rather, appropriate control processes should be applied to ensure that there is no slippage in data quality and that the organisation fully understands its usage. Managing data lineage through systems that allow complete visibility of the data lifecycle makes the source of data easily traceable, enhancing understanding further and ensuring that any issues can be easily fixed.

In addition, education is key: organisations should ensure that data consumers have sufficient understanding and knowledge that, when using data, the right ‘lens’ for the situation is applied.

These steps will also help to resolve many of the issues that banks experience when dealing with their counterparties, since each side will have improved the accuracy of its data. Resolving linkage issues with counterparties consumes valuable resources, particularly where escalation is required. But by giving themselves maximum visibility and control over their data, financial institutions can stop many of these issues before they start.

Financial institutions should not change their ambitions to create a strong data source, but a golden source is a naïve objective: it is too simplistic, and harms more than it helps. True data integrity does not come from such a one-size-fits-all approach. Full control and knowledge over the lifecycle of your data, and the upgrading of legacy systems, is the only way financial institutions will be able to build the strong foundations of true data quality.

IBS Intelligence is partnering with Sopra Banking Software to promote the Sopra Banking Summit, which takes place 18-22 October 2021. The summit is tackling the biggest issues in the financial sector, including public cloud. This weeklong festival of FinTech will touch on the hottest topics in financial services and highlight the new paths industry leaders are taking.

The following article was originally published here.

Cloud computing has long been an attractive option for banks looking to optimise costs, improve flexibility and facilitate digital expansion. Historically, cloud adoption has meant private or limited deployments due to concerns ranging from security to compliance. But in a post-Covid world, the drumbeat of digitisation has gotten louder, and more banking leaders are moving past their reservations. And recently, the use of public cloud platforms is gaining traction. This is due to ongoing margin compression, the need to reduce costs, and the imperative for banks to innovate faster—all things the public cloud can help solve.

by Martin Lee, Head of Managed Services & Cloud, Sopra Banking Software

As more financial institutions move to leverage cloud providers’ huge investment in their tech stacks, it’s worth pausing to survey the landscape and understand the most important considerations for banks moving forward.

The state of cloud banking 

The phrase ‘cloud computing’ spans a range of classifications, types and architecture models. In simple terms, a private cloud means a dedicated cloud computing network. In contrast, a public cloud is cloud computing delivered via the internet and sharing underlying infrastructure across organisations. A hybrid cloud is an environment that utilises both physical and cloud hosting.

In the last decade, the use of public cloud computing via services like Microsoft Azure or Amazon Web Services has turned into a $240 billion industry. In banking, the public cloud is already commonplace for non-critical tools, and a typical bank’s computing environment already includes on-premise systems, off-premise systems and multiple clouds.

Indeed, 19 of the top 20 US banks have already announced public cloud initiatives. In late 2020, IBM rolled out a financial services-specific public cloud featuring 10 of the world’s largest banks as customers. While there is a lot of activity, maturity levels vary. For instance, according to a recent report, 80% of UK banks have migrated less than 10% of their business to the public cloud as of 2020.

But that’s rapidly changing.  Banks know they can no longer ignore the benefits if they want to stave off competition and remain profitable. Data from McKinsey underscores this point. According to one of its surveys, more than 60% of banks plan to move the bulk of their operations to the public cloud in the next 5 years.

Benefits of running a bank in the public cloud  

The trend of public cloud adoption is, to some degree, traditional banks following the model that FinTech proved, i.e., using the cloud to be flexible, agile, and responsive. Through our experience, we have seen several specific use cases where banks in the UK have benefited from the use of cloud-based services. These include:

• Avoiding high CAPEX costs for new and replacement hardware with a more efficient OPEX model, removing the need for future one-off hardware investment
• The ability to access and leverage a wide range of digital products, offerings, and integrations, which are only possible with cloud-based technologies
• Reducing the risk and impact of Covid-19 and other potential business continuity issues by avoiding the need for staff to physically access specific locations to deliver services
• Increasing and ensuring operational resilience in a cost-effective manner to meet the latest regulations
• Improving efficiency via automation and infrastructure-as-code reduces manual effort and improves response times—plus, it reduces complexity and technical debt related to legacy systems

Considerations and keys to success

While there is a general trend toward public cloud adoption across banks in the UK and elsewhere, there are a few important areas to consider to ensure the greatest odds of success.

Be clear on the specific benefits that cloud is bringing to your organisation 

The public cloud brings many potential benefits, but not all of these will apply to every circumstance. And a move to the cloud is generally most effective as part of an overarching business strategy, rather than a strategy unto itself. It’s therefore critical to define which business benefits a cloud migration is expected to deliver.

Don’t assume that the cloud will be secure by default  

Most cloud-related data breaches are due to misconfiguration, not a flaw in the infrastructure itself. This means that it’s essential to either develop the expertise in-house or work with a managed-services provider to ensure that issues around configuration and methodology are avoided.

Understand where your data is 

A well-established benefit of the public cloud is that it enables users to ‘go global in minutes.’ However, for European banks, there are often specific requirements around data residency and transit.

A proven and audited system design, combined with the right technical controls, is key to making sure that data is administered correctly and housed only in approved locations.

Maintain the right level of capacity 

While virtually unlimited amounts of capacity are available in the cloud, utilising it means there is a chance of paying for unnecessary resources. To make sure cloud environments are being used efficiently, it’s important to collect, monitor, and react to the data and metrics available.

Leverage cloud technologies to increase automation and agility 

A significant advantage to hosting applications in the public cloud is to leverage its elasticity, integration and orchestration facilities. Yet, to make use of these, a suitable level of staff expertise, modern working practices and system design is required. A simple “lift and shift” of current hardware will be unlikely to bring improvements with no other changes made.

Improve operational resilience 

The major cloud providers—Amazon, Microsoft and Google—operate at scales that few can match. By adopting best practices like AWS’s Well-Architected Framework, it is possible to increase operational resilience via many layers of redundancy, recovery automation, and the use of multiple regions and availability zones. However, these areas can be maximised only if the right skills, experience and approaches are used.

Select the right partner 

While the public cloud presents exciting opportunities, little can be done without the right partner. Unless significant investment is made in recruiting staff with extensive experience in cloud migrations, transformations and optimisation, capturing the full potential is challenging. When selecting a public cloud partner, there are several vital aspects to consider. These include certification and standards, technologies, data security and governance, reliability, migration support, and service dependencies.

Moving forward 

Adopting cloud technology isn’t a catch-all solution for banks. However, increasingly, doing so has clear benefits when compared to traditional IT deployments. By choosing the right partner, banks can enjoy all the benefits of the public cloud while ensuring security, compliance and support are maintained. In today’s world, progressive banks are meeting customers where they are—and that’s increasingly using services hosted in the public cloud.

VRP APIs are being implemented by the UK’s 9 largest banks to enable customers to freely sweep money between their accounts following a ruling by the Competition and Markets Authority (CMA) in July. In practice, that could help people avoid overdraft fees or increase their automated savings.

by Kat Cloud, UK Policy Lead, Plaid

This is a major step forward and a win for both consumers and businesses as the CMA continues to create more competition across the banking sector. Through this change, consumers and business owners can feel more confident in their money management without fearing unnecessary, not to mention avoidable, charges.

What are VRPs?

Like a direct debit, where a business is able to collect recurring payments from the same customer without permission for every payment, VRPs offer businesses and consumers a similar process through open banking. Banks integrating the VRP API will enable third party providers (TPPs) to initiate variable payments at variable times, without getting the permission from the consumer every single time. As with the overarching mission for open banking, VRPs are intended to create a seamless and frictionless experience for customers.

One of the most common use cases of VRP APIs is sweeping, also known as me-to-me payments, which use TPPs accessibility across different accounts to understand where people can seamlessly transfer money from one account to another. From a consumer perspective, there are many practical applications for this, such as transferring money into an account to prevent dipping into an overdraft therefore avoiding fees, or topping up a savings account by transferring the leftover cash from a coffee purchase.

How can VRP APIs help to eradicate financial vulnerability?

The VRP mandate is the latest move in protecting customers while helping them to lead healthier financial lives. Indeed, as open banking continues to foster an environment where consumers and businesses have access to a wide range of financial products and services, the VRP API is the next step in creating a seamless financial ecosystem that reduces stress, confusion and saves time.

For those in a vulnerable financial situation, the VRP mandate will help them to monitor and manage their accounts. For example, if a consumer has insufficient funds in one account, VRP APIs can transfer money over from another account to prevent them entering an overdraft. Given its smart nature, the API has the capability to move money seamlessly, without constant permissions. In turn this helps prevent consumers from being charged high overdraft fees and penalties, all while creating a pathway to a more secure financial situation.

What’s next?

Once again, the UK is leading the pack against its EU counterparts in creating a fairer financial system through the power of technology, while at the same time maintaining the central ethos of open banking – putting the consumer back at the heart of the financial ecosystem.

Looking ahead, VRPs will certainly have broader use cases in the future. As the process is like direct debit payments, we can expect to see variable payments for utilities bills, investment accounts, subscriptions and more. As we continue to transition towards open finance, the VRP ruling is an important step in promoting financial democracy while helping to eradicate financial vulnerability.

IBS Intelligence is partnering with Sopra Banking Software to promote the Sopra Banking Summit, which takes place 18-22 October 2021. The summit is tackling the biggest issues in the financial sector. This weeklong festival of FinTech will touch on the hottest topics in financial services and highlight the new paths industry leaders are taking.

The following article was originally published here.

Regulatory reporting is a key part of the framework contributing to stability within the banking system. This is fundamental, as the sector’s business activity generates significant risk, which can affect the economy and its stakeholders, such as consumers, companies and governments. That’s why banking activity is regulated. Banks are required to report standardised information to supervisory bodies, known as regulatory reporting.

by Aurélie Béreau Adélise, Product Marketing Manager for SBP, Sopra Banking Software

While the delivery of reports may be transactional, periodic and calendar-based, the requirements can emanate from separate legislative and banking bodies, even though all these stakeholders have the same objectives:

• Ensuring monetary and financial stability
• Promoting international cooperation and transparency
• Protecting customers

However, the notion of regulatory reporting is very broad and covers a variety of obligations, the requirements of which are constantly expanding. This complicates the burden on financial institutions and increases the cost of maintaining their compliance.

Today’s stakeholders believe that the current regulatory reporting system, following several attempts at harmonisation within the framework of European integration, is no longer fit for purpose. This has led European companies to agree on the implementation of a new reporting system: integrated reporting.

New proposals following attempts at harmonisation

The European Central Bank (ECB), responsible for compiling reports for statistical purposes, has been trying to harmonise its reporting requirements for some years. Corep and Finrep were the first reports to be standardised within the various EU countries, starting in 2007. Next came AnaCredit in 2019, along with the advent of granularity and the emergence of new technologies enabling the analysis and exploitation of large data sets. And finally, BIRD (Banks’ Integrated Reporting Dictionary) – a collaborative project that’s still ongoing between the ECB, National Central Banks (NCBs) and commercial banks, which aims to define a shared set of transformations for regulatory reporting purposes.

Today, the ECB would like to move toward more granularity and has launched an overhaul of its requirements via its Integrated REporting Framework (IREF) project, which should be completed by the end of 2024. It launched a ‘cost-benefit’ investigation, completed on April 16, to assess the relevance of the main scenario it would like to implement. This survey was sent to the entire industry, including national banks, commercial banks, banking associations and software providers.

Similarly, the European Banking Authority (EBA), in charge of collecting financial and risk data as part of the banking industry’s single supervisory mechanism, launched a public inquiry from March 11 to June 11. The inquiry aimed to assess the implementation of the IREF counterpart on the prudential and resolution part of the project, called the Integrated REporting System (IRES). This project has made less progress than the ECB project, so there is a question as to how the ECB and EBA projects will eventually converge.

While the EBA has not yet disclosed the next steps for the implementation of harmonised reporting, the ECB foresees the transition to integrated IREF reporting between 2024 and 2027 in the area of statistics – monetary, AnaCredit and securities holding, in particular.

Is integrated reporting the final step in regulatory reporting?

In recent years, the number of new reports has grown exponentially. And each new addition requires work, expense and time. The idea of an integrated reporting system that brings all the information together in one place is therefore attractive, but only if it does not follow the same dynamic as the previous ones. These questions must be answered in the coming years to ensure an effective and rapid transition.

eCommerce is seeing accelerated growth across Latin America, with overall retail eCommerce sales increasing more than 36% throughout the region in 2020 as compared to the same period in 2019. However, the social and practical realities of Covid-19 have exposed some significant pre-existing problems within the digital payment systems that underpin this region’s expanding digital economy.

by Juan Carlos Martinez, Director & Co-Founder, Bamboo Payment Systems

These problems include a lack of financial inclusion among the population, regional disparities in payment formats, arduous complexities in many cross-border transactions, a deficiency in available credit rating programmes, and shaky consumer confidence in digital payment methods – all of which represent major barriers to sustained growth in the sector. To maintain a competitive edge, online merchants must frequently adapt their eCommerce strategies to meet varying local needs, and regional payment service providers (PSPs) that cater to global merchants must allow for constant customisation of payment offerings and flows if they aim to maximise opportunities within the LatAm eCommerce space.

The issue of limited access to and/or adoption of digital payment methods among Latin American populations is nothing new and has traditionally been viewed as a primary barrier to the expansion of eCommerce throughout the region. However, the global pandemic has accelerated adoption of digital payments and eCommerce, in many cases as a resulting necessity of strict quarantine restrictions. However, cash payments remain a major component, and currently account for 20-30% of online purchases. More striking is the fact that close to 207 million Latin Americans – roughly 46% of the population – do not have access to bank accounts, an important catalyst for the adoption of digital payment methods like credit and debit cards.

The local experts

Regional payment facilitators play a crucial role in promoting cross-border eCommerce by offering global merchants simplified access to this fragmented eCommerce environment. The local knowledge of these PSPs and the connectivity with popular local payment methods including cash networks, bank transfers, and local prepaid cards enable the development of unique, tailor-made solutions for each merchant that reflect the realities in each country via a single platform. As consumer preferences evolve and new digital payment methods are adopted, PSPs adapt their connections to local acquirers accordingly, allowing international merchants to benefit from this quick adaptation to ever-changing market realities. Essentially, PSPs are the local experts. Global merchants can then leverage this expertise to maximize the conversion rates of their eCommerce sales and stay at the top of their game.

But how important is this market flexibility in relation to the digital payment methods offered by global merchants to local consumers? Let’s look at a few basic indicators within the top three eCommerce markets in Latin America: Mexico, Brazil, and Argentina, three countries that when combined represent approximately 75% of all eCommerce sales in the LatAm region.

Generally speaking, credit and debit card adoption rates are noticeably low across the board in these countries, underscoring the significant barrier a lack of financial inclusion presents. Furthermore, among those who do have them, a large percentage of credit cards and debit cards issued in these countries are enabled solely for domestic purchases. In other words, these cards will not function for purchases made on merchant websites abroad. Additionally, chargeback rates are high in the region. In Mexico for example, the industry standard can be up to 3-6% which is roughly triple the global average. Thus, regional PSPs are key in mitigating this risk via the utilisation of region-specific anti-fraud systems which incorporate localised transaction databases and region-specific rules.

Another reality is the informality within the LatAm labour market, something that is still quite prevalent, with cash payments being preferred by many consumers. In Mexico, the OXXO convenience store’s cash voucher system is still a highly popular payment avenue, in Argentina the national chains Rapipago and PagoFacil offer many popular local payment options, and in Brazil there is Boleto cash payments which are still popular despite them currently being supplanted by a new national online payment protocol, PIX.

Finally, local bank transfers via standardised protocols are crucial necessities for many consumers, for example the Bank of Mexico’s Interbank Electronic Payment System, SPEI (Sistema de Pagos Electrónicos Interbancários), which is widely relied on by citizens for payment purposes.

In short, the disparities across countries and the widely-varying alternative payment methods available make regional PSPs an invaluable partner for global merchants wanting to access the hugely substantial and yet considerably underserviced LatAm population.

So, what is the outlook as we enter the second half of 2021?

As LatAm markets continue their transitions toward digital payment, as is the case of PIX increasingly replacing Boleto as the new gold standard in Brazil, the diversity of payment methods and consumer preferences across countries is profound, and highlights the supreme importance of regional PSPs as uniquely unifying entities for global merchants wanting to sell in Latin America.

Starting and running a business is no small feat, and as we all know, cash flow is the core fuel that powers any business. A set marker for identifying a healthy and thriving business is strong cash flow, and the importance of this particular resource is not lost upon any entrepreneur

by Mr Vineet Tyagi, Global CTO, Biz2X

They say that the first five years are extremely crucial for any business, and generally determine whether a company will crash or float. The question therein is why do various businesses that have a strong financial foundation and good initial investment, end up failing within five years?

The answer to this simply lies in their cash flow, so much so, that a recent study conducted in the US concluded that 82% of the time, poor cash flow management ends up contributing to the failure of an SME.

To understand how SMEs can manage their cashflow effectively, let us first take a look at the challenges:

Cash flow management challenges faced by SMEs

• Underestimating Start-Up Costs: Having unrealistic estimates and low cash reserve gets most SMEs started on the wrong foot. Obtaining capital and then not calculating realistic costs becomes like quicksand – quite difficult to get out of.

• Managing Receivables: Receivables, as most are aware, is the amount that is due to a company. Inefficient management of it ends up in a huge amount of outstanding receivables, which end up hampering cash flow.

• Managing Payments Efficiently: According to a study, almost 66% of SMEs revealed that the biggest impact on their company’s cash flow is due to the amount of time that it takes for money to process post receiving payments, with some of them having to wait more than 30 days for payments to clear. Thus, due to the time taken, if not managed well, it becomes a huge cash flow challenge for upcoming and ongoing projects.

• Ignoring Overhead Costs: A company with high overhead costs such as rental, travel, etc. will notice the profits depleting quickly. To cover such costs and break even, the organization will have to and hence, make more sales. Thus, to make a long-term difference to the business’s profitability and cash flow, overhead costs cannot be overlooked. 

• Low-Profit Margins: While they say that pricing is an art, the first step is always understanding your numbers. This means that knowing your profit margin is an extremely important metric for analyzing your prices. A low-profit margin implies that either business’s costs are too high or the pricing is too low or it could even be both. The lack of a sustainable and strong profit margin means that a business will always battle cash flow issues.

Having talked about the cash flow challenges faced by SMEs, let us talk about how FinTech can assist in overcoming them.

5 ways FinTech helps small businesses better manage their cashflow

1. Easier Business Lending: Traditional lenders, usually hesitate when handing out loans to SMEs with smaller loan amounts and what they consider to be inconsistent earnings, thus risky. Apart from this, the entire application process for the loan is quite time-consuming and cumbersome. With the advent of FinTechs, it has now become easier for SMEs to bypass the conventional loan obtaining methods and scale their operations faster owing to easier business lending. Thus, bridging the gap, with offerings such as through P2P lending platforms, FinTechs are making the lending space much more dynamic.
2. Simplified and Faster Invoicing Systems: Having access to simplified and faster-invoicing systems, it is now easier for businesses to thrive. Besides saving them from existing revenue losses or accumulation of bad debts, an efficient management system helps firms collect payments effectively, irrespective of the location or currency, thus, creating a sustainable flow of operations and cash flow.
3. Efficient Account Management Tools: Owing to FinTechs, SMEs now have access to a lot of options to help them control their costs and expenses. With the help of online accounting systems, they can monitor their cash flow in real-time, and ensure the smooth running of operations. Taking out the guesswork from running the business, FinTechs with the help of expenses and invoices apps, aid business owners in focusing on expansion and growth instead of other small details. 
4. Transparency: The proliferation of the internet and mobile, has helped FinTechs in creating digital banking solutions that reduce both the cost of transferring funds as well as the need for paper currency for conducting any kind of financial transaction. This aids in making the financial system much more transparent, and reduces the chances of tax evasion or other negative practices, thus ensuring that the business ecosystem becomes robust.
5. Increased Profit Potential: Post the advent of FinTechs, capital markets have witnessed a huge growth in terms of technology infrastructure. Irrespective of the industry or the type of organization, a reduction in costs ends up aiding an increase in revenue and profits eventually. The union of technology and finance has led to the rise of trading platforms that via ‘collection and analysis of market’ and ‘user data’ can help in uncovering trends, providing aggregated views of the market, and enhancing forecasting capabilities that eventually maximize the profit potential for firms and traders alike.

With FinTechs now making it possible for businesses to serve their clients irrespective of location, monumental strides have been made in the areas of payments, inventory management, invoicing, cost-reduction, etc. which were previously unimaginable. Many components of FinTech are now intertwined in business operations that can help in cash flow management for SMEs tremendously. Thus, offering capabilities to leverage technology, FinTechs can really make a difference for companies in keeping their cash flow positive even in times of crisis.

Financial inclusion: How digital lending can help

IBS Intelligence is partnering with Sopra Banking Software to promote the Sopra Banking Summit, which takes place 18-22 October 2021. The summit is tackling the biggest issues in the financial sector. This weeklong festival of FinTech will touch on the hottest topics in financial services and highlight the new paths industry leaders are taking.

The following article was originally published here.

Financial inclusion – its efficacy, implication and urgency – is becoming one of our industry’s biggest talking points. And this is a good thing. The more light that’s shed on the issue, the more likely we are as a collective to push its agenda.

by Nelly Kambiwa, Financial Inclusion Director MEA, Sopra Banking Software

However, there are still question marks over what exactly financial inclusion means. For some, it’s tied intrinsically to demographics; for others, it’s about politics. Most interpretations are not wrong, and almost all are well meaning, but perhaps the clearest and most succinct definition comes from the World Bank:

“Financial inclusion means that individuals and businesses have access to useful and affordable  financial products and services that meet their needs – transactions, payments, savings, credit and insurance – delivered in a responsible and sustainable way.”

Without this ‘access to useful and affordable financial products and services,’ people may not have a secure place to store money, no effective and free means of receiving payment, and no safe, reliable way to make payments.

And while great strides have been made around financial inclusion, there’s still a long way to go. According to the most recent Findex data, there are still close to 1.7 billion adults in the world without access to basic financial services

Financial inclusion in Africa

Of course, financial inclusion is not a challenge limited to a particular country, region or continent; rather, it affects areas all over the world. However, for the purposes of this article, we’re going to look at financial inclusion in Africa, and how digital lending can help to improve the financial lives of millions of Africans.

According to Global Finance, 50% of the African population is unbanked, equating to 350 million people. This is already a problem that needs addressing, but with the African population rising quickly – it’s set to double over the next 30 years, adding an additional 1 billion people – it could quickly go from bad to worse.

The role of digital in expanding access

Extending access to borrowers who are otherwise unlikely to receive it is key to improving the health of a society. Among all financial services, access to credit is perhaps the most important as it’s a force multiplier. To this end, innovative digital strategies and new technologies are enabling lenders to reach traditionally underserved people while securing their own interests.

Indeed, the use of big data, artificial intelligence, machine learning and open banking-enabled solutions is expanding the scope of what’s possible. Thanks to new products and soaring internet penetration rates, geographical limitations are being overcome. More sophisticated data analysis tools have come online and are enabling easier credit decisions in lieu of traditional credit scores.

This is particularly relevant to lending in Africa, where access to physical branches is an issue for many people. A recent white paper published by Sopra Banking explained how the rise in mobile money users in Africa is an opportunity and challenge that many incumbent financial institutions have yet to rise to.

Thankfully, that is changing, and many lenders are coming up with solutions that will allow them to provide digital loans to their customers in a safe and effective way for all parties. With the introduction of video KYC and account aggregators, lenders can easily access permissioned customer data and conduct better due diligence. And the digitization of the entire loan application lifecycle means that borrowers can apply for loans remotely—a benefit both in terms of reducing friction and expanding reach.

New-to-credit (NTC) customers

Historically, credit institutions have been cautious with NTC consumers, due to the lack of credit history to assess their probability of default. However, given technological advances, lenders can now more confidently lend to NTC borrowers. They can do this by leveraging some of the solutions mentioned above, solutions that afford new ways of analysing data, predicting a customer’s creditworthiness and gauging the risk involved in lending.

Analysing mobile and web data makes it possible to offer credit to individuals and SMEs without financial footprints. Over the past decade, this practice has emerged and really caught on in Africa, where FinTechs, microfinance institutions and traditional financial institutions like NCBA Group, Equity Bank and Orange Bank use SMS data to inform credit decisions.

While alternative credit scoring systems show great promise, they also bring up privacy and data reliability concerns. And in at least one case, have led to a large group of digital borrowers taking on unsustainable levels of debt.

Open banking as a catalyst

On the regulatory side, open banking is also driving improvement in lending processes. With access to more data (including non-financial data), lenders can do enhanced credit scoring and risk assessment. This provides additional insight, allowing lenders to assess a borrower’s eligibility more accurately. This not only drives down costs for the lender, but it improves the customer experience and, because it’s digital, it works in places without existing infrastructure.

For those most likely to be denied credit, the sub-prime loan application process can still be paper-heavy, involving the manual submission of payslips or statements. Furthermore, Covid-19 has underscored just how inefficient traditional loan processes are.

As an antidote, open banking is pushing financial inclusion solutions that make it easier to verify customer details in real-time—in some cases, going as far as automating the entire interaction. This makes the process easier for the user and significantly increases the chances of applications being accepted.

The good news is that African banks are taking notice of open banking and starting to take huge strides in furthering its implementation. For instance, in 2020, the Central Bank of Kenya – a country where 44% of the population is unbanked – included open banking as one of its main strategic objectives; and last year at the height of the pandemic, Nigerian startup Okra announced that it had received significant funding to develop an open banking infrastructure.

Such developments are becoming increasingly common throughout Africa and bode well for the future of financial inclusion across the continent.

Looking ahead

Digital lending is redefining the dynamics of the credit market in Africa. With a lower cost base and improved reach, financial institutions – including banks, MFIs, neobanks and Telcos – can simply do more with less. Digital lending cuts the cost of offering services and streamlines onboarding. It also enables instantaneous and remote approval and supports data-driven mechanisms to initiate repayment. At the same time, open banking facilitates greater access to data than ever before and unlocks new use cases.

Ultimately, expanding access to credit requires careful planning and is more of a journey than a destination. The use of alternative credit scoring is still in its infancy, and open banking is only a few years old. At its best, digital credit can be responsible, inclusive and affordable. And it’s something every financial institution should strive for, as it not only helps individuals and communities, but it drives economic growth, too.