IBSi Blogs

While the benefits of fintech are being seen at increasing scale for consumers in the US, Europe and China, adoption among corporates is less emphatic. A recent paper from Wharton Business School highlights what many see as an ongoing challenge – the struggle between existing bank partners and new, challenger fintechs for that vital role with businesses, as they look to transact and manage cash.

Unfortunately, the competing pressures on corporate treasury are far more complex than this argument allows. We need only look to geopolitical factors that have had a knock-on effect on businesses, banks and treasury in recent (and not so recent) years. At this month’s EuroFinance conference, Strategic International Treasury, US tax reform is high on the agenda as businesses of all industries grapple with its implications. There certainly are opportunities following the legislation to adjust and re-think treasury activity, but there is no single approach, with it affecting different sectors and business models in very different ways.

Does this environment present an opportunity for investment in fintech from corporate treasurers? Certainly, but it’s equally useful to look at bank partners and ask – are they ready too? Myriad regulatory developments since the financial crisis mean that banks are potentially only now really ready to look at opportunities for game-changing, strategic technology that fintech provides. So where do the opportunities lie and how can we get there?

From siloes to an enterprise-wide perspective

For treasurers, a key challenge when coming to grips with the opportunities from fintech is attempting to understand the tangible benefits technology will deliver to their business as a whole. Organizational siloes prevent individuals from seeing how improved processes in one part of a business could either be beneficial or a burden in another. That enterprise-wide perspective is a crucial first step, before launching into a deep dive of whether DLT can benefit risk management in treasury operations.

That said, fintech needs to meet treasury in the middle by understanding the cultural differences between the two. Inertia may affect people in businesses because of the culture and habit around existing technology and incumbent infrastructures. If fintech aims to disrupt treasury then it needs to address how to solve existing problems and find ways of helping business in transformation. Just presenting smart new tech is not enough.

Business transformation has steadily evolved as a discipline to help overcome this very issue. For example, in the M&A process there is now an acceptance that merging two companies isn’t as simple as rationalizing costs, ditching an inefficient system and migrating data. Without understanding the people who will be adopting the technology, from CFOs and CTOs to accountants and cash managers, you aren’t laying the foundations for success.

Mass customisation: an achievable goal?

With the right mind-set, businesses can look to leverage the benefits from solutions that are steadily being developed by central and transaction banks, and fintechs. The speed and efficiency from AI and predictive capabilities, the effectiveness of work being done on emerging platforms and the learnings from pilot projects such as Hyperledger will all have lasting impact on treasury and related operations.

The most important thing to consider is how the specific use cases for each technology being developed can be made available at scale. Mass customisation is the missing piece in the growth of the technologies discussed above. There needs to be a shift away from a “one-size-fits-all” approach, to really reflect the pressing needs of individual treasury functions. Each treasury organization is part of a unique business with its own set of problems, so understanding this is the revolutionary change that businesses need to see in the solutions being offered by fintech and the banks.

About the author:

Robert J. Novaria has more than 30 years of corporate experience in the roles of treasurer, credit director, finance manager and controller at BP America and Amoco Corporation. Currently, he is a partner with the Treasury Alliance Group, leveraging his corporate experience in client engagements dealing with global treasury challenges, including risk and crisis management; cash management and cash flow forecasting; working capital management; shared service operations and general management. He also serves as a chairperson, moderator and speaker at treasury conferences worldwide.

For more information about EuroFinance: Strategic International Treasury and to book: www.eurofinance.com/miami

Remember Blockbuster? Woolworths? HMV? Comet?

These brands – once household names – are now a distant memory. But they do lead us to think about what lessons we can learn from their demise. Ultimately, if businesses do not adapt to new technology, they run the risk of falling behind the times, and eventually, failing.

It seems that across almost all sectors, there is a push to innovate. Yet credit and risk professionals continue to rely on traditional techniques, largely ignoring a key tool that could see the revolution of the marketplace – machine learning.

Machine learning is one of the top buzz words being used at the moment – but what does it mean? It is a form of artificial intelligence (AI) that can learn from data, identify patterns and make decisions with minimal human intervention. Once these patterns have been found, they can be used to make predictions and solve a range of data-related problems.

And for risk professionals, this can offer a wealth of benefits – including ensuring regulatory compliance and enabling transparency with data usage. So, it is time to ask firstly, why it is not more prevalent in the sector? And secondly, what can we do to move towards a future where machine learning is at the centre of financial decision-making.

Why now?

Talk about AI and machine learning started a long time ago, but momentum has picked up in recent years, and businesses have started to not just talk about the technology but actually implement it too.

The reason for this is simple – availability. The sheer amount of quality data and computer power we have available, combined with modern technology and the approval from regulators around the world make it easier than ever to use machine learning to make more informed decisions on lending or credit.

Late to the party

The downside of machine learning is that credit and risk professionals are already late to the party as other industries, such as fintech, marketing and transportation have already adopted this technology.

However, this should by no means deter the credit and risk sector from starting to use it. In fact, it is even more critical that they get to grips with machine learning or they could be left behind. As an article in the Harvard Business Review summarises ‘AI won’t replace managers, but managers who use AI will replace those who don’t.’

Fear of the unknown

Due to the handling of consumer finance, trust and reliability are crucial for the credit and risk sector meaning that adopting new technology is often viewed as an uncalculated risk that many are unwilling to take. This puts the sector at a disadvantage in relation to others, such as retail and customer service which are historically more open to trialling new techniques.

Fraud professionals may trust the tried and tested traditional systems that alert them to a potentially fraudulent application, more than machine learning. Or risk analysts for creditors may be hesitant to allow machine learning to make important financial decisions instead of specialists (or pre-existing trusted algorithms).

Despite reservations, the time has come to move past this scepticism and embrace the fact that machine learning already surrounds us in every branch of society. Alexa uses machine learning to collect data and then provide a tailored service to your preferences, Uber uses algorithms to determine arrival times and pick-up locations, and Netflix uses machine learning as part of their recommendation engine. Machine learning is everywhere, and credit and risk professionals need to innovate before it’s too late.

Better decisions, better lending

As regulators begin to shift the parameters that lenders and financial institutions work within, it is important that credit and risk professionals are performing at the top of their game – and machine learning can help.

In fact, at Callcredit we ran a year-long machine learning trial to help highlight the potentially positive benefits of the predictive accuracy that machine learning can offer. The results of the study were very encouraging and point to potential financial benefits for adopters of the technology in the credit, fraud and insurance arenas.

In one modelled scenario, the level of default in a portfolio of 60,000 credit cards was reduced significantly, resulting in a 10 per cent decrease in overall bad debt. If used with other elements of the customer lifecycle, potential machine learning generated benefits could be even greater.

As the benefits of machine learning become evident and transparency becomes a main focus for the sector, machine learning can be used by lenders as a new way to explain lending decisions and to demonstrate that the data going in backs up the eventual decision that comes out. Machine learning can support lenders by analysing huge amounts of data and by doing so, it can discover relationships that have previously been hard or impossible to see, prior to making a decision. The lender can then use the machine’s output to justify its decision to a regulator or a consumer.

Businesses can either embrace the innovation that technology brings, or risk being left behind by it. Many industries are improving their efficiency and performance by using smarter technology and it will only be a matter of time before machine learning will be the norm rather than the exception. It is time for credit and risk professionals to get on board and harness this technology to make better decisions for better lending today.

By Mark Davison, Chief Data Officer, Callcredit Information Group

The Payments Service Directive 2 (PSD2) came into full force in January 2018, bringing with it dreams of open banking that will transform the way we move and use money.

PSD2 opens up banks’ payments infrastructure and customer data assets to third parties.

Expect PSD2 to bring more options and innovations in payments and information services for consumers.  In this new era, banks are required to provide other third parties such as qualified payment service providers (PSPs) connectivity to access customer account data and to initiate payments.

The Giant Leap to Commoditisation

 From a merchant acquiring bank’s perspective, it is exciting to see all the new opportunities that PSD2 will bring in terms of transparency, fair competition, and entry barriers being broken down for new payment services.

The EU banks’ monopoly on their customers’ account information and payment services will soon be in the distant past.  Bank customers will have the power to give third-party providers permission to retrieve their account data from their banks.

PSD2 makes the role of the merchant acquiring bank even more important than ever because now there will be an even stronger need for security and expertise.  It’s all the know-how of the ins and outs of global payment services to truly leverage the benefits PSD2 brings to the payments landscape.  There is going to be a greater need in understanding the intricacies of helping merchants and retailers connect directly to the consumer bank account to initiate payment. There will be a need to safeguard consumers from any bad ecommerce experiences, including fraud.

The Key is in Technology and Innovation

Retailers and ecommerce merchants as well as other third-party providers will look to bank with merchant acquirers and ecommerce FinTechs to help them achieve an improved payment experience.  They will need help to leverage the power of connecting with banking open application program interfaces (APIs) without the need to maintain anything else such as any other backend systems from the bank.

Through the utilization of banks’ APIs, non-banks can enter the financial market without the heavy compliance and infrastructure that banks are required to maintain. This ignites innovation in the financial market and brings fresh ideas about how to shape the banking experience.

However, technology savvy merchant acquiring banks are going to give ecommerce merchants a leg-up in enabling them to quickly deploy their go-to-market strategy and ultimately generate more revenues without the pitfalls.  They will be able to guide them, bringing them within the scope of PSD2 regulation.  They will also be able to provide them with onboarding gateways and beneficial applications to deliver a consolidated view across different types of accounts in a secure and safe way, resulting in better customer insight.  This is why it will be important to partner with the right FinTechs that have the knowledge, technology and services to do all of this.

Ultimately it will be critical for PSPs and online merchants to use payments technology to their advantage and optimize operational procedures in a safe and secure way without losing customers to shopping cart abandonment or have consumers frustrated and not completing their online purchase.  PSD2 requires stronger identity checks of users when they are paying online.  FinTechs that build artificial intelligence (AI) into their ecommerce business will provide better consumer protection against fraud.

The Winning Strategy

In conclusion, PSD2 empowers bank customers, giving them the option to use third-party providers to manage their finances. It wouldn’t be out of the question to use Facebook or Google to pay bills, make P2P transfers and even analyze spending, all while the money is being safely placed in a bank account. The newcomer tech companies and even well-known big-tech can be risky because they are not familiar with the payments market enough, and will provide substandard service to businesses while also carrying over their method of doing business, with privacy issues, etc.  Only tech-savvy banks are uniquely positioned to launch revolutionary services, mitigating risk.  Not only are they able to provide a breadth of services to customers of the post-PSD2 services, they are also able to support market newcomers via partnerships.

Consequently, the winning strategy could be “don’t wait for your retail bank to help you, don’t wait for the leading big technology firms either but rather seek a fast-mover that’s got your back.”  It is expected that third-parties will build financial services on top of banks’ data and infrastructure but they will need tech savvy acquiring banks to help get them there.  The winning strategy is to choose an acquiring bank that has the know-how to reinforce consumer protection, improve the security of internet payments and account access within the EU and globally. Seek out and partner with a tech savvy acquiring bank to get up and running fast. There will be a race to gain market-share and the customers that will, in the end, create their own collection of smaller service providers, instead of choosing one specific bank for all financial needs, will be the most successful.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought for any specific circumstances.

By Dr. Rachel Gauci, Senior Legal Counsel at Credorax

Don’t be daunted by the overwhelming technological resources of today’s market leaders, says Kevin Deierling, vice president marketing, Mellanox Technologies. Times are changing and that exclusive hyperscale architecture is now within reach of any large enterprise.

How to tame the tech titans asked a January 18^th Economist headline in Competition in the digital age. A more recent article (American tech giants are making life tough for startups) outlines the problems of startups in the tech giants’ “kill-zone” – where investors will shy away from any company that might appear to be entering the big boys’ territory.

You do not have to be either a startup or a direct competitor to the likes of the Super 7 – Amazon, Facebook, Google, Microsoft, Baidu, Alibaba, and Tencent – to feel daunted by their sheer market presence and technological dominance. Then there are the second tier “unicorns” like LinkedIn, Twitter and Instagram who share their secret of building massive network infrastructures to achieve

unprecedented power to mine data and automate business processes for super-efficiency. How can the average enterprise survive in a commercial environment that is dominated by such giants?

There are two keys to their market dominance. The first is to have exceptional reach – not millions of customers, but hundreds of millions or even billions. But the real advantage is to have “hyperscale” data ccentres specifically designed to accommodate and work with such a massive customer base.

Hyperscale

“Hyperscale” describes a data centre architecture that is designed to scale quickly and seamlessly to a massive and expanding population of users and customers, while maintaining reliability, performance and flexibility for ongoing development. Until recently there was nothing available that could deliver such a service, so those giants went ahead to design and build their own hardware and software so they could control every detail and achieve unmatched efficiency. This required teams of computer scientists and specialist skills to manipulate every configurable element – something that could not be achieved using off-the-shelf solutions.

By the end of last year there were nearly 400 such hyperscale datacenters in the world, nearly half of them in the USA. There was also a growing number of specialist providers of smart interconnect solutions specifically designed for exceptional performance and minimal latency in order to serve this market.

What has changed is that those same providers now have their eyes on a very exciting opportunity: to apply their experience and advanced technology to simplify the deployment and lower the cost of hyperscaling to bring it within reach of medium to large enterprises. This is wonderful news for thousands of enterprises that will benefit enormously from hyperscaling. For the providers, it also opens up a far larger market.

There are five key factors that must be considered to take advantage of this opportunity.

Key 1 – High Performance

The faster the data travels through a complex system, the more responsive and quick will be the benefits. The leading solution providers have been providing an end-to-end portfolio of 25G, 50G, and 100G adapters, cables, and switches to these hyperscale data centres, and the resulting intelligence, efficiency and high performance is now well proven. Your own business might not yet need 100G performance, but it no longer makes sense to buy 10G now that the cost of 25G is on a par with it.

Key 2 – Open Networking

In a traditional static network environment, the one-stop-shop approach is efficient and reassuring. But today’s business environment demands agility and an infrastructure that can be extended and optimised to meet less predictable changes. Sometimes that means choosing best-of-breed, or sometimes the most cost-efficient, solutions. An open and fully disaggregated networking platform is now vital for scalability and flexibility as well as achieving operational efficiency

Key 3 – Converged Networks on an Ethernet Storage Fabric

A fully converged network will support compute, communications, and storage on a single integrated fabric. To grow a traditional network it was necessary to scale it “up” by the disruptive process of installing further resources into the existing fabric. This is like growing business by recruiting training and accommodating extra staff, whereas in today’s business environment it is often more efficient to outsource skills to meet sudden demand. Hyperscale networks are designed to scale “out” disaggregated hardware, so you can add units of CPU, memory and storage independently – and an integrated, scalable, and high-performance network is the key to achieve this.

Key 4 – Software Defined Everything and Virtual Network Acceleration The hardware required for a converged network (Key 3) is fully integrated with software to orchestrate a virtual environment optimized for the needs of each specific application. The software controller enables the system to be managed from a single screen, and software automation removes most or all of the burden of manual commissioning and ongoing management.

Software defined networking, storage, and virtualization – or software defined everything (SDX) – transforms what would have been an impossibly complex aggregate into an intelligent and responsive whole.

Key 5 – Cloud Software Integration

It goes without saying that you will want your new hyperscale network to be fully integrated with popular cloud platforms such as OpenStack, vSphere, and Azure Stack. It should also support advanced software defined storage solutions such as Ceph, Gluster, Storage Spaces Direct, and VSAN.

One integrated whole

These five key factors show that we have come a long way from a bank’s traditional static datacenter – and this is the way to go. The “Super 7” may be way ahead of anything most enterprises can even dream about, but many more companies will be facing similar pressures for flexible and efficient scalability. A retail or food chain going international could be taking on millions of new customers. There are numerous IoT initiatives that will manipulate terabytes of data flooding into their systems and a company needs massive in-house capability to run and evolve new algorithms. The result could be disastrous unless the systems are designed to scale to meet the needs of the business, while maintaining performance and reliability.

A recent example was provided by Vault Systems, a company that delivers ASD certified Government Cloud to Australian federal, state and local government agencies and their partners – managing sensitive data at the highest levels of security. The company wanted an open, flexible 100GbE network that would at the same time maintain its high level of security. They chose a supplier of hyperscale network solutions to the tech giants but one that also provides for high performance computing, enterprise data centers, cloud, storage and financial services that do not have a hyperscale budget or resources. In the words of Vasult Systems’ CEO and Founder, the resulting system has “contributed to the high performance of our cloud and also given us the confidence and peace of mind that our network is the fastest and most resilient available in market today. We couldn’t be happier with the results we have seen so far.”

Conclusion

All the five keys listed above are bread and butter to the companies that supply those “tech titans”. But don’t be daunted by the thought of asking advice from a company whose customers include giants like Netflix. As a more normal size enterprise you represent their next, even bigger, market opportunity. They will be keen to prove that they can build you hyperscale networking – without a hyperscale budget.

Outsourcing KYC is a good way for banks to safeguard their continued regulatory compliance and control spiralling costs, explains Toby Tiala, Programme Director, Equiniti KYC Solutions

In a bid to combat money laundering, market manipulation and even terror funding, the rising tide of conduct-based regulations continues to challenge banks globally. The cost of compliance – and non-compliance – is steep. The average bank spends over £40m a year on Know Your Customer (KYC) processes yet, in 2016 alone, bank fines worldwide rose by 68%, to a staggering $42bn.[1]

A double squeeze

Resource stretched mid-sized banks, in particular, are having a tough time. As regulators up the ante they are creating an operating environment increasingly conducive to fines. To cope, banks are expanding their compliance resources to mitigate their risk of transgression. Those with resource limitations are, therefore, the most vulnerable.

They are right to be worried. Since 2008, banks globally have paid a staggering $321bn in fines. Earlier in the decade, high profile money laundering and market manipulation cases caused the level of overall fines to skyrocket. After a brief period of respite (when governments and the Financial Conduct Authority backed off fearing industry suffocation), the fines have been steadily creeping back up. This time, however, big-ticket fines have been replaced by a far higher number of smaller penalties. Put another way, the regulators are now tightening a much finer net than before.

A bank’s ability to profile and identify risky customers and conduct enhanced due diligence (EDD) is critical to ensuring compliance with anti-money laundering (AML) law. This is no trivial task. Major banks are ploughing expertise into their KYC and creating proprietary systems dedicated to meeting the new requirements. Mid-sized banks, however, don’t have this luxury and are challenged by the need to beef up their resources. Applying regulations like AML4, PSD2 and MiFID II to complex legal entities like corporates and trusts is a convoluted business.

New focus

A large proportion of regulatory fines result from high-risk customers slipping through the cracks, usually stemming from ineffective beneficial ownership analysis, customer risk rating or EDD. This is especially common in complex entities with numerous ‘beneficial owners’ – something that has brought these individuals into sharp focus. A beneficial owner in respect of a company is the person or persons who ultimately own or control the corporate entity, directly or indirectly. Conducting KYC to effectively identify high-risk beneficial owners of complex entities is skilled and complicated work, to say the least.

Nowhere can the new focus on beneficial ownership be seen more clearly than in the EU AML4 Directive, which recently came into force, in June 2017. This directive is designed to expose companies with connections to money laundering or terrorism, and decrees that EU member states create and maintain a national register of beneficial owners.

Big impact

The growing focus on beneficial ownership is having a clear impact on banks’ relationships with their trade customers. According to research from the International Chamber of Commerce,[2]  40% of banks globally are actively terminating customer relationships due to the increasing cost or complexity of compliance. What’s more, over 60% report that their trade customers are voluntarily terminating their bank relationships for the same reason. That this could be evidence of the regulations working will be of little comfort to banks that are haemorrhaging revenue as a result.

The UK has already formed its beneficial owners register but caution is advised. The data quality still has room for improvement and the regulations make it clear that sole reliance on any single register may not translate into effective AML controls.  Mistakes – genuine or otherwise – may still occur but automatically checking these new beneficial ownership registers is a clear step forward.

The key for mid-size banks is to zero in on what will both enhance their KYC procedures and deliver clear and rapid visibility of high risk entities. Once established, this will enable them to manage their own risk profile, together with their customer relationships, and minimize the negative impact on their revenues.

Highly complex KYC and EDD activity can severely inhibit the onboarding process for new customers, often causing them to look elsewhere. The deepening of these procedures is making matters worse – it can now take up to two-months to onboard a new client according to Thompson Reuters[3], with complex entities usually taking the most time. Large banks have proprietary systems to accelerate this process but, for mid-sized banks, this is a serious headache; not only does it extend their time-to-revenue from corporate clients, it can also turn them away entirely, and lead them straight into the hands of their larger competitors.

Combine and conquer

For these banks, outsourcing their KYC to a dedicated specialist partner is a compelling solution. These partners have agile, tried and tested KYC systems already in place, are perpetually responsive to the changing regulatory requirements and have highly skilled personnel dedicated to navigating the KYC and EDD challenge in the shortest time possible. Plugging into a KYC-as-a-Service partner enables mid-size banks to seriously punch above their weight, by accelerating their onboarding of new clients to match (and often beat) the capabilities of large banks, dramatically reducing their overall compliance costs and helping them get ahead – and stay ahead – of the constantly shifting regulatory landscape. This, in turn, releases internal resources that can be redirected in support of the bank’s core revenue drivers and day-to-day business management.

It is clear that the regulatory squeeze is set to continue for the foreseeable future. Banks that have the vision and wherewithal to accept this notion and take positive steps to reorganise internally will not only be able to defend their ground against larger competitors, they may even turn KYC into a competitive differentiator.

Specialist outsourcing is fast becoming the norm for a wide variety of core banking processes. Few, however, are able to demonstrate as rapid and tangible benefit as the outsourcing of KYC.

It may be hard to believe, but the 20^th January this year marked one year since Donald Trump’s inauguration. Away from all the media furore surrounding his Presidency to date, one of his less well-publicised reforms to the US tax code is perhaps best summed up by one of his political predecessors.

“You may delay but time will not” – the words of none other than Benjamin Franklin perfectly explain the situation surrounding one particular tax reform currently under review – 871(m). This very specific, not to mention very complicated rule, is a tax on the value of dividends a financial institution receives on a U.S. equity derivatives position.

There is a need for banks to comply with the first part of 871(m) in the here and now, particularly given that there is absolutely no indication that the 871(m) legislation will be dropped. While many banks may be inclined to wait until the outcome of the review, this mentality will only open up a whole world of problems further down the line and is preventing operational teams strategically addressing pressing tax and compliance issues today.

Where it starts to get tricky

The current rule establishes up to a 30% withholding tax on foreign investors on dividend-equivalent payments under equity derivatives, covering a number of product types including swaps, options, futures, MLPs, Structured Notes and convertible debt. And this is where things start to get tricky. A firm’s equity-linked derivative instruments will face a tax withholding if the ratio of change to the fair market value is .08, as of Jan 2019, currently, this is Delta 1, or greater to the corresponding change in the price of its derivative. Banks have no choice but to enhance their systems and processes in order to monitor which equity derivatives underlying constituents fall under 871(m) and know exactly when to calculate and enforce withholding on dividend equivalents.

In order to do this, a careful assessment of intricate calculations based on a set of highly convoluted rules and scenarios needs to be carried out, for example, required Combination Rule logic. In order to do this, firms need to pull together vast amounts of data, ranging from relevant trades (positions alone are insufficient for combination rule tracking), as well as Deltas and Dividends across many instrument types. This would not be so problematic if it was the only issue banks had to contend with. However, with so many other IT initiatives for other Tax and Regulatory mandatory projects also in the works, 871(m) is by no means the only significant compliance requirement on a financial institution’s plate right now.

Ever-changing global tax reforms

Different, albeit similar, challenges also arise from other transaction tax legislation. With this in mind, firms should ensure they minimise multiple interface creation and support costs that result from linking to separate systems managing individual tax rules. Instead, firms should look to feed into a single Transaction Tax system that it is flexible enough to support ever-changing global tax reforms down the line.

It is important to address the 871(m) conundrum now to get ahead of the game. It is not the first, and certainly won’t be the last, transaction tax headache banks are having to overcome under this particular presidential regime. After all, we are in the midst of perhaps the biggest ever shake-up of the US tax code, so who knows what is in store for financial institutions at the end of Trump’s first term.

By Daniel Carpenter, head of regulation at Meritsoft

This is the first in a series of articles on this topic. This article first appeared in the IBSi FinTech Journal February 2018.

The retail banking landscape is becoming increasingly crowded with new offerings from ambitious fintech companies and, increasingly, the Silicon Valley tech giants like Amazon, Facebook and Apple. These players are gaining a growing share of the space between traditional banks and their customers, meaning that banks are now competing with a league of new players.

The British Bankers Association forecasts that by 2020, customers will use their mobile to manage their current account a total of 2.3 billion times a year; more than internet, branch and telephone banking put together.

So, how can retail banks stay competitive? Can they actually learn from the fintech, big tech and social media pioneers that are threatening their central standing as the number one go-to provider of financial services? Could they actually go on to beat them at their own game when it comes to digital customer engagement through banking apps?

The simple answer is, yes. Even despite the fact that competition in the market will intensify once PSD2 comes into force in 2018. The forthcoming regulation will further enable non-banking, data-rich giants like Google and Facebook – as well as innovative fintechs and developers – to lure customers to their own sophisticated and engaging financial management and payment services apps using data from their traditional bank competitors. However, banks still have the competitive edge when it comes to access to customers’ (and financial) data at scale, which they can use to enrich the engagement experience in digital banking.

That said, banks must move swiftly in order to exploit this advantage, while ensuring that they focus on doing so in a sustainable way. To drive long term meaningful engagement with customers, the emphasis must be on using data to enhance user experience. For most banks, this means investing in enriching transaction and financial product data that will enable them to customise their engagement with users. Customers need to feel like their bank understands them and encourages them to form habits that drive real value and impact. They also want to feel that the time they pass on a banking app is time well spent.

In addition to providing a clear and insightful overview of customers personal finances and more advanced features there are many other interesting ways to keep your customers more engaged:

• Proactively feeding insights that inform and educate: this could be in the form of recommending a product or giving financial advice that is relevant to a user.
• The motivation of a card-linked offer – a type of personalised digital coupon via a third party that customers opt in through their bank, which then allows them to earn instant rewards – is an effective way of encouraging users to make small savings on a day-to-day basis.
• Enabling community reinforcement by encouraging users to share progress with peers can also be a helpful way to gamify their saving efforts.

In a post-PSD2 world, banks will no longer be able to rely on the inertia of lifelong customers. 73% of millennials say they are more interested in new financial services offerings from the likes of Amazon and Apple than a traditional bank, so it is essential that banks aim to foster long-term relationships with their customers via their digital platforms. In our lives we have a few critical moments when dealing with money. Our first job, first line of credit, renting and perhaps buying our own place, first child and then maybe investments and considerations for a comfortable retirement. Long-term retention is not just about frequent engagement, but about building up trust and being there for customers with the right advice at the right time in a person’s life, such as:

• Guidance on budgeting during university
• Advice on pensions and savings after securing a first job
• Recommendation or insight that renting can be expensive and perhaps it could make sense to look at buying an apartment in the future

If a bank can show its customers that it knows them well and earn their trust, they’ll be more likely to win customers’ loyalty in the long run.

Personalisation of every customers’ banking experience is tied closely to this idea. Everyone has a different relationship with their finances, yet most banking apps look more or less the same. A bank should provide a digital environment that caters to an individual’s needs and shows them that it understands them. Banking apps should serve different financial behaviours – from those who are more conscientious and “good” with money, to those have lower measures of impulse control and tend to struggle with getting to grips with their finances – and help them develop better financial habits no matter what their personality type.

The countdown to PSD2 is on, and so is the race to meaningfully engage with users between traditional retail banks and their technology rivals. The bank that can offer a data-driven, personalised digital environment that helps people gain the most valuable insight into their current financial situation and motivate them to improve it through a seamless user experience, will be the provider that wins ongoing loyalty from its customers.

The best banking apps should provide a digital environment for continuous dialogue with its customers, that goes beyond the transactional to the emotional. Financially stronger customers will be happier customers, which will, in turn, keep your bank top-of-mind when it comes to other financial services that a customer might need. Get meaningful engagement with customers right, and it might just be the silver bullet for banks when it comes to keeping the big tech challengers at bay.

Bragi Fjalldal,

CMO, VP for Product and Business Development

Meniga

The beginning of the year is so often the time of fresh starts, new initiatives and renewed hope. But given the seismic challenge global banks face to accurately calculate how much capital is needed to shield themselves from sharp price falls, some could be forgiven for abstaining from any New Year vigour.

From January, banks have been given less than two years to iron out all the operational wrinkles (of which there are many) involved in implementing the market risk and regulatory capital rules known as the Fundamental Review of the Trading Book (FRTB). While this may seem like a way off, and while delays might occur, as they often do with regulatory timetables, one look at the scale of the work ahead shortens the timeframe somewhat. From fundamentally reorganising their trading operations to upgrading their technology capabilities and improving procedures – that’s a lot to get done.

No bank wants to start the New Year in 2020 feeling completely overwhelmed, which is why when it comes to FRTB, decisions need to be made on whether to adopt a Standardised Sensitivity-Based Approach (SBA) or Internal Model Approach (IMA). Historically, all firms with trading operations have been required to use their own internal models, due to the fact that the standard approach relied on notional instead of risk sensitivities. The problem is that under FRTB, current internal models won’t be up to scratch when it comes to enforcing the right level of capital to cope with times of stress. And let’s face it, with the geopolitical climate the way it is, trading desks may be in for more than a few bouts of stress throughout 2018.

New management structures

In order to reduce this reliance on internal models, SBA provides a credible alternative for trading desks to operate under a capital regime that is conservative, but not punitive. But those taking the IMA route will need to get approval for individual trading desks, as outlined by the European Banking Authority (EBA) recently. This presents a significant challenge as it places additional responsibility with each desk head for the capital-output, and increases the complexity of bulge bracket institutions running hundreds of trading desks. Each desk will need to put in place a management structure which controls the information driving its internal model, not to mention understand how the output can be used for risk management.

Regardless of the model banks adopt, the standard vs. IMA approach underpinning FRTB brings specific data challenges, both in terms of the volume and granularity of underlying data sets required to run risk and capital calculations, including the model ability of risk factors for IMA. This is why, regardless of the selected approach, the banks that have identified how to get the most out of their internal and external data sets will be best positioned to get their FRTB preparations off to the best possible start.

By Neil Vanlint, Goldensource

Time was when the local bank manager was a pillar of the local community, a figure of solemn solidity; trusted by his customers and potentially known to them all by name. Today, the image of the traditional bank manager seems almost as outdated as that of the village blacksmith. We live in an era of virtual shops, virtual friendships – and even virtual banks. What place has the bank manager in the digital age?

Not much, if banks themselves are to be believed. Earlier this year, Avanade released its latest report into digital disruption in the banking sector, which polled senior IT decision makers from across Europe. The poll found that almost three fifths (59%) plan to eliminate human interaction from banking service in the next 10 years.

Doubtless, some customers will see this as a long-overdue development, used as they are to a new generation of banking services delivered entirely online or through apps. Others may welcome the elimination of lengthy queues in the branch, or the lost lunch breaks spent trying to get through to a customer services representative.

Certainly, a host of digital startups and challenger institutions have begun to revolutionise our relationships with financial services providers, showing that day-to-day banking can be conducted quickly and conveniently through a digital interface. Three-quarters of respondents to our research state that their organisation is concerned about the impact that disruptive competition such as fintech start-ups are going to have on the banking sector.

Improving the customer experience with technology

As these ‘disruptors’ become popular, established banks are scrambling to reinvent themselves. Nine in ten of our respondents say they are investigating how they can use technology to improve the customer experience – an area where traditional banks admit they have fallen far behind their digital-first competitors.

As the banks embrace technology and seek to imitate their online-only and app-based rivals, it’s natural that the traditional bank branch – and the staff within – will become a thing of the past, their solid stone facades providing a perfect setting for a new clutch of trendy wine bars. Just over a quarter of senior IT decision makers from Europe say that an increased focus on digital-centric customer relationships will “inevitably” lead to the closure of some or all branches.

Is the decline of the high street bank and its manager something to be lamented? The banks will point to the immense popularity of digital financial services, and point out that eliminating the cost of maintaining a nationwide branch network can be passed on as savings to customers.

Sleepwalking towards disaster

Or is the banking sector sleepwalking towards a future where they risk sacrificing one of the few remaining unique selling points they have over their digital challengers, and merely attempting to copy what other fintech companies are already on their way to perfecting? Is it wise for them to eliminate the human touch entirely from their operations?

There are two compelling reasons why established banks should think carefully about how they can learn from the new wave of digital upstarts. The first relates to their ability to provide the same slick functionality and reliability for their digital services. Traditional retail banks are based on technology stacks that have been augmented and updated over years, yet still contain a vast amount of legacy systems that are completely unsuited to developing, testing and deploying at speed.

Of course, banks are beginning to realise that they need to replace legacy infrastructure and embrace new technologies such as the cloud. But this process will take some considerable time, during which the fintech challengers will forge further ahead with more sophisticated services, stealing, even more, market share along the way.

The second reason is that physical branches and trained, knowledgeable staff represent a unique and valuable asset – one which banks should think very carefully of consigning to the history books. In spite of the popularity of app-based services, there are some transactions that rely on human interaction – one could even say, on human relationships.

But what is the direction of travel?

Complex, high-value or long-term financial products such as loans, mortgages and investments are obvious areas where humans can make a real difference: for example, by recommending different products, discussing risks and rewards, or even just providing a commiserating explanation for why a customer has been turned down for a loan or credit card.

No-one would claim that banks don’t need to invest in new technology so that they can develop new, more relevant services for their customers. Rather, it is the direction of travel that banks need to examine. Will they profit more from slavishly copying the fintech startups or, what seems more likely, will they do better to reinvent the way they communicate with customers while retaining, where possible, the human touch?

The traditional image of the bank manager might be a thing of the past, but could there be a place for a successor – one armed with an iPad with which to talk customers through their financial future? It makes sense – in fact, you can almost certainly bank on it.

By Paul Bowen, Banking Lead, Avanade

The past five years has seen an incredible rise in awareness around bribery and corruption in both the public and private sectors. While bribery and corruption detection has typically been the purview of whistle-blowers in the finance and audit areas of organisations – the era of whistle-blowers as the only ones exposing these issues is ending. Advanced analytics and other technology processes are lending support to the complicated challenge of following payments and other indicators of corruption.

Since the passage of the UKBA and other updated legislation in nearly 60-plus countries, the world has seen FIFA, Petrobras, Samsung, Shell, Rolls Royce, Unaoil, Embraer, Pfizer, and other organizations exposed for “back room” and other deals to secure multi-million and even billion dollar contracts. In 2017 alone, two companies, Odebrecht and JBS SA have both been fined over $3B a piece for bribes. What does this history of corporate malfeasance mean for the audit function at an organization?

The Audit function, both internal and external, has often been the unsung hero in the identification, investigation and subsequent alerting for many anti-bribery and corruption cases. The primary challenge that audit faces is the complex task of finding these schemes manually. This is where analytics and specialised technology can help significantly.

So how can analytics help the auditor work faster and more accurately? There are three main areas that provide benefits to the audit process:

• Integrating Automation: Auditors primarily rely on their experiences to identify potential ABC issues. With the use of analytics, an organization can depend on sophisticated algorithms to detect potential problem areas by continually looking for schemes within a company’s books.
• Staying Up-to-date: Criminals are always looking for new ways to push their money through the system. Analytics can learn to look for shifting patterns of unusual behaviour by a company’s vendors, customers and even employees and raise an alert to auditors before a problem may have even started.
• Gathering Evidence: Auditors spend significant amounts of time gathering evidence to support a case.  Analytics can significantly reduce this effort by providing continuous monitoring of transactions and quickly bringing back linked transactions related to the case.

Analytics is now viewed as a complimentary tool to an auditor’s function by reducing the time spent identifying problems, and by providing better quality alerts and cases back.

Micah Willbrand

Global head of anti-bribery and corruption solutions

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