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By Eli Rosner, Chief Product and Technology Officer, Finastra  

Changes in regulation, customer expectations and technology have set many banks on a journey of digital transformation. As traditional structures and processes are dismantled and rebuilt across the whole banking sector, it has become increasingly clear that data, along with its safe harbour, exchangeability, timeliness, and accuracy will be key to the future shape of financial institutions.

For this reason, data is often described as the new oil – such is the power of data to enable personalisation, platform models and collaboration in the brave new world of banking. Some financial institutions have already embraced these, realising that collaboration and platform models can ease access to innovation and open a path to working more closely with FinTechs, ultimately to better serve customers.

However, unlike oil, data is not a finite commodity but continues to proliferate. It also inhabits the traditional, product-focused silos built over decades by banks within legacy technology systems.

So, what have the experiences of banks been so far with open banking? What are the lessons that can be learned from them, and how should institutions prepare for a future in which their position as trusted data custodians could be hugely different from the role that they play today? We set out to gather insights from the industry and our partners, to see what they think.

Cultural barriers and the not-invented-here syndrome

The first lesson learned is that legacy systems and thinking can create barriers, both because data needs to be exchanged between open networks and closed banking systems and because institutions have leaned towards caution and protectiveness in the past. This has sometimes had an impact on banks’ ability to attract the skills they need to transform their operations.

Ferenc Böle is Head of IT Project Management and the Transformation Directorate at OTP Bank, a Hungarian bank operating across 12 countries. OTP Bank has invested heavily in digitisation and innovation over the past three years but has had to work through some challenges along the way.

“People are living their lives online and we had to change significantly,” says Böle. “At first we found that connecting to our systems created technical bottlenecks. We also had concerns about which data could be used by us, or shared with which partners, and that constrained some activities.

“However, we found that asking permission to use client data and providing superior services in return for that permission removed the barrier. We are now finding that as long as the banking services work, people aren’t too interested in how it operates – just as they expect a light to come on without knowing how the electricity is generated.”

Banks too are embracing the concept of collaborating with FinTechs instead of seeing them as the competition. Joel Winteregg, co-Founder of Swiss FinTech NetGuardians, says: “The not-invented-here syndrome was definitely in place when we started out: no-one wanted to talk to us and it was difficult for large banks to work alongside a fast-moving start-up. There’s been a big change in the past couple of years, enabled by platforms and driven by regulation like PSD2.”

The commoditisation of banks’ traditional products and services is a further driver for change, simply because it has lowered the barriers to market entry for so many new players.

Juan Jiménez Zaballos, Head of Financial Industry Transformation, Santander Digital Platforms, comments: “Banks have been obsessed by products, but there has recently been a flight to vanilla that makes it difficult for banks to differentiate themselves from competitors: a loan is a loan wherever you get it from. Creating relevant and personalised services and experiences is vital, but the only way to respond is with the intelligent use of data.”

Think like a customer

The key to progress in open banking is to think back from the customer’s point of view and requirements, then fill in the gaps with systems and processes via open APIs within a strict governance and security framework using an open platform. Insights into data, both historical and real-time, will create opportunities to build personalised services and new revenue streams.

Eyal Sivan, Head of Open Banking at Axway, also known as Mr. Open Banking, says it is no secret that the big challenge with all of this is that banks have so much data to work through. “Banks have years of historical data about all of their customers. The race is on to get their arms around that data, use tools that deliver insights and think about how it can be shared.”

Collaboration will also bring change in the corporate banking sector, says Paul Le, Chapter Lead Trade, Data & Platforms, ING. “Physical documents in Trade are commonly used and in one single transaction 80% of information is duplicated,” he says. “What we really need is one digital version of the truth that everyone can use. Collaboration is needed to achieve this.”

New doesn’t always mean better

By its nature rapid innovation has led to many new ventures that tackle the inefficiencies of individual traditional processes. This dislocated approach does not always necessarily take into account the overall service that needs to be offered to clients, so we are now at the stage where banks can step into to unify best-of-breed services on a single platform, collaborating with competitors rather than trying to ‘own’ the whole process.

An example is the open, collaborative clearing platform that Kynec is developing: “In the old days clients would trade, clear and settle through one bank,” explains Robert McWilliam, CEO & Founder at Kynec. “Disruption driven by regulation broke down the trade lifecycle and customers were tempted by lower prices for different parts of the process.

“However, while new entrants offer cheaper alternatives, the disadvantage is that customers need to deal with lots of providers, not just one. That’s why we are building a platform connecting banks and funds that want to clear with multiple Clearing Houses and companies that provide clearing related services. A single connection to our platform will give fast and efficient access to the entire clearing marketplace.”

Looking forward to a new era

Eyal Sivan adds that a further impact of open banking, together with data protection regulation, is that customers regain ownership of their data. The role of banks is likely to shift as a result, from protectors of physical currencies to trusted data brokers and custodians.

“There will be a rediscovery of banks as we realise that the business they are actually in is trust,” he says. “When we are all sharing our data across the internet, we need organisations that can protect personal information on our behalf. Perhaps banks could provide a trusted facility that we can go into and adjust who sees what information.”

However the landscape changes in future, it is clear that we are moving towards a world in which banks will need to become confident in selling products and services that they haven’t manufactured themselves. This will mean having the platform that attracts the right developers and provides an ecosystem that creates the groundwork for entirely different business propositions.

And as Ferenc Böle concludes, many banks are still at the beginning of this road to transformation. “We have to be aware that there will be obstacles, and that there may be conflicts with existing projects that need to continue. Despite all of that we need to invest in technology today that will allow us to harvest benefits in the future.”

Two recent news stories vividly illustrate how there is no such thing as internal and external comms.

by Jim Preen, Crisis Management Director, YUDU Sentinel

 

These days it’s all one, but consistent communication remains of critical importance to an organisation and its reputation. If anything, the pandemic is amplifying the mistakes.

Virtually no communication, if it’s deemed interesting, can be kept under wraps or targeted at just one group and be expected to remain there. Once the comms cat is out of the bag it likes to roam free.

Recently JPMorgan Chase sent some of their staff home after an employee tested positive for Covid-19. He was an equities trader working on the 5^th floor of their Madison Avenue HQ. The firm sent a memo to all those working on that floor saying they had to go into quarantine.

Staff working elsewhere were not informed and only found out about the case when it was reported in the media. Some were pretty upset and started questioning why they had heard nothing from their employer. “Why did I have to read about this in Bloomberg?” said one trader.

Home again

Despite a UK government U-turn with workers now once again being asked to work from home, some hardy souls are making their way back to their offices. Inevitably a number of these staff will be nervous and will want to know if anyone in their building has contracted the disease.

Firms may desperately want some of their people to get back to the office, but staff safety has to be paramount. If companies are not forthcoming and honest with their staff, they will vote with their feet and march straight back home.

Perhaps JPMorgan justified their decision to keep the Covid diagnosis under wraps because they didn’t want to alarm staff, but knowledge is power, and employees need to be in possession of the facts so they can take informed decisions that might not only affect them but their whole family.

The Financial Times recently highlighted an instance where another major firm came a cropper.

A member of staff, who had worked at the company’s HQ throughout the pandemic, was idly scrolling through Twitter when something caught her eye.

A tweet indicated that the boss classes were so delighted with the productivity and can-do spirit of staff working from home that they were sent delightful gift hampers as a thank you for all their hard work.  Unfortunately, the woman and other colleagues who had actually made it into the office at some potential cost to themselves received, you guessed it, zilch.

How rotten and unloved did those staff feel who had slogged through the pandemic back at the office? And what did the JPMorgan staff, who may have been agonising over whether or not to return to their HQ, feel when they uncovered the covered-up case of Coronavirus?

But I guess the big question is: did both firms not think they would be found out?  Be open and honest, treat staff equally and don’t let them find stuff in the media that you don’t want them to see, because find it they will. You can’t trap the comms cat for long.

The world of international remittances is now worth $550 billion to low- and middle-income countries, and the World Bank only expects this growth to continue. 

by Daumantas Dvilinskas, CEO and co-founder of TransferGo

As physical borders look to once again be drawn firmly in the sand, virtual borders – such as those in financial services – are expanding and becoming ever more inclusive.  This trend is reflective of the role of FinTech in navigating geo-political tensions to provide a service that connects us all, no matter which physical borders separate us.

Democratising financial access

For too long, financial services has not worked for hard-working migrants. They have been victimised by an outdated system that benefits local communities as opposed to those who maintain a need for global connections. Traditionally, migrant communities have been stung by predatory fees, inefficient processes and unfair foreign exchange margins when making international money transfers. Remittances are a vehicle for international development, effectively lifting people out of poverty by funding education, healthcare, housing and business investments. They empower families to explore new opportunities abroad, learn new skills and seek out better career prospects.

Yet, the existing model can penalise this movement of workers by charging unfair fees. The World Bank estimates the global average cost of sending $200 at around 7% – or $14. However, traditional incumbents have been charging anywhere between 11-29% of the transfer value, and few can settle those transfers in anywhere near what consumers should accept.

Thankfully, this system of remittances no longer needs abiding by. It’s a model that is synonymous with the same attitudes as creating physical borders and preventing free movement. Instead, FinTechs have created an alternative; borderless financial services that create access for migrants the world over.

Leading by example

Across Europe, there are start-up hubs that are leading the charge in breaking down the obstacles in remittances, and creating virtual, permeable borders. One FinTech strain that is pioneering change is digital money transfer services. These facilitate the flow of money across borders without unfair fees and hidden exchange rate mark-ups, empowering migrant communities by giving them total control over the movement of their money.

As well as empowering consumers, a separate cohort of FinTechs that specialise in payments are creating open, financial borders for businesses of all sizes. Companies are unlocking the global opportunity for online businesses, allowing them to accept payments in foreign currencies, scale into new markets, and tap the growing global e-commerce market. Similarly, point of sale (POS) merchant platforms are enabling businesses to accept online, mobile and POS payments and access a global customer base.

Therefore, while geo-political trends [and the pandemic] may be leading to the affirmation of physical borders and a move away from globalisation, FinTech is playing an evergreen role in connecting international communities regardless. The incumbent money transfer system is outdated and detrimental to migrants, but innovative start-ups across Europe are helping to provide borderless remittances and offer an inclusive alternative.

 

As it gradually becomes mainstream, evolutionary AI’s capability to innovatively create complex AI models, and to optimise decisions considering multiple scenarios, is set to reimagine the financial sector. It will enable every player in this field to spot novel strategies that would never have been identified by human data scientists, and, in turn, allow companies to take full advantage of today’s massive data sets.

 by Babak Hodjat, VP of Evolutionary AI at Cognizant

 AI driven solutions are becoming a competitive differentiator for banks and other financial services — delivering a hyper-personalised customer experience, improving decision-making and boosting operational efficiency. Yet, many financial services institutions (FIs) remain in an experimental phase and will need to accelerate actual AI deployment. Otherwise, they risk being left behind by digitally native players. AI is rapidly transforming every aspect of the financial world. This transformation has accelerated recently, thanks to evolutionary AI – a new breed of technologies that allows AI to automatically design itself with little need for explicit programming by humans

How it all works

Emerging technologies that enable AI algorithms to design themselves are allowing organisations to transcend human limitations. Evolutionary AI operates iteratively. Firstly, it randomly generates a set of potential solutions to form an initial population and assigns a score to each solution based on how well it performs relative to other solutions. In the second round, it retains the solutions that performed best, perhaps only 5% of the total, and recombines their components, sometimes “mutating” them to create a new population. This new population is then tested, and the process begins again. Over multiple generations, the appropriate components of the more successful solutions become increasingly prevalent in the population, and eventually a solution is discovered that yields the best outcomes.

The advantages of evolutionary AI

Compared to human design, evolutionary AI can be deployed far more quickly, avoids biases and preconceptions, and typically performs better. Furthermore, the chosen model will evolve and improve over time, based on new data.

Evolutionary AI can be applied in a wide variety of areas at FIs. Some examples include designing quantitative trading strategies to maximise returns while minimising risk and loan underwriting. Rather than relying on human analysis, evolutionary AI solutions can quickly analyse all the combinations of relevant variables to create models that more accurately assess the risk of default by a potential borrower.

Reaping the benefits

In order to reap the benefits of the technology, FIs should focus on the following:

• Create and maintain responsible AI applications – Behave in ways that make customers and employees comfortable, i.e. not making decisions that are unethical or exhibit bias. Companies need to monitor them to ensure they continue to act appropriately, as they learn and evolve.
• Craft business-driven AI strategies – AI should be viewed through a business lens, rather than as a technology issue. Having AI projects managed by cross-functional teams with business executives in the lead is a good place to start. Companies also need to look across their organisations to identify opportunities to generate concrete business value from AI — not only in reduced costs but also in boosting revenues by delivering enhanced customer experiences and through improved decision-making.
• Enhance data management – AI applications depend on access to timely and accurate data, which is a challenge for many FIs that have fragmented data architectures with multiple legacy systems. Companies need to identify which types of data are required for each AI project and ensure they can be captured in an appropriate format.
• Adopt an experimental mindset – AI projects need to be rolled out quickly, while at the same time be rigorously measured, so failures are terminated promptly while successes are moved into production.

 

As AI applications increasingly design and test themselves, the pace of innovation and the accuracy of predictions will vastly improve. It is inevitable that FIs will soon consider it irresponsible to make important business decisions without first consulting with an AI system. Robots will handle routine tasks while flagging exceptional cases for review and resolution by employees. Employees will spend their time on more complex decisions and sensitive interactions with customers, such as resolving complaints or providing sophisticated financial advice. In short, humans and AI robots will be working side by side, delivering more value in combination than either could on its own.

The implementation of open banking and PSD2 in Europe has already forced banks towards being more customer centric. However, while some may have initially seen this as a challenge, this shift is providing an excellent opportunity for banks to offer far greater value to customers and unlock more revenue opportunities than ever before through platformification.

By Danny Healy, financial technology evangelist, MuleSoft

We are amid a complete transformation of the banking sector, affecting the way that we, as consumers, will access and use financial services for years to come. The banks of tomorrow will no longer define how financial services are delivered – the demands and expectations of the markets they serve will. Customers won’t be tied to a single bank, but instead will access financial services wherever they want, whenever they want, and however they want.

Building a platform on APIs

Data is key to tapping into these new opportunities, offering huge potential for banks to build personalised customer experiences in partnership with other service providers. PSD2 and open banking encourage banks to do precisely this, prompting them to develop APIs that open up their capabilities and data for others to build upon. The more open that banks become, the more opportunities they have to join new value chains.

Platformification and open banking present an opportunity for banks to establish themselves as a hub where customers and providers can come to select the best products at the right price. They can capitalise on this and enable more revenue to flow through their business by building a platform of reusable APIs that connect to third parties. HSBC, for example, was one of the first UK banks to realise this vision with the release of its Connected Money app, bringing in data from more than 20 rival banks to create a hub from which customers can manage all their bank accounts.

Opening up to new opportunities

For banks to position themselves as modern financial services hubs, they need to reimagine their business through platformification. This can best be achieved by unbundling and repackaging their digital assets as a set of capabilities exposed via APIs. It certainly seems that many are on the right track, as the Connectivity Benchmark Report 2020 revealed that those in financial services were amongst the most likely to be using APIs – 85% versus the cross-industry average of 80%.

In time, this will lead to the emergence of an application network, composed of applications, data and devices. Every asset on the network becomes pluggable and reusable for any team that requires them, even for third parties. This lays the perfect foundation for future success, enabling faster innovation and greater collaboration between banks, FinTechs and other service providers.

With the implementation of an application network, traditional banks will be able to create new revenue channels by sharing their core banking capabilities and customer base with authorised innovation partners. Mastercard, for example, has turned many of its core services into a platform of APIs.

Into a more open future

As banks continue moving towards this vision, it is critical that they understand that going it alone will not maximise value for customers. Success can best be achieved with an API-centric mindset that accelerates integration and innovation and provides seamless banking experiences. Unlocking data through APIs and an application network is ideal for achieving a competitive edge as the pace quickens in the race towards a more open future for banking.

Banks are desperately trying to hedge their positions as equities and bond values have plummeted, but do they have a full understanding of their credit risk exposure? In most cases, no.

By Volker Lainer, VP of Product Management and Regulatory Affairs at GoldenSource

After years of flatlining market conditions, it is safe to say volatility is back with a vengeance. The knock-on effects of the Covid-19 crisis will make the coming months, and perhaps even years, very testing for financial institutions. Despite there being several regulations to help banks prepare for a large global economic downturn since Lehman’s, such as FRTB and Basel 239, the current levels of volatility will show just how well capitalised banks really are.

Realistically, it’s extremely unlikely there won’t be any wholesale bankruptcies at some point in the next few months as the ripples of the enfolding crisis work their way through the global economy. As the UK Chancellor has acknowledged, we will not be able to save every job and every business. For banks, it’s only a matter of time until the first domino falls because, at some point, there will be the first multi-national company, or even country to default on their debt.

The nature of global debt makes it very difficult for banks to truly know their credit risk at the corporate level. When Lehman’s went under, nobody knew the extent of its exposure because it was 2,800 seperate legal entities. Regulations like Basel 239 address some of these problems and encourage banks to have a single view of their customer. However, many banks have been implementing their compliance solutions across the bank without fundamentally changing the way they aggregate and manage data across their business. The various systems remain separate and do not work in tandem, meaning a parent company can still be registered with different names across a bank’s trading books and, therefore, the banks aren’t in a much better situation now to do comprehensive risk calculations.

They might have successfully kept the regulator happy but, in most cases, they have not really achieved the required understanding of their credit risk for the scenarios they may soon find themselves in. To find out the exposure in case of a major default, a bank would have to compile a load of reports, consolidate it into a spread sheet and try to figure it out.

What is needed is a central validated model for credit risk at an umbrella level. This modelling should be able to isolate any entity in question, whether that be a currency or company, before analysing the banks entire relationship with the entity into one consolidated data set. As an example, let’s say Italy or a major airline was going to default, banks should know what that means for them and how it affects their trading operations. The only way to do this proficiently and at speed is to automate their approach to having as single view of their corporate clients.

Having such a capability will also help make the best lending decisions and have the best view of risk while loosening lending requirements to maintain liquidity in the economy. Several government representatives have prompted banks to be less stringent with granting loans at this time, but having some freedom to use reserves for the greater good of the economy should only be done with eyes wide open. This makes it even more important to fully understand what the true risk is, so as not to have too loose conditions blindly.

Finally, the current pricing volatility is the ultimate test of the banks’ operations and how well their systems can come together in a coherent way. Credit risk solutions are about to be put to the test to see how far they have come since 2008 and we’ll soon find out how well capitalised these firms really are. Those who have the data modelling capabilities to quickly analyse how an inevitable default will affect them will be best placed to hedge their risk of large exposure.

As the financial services market shifts, we are witnessing a swing towards factors such as simplified access, embedded financial services and financial inclusion. What does the future hold for FinTech and what trends and challenges might the FinTech ecosystem be faced with over the coming years?

By Shaun Puckrin, Chief Product Officer, Global Processing Services (GPS)

The financial services industry had been ruled by traditional banks for decades, but with the financial crash in 2008, regulation and microinspection paved the way for younger and more innovative competitors, leading to a new era of challenger banks. Driven by digital processes and new technology, and fuelled by the introduction of PSD2 regulation, challenger banks were able to take hold of the market, offering consumers alternative ways of banking.

Equipped with tech savvy developers and big ideas, new FinTechs are developing digital offerings that meet consumer demand for an increasingly frictionless and seamless banking experience. As well as this, they have found an edge on traditional banks by combining financial advice and money management services as part of their proposition.

A new era for financial inclusion

Financial inclusion is described by the UK government as being “access to useful or affordable financial products and services” including “banking, credit, insurance, pensions and savings, as well as transactions and payment systems and the use of financial technology”, with governments around the world moving to deliver policies at scale.

With almost one-third of adults worldwide – or 1.7 billion people – remaining unbanked, FinTechs and challenger banks are presented with a unique opportunity to develop offerings that target those in typically underserved communities and the underbanked.

For example, FinTech can now be leveraged to provide a sort code and account number to enable those who are not eligible for a full bank account to still make online transactions and direct debits. This is a huge shift in an industry that has previously been extremely difficult to access for those who do not already use traditional bank accounts. As a result, program managers, agency banks and other financial institutions can access an alternative method of delivering mainstream payments processing capabilities to their customers.

Make way for the non-banking entities

FinTech has revolutionised the banking space and consumers are embracing the wide array of non-traditional banking products available. In response, it didn’t take long for mainstream, digital players to recognise the popularity of FinTech offerings and find a way to embed them into their services.

This new trend has led to a race to build a ‘Super App’ within the payments space, with apps that combine multiple purposes for the user, regardless of their vertical origins. With a frictionless, invisible interface, these apps will integrate PayTech as part of the native user interface, providing a seamless pay-out facility.

New competition and switching between banks

The new challengers in the marketplace have continually raised the bar for innovation since the 2008 financial crash, attracting swathes of customers looking for a modern offering. As the process of switching becomes easier, and the relationship between the customer and traditional banks becomes less tangled, it’s likely we will continue to see a shift in the market as users switch between banks with increasing frequency.

Banks will be forced to innovate to remain relevant and this is most likely to occur through partnerships. This will increase competition between traditional players and challenger banks alike, who will all be vying to maintain and attract customers.

Consumers will need to get smart about their data

With open banking making customer data accessible to more players and as all financial services organisations look to increase their revenue, it’s increasingly likely that some will look to monetise consumer data and spending behaviours. This can be done in a way that is positive for consumers and financial institutions, but it can also be done badly and may make consumers feel insecure about their data.

This will, in turn, lead to greater innovation in FinTech where personal data control solutions are concerned. While GDPR has afforded consumers in the EU strong powers when it comes to companies handling their data, it might be wise to pre-empt that scenario and look more closely at the ‘Terms & Conditions’ before clicking ‘Accept’.

Current regulations are facing evaluation

With the rapid advancement of new technologies and third-party integration across the FinTech payments’ ecosystem, regulations will require an overhaul in order to keep up with the changing face of payments. Foreign currency exchange giant, Travelex, recently experienced a cyberattack that left its customers and banking partners stranded without its services. Such attacks necessitate changes to make the sector less vulnerable to attacks in the future.

The European Securities and Markets Authority (ESMA) and Germany’s Federal Financial Supervisory Authority have created forums to address these vulnerabilities, with operational resilience increasingly coming into focus. Constant fine-tuning of regulations relating to security policies and governance is therefore necessary in order to keep up with the rapid pace of technological change.

The payments scene is likely to look very different in a few years than it does today, and there is a fundamental shift in the ecosystem on the horizon. Whilst customer experience will remain key, the future of FinTech will also be about scalability, partnerships, embedded functionality and regulation, and those who fail to adapt will be left behind.