January

The pandemic escalated the creation of digital banking business ecosystems. In this article, Sanat Rao, CEO -Infosys Finacle, speaks about eight new and innovative digital business model archetypes that banks need to thrive in these ecosystems.

by Sanat Rao, Chief Executive Officer at Infosys Finacle

The conversation about digital business model innovation is not new, but it has never been more pressing. As CEOs grapple with their biggest challenge, namely, how to stay relevant amid rapid change and uncertainty, the legacy pipeline-based business model was often at the heart of the problem, and ecosystem-led business model, invariably, at the heart of the solution.

Digital technologies are unlocking opportunities to create, deliver, and realise value in new ways. By and large, the traditional universal bank is built on a pipeline model where the bank does everything, from manufacturing to selling to distributing, on its own, using in-house resources.  This vertically-integrated pipeline business model is breaking apart, giving way to fragmenting value chains and new business model opportunities.

Our latest research study on digital banking business model innovation, conducted in association with 11:FS, organized the new models into 8 distinct archetypes, which are briefly described below:

Digital-only banks: Digital-only banks deliver banking services entirely (or almost) through digital touchpoints. Their key competitive advantages are high-quality self-service experiences and much lower operating costs than traditional banks. While digital banks mostly target digital-native/ tech-savvy consumers and small businesses, some start with narrower segments and gradually expand their reach to other groups. Digital banks are mobile-first, with some online banking offerings; and even their customer service is digital-first, chatbots led with limited human support. There is a long list of such banks, among them, Marcus by Goldman Sachs, Liv. By Emirates NBD, Digibank, Monzo and Kakao Bank.

Digital financial advisors: The digital financial advisor model brings the private banking experience to a much larger customer base. With data proliferating rapidly and becoming highly accessible in the open banking economy, firms, such as Plum, Snoop and TMRW by UOB, are able to run it through AI algorithms to understand a customer’s financial situation and offer highly personalized, appropriate financial advice. The traditional relationship manager is replaced by a hybrid of self-service and personal assistance rendered by both humans and chatbots.

Finance marketplaces: Finance marketplaces enable customers to choose financial services from a variety of third-party suppliers in an open environment.  These marketplaces are accessed through websites and apps, and also developer portals and APIs. Examples include BankBazaar, Stripe, and Raisin. As the industry embraces open banking and open data paradigms, these marketplaces would increasingly democratize and facilitate easy access to the best products and services.

Non-finance marketplaces: Financial Institutions-led non-finance marketplaces – such as those from DBS Bank and Paytm – enable customers to choose a range of (non-financial) goods and services from suppliers in an open environment. For instance, DBS Marketplace is a one-stop portal to browse property listings, cars, book travel flights, book hotels, and compare utility providers, with financing options bundled along.

Banking as a service (BaaS): In this model, a bank offers complete banking processes around their financial products such as payments, loans or deposits as a service that third parties can embed into their products and services. BaaS enables integration of financial products seamlessly into the primary journeys of the customers such as getting instant auto loans at the dealer site. Typically delivered through well-defined APIs and business partnerships, BaaS is gaining significant traction across the globe. Banks of all sizes and persona such as BBVA, Goldman Sachs, Sutton Bank, ICICI Bank, and Solaris Bank are actively building their business using this approach. In addition, specialist BaaS intermediaries such as Galileo, Marqeta, and Setu, are also getting significant traction.

Banking industry utilities: Banking industry utilities specialize in delivering non-differentiating services by pooling resources, expertise, and capabilities to increase the efficiencies of all industry participants. The utilities offer a Business platform as a Service (BPaaS), combining technology, operations, and data. Examples include ClearBank – UK’s new clearing bank, Stater – The largest mortgage service provider of the Benelux that services 1.7 million mortgage and insurance loans for about 50 financial institutions in the Netherlands and Belgium

Banking curators: New-age digital banks following this model aim to offer best-of-breed products by combining basic accounts with financial advice and a curated set of third-party products on a single platform.  N26, Monzo and Starling Bank are all examples of banking curators.

Embedded finance: Companies with frequent engagement and deep customer understanding are embedding banking and payments into non-financial products and services. The interest for embedded finance is rising across industries. Digital technology giants, e-commerce companies, retailers, travel – companies from across the spectrum are actively embedding financial products in their user’s customer journeys. For instance, buy now pay later proposition at the time of checkout or offering cash-flow based credit products to suppliers in association with banks. Shopify offers a good example here. It offers a ‘Buy Now, Pay Later’ option for consumers, a business debit card for merchants, and plans to offer  business bank accounts with Stripe Treasury.

Like most businesses, banking is also going the way of the ecosystem. A scan of the landscape shows that few, if any, banks are succeeding by standing alone. But to thrive in an ecosystem, banks need to adopt new business models, such as those identified above.

What do manufacturers of automobiles, personal computers, refrigerators, and tumble dryers have in common? They were all caught out by the global microchip shortage. The list of blindsided companies with a disrupted supply chain includes some of the most advanced, technological companies of our generation worth multiple billions. How could they not have the foresight to be prepared?

by Michael Boguslavsky, PhD – Head of AI, Tradeteq

2021 was supposed to be the year of recovery for global trade, but it hasn’t quite worked out that way for thousands of companies across the globe. A fire at a warehouse in Japan and severe winter weather in Texas both resulted in a temporary pause in the manufacturing of microchips. As it turns out, the timely delivery of these chips was essential to companies in more than 150 different industries.

Billions of dollars in profits have been wiped from balance sheets. Customers are frustrated by the delays and the ramifications are likely to be felt for another 12 months, at least. It couldn’t have come at a worse time with the global economy still reeling from Covid and will set back the recovery.

For example, tech giant Samsung announced that television and appliance production had been interrupted, while car manufacturers paused production because of a shortage of parts. Ford put the cost at a whopping $2.5 billion.

This demonstrates the extent to which the global supply chain, and therefore global trade, is interconnected. If companies on different sides of the globe know how reliant they are on each other, it begs the question: who could’ve predicted the havoc this would cause on the global supply chain, and how could they let it happen?

Hard questions and head-scratching in the c-suite

That wasn’t a rhetorical question. There is a lot of head-scratching going on in boardrooms all over the world. Chips are essential components of the everyday technology that consumers and businesses use – from household electrical devices to heavy-duty machinery. How on earth did this fly under the radar of dozens of multi-billion-dollar companies across different sectors?

The shortcomings are further highlighted by the fact that these companies have access to, or have developed, advanced and complex technology that would’ve been considered science fiction a few years ago.

Large global companies cannot blame a lack of resources. They have some of the best operational and risk management systems in place, which ultimately failed to recognise how a microchip shortage would affect their operations and help them prepare accordingly.

The reality is that many companies didn’t take steps to mitigate supply chain risks or respond quickly enough. This is a moment of self-reflection and humility for the global business community. It needs to learn the lessons from this debacle and put improved supply chain risk monitoring and communication protocols in place.

Integrating modern AI advances into the supply chain

Numerous systems today enable companies to track how their consumers engage with them in real-time. Companies can send payments to their partners thousands of miles away, in real-time, and communicate with people across the world as though they are in the same room. Surely the technology exists to monitor risks in their supply chains, more effectively?

An example of this is artificial intelligence technology which can monitor risks in the supply chain and take steps to identify and mitigate those risks before they become a systemic issue.

If, for example, a supplier has a cash flow problem, or weather patterns affect their ability to manufacture a product, or an incident takes place that affects companies of a similar size and profile, companies can receive an early-warning sign to investigate what happened, how it might affect them and respond quickly.

This ensures businesses are staying ahead of potential risks and systemic events, rather than reacting to them. It is an example of technology making the global trade and supply chain ecosystem more responsive, agile and efficient; it reduces operational risks and means companies avoid the ire of customers.

Future-proof your supply chain now

Global trade is interconnected, and companies are more reliant on one another than ever before, which is why the impact of the chip shortage has been and continues to be so significant. The last year has shown that many global events cannot be predicted or planned for, nor can their impact be completely avoided. Technology, however, and in particularly AI models, can be used to manage and mitigate the negative effects.

Technology has been one of the biggest drivers for change in global trade in recent years. It can be used to digitise and speed up how information is shared and improve communications across supply chains. The former CEO of General Electric, Jack Welch, once warned that companies should change before they have to – the past few months have given proof to that phrase.

When future incidents, similar to the global chip shortage, become case studies in business schools, colleges and universities, will your company be consigned to the history section or be acknowledged as a trailblazer that embraced technology? It’s a question that c-suite executives should address sooner rather than later, or it will be answered for them.

Even though the banking sector has lent record amounts to small businesses during the pandemic, these same SMEs are increasingly turning to alternative finance providers. With smaller, more agile, digital-first players providing a range of new services to the small business sector, how can banks rekindle some of the love and loyalty they’ve lost to FinTechs?

by Yishay Trif, CEO, MoneyNetint

One answer is for banks to be ambitious on their customers’ behalf and, rather than just lending them the cash to stand still, help them expand into new markets by removing the cost and complexity that has always dogged cross-border payments.

An unequal revolution

Unlike multinational enterprises with their sophisticated e-commerce sites and worldwide banking relationships, the rest of the world has always been out of reach to the vast majority of SMEs.

While applications like e-wallets, real-time payment systems and credit cards are enabling businesses to sell their products and services anywhere in the world, many SMEs were unable to take advantage because it remained incredibly complicated, expensive and time-consuming to manage the minutiae of cross-border payments. Factors such as fast settlement, transparency, AML and regulatory constraints all push up the cost and complexity of international payments far beyond the resources of most SMEs.

As much as banks might wish to help SMEs spread their wings around the world, it’s uneconomical for them to open new payment channels between two different jurisdictions: they simply can’t justify the time and effort to establish bank-to-bank relationships in every one of the territories in which their customers wish to do business. But while that used to be true, there is now a new model of relationships between banks, one that’s powered by the blockchain revolution and the wave of new institutions harnessing this technology to build a new payments infrastructure for the whole world.

Blockchain: not just for Bitcoin

There’s an assumption that distributed ledger technologies like blockchain are limited to cryptocurrencies, but the most exciting (and relevant) applications actually involve traditional, day-to-day activities such as sharing information and conducting transactions.

Blockchain platforms like RippleNet and others were developed to address the challenges arising within traditional technological infrastructures. With use cases ranging from financial transactions to smart contracts, compliance to anti-money laundering, it’s no surprise that blockchain is transforming the world of legacy finance every bit as much as it is driving the new wave of crypto innovation. To deal with challenges in the traditional cross-border payments world, platforms like Ripple have developed standardised, decentralised infrastructure, with full visibility over fees, delivery and statuses, transaction route optimisation and overall cost reduction. In doing so, they are creating the technological foundation for a new breed of Payment Institutions and Electronic Money Institutions (EMIs) which are establishing a  new kind of correspondent relationships with banks around the world, lowering costs, lowering barriers for entry and improving efficiency creating one global standardized scheme.

These financial institutions take complete control of settlement and distribution in multiple markets to create payments networks on which any business can piggyback to start expanding into new markets. And not just businesses, but banks too. Thanks to blockchain platforms like Ripple, instead of paying to use traditional payment rails like Swift, banks today can facilitate secure payments via electronic means that enable their business customers to pay in local currency without losing out on transaction fees or unfavourable rates of exchange.

Changing the narrative

One of the charges levelled at banks — it must be said, often unfairly — is that they are reluctant to update their systems, processes, and platforms. Even when banks are slow to adopt new technology, it’s rarely the will that’s lacking and rather the limitations of legacy infrastructure. But that cuts little ice with SMEs, especially when so many FinTechs are waiting in the wings.

The beauty of EMIs and other payment service providers is that they are doing all this work anyway: they are building a new worldwide financial infrastructure that, like the Internet itself, is open for anyone to use. Instead of being competitors, these businesses are all potential partners for banks, enabling them to open up new markets and revenue streams for SMEs. The best providers manage the entire payment cycle, from receiving payments to paying invoices and salaries, in a secure, inexpensive and user-friendly way.

Partnering with EMIs and payment institutions requires minimal (if any) upfront investment; instead, banks can start providing more affordable, reliable and faster cross-border payments services almost immediately.

Blockchain and other payments technologies can be the foundation for a new era of love and loyalty between banks and their business customers, but it’s important to think beyond the services and functionality they provide. If banks are to seize this opportunity with both hands, they should consider how they use these new capabilities to change the narrative around business banking.

As consumers, our expectation of what a bank should be has changed almost beyond recognition in the last few years; the same must happen for business customers. By choosing the right partners, banks have a unique chance to raise SMEs’ expectations, and to position themselves as their partners for success, not just in the high street at home but in every part of the global village.

Had Ali Baba been a banker in 2021, had he wanted to open the door to digital banking, his encrypted exclaim may still be “Open Sesame.”As is often the case, the name, label or tag accorded to the ongoing transformation in Banking is easy on the lips yet understates the potential.

by Indranil Basu Roy, Chief Business Officer, Modefin 

Hark back to a time when mainframes gave way to the personal computer, yet not much importance was given to the term “PC.” Look at where we are three decades later in personal computing.

Or remember how COBOL and FORTRAN foretold the dominance of “software.” Application development has now advanced to AI and ML, with voice commands programmed to play our favourite OTT show, type as we talk, or stream as we walk.

Back to the fable and the veiled allegory of a treasure cave. Technology has put on the virtual table a banking platform so vital and strategic that everything else seems small change.

Its name: Open Banking. Objective: Bringing together data, processes, and business functionalities of banks, FinTechs, and third party providers. Ultimate Objective: Transformation in Banking Services:  Limitation: None. Opportunities: Many.

The lucid or eloquent definition of Open Banking is the same, whether you are a dummy or techie. Here we go with three, not mutually exclusive but complementary:

• A platform designed to nurture openness, information exchange and transparency.
• A customer-centric configuration (as opposed to product-centric) that creates new solutions or enhances existing offerings by integrating an Application Programming Interface (API) and datasets.
• An alliance between banking institutions, FinTechs, and third-party aggregators for developing or infusing agile applications.

How does Open Banking work, especially in a digital world where the inherent promise is privacy and security? Well, for starters, the opening up of financial data is done only with the customer’s consent, with the flexibility to manage or cancel the access.

An elementary example of Open Banking is a third-party mobile wallet that you have installed on your phone. With access permitted to the bank account (by the user), the wallet replaces net banking by providing most services at the touch of an icon (QR code payments, P2P transfers, utility payments, EMIs, and more). In short, you can now bank without logging in to your bank account.

Here are five scenarios to illustrate the benefits of Open Banking to the financial services industry and the end customer:

• Data aggregation by a third party aggregator from bank accounts, such as spending habits, investments, or credit history – this will help the Bank offer a personalised wealth management tool for the end customer.
• Enables third-party credit providers to offer instant credit and execute immediate remittance, whereas earlier the process would be time-consuming and procedure-driven.
• Relevance and Personalisation – with APIs serving as a window to preferences, banks can generate personalised offers and provide relevant value adds such as loyalty rewards and financial education.
• Banks and fintech can co-exist rather than compete. Data-sharing agreements with FinTechs and other non-financial companies can open the door to newer and more agile services.
• Very soon, technologies such as voice assistants and augmented reality will be part of the bank’s digital interface. Banks can work with FinTechs to enrich the customer journey in this emerging space.

End of the preamble, parable and all other rambles. Let’s move on to an overview of the origin of Open Banking.

It all started with countries and governments realising digital banking is not just an enabler but a juggernaut that needs to be constantly fed with innovation. Taking cognizance of new-age solutions being launched by FinTechs, wary of their momentum from the periphery to mainline and capability to offer services akin to a bank (such as online lending or deposit creation), and appreciating that the trickle-down effect or financial inclusion is best achieved through collaboration rather than regulation, various governments began to “open up” banking.

While referred to as regulations, in reality, the promulgation from the helm of the financial realm, such as the apex bank of a country, tended to favour information exchange and APIs, the primary technology that facilitates account holders and the financial institutions to share data with 3^rd parties. Australia’s Consumer Data Right Legislation permits Accredited Data Recipients (ADRs), on behalf of a customer with the customer’s consent, to collect and use data held by a data holder to provide a specific product or service.

In the European Union, banks are legally obliged to facilitate access to account information through APIs, per the Revised Payment Services Directive (PSD2). In the UK, The Open Banking Implementation Entity (OBIE) creates software standards and industry guidelines to drive competition, innovation, and transparency in retail banking.

Well ahead of Open Banking initiatives, India has launched in the last decade landmark measures such as the creation of a unique digital identity for every citizen (Aadhar), enabling access to banking services for unbanked households (Pradhan Mantri Jan Dhan Yojana), and launch of Unified Payments Interface (UPI).

From an Open Banking perspective, such progressive steps in India have increased “interoperability” and created greater avenues for data sharing in the financial services sector. For example, Account Aggregators (AA) are authorised to enable financial data sharing from Financial Information Providers (FIPs) to Financial Information Users (FIUs), based on consent from customers.

Around the world, Open Banking has come a long way from the build and design phase. Unseen, unsung, and by that, I mean underestimated, it has arrived and is here to stay for the greater good.  As a representative of the FinTech sector, a key constituent of the digital banking ecosystem, here are my pointers that will help banks embrace Open Banking.

1. Do not view Open Banking as a solution; it is a platform, like a chassis around which parts of a vehicle are assembled.
2. As a Digital or Challenger bank, your goal is omnipresence – the ability to be present at every customer touchpoint. Make sure every product or solution in this journey is more like a Lego block and not a silo on the open banking platform.
3. If a traditional bank, do not fret over disruptors. By adopting Open Banking, you too can create greater stickiness, retain customers, and even onboard Generation Z.
4. Being a nascent and evolving practice, Open Banking cannot be created or delivered as a standard application. Talk to an evolved fintech provider who can create a customised platform.
5. Take a strategic approach first: Consider how to build a business model that maximizes your position in the Open Banking value chain.
6. Next comes the implementation of the application network connected by APIs – decide if this will be on-premises or in the cloud, developed in-house, or acquired from a fintech provider.
7. Look upon Open Banking as a holistic business transformation plan. If your strategy is defence, you will end up being reactive. The moment you set up an open banking platform, you are on the offence and you have the opportunity to offer greenfield services that will delight your customers and take the competition by surprise.

Time to end my open letter. In the final analysis, banks that resist change, desist from collaboration, or postpone migration, will find themselves forever at the entrance of a treasure cave. Those who have done too little and too late, and thereby fail to unlock the potential with “Open Sesame,” have themselves at fault.

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 the European Payments Initiative and highlight the new paths industry leaders are taking.

The following article was originally published here.

A new payment scheme is aiming to create a pan-European payment solution for both euro and non-euro markets. The European Payments Initiative (EPI) aims to be the new standard in payments across all types of transactions in Europe. While the promise of EPI is very real, the scheme is yet to be fully realised and has plenty of hurdles to overcome if it’s to achieve its ambition of launching a true pan-European payment solution.

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

It’s no secret that the European Central Bank (ECB) has long harbored an interest in breaking up the dominance of Visa and Mastercard over the European payments market. Indeed, 80% of European transactions are handled by the two US multinational financial services companies, according to estimates from EuroCommerce.

A series of initiatives have been rolled out by the ECB and other interested parties to challenge this duopoly. For instance, in 2019, Instant Payments were introduced to ease the payment experience for users across the continent and tip the balance in favor of homegrown players.

ECB board member Yves Mersch described Instant Payments as an ‘opportunity to instantly clear and settle card transactions, which would offer a possible way of supporting the interlinking and interoperability of national card schemes … Efforts to ensure the interoperability of schemes should be strengthened and should aim to foster a European identity.’

The Instant Payments initiative has indeed been a success, and its outlook is bright. Its value is estimated to rise to $18 trillion by 2025, up from $3 trillion in 2020. But to truly forge this ‘European identity’ for payments, the ECB has been calling on the support of major European banks to create a unified payments scheme relying on Instant Payments and other such initiatives.

Certainly, there’s a need in Europe for standardisation and interoperability, as far as payments are concerned, and without it the bloc risks falling behind in key areas such as card penetration.

However, action has been taken. In 2019 – the same year that the Instant Payments initiative was launched – the ECB announced that a number of Europe’s top banks were exploring the possibility of creating a rival payment scheme to take on the European market. Since then an interim company has been created by 30-plus banks – including BNP Paribas, Société Générale and La Banque Postale – and the goal is to launch in the first half of 2022.

Challenges and solutions toward mass adoption

Of course, implementing EPI successfully will not be easy. Challenging the dominance of Mastercard and Visa is no small task. These players have well-established solutions, large innovation budgets and many value-added services for merchants.

Furthermore, there’s the issue of migrating existing schemes to EPI and developing new network infrastructure – apps, platforms, cards, and compatibility with point-of-sale devices – could be a long and expensive process.

However, there’s plenty to be optimistic about, too. Research conducted by European payment leader Galitt suggests that consumers are, on the whole, positive about the prospect of a unified payment solution. Approximately 75% of users surveyed in France report being open to a change in payment scheme, and there’s also a noticeable bias toward European players for banking operations – with nearly 60% indicating they prefer their bank or a European company to handle their payments.

The major challenge for EPI and its stakeholders will be convincing consumers (and, by extension, merchants) to get onboard. To acquire and retain a critical mass of users, EPI must have strong user incentives. It needs a compelling business case to convince issuers to migrate from domestic or international brands and acquirers to enable acceptance. It also needs a winning narrative, and users must be able to experience the value for themselves. In this sense, possibilities include:

• Immediate payment guarantees and high security
• Capped debit interchange – lower fees
• A standardised solution accepted across Europe – easier travel and enrollment procedures
• European-centric product development, featuring a familiar customer interface
• Robust data privacy and protection guarantees
• Parallel development with Central Bank Digital Currencies and an identity scheme – enhanced user experience
• A consolidation of use cases – increased convenience
• The compatibility of existing card services with changes to other European payments schemes, such as SCT inst

The future of European payments

The EPI initiative represents a vision and a desire to create a modern, standardised, end-to-end European payments solution. With a system that will run on SCT Inst rails instead of more expensive card rails, EPI stands to make huge efficiency gains, and it could revolutionise how people pay across the continent. In this way, its architects have a unique chance to write the future of payments in Europe.

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.