January

Open banking is coming up to the fourth year of PSD2 as a regulatory requirement in the UK. We can see the impact it has already had, and the predicted growth for the year to come. In addition, the pandemic has driven the growing demand for flexible financial services, and this has transformed how consumers and small businesses leverage their financial data.

by Travis Spencer, CEO, Curity

Open banking has allowed third-party organisations to access data through APIs to create a frictionless experience with better products and services to manage finances.

As APIs continue to give financial institutions the ability to connect to both customers and businesses alike, security has become more important than ever. It is vital to evaluate the various measures that financial services need to adopt to thrive in a safe and secure way.

Carefully managing financial data has always been of the utmost importance for businesses. Failing to do so and leaving sensitive data to fall into the wrong hands can be critical for consumers, businesses, and banks. Financial-grade API security is paramount when it comes to exchanging data and financial information between institutions and third parties such as FinTech vendors and other partners.

Complexities of authenticating

It is important to have solid confidence in the users’ identity. This requires a Strong Customer Authentication (SCA) method, which generally translates to a high Level of Assurance. This is accomplished to some degree by using multi-factor authentication. Similarly essential, users must prove their identity as part of the registration and authentication process. To achieve this, the regulators require standards-based proven methods that ultimately result in a token (i.e., a ticket or memento) that encrypts and secures the identity of the user, their authentication method, and provides assurance that the user represented by that token really is who they say they are.

Users confirming consent

Authentication is important, but, alone, it isn’t enough. Open finance regulations are clear that users must consent to a business accessing certain data or performing an action such as creating a transaction. But it must also be possible for users to manage and even revoke their consent through an easy-to-use user management service.

Protecting users’ data

Securing and protecting users’ data can be a difficult task, but it’s a critical one in open banking. It takes a long time to develop trust – particularly when finances are involved – and it can be slashed in seconds if users lose confidence in a business’s ability to look after them and their data. As well as costing customers time, money, and resulting in extreme dissatisfaction, this can ruin a business’s reputation. Consequently, the safety of user data must be prioritised.

A blend of various procedures, frameworks and processes can be introduced to mitigate the risk of fraud, leaking or manipulating data and violating privacy. This is an opportunity to ensure consistent security practices are implemented across the board. Standards and directives such as PSD2 are designed to protect user data, as well as securing bank services. Businesses need to ensure they are investing in the right technology to adhere to these standards. By choosing solutions that automatically implement these specifications, businesses can reap the benefits of a secure customer database which will help improve the customer experience to build credibility and trust.

Prioritising skills

Businesses must also invest in their teams. It’s not enough to simply put protocols in place. Design and execution require a specific set of skills which, unfortunately, are high in demand and low in supply. Recent research commissioned by the UK Department for Culture, Media and Sport found that half of businesses in the country (approx. 680,000) have a basic skills gap, lacking staff with the technical, incident response, and governance skills needed to manage their cyber security. Meanwhile, a third (approx. 449,000) are missing more advanced skills, such as penetration testing, forensic analysis, and security architecture.

Regardless of being essential – considerably more so as services are progressively digitalised, cybersecurity skills are often poorly understood and undervalued by both management boards and within IT teams. This can prompt a lack of investment in training, mishiring, and poor retention of staff in security roles. This only intensifies the challenge of building a team that possesses the requisite skills.

Hiring can be hard when there’s a deficiency of skills and abilities, so businesses need to be innovative. This means considering new recruitment avenues and, importantly, breaking free from the conventional model of what cyber security professionals look like. Curiosity is vital, so, for more junior roles especially, attitude should be a key qualification. Businesses should trust that many skills can be acquired on the job if the candidate has the essential fundamental knowledge and drive. To help with this, employers should provide training and mentorship.

The future is looking bright for financial services. The way banks do business and how consumers manage their financial transactions will continue to revolutionise. New opportunities and new practices are likely to arise meaning security remains an important factor to combat any future requirements.

As we continue to assess financial-grade security and authentication protocols, success will also rely heavily on expertise and know-how. The skills gap in security needs to be considered to ensure that flexible finance options within open banking and open finance can be utilised without compromising security. Businesses must ensure they are prioritising training for the team to close this skills gap and improve practices across the industry. There is a massive opportunity to push protocols and standards across the board, as it will not only help to ensure a high level of security but also makes skills more transferable in the long term.

The Indian government has achieved the milestone of inoculating over 150 crore vaccines. With the progressive unlocking happening in the majority of cities and villages across the country, the Omicron-led contagious third wave is anticipated to come under control soon.

by Vishal Maru, Senior Vice President Merchant Payment Services, Loyalty and Digital Payments, Worldline India

Physical shopping is regaining its lost glory as small retail outlets, malls are opening up while native markets are thriving. Amid all this, the requirement for quick, secure, contactless digital transactions remains a top priority for merchants and consumers alike.

Making embedded payment solutions available to all or any merchants across the country can help address these growing needs. Enterprise Resource Planning (ERP) solution has become critical for physical stores to assist in keeping track of inventory, system, and payment ledgers of the business. Today, most digital payment solution providers are realising the benefits of enabling ERP solution providers to integrate their billing software with POS terminals.

How does an embedded payment system work?

The embedded payment is about integrating payments options with enterprise resource planning platforms used by the merchants. This automates the process of entering the purchase amount manually in the POS terminals. It captures the card transaction details within the billing software for merchants. At the physical store, the selected items are added to the cart for billing by the merchant and therefore the system reflects the ultimate price including local taxes and discounts if any. Customers can pay by their preferred digital mode instantly because the waiting time is drastically reduced.

An advantage to the merchants

The Integrated system enables a merchant to supply quicker check-outs and error-free payment acceptance to the cardholders additionally to a quicker reconciliation of card transactions. Embedded payments on Android POS terminals make it a furthermore powerful and useful gizmo for merchants to manage their enterprise end-to-end because it is a mini kiosk with all features like payments, billing, inventory, reconciliation, customer loyalty, credit/cash history, BNPL, etc. on one single platform.

Embedded payments modernising most sectors

Embedded payments are changing the way businesses accept payment. It’s getting adopted across wide merchant categories like retail stores, hospitals and pharmacies, hotels, and quick service restaurants among others. This can not only help merchants to supply innovative payment acceptance but also first-of-its-kind contactless payment but automating their current billing processes and enhancing payment acceptance modes for quicker checkouts.

The growth within the size of the embedded payments is primarily thanks to increased government focus and initiatives that are aimed toward digitising the economy. It’s not to mention the customer-centric innovation that the industry is bringing to the table. As an example, POS terminals aren’t any longer limited to facilitating card transactions, it accepts payments via NFC-powered contactless cards, QR codes, UPI and offers several value-added services like EMI, DCC, among others. Additionally, it offers services like accounting and inventory management, payroll management, merchant financing, etc.

The connected POS helps hospitality players lead sales, invoicing, and orders at restaurants, rooms, activities, meals, and hotel boutiques. It will not only work in a restaurant but also for hotel activities, the boutique, and room service moreover. It ensures a connection between a hotels’ various departments, making it more efficient for the deployer while offering a flawless high-end customer experience.

From better inventory management to simplified invoicing, quick payments, and absolute customer satisfaction, embedded payments are adding value to the business and enhancing customer experience in every possible way for better and greater achievements.

Over the last decade, FinTech has transformed UK banking. This was most prominently seen in the rise of challenger banks like Revolut and Starling and remittance companies like Wise. Unencumbered by the need for branches and sensing chronic disillusionment with traditional banking, the newcomers created systems and products that customers wanted, often at better prices than traditional banks could offer.

by Philipp Buschmann, Co-Founder and CEO of AAZZUR

This sent those banks scrambling to frantically bring their products into the 21st century. All so they could offer a customer experience that matched that of the challengers.  This genuine focus on customer experience is FinTech’s most visible legacy. Thanks to the positive customer relationships companies fostered, incumbent banks now face an expectant customer base who are willing to move to get what they want.

That’s just the tip of the transformation. FinTech has reimagined what it means to even be a bank through Banking-as-a-Service (BaaS). This, combined with the data opportunities afforded by Open Banking, is FinTech’s real legacy and where the sector’s new players still lead most incumbent banks.

Traditionally a bank controls every aspect of its services. BaaS allows FinTechs to integrate their systems with each other to expand their own offerings or profit from others integrating theirs. Take Starling for example. It benefits hugely from opening its payment rails to companies like SumUp and MasterCard while simultaneously offering its own customers the services of FinTechs like Wealthify and PensionBee.

Traditional players in UK banking are already getting in on the action. Lloyds is working with Thought Machine, RBS with 11:FS. By integrating with some of the most innovative companies in the world they are able to vastly expand and improve their own offerings with relative ease. The most exciting bit is it’s not just banks doing this. Any retail business can now offer a vast ecosystem of financial products.

What, though, does this mean for investment in the sector? The end of the last decade saw billions of VC and private equity dollars annually pumped into FinTech. But the planet is a volatile place right now. It is this, more than anything else, that will dictate the direction of investment.

In times of crisis, investors seek safety, so expect a shift towards sure bets. In UK banking, this already seems to be the case. The biggest benefactors will be the largest FinTechs. Companies like Revolut, Starling and Wise are now, just like the very banks they were created to challenge, simply too big to fail.

Another big factor will be where traditional banks invest. As they continue to mirror the challengers, innovation seems most likely. Either internally or by partnering with smaller, agile firms like AAZZUR and focusing on the benefits of BaaS and embedded finance.

Further down the FinTech ladder, smaller startups are most at the mercy of the market. If global volatility stays roughly the same or decreases, investment should continue. The level of innovation at some of these companies is too high not to support.

But if something throws the globe – and, in turn, the markets – into prolonged chaos, expect funding to dry up for almost everyone but the biggest names. And if 2008 showed us anything, a few big scalps are still to be expected.

It’s this that makes me so certain embedded finance and BaaS are set to see an investment surge. Both from investors and businesses themselves. Why? Because they allow traditionally sluggish businesses to finally start turning a profit, offering their investors a genuine return. Most importantly, it allows them to detach themselves from investment life support.

Right now, that’s just good business but at some point, that could mean survival.

The FinTech industry is constantly evolving, making it a rather exciting sector to be in. New solutions are continuously being developed to transform the way we bank and pay for goods and services both domestically and internationally. However, just like the rest of the technology industry, for many decades, this sector has been dominated by men. Luckily, this is changing.

by Terry Monteith, SVP Acquiring & Payments at BlueSnap

I have witnessed the shift throughout my career. I started my professional journey at a large financial institution. By the time I joined BlueSnap in 2013, I noticed a big difference, in not only the number of women entering the industry in more junior roles but in the number of women who were taking on senior leadership roles with decision-making responsibilities. This has only grown since then, and I have noticed this trend towards equality in many other tech/fintech organisations.

Having said that, there are still some barriers to women entering the industry. It is important that we unpack these hurdles and spotlight the solutions so we can drive more inclusivity within the industry.

The barriers for women in fintech/tech

There is a need to educate people about the various paths into tech. There is a misconception that you need a coding background in order to enter the industry, which isn’t true at all. The people I work with come from various disciplines. Hence, there is more we can do to show people the range of roles available in the industry.

And for those that want to learn to code, there are so many online platforms that aren’t expensive (some are free) that will allow them to develop this skillset from the comforts of their own home. We are happy to see some universities adding Fintech tracks to their curriculums.

A lack of work flexibility can also act as a deterrent for women either entering the industry or climbing to those senior positions. When putting together work policies, it is important that companies consider the work-life balance that people now demand – such as remote workdays and flexible work hours. This will help foster a more inclusive workplace.

How to encourage more women into tech

The key to attracting more women into the industry is by creating a healthy work environment that people regardless of gender want to be a part of and stay in. Having a senior management team with multiple women makes women in all positions more open to your organisation. When the culture is right, it makes it easier to just focus on hiring the right talent.

One of the first things people do when looking for a job or preparing for an interview is to go on platforms like LinkedIn, to understand who the key stakeholders are. Therefore, when they see diversity throughout the company, especially at the top, they will feel more welcome. It’s one of those things where, if you can see it, then you can be it.

At BlueSnap for example, we have created a culture where women feel welcome and are able to rise to very senior positions. Our senior executive team is very balanced between the number of men and women. A third of BlueSnap’s senior executive team are women and it’s worth noting that there are a number of women in senior-level positions, including coding and developing.

Key considerations for women entering FinTech

There is so much to learn about fintech. I would encourage people to think globally. For example, if you are based in the US, where payments are quite a card centric, it is imperative that you know what’s happening in other countries. And learn about those emerging payment trends. Understanding the big picture will place you in a better position to get ahead. The more you know, the more positioned you are to help.

Additionally, payments are a detailed oriented business. You have to get into the weeds of things. So, learn about the little frames that help tell the big picture, and understand the importance of keeping things simple.

Throughout my career, I have strived to be part of what’s next in finance, banking, and payments. I’m inquisitive by nature, so thinking about where the industry is headed has always helped me navigate my career and be a part of the continuous evolution of the sector.

As cryptocurrencies become ever more mainstream, blue-chip names are anxious not to be left behind in the crypto stampede. With Goldman Sachs predicting that bitcoin will increasingly compete with gold as a store of value, banks and major corporates are eagerly seeking to extend their crypto footprint.

by Manoj Mistry, Managing Director, IBOS Association

The most recent big name to join them is the Canadian arm of KPMG, which recently announced that it had added ethereum (ETH) and bitcoin (BTC) to its balance sheet, making it the first of the Big Four to invest in decentralised digital currencies.

By doing so, the accounting giant has joined legions of crypto investors worldwide. According to Statista, the global number of Blockchain wallet users has already surpassed 81 million with some analysts estimating that the total figure now exceeds 200 million. Figures published by the Financial Conduct Authority (FCA) estimate that there are around 2.5 million cryptocurrency owners in the UK.

KPMG’s strategic decision can be interpreted as a reflection of the market’s direction of travel: an explosion of investor interest in crypto and increasing participation in other blockchain technologies, such as NFTs (non-fungible tokens) and decentralised finance (DeFi) technology, that has simply become too big to ignore.

The managing partner at KPMG’s Canada office, Benjie Thomas, was distinctly upbeat when he announced the move. “This investment reflects our belief that institutional adoption of cryptoassets and blockchain technology will continue to grow and become a regular part of the asset mix,” he said.

A few weeks later, KPMG Canada went further: buying a World of Women NFT (Woman #2681) for a reported 25 ETH (US$73,000), acquiring an Ethereum Name Service domain name – a tool that makes cryptocurrency addresses more user-friendly – and minting kpmgca.eth.

KPMG is not alone. Many banks have also recognised cryptocurrencies as a maturing asset class: 55 per cent of the world’s 100 biggest banks by assets under management are now investing directly or indirectly in companies and projects related to cryptocurrencies and blockchain, according to Blockdata.

In allocating bitcoin and ethereum to its corporate treasury, KPMG also follows in the footsteps of major companies such as MicroStrategy, Square and Tesla, which are now holding crypto on their balance sheets. Tesla’s CEO Elon Musk has been a keen advocate of crypto, having publicly stated that his personal portfolio includes bitcoin, ethereum and dogecoin. Meanwhile, Tesla’s most recent accounts reveal that the company held almost $2 billion worth of Bitcoin holdings last year.

The absence of specific regulation is arguably part of crypto’s appeal. But as the combined market value of all cryptocurrencies breached the $2 trillion mark in 2021, financial markets and investors knew that key global regulators were set to respond to what they perceived as high levels of risk.

UK regulators have set the rhetorical pace. The FCA and the Bank of England have both cautioned investors in uncharacteristically strong language to help them appreciate the risks: fraud, hacking, money laundering, sanctions risks, as well as general market and credit risks.

In the US, Treasury Secretary Janet Yellen has repeatedly suggested that fundamental questions exist about the legitimacy and stability of cryptocurrencies and that the US should implement an appropriate regulatory framework.

Despite these siren voices, bespoke regulatory regimes for crypto have not yet been put in place on either side of the Atlantic, although it can only be a matter of time before they are.

Canada also has no crypto-specific regulations. Instead, cryptos are regulated under the country’s securities laws – part of the mandate of Canada’s 13 securities regulatory agencies (SRAs), established by ten provincial and three territorial governments.

Not considered legal tender under the Bank of Canada Act, cryptocurrencies are classified as a commodity rather than money, while Canadian securities laws treat cryptos as tokens, classifying them as securities.

But Canada’s regulatory framework is distinctly more supportive of crypto than the US, which may have been a driver for KPMG’s local move into crypto. Notably, the Canadian Securities Administrators (CSA) allow financial innovations to test the waters for a designated period of time, during which they are exempt from the compliance rules under existing securities regulation.

The CSA is also breaking fresh ground in defining the contractual right to custodied crypto assets as a security, making Canada the first jurisdiction in the world to do so. This potentially puts Canadian crypto players on a path to experience the type of regulation that is not yet seen elsewhere.

Like other cryptos, bitcoin and ethereum are regarded by investors as speculative assets. Beyond their inherent volatility, KPMG’s decision to add digital assets to its balance sheet creates other potential risks including anti-money laundering (AML) and the future of tax reform.

For the partners of KPMG Canada, there are also compliance considerations. These extend to areas for which banks are typically responsible: security and AML checks. Notably, the International Financial Reporting Standards (IFRS) has no specific provisions that detail how to account for cryptocurrencies.

Big corporations’ involvement in crypto is both exciting and welcome. Having crossed that investment Rubicon, however, they will have to implement and maintain effective regulation and supervision in order to prevent white-collar crime, money laundering and cybersecurity breaches, among other issues.

Financial services are increasingly implementing AI technologies in order to help analyse massive volumes of data, identify market trends and prioritise tasks. On top of this, it is being used to identify fraud, personalise the customer journey, as well as cyber security and general risk management.

by Dr Leslie Kanthan, CEO and Co-Founder, TurinTech

The volume of information and data generated by financial institutions is huge, and AI is proving to be a pivotal cog in the sector machine by handling this data more efficiently. 

According to a past Accenture report, banks could increase revenue by 34% by this year if they invest more readily in artificial intelligence. Fortunately, this report also concluded that in general the banking industry and its executives and employees were optimistic and positive about the impact AI could have on their organisation. 

It comes as no surprise that as of February 2022, 56% of financial firms have implemented AI in business domains like risk management and 52% in revenue generation areas.

So where are we today? Is AI just another buzzword or can it really help deliver efficiency and increase productivity in the financial sector? Let’s dive into three important ways AI optimisation can revolutionise the financial sector.

Empowering innovation at speed and scale

Operationalising AI at scale is still a big issue for many companies, with IDC citing only 25% of firms running an AI project having developed an “enterprise-wide” AI strategy and many of these projects are doomed to fail. 

Operating in a highly regulated industry, financial institutions often have to trade-off between model performance and explainability. But this is where AI optimisation can help, which uses AI to optimise model and code, enabling full transparency and explainability, without compromising on the accuracy and running speed of the model.

Unlike other AI automation tools, AI optimisation platforms can help financial firms build custom models with multiple criteria, at scale. What this means for financial services is that these tools can create better and faster algorithms for their unique business problems, optimising business processes efficiently and effectively.

Elevate ESG compliance with greener AI

A Global Data survey reported how the pandemic has pushed ESG executives to increase their focus and action on ESG issues. 

As an industry, it’s time to reconsider our carbon footprint and start to prioritise sustainable change. WWF and Greenpeace report that UK Financial Institutions were responsible for 805 million tonnes of CO2 emissions, almost 1.8 times the UK’s domestically produced emissions.

AI optimisation will be a force for good in meeting sustainability goals, with machine learning models becoming faster, more efficient, and consuming less energy. Green AI ultimately integrates technology and sustainability into a unified ecosystem. 

With more change and uncertainty to come in the year ahead, AI optimisation will be there to support and transform those businesses that are willing to rethink existing processes and agendas. Ultimately every organisation has a responsibility to be contributing positively to the climate crisis, and optimising processes is certainly a step in the right direction.

Accelerate algorithmic trading speed and improve accuracy

According to Coalition Greenwich’s report, 28% of FX executives said they are currently using execution algos, with 51% confirming they intend to increase their use of algos. 

If and when applied correctly, AI can bring impactful benefits to algo trading. Take, for example, a case when a hedge fund’s statistical models are underperforming, unable to take advantage of more complicated patterns in ever-increasing data types and volumes (e.g. Market price and volume data, third party data, proprietary data).

What can the trading team do? 

By leveraging AI optimisation platforms to accelerate the end-to-end trading strategy development process,  they can create dozens of optimal models in days for different prediction needs, such as the price, price percentage change, up/down momentum, on large amounts of data. The fund can then automatically identify the most effective signals among thousands of data features, avoiding spending hours to do so manually. Applying this to the real world can make trading strategy development 25 times faster and increase the annual return rate by 90%. 

The bottom line

Through the use of AI technology, the financial sector is able to significantly improve its performance and revenue in more ways than one. McKinsey estimates that AI could generate up to $1 trillion additional value annually for the banking industry globally.

Furthermore, in today’s constantly evolving landscape, staying innovative and agile is crucial. Having technology that not only empowers this change and innovation at scale but compliments it with ESG  considerations will be of huge importance to the sector moving forward. Vital innovation is required to be implemented at speed and scale in order to keep up with competitors, which can be achieved through the implementation of AI. 

For banks around the world, leveraging an eco-mindset is becoming increasingly crucial as consumers consider their role in environmentally damaging CO2 emissions and climate change. As challenger banks, such as Starling and Monzo, drive up social initiatives and commit to net-zero pledges,  more traditional banks are shifting their public perception of climate change and making investments in greener services.

by Dr Carsten Wengel, Head of Global Sales & Distribution in the Card & Digital Payments Business, Giesecke+Devrient

In fact, the latest research by YouGov finds that 58% of consumers in the USA and 57% in the UK are now willing to spend more on sustainability in the banking sector. Banks are a mirror of the societies they serve, and as a result, they need to decide if they want to be the driver of or driven by the global trend of sustainability. But how best can they achieve this, and which methods can they adopt to win the eco-conscious consumer?

Sustainable banking cards for a sustainable consumer

Over the recent years, more consumers have come to realise their purchasing decisions have the power to impact positive change. As such, they now expect sustainable offerings from any company they engage with. This includes banks too, with consumers increasingly demanding their banks’ support to help them shift to more sustainable payment practices. One way to meet this growing demand is for banks to introduce sustainable banking cards.

Despite a common misconception, banking cards can in fact be environmentally-friendly. They can be made of climate-friendly materials such as renewable plant fibres that are entirely compostable under industrial conditions. Even though the material has similar characteristics and strength to petrol-based plastic, it is nothing like it as no additional greenhouse gases are released during the combustion process. Compared to the production of conventional cards, sustainable banking cards can save up energy and harmful gas emissions of as much as 68%. This can significantly reduce their impact on the planet considering the volumes produced each year.

With 91% of the world’s plastic not yet recycled, sustainable banking cards can also have their bodies made entirely of recycled PVC, driving the circular economy and taking appropriate steps to end planned obsolescence. A smarter use – or re-use – of materials can help reduce waste and pressures on the environment whilst stimulating innovation and boosting economic growth.

It’s not just the physical banking card, however, that should be put through a sustainability check and replacement. Every new card requires a PIN which is often sent to consumers by post, creating more paper waste. Banks should therefore consider an eco-friendlier alternative – a digital way to send PINs. For example, by a text message, QR code or provide secure access to new PIN via the app and multi-factor authentication.

Such a step towards sustainability can not only be life-saving for our planet, but it can also act as a powerful business tool for banks. In the hands of customers, sustainable banking cards can create a successful brand multiplier effect and help reinforce the bank’s mission, purpose and commitment to becoming more environmentally friendly. Customers will naturally become advocates of sustainable lifestyle banking, helping traditional institutions stand out with their eco-offerings amongst fierce competition.

Joint efforts needed to reduce climate impact

The fight against climate change does not have to be a lonely one for financial services institutions. To ensure greater results and a real impact, banks and fintechs should create fruitful partnerships and in a joint effort, satisfy consumer demand for more sustainable means of payments and offerings. Together they could develop and promote new services that calculate how much CO2 a consumer contributes each time they buy something.

Through an API, for example, banks could integrate such calculations into their digital wallets, which would analyse all types of transactions a consumer completes each month and showcase their carbon footprint through a visual dashboard. This could not only help consumers become better informed but also prompt them to make changes. Sweden-based company Doconomy is one fintech that has been making progress in this area, giving its customers more transparency on how their decisions impact the planet, encouraging them to change their behaviour and practices into more sustainable ones.

Taking the learnings and innovations that fintechs are pioneering, traditional commercial banks should follow their footsteps and build a more sustainable financial services ecosystem in which knowledge and best practice are shared regularly. It is apparent that banks need to become partners, or even drivers of change, however, they can only achieve that with the support of other, more experienced financial institutions to create a strong, reliable and transparent environmental initiative. It could be that through introducing concrete, climate-positive policies in the near future, banks and fintechs will be more encouraged to collaborate and form such a crucial ecosystem, meeting consumer needs for sustainable banking practices and ultimately achieving the international environmental and global warming goals.

Achieving a climate-friendly banking future

Fuelled by consumer demand for a green value proposition, traditional banks have started waking up to the need to act positively when it comes to payment sustainability. Through the introduction of sustainable banking cards, leveraging technology to raise greater carbon footprint awareness amongst consumers and joint actions between all financial ecosystem players, the industry can foster a greener future and make a real, positive difference for generations to come. As banks look to become more competitive and innovative, ensuring sustainable products and services could not only be life-saving for the planet, but also a new, profitable avenue worth exploring.

In 2021, so much of the attention was focused on collectible NFTs, gaming and the metaverse. Their popularity took many by surprise and benefitted tokens that are linked to these powerful trends. In 2020, decentralised finance was the star of the show before NFTs stole the limelight. The DeFi ecosystem continues to expand and new opportunities open up, despite token performance not being on par with some of the newer use cases.

by Martha Reyes, Head of Research, BEQUANT 

There are several compelling protocols that should not be ignored, such as those that bridge the real-world economy to the blockchain. This can include financing for SMEs or facilitating global trade transactions. While perhaps less attention-grabbing than other token-backed protocols, the total addressable market is vast.

Remittances are one of the most widely known applications

One better-known use case that has risen to prominence is the trillion-dollar money transfer industry. Tokens’ ability to on-ramp any global fiat currency and off-ramp it into another at lower rates than the traditional transfer methods, securely and almost instantly, makes them a real disruptor in an archaic corner of finance. Strike, the company using the Lightning Network on Bitcoin rails, is one of the most successful examples, with entities as disparate as Twitter and El Salvador relying on the technology for international payments and remittances.

Global trade is an even larger market ripe for improvement

The technology can extend to other areas of the old economy. Global trade, a $5.6 trillion market and growing, is one such segment and it’s larger than remittances. Buying goods and services across borders is complex, with lengthy processing times and high transaction fees. It also requires financing, creating barriers for small and mid-size companies.

Businesses can utilize smart contracts on the blockchain, storing agreements and documents and guaranteeing traceability. Smart contracts allow the two parties to specify the terms of an agreement and ensure that those are transparent by virtue of being on the blockchain.

Many other possibilities being explored

In the NFT space, applications are not limited to digital objects but also to physical ones, hence the birth of NFT mortgages backed by real assets or tokenized ownership of real estate and expensive artworks.

Blockchain’s potential is by no means limited to these examples. Others include secure sharing of data such as medical data, music royalty tracking, real-time IoT operating systems, personal identity security, anti-money laundering tracking systems, supply chain and logistics monitoring, voting mechanism, advertising insights, original content creation, and real estate processing platforms.

What makes for a successful project?

When evaluating a project, retail and institutional investors sometimes focus on different properties of a project. Key metrics to keep in mind are the strength of the underlying technology, use cases, total addressable market and adoption trends.

One example is the XDC Network, a hybrid, delegated proof of stake consensus network, with developer-friendly architecture. As a third-generation blockchain, the technology is more advanced than some of the more established blockchains. Bitcoin can handle between 3 and 6 transactions per second, Ethereum’s blockchain can handle 12 to 16, while XinFin’s can handle more than 2000.

A use case is reducing friction and expanding access to trade financing for SMEs and creating yield opportunities for investors. Agreements and documents are stored in interoperable smart contracts, and transactions are settled on the blockchain more efficiently than in the legacy systems. There is also higher security as there is clear evidence and traceability of ownership.  The smart contract transactions feature digital tokens, which represent the value of off-chain, the bank originated assets and can generate yield for investors.

This means that when individual purchases and makes an investment into the XDC token, they are investing in the underlying technology which can be used to develop payment solutions and other blockchain apps.

Fees have also greatly reduced over the span of three generations, from $15 to $0.00001 per transaction, with confirmation speeds cut from 1-60 minutes to around 2 seconds. With an increased capacity and lower fees, the barriers to access the technology fall away. Energy consumption has also been reduced from 71.12TWh on Bitcoin to 0.0000074TWh on the XDC Network.

Many alternative Layer 1’s such as XinFin’s XDC Network, have been developed or are in development to challenge those popular in the NFT and DeFi space that have struggled with scalability issues. Developers are working to increase the number of transactions processed and reduce gas fees, as users have been stung by high costs on the Ethereum blockchain.

Now, blockchains are being developed to be cheaper, faster and more energy-efficient, albeit with compromises on decentralization, to address growing demand. Thus, they are generating interest from individual and professional investors alike. Scalability will unlock important avenues of growth in the digital economy as well as the physical one. It will be an important theme in 2022.

BaaS (Banking as a Service), is the enabler of contextual and embedded finance. It presents a huge opportunity – and threat – to all participants in today’s financial services ecosystem. Customers increasingly expect financial products and services to be brought to them, wherever they are. They expect them in the right context. With forecasts showing that the total market opportunity for BaaS will exceed $7 trillion by the end of the decade – the impact of BaaS simply cannot be ignored.

by Eli Rosner, Chief Digital Officer, BaaS and Platform, Finastra

To gain revenues from high growth sectors or geographies banks must adopt new scaling strategies. They must leverage partnerships, to get them to where the customer is and what the customer wants, today and in the future. They must meet the customer where they are in their journey, whether the customer engages directly through established banking channels, or whether the customer consumes the bank’s services contextually, as an integral part of their journey with another brand.

Traditional channels will not deliver the radical value that’s being offered by BaaS and Bank as a Platform models. These models leverage platform ecosystem advantages to create better customer experiences. Unless banks embrace these models, they will face a tougher fight for revenue in ever-decreasing addressable markets.

Outlook for BaaS

BaaS is expected to grow at more than 25% per year for the next 3-5 years. Players across the BaaS value chain are seeking to monetize the opportunity and deciding on the role they want to play.

Recent Finastra research on BaaS has found that some 85% of senior executives in the financial services ecosystem are already implementing BaaS solutions. It also identified that areas such as SME lending, corporate treasury and foreign exchange services are poised to gain the highest traction.

The research goes on to outline the key players, exploring where they are on their journey and what they anticipate in the future:

• First you have the BaaS providers – financial institutions holding a banking license and manufacturing regulated and compliant financial products. Our research shows that some 42% of those surveyed are already in the advanced stages of implementing BaaS. These providers expect the BaaS market to grow by more than 50% per year over the next five years.
• Next you have the BaaS enablers – usually BigTechs and FinTechs that help to embed financial services into third-party platforms and apps. Some 50% are already in the advanced stages of implementing BaaS. Enablers see high growth potential from offering payments and credit cards. In addition, 40% believe checking accounts offer high growth potential.
• Finally, you have the BaaS distributors – consumer brands such as retailers and e-commerce brands that will supply embedded financial products to retail or corporate customers. Some 33% of these organizations in our research are already in the advanced stages of implementing BaaS. Distributors expect BaaS revenues to increase by more than 15% per year over the next five years.

Unlocking success

Monetising BaaS is a lot harder than embedding it. Not all BaaS strategies will succeed – and it’s vital to first understand the ecosystem in depth and to take a structured, programmatic approach to developing a use case in close collaboration with partners.

To succeed, financial services providers need to have an open API platform in place, as well as integrated data and analytics to support specialized digital solutions. They also need to create dynamic and compelling products that stand out against competitors. Winning in BaaS requires a focus on discrete, profitable and differentiating use cases that align to the bank’s overall strategy, and play to key differentiators, alongside a good understanding of where they will be able to exert the greatest influence over positioning and pricing.

Knowing the players and their ambitions is key to unlocking the value of contextual finance beyond just the redistribution of financial products, helping create new retail and wholesale marketplaces.

Some banks are already making significant inroads. UK digital bank Starling, for example, launched its BaaS offering in the UK back in 2018. Today it has 25 payment and banking services customers, including Raisin, CurrencyCloud, Moneybox and Vitesse, and is in the process of expanding into Europe. Starling’s ethos is simple: allowing businesses to build their own financial products on the bank’s platform while it handles the technical and regulatory demands behind the scenes.

Payment processing platform Stripe has also established itself in BaaS. The firm took the decision to work with Shopify as a distribution channel, and to partner with Goldman, Citi, and Barclays to provide Stripe treasury services globally. The Stripe example demonstrates the value to be found in partnerships and leveraging existing distribution channels which can help fuel exponential growth at speed.

Other examples include Uber working with Square, and Goldman Sachs expanding its footprint through digital lender GreenSky. In the corporate banking space, HSBC is working with Oracle NetSuite to embed international payments and expense management services into the SuiteBanking solution so that customers can access these services exactly when they need them.

In essence, the potential to create entirely new retail and wholesale offerings as a service is vast, restricted only by imagination. The most important thing is for financial services providers to start taking action today, exploring BaaS use cases and putting the tech and partnerships in place that they will need to maximise the opportunities ahead.

Hack to the future: supporting innovation in embedded finance

To help drive innovation and explore new ideas in the world of embedded finance, Finastra is inviting participants to sign up to the hackathon which opens on 8 March. This year we’ll be focusing on the three key themes of embedded finance, DeFi and sustainability. The hackathon is open to all, as everyone has a role to play in defining the future of finance.

 It’s been said that “change is the only constant in life.” The global pandemic created a wave of change for everyone. We experienced the sudden shift to remote work, the acceleration of e-commerce, and a focus on digital capabilities.

by Michael D’Onofrio, CEO, Orbus Software 

For financial services, there was the additional challenge of tighter budget control, and increased regulations around cybersecurity and data protection, in addition to rising customer expectations for stellar digital-led delivery.

As a result, we’re seeing three key challenges emerge for financial services CIOs:

• addressing disruption from new technologies and emerging business models,
• achieving a first-class customer experience,
• maintaining business as usual.

What links these challenges is the balancing act of controlling risk while enabling technology-driven transformation. Organisations with a more proactive and collaborative approach to risk management fared better during the pandemic than those with a defensive and reactive approach.²

However, Gartner notes that “almost half of global financial services organisations are still in a very early or even immature stage of their digital transformation journey”³ and rely on traditional business growth or are still working on digital optimisation (versus digital transformation) efforts. When confronted with the above challenges, those with strong Enterprise Architecture were more equipped with the tools to assess and respond.

Addressing market disruption

A 2022 Alix Partners study found that “70% of business leaders report high disruption to their company, up 11% in the past year. 94% of executives say their business model must change in the next three years.” The pace at which disruptive forces impact businesses today means leaders can no longer “wait and see.” The best-performing companies disrupt and reinvent themselves on a continual and ongoing basis.”¹

Technology is the foundation of the modern bank and at the heart of much of this reinvention. But many financial services firms rely on customised and legacy systems (about 55% of enterprise applications!) and are only very slowly migrating to cloud-based options. Outdated technology infrastructure reduces agility, flexibility, and organisational resilience. You just can’t pivot or bounce back from a threat or transform as quickly.

Rising from disruption requires executing on increasingly integrated capabilities. This requires clarity and alignment on the challenge being faced, the systems, people and processes impacted, the strategy to move forward, and the shifts already underway. Many organisations don’t have the tools needed to cut through this level of complexity.

Enterprise Architecture supports the ability to execute through a shared common language across lines of business, an understanding of the layers of the organisation impacted, and a toolset to respond. A microservices and service-oriented architectural approach supports greater business agility. EA improves speed to market for application and data integrations, and the automation of business processes or workflows while establishing control over scenarios. For CIOs, speed, executional clarity and alignment make the difference in responding to change – and, planning for the future.

Achieving a first-class customer experience

To remain competitive retail banks need to ensure customers can move between communication channels easily and that they personalise online interactions to maximise customer interactions and additional revenue opportunities. McKinsey reported that 76% of US consumers moved to digital channels for the first time during the pandemic, while a survey by Accenture²  showed that 58% of customers want to be able to switch between human and digital channels.

In order to achieve a first-class customer experience, financial institutions need to focus on delivering true omnichannel: offering the same services to customers across all digital and offline channels, synchronising their data for reuse across channels in real-time. For many FIs, this trend accelerated the need for digital transformation and increased focus on digital customer experience.

The challenges CIOs face here are threefold:

• Cost and complexity of adopting omnichannel technology often spiral out of control
• Omnichannel technology projects are sometimes impeded by disconnected silos of enterprise information
• Security and compliance risks are not always visible and not accounted for

The delivery of integrated channels and seamless end-to-end transactions relies on Enterprise Architecture. Enterprise Architecture can not only help with the delivery of such things but also enable the creation and deployment of digitally-enabled business strategies and new operating models using those technologies.

Enterprise architecture can help control investment across IT portfolios, create a single source of truth of all enterprise information from all areas that are to be integrated, and gain visibility into compliance and security to anticipate and prevent potential threats.

Reinventing Business-As-Usual

According to an FT article from last summer, banks in the US and Europe were starting to show signs of being back to Business as Usual, moving away from the negative effects of the pandemic. This does not mean we are out of the woods. But it is a start.

The pandemic highlighted two things: the need for and benefits of cross-departmental collaboration, and the importance of “as is” and “to be” planning. Organisations need to start moving away from a reactive business model to a proactive one where the focus is back on winning against the competition. This is also the time for financial services firms to reassess the short-term fixes they put in place over the last two years and look at long term designs.

We know change is a constant. What differentiates resilient organisations is the ability to endure and even benefit from change. They have the agility to align IT assets with risk, resiliency and business processes & programs around an actionable plan.

Enterprise Architecture is the missing link between technological resilience and operational resilience. Enterprise Architecture provides organisational clarity to accelerate this transformation in a strategic and purposeful way, mapping the process of a desired future state. Overcoming these challenges in the coming year will be key for FIs in order to be truly resilient and be able to weather the next storm.