IBSi Blogs

By Eli Rosner, Chief Product and Technology Officer, Finastra  

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

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

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

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

Cultural barriers and the not-invented-here syndrome

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

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

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

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

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

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

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

Think like a customer

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

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

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

New doesn’t always mean better

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

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

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

Looking forward to a new era

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

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

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

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

Now more than ever, digital transformation and the ability to respond rapidly – in what is a very fluid situation – are critical.

By David Murphy, Financial Services Lead, EMEA & APAC Publicis Sapient

Unlike the last major financial crisis, which played out over the course of months and years, the current economic upheaval has impacted markets, businesses and livelihoods at lightning speed. Similarly, in contrast to the events of 10 years ago, banks find themselves on the front-line of the recovery, charged with helping to address the acute financial needs of their customers. The ultimate test is whether they can do so effectively and at speed.

Customers at the centre of the response

If there’s one thing we can be certain of with Covid-19, it’s that life isn’t returning to normal any time soon. On the other side of the curve, when the economy shows signs of an upward trajectory, the recovery is likely to be protracted and arduous.

While banks need to confront and mitigate risks – spanning income, operations, capital and reputation – all solutions must start with the customer. And in line with the expected slow pace of recovery, they’ll have to move from shorter-term metrics driving customer decision-making to a far longer-term focus on lifetime value.

Customers will be looking to banks to cut them some slack. Following standard rules and policies won’t work for a population that remembers very clearly the bail-outs of 2008. Since then, banks have focused on improving customer leadership, revenue growth, operational efficiency and automation, but with the emergence of this new crisis, they will need to revisit their communications, policies, business rules and operational processes to ensure they are fit for a very different economic, sociological and reputational era.

Digital transformation’s time has arrived

The availability of new digital capabilities means that banks can fundamentally change their response from previous crises. Organisation-wide digital transformation is the catalyst that enables them to act and implement changes faster than ever before; specifically addressing three key pillars:

Prioritising customer help: Access to significant levels of data means that banks can identify strategies and comms appropriate to different segments, repurpose existing products and generally enable a broader set of personal and business customers to address and take control of their finances. Empowering these customers to digitally serve themselves through the crisis can provide both stability and longer-term growth.

Optimising decision-making: Decision-making and approaches to many of the income, capital and reputational risks, can be optimised through the implementation of technical solutions, such as machine learning and AI. Triaging, adjusting and deploying new models for a more relevant and impactful response will not only increase effectiveness but generate new organisational capabilities.

Maintaining operational resilience: Changing traditional ways of working to enable the successful deployment of technology will be required to secure and maintain operational resilience. This can include assessing and adjusting governance structures, streamlining highly complex and manual processes to reduce the operational burden and retraining staff for remote proficiency.

Clients taking action

We’re already seeing banks take positive steps to leverage existing digital transformation capabilities or accelerate programmes. They’re emphasising strategic thinking and operational efficiency and framing responses around customers. From fast tracking solutions for health workers and vulnerable customers to leveraging cloud-based technology to bridge financing gaps for small businesses, this bold approach is precisely what’s required.

But in the early days of this crisis, there’s a lot more work to be done and many more institutions need to lift their game. Not just to provide the help that many customers so desperately need but to manage the considerable organisational impact and successfully navigate the uncertain digital transformation journey ahead.

The past three months have set in motion changes that will not be stopped nor reversed as social distancing measures are gradually relaxed. This is certainly true in the financial services sector, where the lockdown has brought about a watershed moment in the proliferation of FinTech.

by Ammar Akhtar, CEO, Yobota

In the aftermath of the coronavirus pandemic we – consumers, businesses and governments alike – will be living in the “new normal”. We have purportedly witnessed ‘a FinTech revolution’ over the past decade; however, such claims have suddenly been brought into sharp perspective. Only now is the much-lauded transition from a physical world to a digital one going to take shape.

Gathering momentum in the aftermath of the 2008 global financial crisis, the so-called FinTech revolution promised open access to data, hassle-free banking experiences and fairer deals for customers. Yet only relatively small steps have been taken towards this vision.

Until now we have witnessed a cautious adoption of technology in the finance sector as consumers, regulators and established banks familiarise themselves with what it can enable – and this has still come at considerable investment.

Covid-19 has changed this.

Today, people must be able to access advice, take out new products and manage their finances digitally. Financial service providers, meanwhile, must ensure business continuity and a painless customer experience at a time when their teams are unable to work from the office or bank branch.

The pressure is on

At present, many finance companies remain completely reliant on legacy technologies and on-premises servers – they cannot access data or execute processes remotely. Simply put, these firms are under threat of being left behind as society prepares for the new normal.

The pressure is on, with technology no longer just a form of competitive advantage for financial services firms; it is essential to their very existence. And for those now grappling with how to deploy FinTech successfully, two things are key: interoperability and cloud computing.

Over the past decade firms have too often taken a piecemeal approach to adopting FinTech; they have used specific technologies to solve isolated problems. That is because FinTech startups are typically created with that very focused mindset.

Finance firms, particularly those providing banking services, should have a much broader perspective when developing or adopting technology. They must focus on the interoperability of best-in-class technologies – put another way, they must make progressive choices to use technologies that fit together to form entire systems that work together seamlessly.

Take the example of someone applying for a credit card; something that is increasingly common as a result of the economic hardship brought about by Covid-19. There are various different stages that an applicant will need to pass through – identity verification; credit scoring; advice or product recommendation; application and assessment; and, if successful, creating the account.

There are FinTech solutions that can automate each of those processes. Yet the companies best equipped to deliver exceptional services in the post-pandemic landscape will be those that have interoperable cloud-native technologies on a platform that can take the user from the start of the credit card application process to the end as quickly and easily as possible.

Embracing FinTech

FinTech should not be confused with someone checking their account or transferring someone money. These isolated actions are not a true reflection of FinTech’s revolutionary potential, which is quickly becoming apparent.

In the primarily digital environment we are now living in, financial services firms that cannot deliver an exceptional level of service to customers – be it individual or business – risk losing them to those who can. Now is the time for the sector to embrace FinTech to its fullest and build systems that are not just adapted to the new normal, but actually help to shape it.

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

by Daumantas Dvilinskas, CEO and co-founder of TransferGo

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

Democratising financial access

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

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

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

Leading by example

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

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

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

 

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

 by Babak Hodjat, VP of Evolutionary AI at Cognizant

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

How it all works

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

The advantages of evolutionary AI

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

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

Reaping the benefits

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

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

 

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

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

By Danny Healy, financial technology evangelist, MuleSoft

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

Building a platform on APIs

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

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

Opening up to new opportunities

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

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

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

Into a more open future

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