Open Banking has the potential to be a game-changer for the banking industry. The gatekeepers (banks) are being forced to share their single most prized possession – customer data – in order to create a more vibrant ecosystem that promises to maximise consumer welfare.
Banks can be thought of as companies that use information (credit scores, cash flows histories, payment trends and asset prices) to make decisions (granting credit, deciding level of interest rates and fees) through the use of complex technological systems (payments infrastructure, trading systems and customer databases).
Since bank behaviour is so similar to Big-Data tech firms, opening the database to other services providers will be transformative. What makes it even trickier for banks is the fact that the onus on ensuring data security will most likely be placed on the banks themselves.
Open Banking’s Impact on Banking
An often quoted statistic is that the average bank customer is more likely to stay with their bank than remain loyal to their husband or wife. Stickiness of banking customers works heavily in favour of incumbents and strong initiatives like ‘current account switching’ have not changed the statistics dramatically. However, Open Banking has all the prerequisites to change the old rules of the game. Simon-Kucher & Partners sees at least three potential consequences that should be considered by incumbent banks in their strategic response to Open Banking.
Competitors: the emergence of Fintech-Fintech collaboration
So far, the prevalent business model has seen incumbent banks collaborating with Fintechs to leverage each other’s strengths: a wide client base meets better technology, for instance.Open Banking has the potential of creating collaborations among leaders in the fintech space and crowding out incumbent banks from the latest innovation. Marketplaces for banking products are already emerging parallel to traditional channels, championed by the most successful disruptors. The collective approach will get more common as Payment Services Directive 2 (EU-wide) unlocks customer data and the ability to make payments on behalf of someone else’s ‘customer’.
Customers: the dawn of planet of the millennials
Fintechs are attracting mostly technology-savvy millennials who over the coming decade will be the most powerful consumers (if they aren’t already). Fighting for a share-of-wallet of these consumers could be the differentiator for a bank’s long-term profitability.As more millennials start to occupy centre stage in the economy, banking services will be channeled more through non-traditional players. Banking will remain an intergenerational industry, with parents opening accounts for children before they even understand the basic concepts of finance, but millennials have proven much more likely to challenge the status quo, to try new experiences, even in financial services. For banks, Open Banking could mean the loss of an exclusive relationship with their customers. The risk is that they become pure back-office servicers while new players capture more of the value chain.
Products: commoditisation and margin erosion
As the barriers to entry fall due to the sharing of customer data and new players enter the market, the industry runs a risk of price wars being triggered to grab additional market share. Pressure on margins and profitability is common in industries that went through a shakeup of competition rules and saw the entry of innovative competitors, the airline industry being a prime example. Also, considering the stickiness of the average bank customer, new disruptors will necessarily compete on price as well as quality of service to convince customers to move. This will likely result in further battles for the last basis point. Open Banking will definitely put pressure on the profits generated by traditional banking products by making them more comparable and more easily accessible.
Crystal Ball 2027
The threat to the traditional banking business model as it stands today is real. It is entirely likely that the bank of 2027 will look very different from today’s version – just as today’s banks differ quite significantly from their 2007 iteration.
Banks will need to create moats in order to ensure that their core business remains intact.In order for banks (High-street, Challengers and everyone in between) to get their Open Banking strategy right, they need to fully understand their customer needs and expectations in a digitally-banked world.
Traditional banks have a high-value proposition which they should not neglect as part of their future customer retention and acquisition strategies:
- Access to central banking infrastructure means that banks are guardians as well as beneficiaries of the people’s trust in the financial system
- The ability to offer a full financial product suite through the use of financial leverage
- An often under-appreciated presence on the high-street
- Years of insights into customer behaviour
However, banks have been hamstrung by legacy issues. They have yet failed to capitalise on their core advantages. The threat and the opportunity of Open Banking is hard to ignore anymore. High street and Challenger banks both need to press home their advantages at this critical inflection point.
Banks will need to implement several-to-all of the following 10 strategies to remain competitive in the ‘new world’ of a post-Open Banking era:
10 strategies for banks to remain competitive in the post-Open Banking environment
- Enhanced approach customer segmentation: Understand customers’ real needs and address these through strong segmentation strategies. Young tech-savvy consumers need to be pursued and retained aggressively in the immediate future. However, as more people start to adapt to managing their finances digitally, longer-term segmentation strategies need to address these customers through differentiated and targeted offerings.
- Advanced analytics to aid customer segmentation: Identify the business units most vulnerable to Open Banking. Develop analytics to identify customers within those business units most likely to be unprofitable in a range of (pessimistic, realistic, optimistic) post-Open Banking scenarios. Banks will need to decide whether they can offer incentives to these customers to stay and increase profitability through cross-selling initiatives or decide on alternative low-cost ways to service this segment in the future.
- Optimised digital customer journeys: Equally fundamental is to ensure that digital experiences align with customer expectations. As more and more banking relationships evolve into‘digital-only’, they need to become simpler, yet flexible enough to guide customers to suitable product and service configurations. The digital journey needs to promote customer confidence.Banks need to convey that customers’ financial interest are top priority even with reduced human interactions. Banks have failed at this fundamental task over recent years but digitisation offers a golden opportunity for them.
- Solution-oriented approach to innovation: Product and service design need to accurately align to divergent demands. The purpose of a solid customer journey is to aim to solve a consumer problem, not just offer a fancy financial product. Banks need to be vary of customers becoming uncomfortable with feature-heavy Open-Banking solutions and communicate effectively how their offering solves specific problems and makes lives simpler.
- Improved loyalty strategies: Reduce customers’incentive to act (e.g.: move money to a different bank) for short term gains. Loyalty schemes and reward structures need to be dynamic – able to react to tail-risk events such as an abnormally large number of outbound payments made by an Open Banking-related API. The value proposition also needs to be tailored to convey the bank as a “pair of safe hands” that provides a “hassle free” service.
- Enhanced pricing models: R eview the pricing strategy and product architecture to generate more fee-based income through innovative services. A good digital product offering will be vital here to increase customers’ willingness to pay. A simple example is a Good / Better / Best solution that offers a no-frills account, a premium account that incorporates a degree of advisory services and a tech-heavy all-inclusive package.Such a comprehensive product offering presents increased monetisation opportunities and needs to replace the one-size-fits-all Internet Banking model that is prevalent today.
- A coherent customer communications strategy: A new product roll-out is toothless without a strong sales communications strategy. Sales teams need to be trained in the basics of behavioural economics and incentivised suitably for maximum impact. Communicating value to the client will be crucial in an Open Banking world with a hyper-fragmented product suite.
- Heavy investment in technology infrastructure: The core objective of Open Banking is to unlock the closed ecosystem in which banks operate. Ignoring the quality of the technology infrastructure will leave banks vulnerable to inestimable operational risks.
- Develop a Fintech strategy: Banks may choose to acquire or incubate the Fintech start-ups most likely to eat into their core business, run them initially as independent subsidiaries with a view to integrating them at a future date. Another option can be collaborating with established Fintechs. Smaller banks will want to collaborate early with large Fintechs to offer bundled products that can help compete with big banks. Developing a strong pricing configuration and roll-out strategy before going to the market will be key for the Challenger banks.
- Leverage high-street presence: Finally, banks need to make effective use of the one advantage that other players will never have. Physical presence must not be wasted and needs to be used to be augmented with a more fleet-footed sales process in-branch. Banks will need to provide tailored advisory services that clients are asking to cope with an increasingly complex and uncertain world. Branch numbers and sizes will be reduced but customers will still want them at least in the medium term. These will be captive customers for banks whose willingness to pay needs to be optimally captured.
Banks are effectively information technology companies.It is inevitable – by design – that their business will be affected by the Open Banking initiative. A range of impacts will be felt through changing behaviours displayed by customers and by competition. Banks will need to respond early and decisively in order to thrive.Big banks that do well will be the ones that focus on innovating their core business, invest in technology and monetise their digital propositions.
Small banks have the opportunity to innovate too, use their systemic vantage-point and couple it with newer technology to truly challenge big banks. They may choose to fend off or collaborate with Fintechs depending on their proposition. The Challenger bank of today that ends up as a digital leader in the Open Banking era will be the one that acts like a Fintech while optimally utilising the access it has to the same infrastructure available to the big banks.
Lockdown 2.0 – Here’s how to be the best-looking person in the virtual room
suggests “the product you’re creating is not the camera, the lens or a webcam’s clever industrial design. It’s the subject, you, which is just on e part of the entire image they see. You want that image to convey quality, not convenience.”
Technology experts at Reincubate saw an opportunity in the rise of remote-working video calls and developed the app, Camo, to improve the video quality of our webcam calls. As part of this, they consulted the digital photography expert and author, Jeff Carlson, to reveal how we can look our best online.
It’s clear by now that COVID-19 has normalised remote working, but as part of this the importance of video calls has risen exponentially. While we’re all used to seeing the more casual sides of our colleagues (t-shirt and shorts, anyone?), poor webcam quality is slightly less forgivable.
But how can we improve how we look on video? We consulted Jeff Carlson for some top tips– here is what he had to say.
- Improve the picture quality of your call
The better your camera, the higher quality your webcam calls will be. Most webcams (as well as currently being hard to get hold of and expensive), are subpar. A DSLR setup will give you the best picture, but will cost $1,500+. You can also use your iPhone’s amazing camera as a webcam, using the new app from Reincubate, Camo.
Jeff’s comments “The iPhone’s camera system features dedicated coprocessors for evaluating and adjusting the image in real time. Apple has put a tremendous amount of work into its imaging software as a way to compensate for the necessarily small camera sensors. Although it all works in service of creating stills and video, you get the same benefits when using the iPhone as a webcam.”
Aidan Fitzpatrick, CEO of Reincubate explains why the team created Camo, “Earlier this year our team moved to working remotely, and in video calls everyone looked pretty bad, irrespective of whether they were on built-in Mac webcams or third-party ones. Thus began my journey to build Camo: an iPhone has one of the world’s best cameras in it, so could we make it work as a webcam? Category-leading webcams are noticeably worse than an iPhone 7. This makes sense: six weeks of Apple’s R&D spend tops Logitech’s annual gross revenue.”
- Place your camera at eye level
A video call will never quite be the same as a face-to-face conversation, but bringing your camera up to eye level is a good place to start. That can involve putting your laptop on a stand or pile of books, mounting a webcam to the top of your display screen, or even using a tripod to get the perfect position.
Jeff points out, “If the camera is looking down on you, you’ll appear minimized in the frame; if it’s looking up, you’re inviting people to focus on your chin, neck, or nostrils. Most important, positioning the camera off your eye level is a distraction. Look them in the eye, even if they’re miles or continents away.”
Low camera placement from a MacBook
- Make the most of natural lighting
Be aware of the lighting in the room and move yourself to face natural lighting if you can. Positioning the camera so any natural light is behind you takes the light away from your face, which can make it harder to see and read expressions on a call.
Jeff Carlson’s top tip: “If the light from outside is too harsh, diffuse it and create softer shadows by tacking up a white sheet or a stand-alone diffuser over the window.”
Backlit against a window Facing natural light
- Use supplementary lighting like ring lights
The downside to natural lighting is that you’re at the mercy of the elements: if it’s too bright you’ll have the sun in your eyes, if it’s too dark you won’t be well lit.
Jeff recommends adding supplementary lighting if you’re looking to really enhance your video calls. After all, it looks like remote working will be carrying on for quite some time.
“The light can be just as easy as a household or inexpensive work light. Angle the light so it’s bouncing off a wall or the ceiling, depending on your work area, which, again, diffuses the light and makes it more flattering.
Or, for a little money, use a softbox or a shoot-through umbrella with daylight bulbs (5500K temperature), or if space is tight, LED panels. Larger lights are better for distributing illumination– don’t be afraid to get them in close to you. Placement depends on the look you’re going after; start by positioning one at a 45-degree angle in front and to the side of you, which lights most of your face while retaining nice shadow detail.”
In some cases, a ring light may work best. LEDs are arranged in a circle, with space in the middle to put the camera’s lens and get direct illumination from the direction of the camera.
- Centre yourself in the frame
Make sure you’re getting the right angle and that you’re using the frame effectively.
“You should aim for people to see your head and part of your torso, not all the space between your hair and the ceiling. Leave a little space above your head so it’s not cut off, but not enough that someone’s eyes are going to drift there.”
- Be mindful of your backdrop
It’s not always easy to get the quiet space needed for video calls when working from home, but try as best you can to remove anything too distracting from your background.
“Get rid of clutter or anything that’s distracting or unprofessional, because you can bet that will be the second thing the viewers notice after they see you. (The Twitter account @RateMySkypeRoom is an amusing ongoing commentary on the environments people on television are connecting from.)”
A busy background as seen by a webcam
- Make the most of virtual backgrounds
If you’re really struggling with finding a background that looks professional, try using a virtual background.
Jeff suggests: “Some apps can identify your presence in the scene and create a live mask that enables you to use an entirely different image to cover the background. While it’s a fun feature, the quality of the masking is still rudimentary, even with a green screen background that makes this sort of keying more accurate.”
- Be aware of your audio settings
Our laptop webcams, cameras, and mobile phones all include microphones, but if it’s at all possible, use a separate microphone instead.
“That can be an inexpensive lavalier mic, a USB microphone, or a set of iPhone earbuds. You can also get wireless lavalier models if you’re moving around during a call, such as presenting at a whiteboard in the camera’s field of view.
The idea is to get the microphone closer to your mouth so it’s recording what you say, not other sounds or echoes in the room. If you type during meetings, mount the mic on an arm instead of resting it on the same surface as your keyboard.”
- Be wary of video app add-ons
Video apps like Zoom include a ‘Touch up your appearance’ option in the Video settings. This applies a skin-smoothing filter to your face, but more often than not, the end result looks artificially blurry instead of smooth.
“Zoom also includes settings for suppressing persistent and intermittent background noise, and echo cancellation. They’re all set to Auto by default, but you can choose how aggressive or not the feature is.”
- Be the best looking person in the virtual room
What’s important to remember about video calls at this point in time is that most people are new to what is, really, personal broadcasting. That means you can easily get an edge, just by adopting a few suggestions in this article. When your video and audio quality improves, people will take notice.
Bringing finance into the 21st Century – How COVID and collaboration are catalysing digital transformation
By Keith Phillips, CEO of TISATech
If just six or seven months ago someone had told you that in a matter of weeks people around the world would be locked down in their homes, trying to navigate modern work systems from a prehistoric laptop, bickering with family over who’s hogging the Wi-Fi, migrating online to manage all financial services digitally, all while washing their hands every five minutes in fear of a global pandemic… You’d think they had lost their mind. But this very quickly became the reality for huge swathes of the world and we’re about to go through that all over again as the UK government has asked that those who can work from home should.
Unsurprisingly, statistics show that lockdown restrictions introduced by the UK government in March, led to a sharp increase in people adopting digital services. Banks encouraged its customers to log onto online banking, as they limited (and eventually halted) services at branches. This forced many customers online as their primary means of managing personal finances for the first time.
If anyone had doubts before, the Covid-19 pandemic proved to us the importance of well-functioning, effective digital financial services platforms, for both financial institutions and the people using them.
But with this sudden mass online migration, it’s become clear that traditional banks have struggled to keep up with servicing clients virtually. Legacy banking systems have always stilted the digitisation of financial services, but the pandemic thrust this issue into the limelight. Fintech firms, which focus intently on digital and mobile services, knew it was only a matter of time before financial institutions’ reliance was to increase at an unprecedented rate.
For years, fintechs have been called upon by traditional players to find solutions to problems borne from those clunky legacy systems, like manual completion of account changes and money transfers. Now it is the demand for these services to be online coupled with the need for financial services firms to cut costs, since Covid-19 hit the economy.
Covid-19 has catalysed the urgent need to bring digital transformation to a wider pool of financial services businesses. Customers now have even higher expectations of larger institutions, demanding that they keep up with what the younger and more nimble challengers have to offer. Industry leaders realise that they must transform their businesses as soon as possible, by streamlining and digitising operations to compete and, ultimately, improve services for their customers.
The race for digital acceleration began far before the recent pandemic – in fact, following the 2008 financial crisis is likely more accurate. Since the credit crunch, there has been a wave of new fintech firms, full of young, bright techies looking to be the next big thing. Fintechs have marketed themselves hard at big conferences and expos or by hosting ‘hackathons’, trying to prove themselves as the fastest, most innovative or the most vital to the future of the industry.
However, even during this period where accelerating innovation in online financial services and legacy systems is crucial, the conditions brought about by the pandemic have not been conducive to this much-needed transformation.
The second issue, which again was clear far before the pandemic, is that fact that no matter how nimble or clever the fintechs’ solutions are, it is still hard to implement the solutions seamlessly, as the sector is highly fragmented with banks using extremely outdated systems populated with vast amounts of data.
With the significance of the pandemic becoming more and more clear, and the need for better digital products and services becoming more crucial to financial services firms and consumers by the day, the industry has finally come together to provide a solution.
The TISAtech project was launched last month by The Investing and Saving Alliance (TISA), a membership organisation in the UK with more than 200 leading financial institutions as members. TISA asked The Disruption House, a specialist benchmarking and data analytics business, to create a clearing house platform for the industry to help it more effectively integrate new financial technology. The project aims to enhance products and services while reducing friction and ultimately lowering costs which are passed on to the customers.
With nearly 4,000 fintechs from around the world participating, it will be the world’s largest marketplace dedicated to Open Finance, Savings, and Investment.
Not only will it provide a ‘matchmaking’ service between financial institutions an fintechs, it will also host a sandbox environment. Financial institutions can pose real problems with real data and the fintechs are given the space to race to the bottom – to find the most constructive, cost-effective solution.
Yes, there are other marketplaces, but they all seem to struggle to achieve a return on investment. There is a genuine need for the ‘Trivago’ of financial technology – a one stop shop, run by an independent body, which can do more than just matchmaking. It needs to go above and beyond to encompass the sandboxing, assessments, profiling of fintechs to separate the wheat from the chaff, and provide a space for true collaboration.
The pandemic has taught us that we are more effective if we work together. We need mass support and collaboration to find solutions to problems. Businesses and industries are no different. If fintechs and financial institutions can work together, there is a real chance that we can start to lessen the economic hit for many businesses and consumers by lowering costs and streamlining better services and products. And even if it is just making it that little bit easier to manage personal finances from home when fighting with your children for the Wi-Fi, we are making a difference.
What to Know Before You Expand Across Borders
By Sean King, Director of International Tax at McGuire Sponsel
The American retail giant, Target Corporation, has a market cap of $64 billion and access to seemingly limitless resources and advisors. So, when the company engaged in its first global expansion, how could anything possibly go wrong?
Less than two years after opening its first Canadian store in 2013, Target shut down all133 Canadian locations and terminated more than 17,000 Canadian employees.
Expansion of an operation to another country can create unique challenges that may impact the financial viability of the entire enterprise. If Target Corporation can colossally fail in its expansion to Canada, how might Mom ‘N’ Pop LLC fare when expanding into Switzerland, Singapore, or Australia?
Successful global expansion requires an understanding of multilayered taxes, regulatory hurdles, employment laws, and cultural nuances. Fortunately, with the right guidance, global expansion can be both possible and profitable for businesses of any size.
Any company with global ambitions must first consider whether the company’s expansion outside of the U.S. will give rise to a taxable presence in the local country. In the cross-border context, a “permanent establishment” can be created in a local country when the enterprise reaches a certain level of activity, which is problematic because it exposes the U.S. multinational to taxation in the foreign country.
Foreign entity incorporation
To avoid permanent establishment risk, many U.S. multinationals choose to operate overseas through a formal corporate subsidiary, which reduces the company’s foreign income tax exposure, though it may result in an additional level of foreign income tax on the subsidiary’s earnings. In most jurisdictions, multinationals can operate their business in the foreign country as a branch, a pass through (e.g., partnership,) or a corporation.
As a branch, the U.S. multinational does not create a subsidiary in the foreign country. It holds assets, employees, and bank accounts under its own name. With a pass through, the U.S. multinational creates a separate entity in the foreign country that is treated as a partnership under the tax law of the foreign country but not necessarily as a partnership under U.S. tax law.
U.S. multinationals can also create corporate subsidiaries in the foreign country treated as corporations under the tax law of both the foreign country and the U.S., with possibly two levels of income taxation in the foreign country plus U.S. income taxation of earnings repatriated to the U.S. as dividends.
Under U.S. entity classification rules, certain types of entities can “check the box” to elect their classification to be taxed as a corporation with two levels of tax, a partnership with pass-through taxation, or even be disregarded for U.S. federal income tax purposes. The check the box election allows U.S. multinationals to engage in more effective global tax planning.
Toll charges, transfer pricing and treaties
When establishing a foreign corporate subsidiary, the U.S. multinational will likely need to transfer certain assets to the new entity to make it fully operational. However, in many cases, the U.S. multinational cannot perform the transfer without recognizing taxable income. In the international context, the IRS imposes certain outbound “toll charges” on the transfer of appreciated property to a foreign entity, which are usually provided for in IRC Section 367 and subject to various exceptions and nuances.
Instead, the U.S. multinational may prefer to license intellectual property to the foreign subsidiary for a fee rather than transfer the property outright. However, licensing requires the company and foreign subsidiary to adhere to transfer pricing rules, as dictated by IRC Section 482. The U.S. multinational and the foreign subsidiary must interact in an arms-length manner regarding pricing and economic terms. Furthermore, any such arrangement may attract withholding taxes when royalties are paid across a border.
Are you GILTI?
Certain U.S. multinationals opt to focus on deferring the income recognition at the U.S. level. In doing so, they simply leave overseas profits overseas and delay repatriating any of the earnings to the U.S.
Despite the general merits of this form of planning, U.S. multinationals will be subject to certain IRS anti-deferral mechanisms, commonly known as “Subpart F” and GILTI. Essentially, U.S. shareholders of certain foreign corporations are forced to recognize their pro rata share of certain types of income generated by these foreign entities at the time the income is earned instead of waiting until the foreign entity formally repatriates the income to the U.S.
The end goal
Essentially, all effective international tax planning boils down to treasury management. Effective and early tax planning can properly allow a company to better achieve its initial goal: profitability.
If global expansion is on the horizon for your company, consult a licensed professional for advice concerning your specific situation.
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