By Fabrice Gouttebroze, Managing Director of Sirma UK
During the pandemic, most countries have experienced a state of lockdown, which also reduced access to cash. At the same time, individuals and businesses have been opting for cashless payments due to fears of contracting the virus through touching infected surfaces. This psychological effect may be long-lasting.
Could this be the end of cash in our society? Are the banks fully ready to go cashless?
Getting set for digital-only payments
Banks have been changing the way they do business for some time in order to keep pace with the changing demands of their customer base, as well as the threats from big technology companies like Apple and Amazon who have access to large amounts of powerful customer data. The race has been on to act like a digital giant before the digital giants could act like a bank.
Studies quote exceptionally high failure rates – sometimes as high as 84% – for traditional businesses attempting digitalisation projects.
So why are failure rates so high?
Many traditional banks are still struggling with their digitalisation efforts due to the complexity of their legacy IT systems and infrastructures. On top of this,businesses often have insufficient expertise internally to run the project and there can also be cultural barriers to embracing digitalisation efforts as employees fear for their jobs and stall the progress.
Some banks are creating great success with digitalisation despite the challenges by partnering with more agile and digitally skilled Fintech companies who catapult their progress. These partnerships bring the best digital skills and agility together with the experience, brand, trust and reputation enjoyed by traditional banks.
Banks are realising the benefits of e-payments
The case for digital payments is clear; for banks that can implement the technology successfully, transactions can be processed faster at a far lower cost, with fewer errors and with less employees to manage them.
Without the need to store and distribute cash there is a reduced need for physical branches and ATMs, which again saves money. The infrastructure that we built to manage a high cash society is not viable to maintain to serve a low cash society.
According to The Telegraph, UK banks saved £120m through ATM and branch closures and they predict that only a change in the law would extend the life of cash in society.
Is banking technology robust enough to move away from cash?
The concept of moving to a cashless society has raised concerns about what would happen in the event of a technology failure affecting the banks.
There have been significant technology incidents within the last three years which are still fresh in the minds of regulators and of the customers who were negatively impacted.
2018 was a particularly difficult year for significant IT failures at banks which left customers without access to their money. Around 1.9m TSB customers were locked out of their accounts for weeks during April 2018. In June 2018 5.2m Visa transactions failed and in September 2018 millions of Barclays customers were unable to access their accounts, followed by issues for RBS, NatWest and Ulster Bank.
In a cashless society there is no room for these kinds of errors.
Banks must ensure both the security of their digital channels from fraudsters and the resilience of their testing systems before new technologies and upgrades are launched. Systems must be capable of handling greater and greater volumes of transactions as the use of cash decreases.
Even if banks are themselves set for the transition, it’s clear that not every customer is.
Who will be left behind?
Cashless payments have been readily adopted by the more affluent consumers, the tech savvy and the younger generations. Retailers are increasingly directing customers to make card payments due to the increased costs and risks involved in handling cash.
However, there are fears that the removal of cash from circulation would negatively impact several groups in society including the less affluent customers who keep on top of their spending through a cash budget, customers with learning disabilities, customers who live in more remote communities with less reliable internet connections and those who need others to make purchases for them.
The Access to Cash Review – Final Report concluded that “17% of the UK population – over 8 million adults – would struggle to cope in a cashless society” and that Government intervention would be required to keep the use of use of cash viable.
Sweden has become a near cashless society in recent years. Fears about the impact this could have on groups within society led the Swedish Government to bring a draft legislative proposal to Swedish Parliament in September 2019 which would mandate specific lenders to continue to offer cash-related services.
In the UK banks such as Barclays have invested resources in educating their customers on how to safely use banking technologies through ‘tea and teach’ in-person sessions, website guidance and YouTube ‘how to’ resources.
More will need to be done to support small business owners who have traditionally opted for cash because they found payment terminals to be a costly way to transact in lower profit margin businesses. In some countries, ‘cash on delivery’ remains a popular option for customers who prefer to pay on receipt of the product or service. However, this comes at a high risk to the seller who would be better protected by an electronic payment option for orders.
Businesses selling services or items at a relatively low cost in general, such as fast food items, taxi journeys around town and newsagents, are likely to benefit from installing point of sale (POS) terminals that allow contactless payments. These are now widely found to be convenient for customers, including the elderly.
The banks have work to do
There is now a wealth of viable alternatives to cash payments beyond traditional card payments, from internet and mobile banking, to digital wallets, to Open Banking and payments made within apps. The strategic decision on which route banks should focus on lies with their Chief Technology Officers and Customer Experience Officers. Certainly, Open Banking coupled with instant payments has clear benefits over card transactions, which would be felt by the merchants who opt-in.
While the necessary infrastructure for a cashless society is now in place, banks need to ensure that their systems are secure and able to withstand the additional volumes of digital payments they will be processing.
Each bank should also consider offering education and training for groups in society who are currently reliant upon cash, to ensure that they are not left behind. Financial organisations need to review their physical footprint to ensure that branches that they decide to keep open still have a profitable way to contribute to the communities they are based in, and the staff is focussed less on processing and more on the human interactions that make the most difference in a banking relationship.
Chief Technology Officers have an even bigger weight on their shoulders in the dawn of a cashless society. Plan A has to work when there is no Plan B.
Can the financial industry ever be truly flexible?
By Dave Hornby, Business Development Engineer, EMEIA at Jamf
The financial industry is tasked with keeping a secure network and following a plethora of strict industry standards. While Regulators in the UK and Europe have loosened some of the rules for companies to continue operating at a time of crisis, the financial industry must continue to be both compliant and conformant to requirements or they could face heavy fines and court action.
These fears teamed with managing remote staff who are logging in from an array of premises, with devices that may not be owned by the company, has meant remote working hadn’t previously enjoyed widespread adoption until it became compulsory for non-essential workers to stay at home.
The key to solving this challenge is by striking a balance between data protection, compliance and employee trust and productivity. Financial organisations need to first gain a holistic overview of how employees will use devices to access information, what access employees need to perform their role, and how the organisation can offer a great experience while implementing a secure and robust device and app management strategy.
Securing Remote Workers
The safety of an organisation’s customers, workforce and devices should be paramount and that means looking at the type of devices connecting to the network. Choosing devices that employees are familiar with, and may already have, can go a long way in making sure user productivity continues. Apple has increasingly become a firm favourite within the enterprise because it’s easy to use and manage, and has numerous built-in native security features that can be leveraged – even the App Store is closely vetted with guidelines.
Financial organisations need to look at, and pre-approve, the apps and software that are required by employee role and ensure they meet compliance and regulatory requirements. The Financial Conduct Authority (FCA) is the conduct regulator for 58,000 financial services firms and financial markets in the UK, and has strict guidelines which businesses must adhere to in the office and at home.
All software and apps need to be systematically updated regularly, including the operating system in order to get essential security updates as well as functionality. A rogue app can be used to share confidential data and gaps in software can lead to weakened entry points – perfect for cyber criminals to attack. The IT department can empower employees with privileges to install specific apps and software to work productively but additional security may be needed to remain secure. For example, some threats are at root-level: Zoom’s recent vulnerability was due to the use of an insecure system API Authorization Execute With Privileges, which could allow attackers to hijack the camera and microphone of users as well as elevated privileges. This is why device security alone is not enough and several security layers are needed.
By using a third-party solution provider, IT teams can manage the roll out of both devices and apps that enable them to maintain the security of those devices from one central location and at the click of a button. This will also help to identify where there are gaps in security and what access is needed. The IT department can then impart access to employees to take on some of these actions, helping to build an environment of trust and reducing the burden on the team.
Additionally being able to detect anomalies in usage, can help to identify the prevalent threat patterns attacking the business to help focus where security needs to be applied.
A common bugbear for IT departments is the ongoing burden of password reminders and resets, but if employees are unable to login or access their emails and systems, the working day can grind to a halt. Organisations can empower employees to receive login reminders or resets and provide multi-factor authentification to add an extra layer of security.
Financial organisations must show evidence of delivering strict, specific and appropriate access to information for employees. It’s a particularly pressing matter within the finance and banking industry as insider trading remains an ongoing issue and can heighten during the lockdown.
Employees should have access to specific files and documents relevant to their position. If an employee moves department, the IT team can simply revoke their access from one and assign them to another – keeping them productive and the business safe.
If a breach does occur, being able to remediate and analyse the entry point is vital – this way the IT team can quickly login and lock down that MacBook or iPad to stop the threat from spreading.
While the current crisis has meant financial organisations have had to think quickly and deploy remote working at scale, it is an opportunity to provide updated communication plans to all staff on security policies and expectations.
The financial industry can be more flexible in its working practices for the benefit of its employees and customers – as long as the right security steps are taken to remain compliant. Technology solutions that can make managing consumer IT, such as Apple, a benefit when needing to create a remote workforce will be essential– particularly if that solution can offer overall visibility and threat detection.
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Coronavirus gives a changing perspective
By Mike Hampson, CEO of Bishopsgate Financial
The shock to the global economy from Covid-19 has been more severe than the 2008 global financial crisis and even the Great Depression. These previous episodes shook the world, saw the markets collapse and caused credit markets to freeze all in a few years. However, the current situation only took three months to shut down the globe country after country. Now, while many countries are opening up again, we need to be cautious. As has been said, we’re probably just at the end of the beginning.
Writing in the FT, John Flint, former chief executive of HSBC said: “think about a crisis not as a single event, but as a series of episodes much like waves breaking on a beach.” This pandemic illustrates why regulators have spent the past decade pushing the banks to demonstrate resilience. After all, this is all about being able to prevent, adapt, respond, recover and learn from a series of disruptions. All much-needed in the current situation.
Earlier this year, we published our Change Perspective Report looking at the factors driving change in the banking industry. One of our key findings was the need for banks to focus on their operational resilience to ensure they can continue their operations through disasters, crises or extreme events. Who knew that weeks later, those plans would be tested for real.
Banks and other financial institutions worldwide are facing unprecedented challenges. Not only are they providing services as usual during a time when this has become more difficult; they are also tasked with being the conduit for distributing funds from central banks to those in need, as well as providing support to anxious customers. Beyond this, none of the challenges the sector faced in February have gone away. Here’s a brief run-through of some of the issues facing financial services:
The year ahead is likely to be defined by the digital transformation at pace and scale as seen when banks moved to home working. Some organisations have struggled to get this up and running, with banks rushing to buy thousands of laptops at short notice, internet bandwidth issues causing costly delays when executing trades, along with infrastructure limitations around platforms used to facilitate remote access. Yet in general, this shift has been achieved smoothly.
Because of this, finance directors will be looking at the potentially huge savings that can be realised by reducing office space if working from home becomes the new normal for large parts of the workforce.
With people handling sensitive data while working off-site, cybersecurity becomes a key consideration. Our data shows that 95% of firms see it as a priority. With revelations about data breaches regularly appearing in the press, banks are becoming acutely aware of the risk of pushing digital innovation without also rethinking and investing in security.
Culling of Challenger Banks
Over the past few years, we have seen the headlines announcing launch after launch of start-up, digital-only banks. Yet in the current environment switching banks is on no one’s priority list. This crisis could see a clear-out of fintech start-ups in the same way that the .com bust earlier this century removed many of tech start-ups, wiping out hordes of large and exotically valued businesses.
Customers and clients need stability from their bank, and it is not clear what the long-term outlook for challengers will be. Most, if not all of these, are heavily loss-making. Monzo and Starling have already furloughed a large number of their staff (while still running expensive TV advertising campaigns). N26, which had 200,000 customers, closed in the UK in mid-April.
The number of challengers also presents problems, and even without COVID-19, consolidation would have been likely. At the same time, incumbents have been closing the gap between their offer and that of the newcomers. Retail banks have dramatically improved their digital services and thus there’s no reason to swap.
Coupled with this the challenger banks have lower lending volumes and so they are more exposed to external elements than traditional banks.
When all this is added up, and as we enter a new age of anxiety, the future for challengers looks bleak.
Three key topics continue to dominate the regulatory agenda: anti-money laundering, privacy and financial crime.
However, in March the UK’s financial regulators announced that various regulatory work would be postponed, alongside 2020’s bank stress tests being cancelled. This is to allow banks the space to focus on customer needs during the COVID-19 crisis. This breather is no doubt welcomed and appropriate. That said, the Prudential Regulation Authority announced that EU withdrawal and climate change operational resilience remain priorities, and that work will continue on these.
Compliance remains at the top of banks’ to-do lists, and financial crime remains a significant concern.
Reports of phishing attacks and fraud are on the rise, with criminals swiftly adapting and using corona-led messaging to con people out of money. Under the guise of panicked money movement, there are less obvious financial crimes happening, too.
As fraudsters seek new ways to launder proceeds, regulators will continue to expand the scope of their vigilance and banks will look to ways to identify and stop criminal activity. While banks become more mature in their approach to identifying and understanding clients, some are beginning to consider ‘’perpetual KYC’’ as a solution to client data needs. Besides, there is a lot of effort being expended on Artificial Intelligence and Robotic Process Automation solutions to reduce the need for large teams and manual processes.
The current environment once again highlights the need for a flexible workforce across the economy. No sooner has the government clamped down on IR35 than we run straight into a situation where flexibility would have benefited businesses, the economy and individual workers.
The banking industry relies on a flexible, multi-skilled workforce that enables it to implement change programmes successfully and cost-effectively. This creates a constant drive to maintain the appropriate workforce mix and, with potential legislation affecting the supply of skilled workers, banks are looking at strategies to help them maintain access to the talent they need.
77% of respondents of the Change Perspective report listed employee wellbeing as a key factor. Mental health and stress at work can manifest itself in many ways and large numbers of companies have upped the support available to their people.
By broadening the conversation to talk openly about both work-related stress and personal life events, organisations are seeking to provide a more supportive environment for their staff. What’s more, there’s an open acknowledgement of the performance benefits a healthy workforce can bring.
While change is a constant, the current pace and impact are beyond anything anyone could have forecast. Yet, change leaders are flexible, resourceful planners able to respond rapidly to organisational and systemic challenges.
Which is lucky as they’re about to feel the heat.
The Future of Capital Raising
By Thomas Zeeb, Head, Securities & Exchanges, the Swiss Stock Exchange
Capital markets are facing a turbulent period, having been routed by the volatility brought about by Covid-19. The Swiss Stock Exchange shares its unique insights into how capital markets are likely to evolve over the coming months and years.
Initial public offerings (IPOs): Still a force to be reckoned with
Although deal volumes and proceeds increased year-on-year in 2020, the market has ground to a halt as the impact of Covid-19 takes its toll. In Europe, IPOs have been put on hold as bankers, issuers and investors struggle with the logistical challenges of being unable to travel. However, the disruption being caused by Covid-19 is likely to be temporary and the Swiss Stock Exchange expects IPO activity to normalise once the situation stabilises.
IPOs will remain an essential fundraising mechanism for companies and that is unlikely to change in the foreseeable future. The benefits of going public are well-documented. Firstly, they provide issuers with additional working capital, which can then be used to invest into their businesses. Similarly, publicly traded companies can also leverage the secondary markets to raise further cash. Moreover, IPOs make it considerably easier for organisations to access debt markets, as the transparency and reporting obligations imposed on public companies can help them negotiate more generous credit terms with prospective lenders.
In addition, IPOs are a vital ingredient for generating deeper brand awareness. Again, this can help companies grow market share, thereby boosting revenues. And finally, proceeds from IPOs are often used to remunerate staff with generous share benefits, helping with talent retention once a company has finally gone public. In short, the traditional IPO process and the exchanges that facilitate it are not going to disappear anytime soon.
Will private equity take over?
While an IPO has always been viewed as a pinnacle moment in a company’s lifecycle, the reality is that more businesses are opting to stay private for longer. McKinsey data found the average age of a US technology company going public in 2014 was 11 years, compared with just four in 1999. This has nothing to do with the health of public markets, but rather the sheer amount of institutional capital that has been allocated into private equity funds.
According to data provider Preqin, there is now $4.11 trillion invested in private equity, a new record. Of that sum total, an estimated $1.5 trillion is unspent, also known as dry powder. Up until Covid-19 struck, there was enormous amounts of competition in the private equity market, with managers putting valuations on companies that were many multiples of their actual EBITDA (earnings before interest, tax, depreciation, amortisation).
This pandemic will lead to a severe market correction of these – arguably excessive – valuations. The volatility also means a number of companies who would have otherwise gone public will choose to stay private. This will result in private equity deploying its vast piles of unspent cash to hoover up bargain deals. Consequentially, there is likely to be a short-term acceleration in private equity dealmaking at the expense of public markets.
The longer-term vision
Capital raising, however, is likely to undergo a profound evolution over the next few years, and it is being facilitated by providers like the Swiss Stock Exchange. Initial digital offerings (IDOs) is a premise whose origins can be traced back to digital assets such as crypto-currencies and ICOs (initial coin offerings). While vast numbers of institutional investors baulk at the concept of crypto-currencies and ICOs, they are interested in (legitimate) IDOs’ potential.
IDOs – also known as initial securities offerings – share a number of commonalities with their IPO forebearers, but they are structured in a way that could help make the listing process become more accessible to boutique companies who may not have normally gone public on a stock exchange but instead sold out to private equity investors. Whereas IPOs will typically have a minimum valuation threshold of around $25 million, IDOs are targeting enterprises with market capitalisations of between $5 million – $25 million.
Such innovation being pioneered by the Swiss Stock Exchange could help democratise the investment process. It will do this by enfranchising ordinary investors by allowing them to buy directly into companies which they normally would not have had access to. At the same time, IDOs will provide an alternative fundraising route for smaller companies, sparing them the costs of going public along with the constraints that might be imposed by private equity.
Innovation: Swiss style
IDOs are not going to replace or disintermediate the traditional IPO process. Instead, they should be seen as a complement, allowing a wider range of issuers and investors to participate in a process, which has long been dominated by large institutions. By doing so, IDOs will generate massive amounts of liquidity, thereby creating stronger capital markets.
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