By Sriniketh Chakravarthi, Head of Banking and Financial Services for Continental Europe at Cognizant
The Millennial Disruption Index survey of young bank customers in the United States is a fascinating read as it reveals how differently millennials or digital natives (people born between 1981 and 2000) view banking. The survey shows that in five years’ time, 68 percent believe we will access our money in a completely new way, 70 percent say the way we pay for things will be totally different, and 33 percent say that they won’t need a bank at all. These findings should come as no a surprise as many members of this wholly digital generation rarely enter a bank branch and use mobile first – smartphones or tablets – for all their banking needs.
Changes in technology and customer demographics are leading to a fundamental shift in the way banks are perceived and used or, as it may be the case, not used. As such, innovative payments methods and the changing banking landscape, including the use of mobile devices, are rapidly leading to an atomisation of financial services. We can already see how banks face disruption from new non-bank players including major tech companies such as Google and Apple, but also smaller disruptive payments players like Tink, Toborrow, Klarna, iZettle and SEQR.
There are three key tenets of banking that will be fundamentally challenged in years to come: transaction processing (i.e. payments), deposits and lending. Though currently only seriously challenged peripherally in regards to payments, this disruption will eventually reach the other two core aspects of banking, currently not possible due to banking regulations.
High proliferation of smartphones and tablets has led to the creationof a new payment landscape where non-bank actors process transactions between buyers and sellers in real time and, most importantly, without involving the banks.Some of the new players, such as Klarna, Apple Pay and SEQR have either enhanced, modified or partially bypassed traditional banking networks to process transactions.By being left out of such transactions, banks lose someaccess to customer insights as well as a substantial amount of their core business.
A growing number of retailers are offering customers a variety of deposit options, some of which offer better yields than with traditional banks and with the convenience of liquidity. As a growing number of non-banks enter the deposits’ arena and offer customers compelling alternatives, banks face a growing challenge in what was once their own exclusive core business area.
Technology is creating new and direct lending options for retail banking customers. Through a combination of technology, social networks and analytics, individuals are now able to lend directly to others through peer-to-peer platforms such as Lending Tree, Fixura or Trust Buddy.
Overall, the bank’s traditional function as intermediary of risk and transactions is being challenged. While the banks’ new disruptive competitors are still seen as operating on the fringes and with the disruption mostly visible in the retail side of things, especially in payments, the trickle of today could easily become a deluge pretty soon.
To counter these disruptive trends, banks need to first of all reassess their own contribution to the new value chain being created and find where the bank can add customer value. For example, customers may choose different payment options for different transactions but all of them would value having access to an aggregated dashboard offering a useful overview of personal finances. Secondly, they need toembrace new trends and enter new business areas while using the bank’s brand, trust, technology and network as selling points. For example, a US bank recently launched Peri, which is an instant mobile shopping app and service. Thirdly, financial institutions shouldally with the non-bank players. For example, banks such as SunTrust and Barclaycard have embraced Apple Pay. While banks and major financial institutions are increasingly active in the peer-to-peer loan arena by offering loans on P2P lending platforms, the next step could be to launch or buy up lending platforms of their own. Furthermore, banks should go from online-only strategies to mobile-first strategies. This entails, among other things, ensuring a well-designed and user-friendly experience though mobile apps and mobile optimised websites. Finally, banks need to consider increasing customer protection and IT security to enable customers to do their banking and transactions on the go, since it involves handling sensitive personal information.
Giving millennials/digital natives the bank services they want is by no means a small task. The mobile bank, which be availablearound the clock and always has to be user-friendly, must also guarantee vault security at all times. To stay ahead of the curve, banks can and should look to the new competition for inspiration.
Keeping a watchful eye on atomisation trends and simultaneously developing services to meet changing customer demands ultimately requires banks to remainflexible and embrace the disruptive nature of digitalisation.
Former BOJ executive calls for ‘genuine’ review of central bank stimulus
By Leika Kihara and Takahiko Wada
TOKYO (Reuters) – The Bank of Japan must abandon the view it can influence public perceptions with monetary policy and conduct a “genuine” review that takes a harder look at the rising cost of prolonged easing, said former central bank deputy governor Hirohide Yamaguchi.
The BOJ will conduct a review next month to make its monetary policy tools more sustainable, nodding to criticism its policy is crushing bond yields, drying up market liquidity and distorting stock prices.
But Yamaguchi, who was deputy governor when the BOJ first began buying exchange-traded funds (ETF) in 2010, said the costs of the bank’s stimulus programme have become too large to mitigate in the review in March.
“It’s unlikely the BOJ can come up with an outcome that has a substantial impact on the economy and markets,” he told Reuters in an interview on Monday.
“The review will probably be just a show of gesture that it’s doing ‘something’ to address the cost,” said Yamaguchi, who retains strong influence on incumbent policymakers.
Under its yield curve control (YCC) framework, the BOJ guides short-term interest rates towards -0.1% and 10-year bond yields to around 0%. It also buys risky assets such as ETFs to fire up inflation.
Ideas floated in the BOJ, which could be discussed at the review, include allowing the 10-year bond yield to deviate more from its 0% target, and making its ETF buying nimble so it can slow buying when stocks are booming.
Tolerating bigger yield swings, however, could undermine the feasibility of YCC by highlighting the limits of the BOJ’s control over the yield curve, Yamaguchi said.
“It’s hard to control long-term interest rates within a tight range for a long period of time,” he said, calling for an overhaul of YCC – something the BOJ rules out as an option.
Yamaguchi also called for halting the BOJ’s ETF purchases, as the bank could “end up using monetary policy to prop up stock prices” if the programme continues.
“At the very least, the BOJ must end as soon as it can the current situation where its ETF holdings keep accumulating.”
When the BOJ began buying ETFs in 2010, it used a pool of funds to ensure purchases remain at a manageable level, said Yamaguchi, who was involved in the decision.
That cautious approach was replaced by Governor Haruhiko Kuroda, Yamaguchi said, after he took over as head of the BOJ in 2013. Kuroda ramped up purchases dramatically with his “bazooka” stimulus deployed that year under a pledge to deploy all available means in a single blow. Eight years on, inflation remains distant from the BOJ’s 2% target.
“It’s impossible for the BOJ to guide public perceptions at its will,” Yamaguchi said. “It’s time now for the BOJ to conduct a ‘genuine’ policy review and use the findings to modify its policy framework.”
(Reporting by Leika Kihara and Takahiko Wada; Editing by Ana Nicolaci da Costa)
Metro Bank expects defaults to rise as COVID-19 support measures fade out
(Reuters) – Metro Bank posted a much bigger annual loss on Wednesday and said it expects defaults to rise through the year in line with its provisions as government support measures set in place due to the COVID-19 crisis are wound down.
The mid-sized company, part of a breed of challenger banks set up to take on the dominance of bigger and more conventional lenders in Britain, said underlying pretax loss was 271.8 million pounds ($385.58 million) for the 12 months ended Dec. 31 compared to 11.7 million pounds a year earlier.
“The pandemic has clearly impacted performance, leading to significant expected credit losses, but our transformation strategy is firmly on track and we have accelerated initiatives to shift our asset mix, bringing higher yield and improving net interest margin, as evidenced in the second half,” Chief Executive Officer Daniel Frumkin said.
Metro, which relieved some of the pressure on its capital levels last year by selling one of its portfolios to NatWest, estimated impact from the coronavirus pandemic to be 124 million pounds.
The bank, whose net interest margin fell to 1.22% from 1.51% in a low interest rate environment, said provisions to cover loan losses amounted to 126.7 million pounds at 2020-end, compared with 11.7 million pounds a year earlier.
The company said the increase in expected credit losses was driven by deteriorating macro-economic scenarios that have increased the probability of defaults.
($1 = 0.7049 pounds)
(Reporting by Muvija M in Bengaluru; Editing by Vinay Dwivedi)
As We Get Back to the Future of Work, Banks Must Embrace WhatsApp
By Shaun Hurst, Technical Director, Smarsh
If you had told me a year ago that the world’s major financial services companies would all be operating almost entirely with a remote workforce, I would have broken out in a cold sweat.
Straight away my mind would have jumped to the severity of the compliance issues that such a move would involve. Then I’d worry about the magnitude of the investment that banks would need to make in innovative collaboration tools – a move they had put off for so long. For nights on end, I would have tossed and turned thinking about the creaking legacy archives so many banks still held onto, already struggling to keep pace with the exponential rise in data flowing in and out of modern businesses every nano-second.
What a difference a year makes.
Coming in to 2021, banks are light years ahead of where they were at the turn of the decade. The vast majority have implemented the technology they need to enable their workforce to compliantly use the collaboration tools. Most have either moved their archives to the public cloud or have seriously sped up their plans to do so. And the ‘Future of Work’ is no longer a buzz word. It is now a reality. We will never go back to a situation where employees are only able to work in a physical office.
But there is work still to be done. There is a valuable lesson that banks need to learn from 2020: embrace technology, do not fear it. Fear of compliance issues was one of the main reasons that so many had put off fully adopting the collaboration tools that are now the lifeblood of their businesses. What they need to do now is expand their newfound wisdom and embrace all communications platforms that enable employees to stay connected and work effectively, wherever they are.
WhatsApp and Financial Services Regulations
This is most evident with WhatsApp. Many people working in the financial services industry already know that the end-to-end encryption messaging tool is ubiquitous and widely used to keep in touch with colleagues, clients, and contacts. But while company policies largely prohibit the use of WhatsApp, financial regulators have stayed away from an outright ban. Instead, they have issued guidance requiring companies to ensure that the instant messaging tools used by their employees are supervised and in compliance with already existing record-keeping rules such as MiFID II.
In 2019, the FCA stated that firms need to “take reasonable steps to prevent an employee or contractor from making, sending, or receiving relevant telephone conversations and electronic communications on privately-owned equipment which the firm is unable to record or copy.” Similarly, the SEC issued guidance in late 2018 reminding companies of their responsibility to monitor electronic messaging and encouraged them to “stay abreast of evolving technology.”
Ensuring that these guidelines are adhered to has been complicated by the fact that many companies have brought in outright or partial bans on unmonitored instant messaging tools, while also adopting bring-your-own-device (BYOD) policies. Largely implemented to cut costs, these BYOD policies mean businesses are now less able to police which communications apps and platforms their employees are using. This means that they have now lost the oversight they need to ensure that employees are adhering to the bans.
Despite a mountain of anecdotal and judicial evidence that employees in the financial services industry have turned to WhatsApp even more since the outbreak of the pandemic, banks are still failing to adopt the compliance tools they need to ensure their employees are acting legally.
Legal Issues with WhatsApp
In 2020, there were several legal and disciplinary cases that centred upon the misuse of WhatsApp within banks.
In April, Bloomberg reported that a dozen traders at one investment bank were punished for using WhatsApp at work – one was fired and the others had their bonuses cut. In October, two senior executives working in the commodity sector quit after accusations that they had broken their company’s rules on instant messaging platforms.
While one banker was acquitted over a legal case with the FCA in which he was accused of purposefully obstructing an investigation by deleting WhatsApp messages, the UK regulator stated it would ‘take action whenever evidence we need is tampered with or destroyed.’ A clear message to banks that they will be expected to provide accurate accounts of any messages sent by their employees over WhatsApp.
The Solution: Capturing and Supervising WhatsApp Communications
The compliance challenges of the increased use of WhatsApp have been widely played out in the financial media in recent years, with multiple firms being handed significant fines due to their communications-monitoring oversights. This doesn’t have to be the case.
As I said before: We will never go back to a situation where employees are only able to work in a physical office. Companies working in regulated industries, and especially financial services companies, must embrace the tools that they know are in wide use by their employees.
Very few banks have introduced the monitoring solutions they would need to adequately manage the use of WhatsApp or other encrypted messaging tools by its employees. But encrypted messaging tools like WhatsApp and WeChat can be captured, monitored, and supervised. Firms simply need to invest in the technology in order to do so.
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