Alex Kwiatkowski, Senior Industry Consultant, Global Banking Practice, SAS UK
Another year’s over, a new one’s just begun. And it’s time to answer that most crucial of questions: ‘What does 2018 hold in-store for EMEA banking?’. Unless I’m missing something obvious, all the signs point to the coming 12 months being characterised by the usual ‘evolution not revolution’, and anybody hankering for radical change between now and December 31st had best prepare to feel the cold hand of disappointment. I’ll stop short of saying that banking is boringly predictable, but with its overall course having been set some years earlier – characterised by the drive to digital transformation in an era of macroprudential regulation – there’s nothing either on or over the horizon which is going to act as a seismic force. There’ll be disturbances and distractions as the year unfolds, but no disruptions. Sorry.
Taking this into account, and having given my crystal ball a thorough polish, the following trends are going to manifest themselves in the EMEA banking industry over the coming 12 months.
Digitalisation of corporate banking
Corporate banks finally get hip to digital, as the general murmurings of service dissatisfaction among national and multinational companies prove impossible to ignore. There’s already been some digitalisation of the back office (e.g. cash management), but in 2018 progress will extend through the middle office (where new banking products are created) and into the front office (where relationship managers get their hands on the digital tools to make a) their job easier and b) their client(s) happier).
Platformification efforts accelerate
‘Platformification’ is a truly dreadful word. Hard to pronounce. Sounds like ‘fornication’. Vague. And yet it’s one of the most significant developments in banking. For the uninitiated, platformification is “the bundling together of multiple services onto one online platform, and provides an efficient, automated and integrated customer experience” (source: Forbes). At the risk of stating the obvious, those three outcomes are highly desirable for banks, as in combination they drive improved financial and operational performance. Platformification also puts banks on a similar plane to other industry sectors (e.g. retail), although any CEO who thinks his or her firm is about to become the Amazon of banking needs to lower their expectations.
Technology innovation boosts financial inclusion
Connecting – and reconnecting – people to the financial system remains a priority across EMEA (and the rest of the world) in 2018. While improvements have been made in recent years to close the gap between those who can access to banking services and those who can’t, progress needs to go at a faster pace. This necessitates national governments, financial service providers (traditional and non-traditional), telcos and technology vendors (device manufacturers, ISVs, app developers etc.) working collaboratively. An impossible dream? Nope.
Growth of fintech and regtech in emerging markets
During the last quarter of 2017 I’ve seen ample evidence that fintech and regtech is beginning to proliferate in EMEA’s emerging markets. This will continue during the next 12 months (and beyond), with new firms entering the competitive environment. It doesn’t take a genius to deduce that it’s trend intrinsically linked with improving levels of financial inclusiveness. Exciting times are ahead.
Understanding EU-wide stress tests in an era of IFRS 9
The latest round of EU-wide stress testing commences in January. We’ll need to wait until November 2nd to see the results, but extra significance is assumed as this is the first assessment undertaken in the era of IFRS 9 – the standard which specifies how an entity should classify and measure financial assets, financial liabilities, and some contracts to buy or sell non-financial items. I’m not expecting shocks, but there might be a surprise or two to make things interesting.
Blockchain in lending and trade finance
Blah-blah-blah-blockchain. I’m bored of talking about it. What I really want to see is blockchain technology taking root in areas other than the frankly insane world of cryptocurrencies. Blockchain has been slower to come out of the lab and into the live environment that I anticipated a couple of years ago, but my senses tell me that this will change in 2018. Lending and trade finance are two obvious areas where blockchain can disturb the status quo by reducing the need for paper-based processes (and sounding the death knell of the fax machine). And then there’s the blockchain analytics angle to explore too. We’ve already started. Catch us if you can.
Extension of open banking standard(s)
Within the more advanced economies of EMEA, the concept of open banking – which is where banks make the transition to be marketplaces for financial services (see ‘Platformification’ above) – has taken the industry by storm. To weather a storm, protection in the form of an umbrella is required. In this instance, the umbrella takes the form of an open banking standard, which uniformly prescribes the steps which firms must take. Developments such as PSD2 have hastened standardisation, but there’s still a huge amount of scope for further improvement. In Europe, a collaborative effort is being made by AIB Group, Bank of Ireland, Barclays, Danske, HSBC Group, Lloyds Banking Group, Nationwide, RBS Group and Santander to create an open API standard. I expect to see more ‘groupthink’ examples emerge as the year unfolds.
Beginning the preparations for regulatory adjustments
2018 will witness some major regulatory developments. There’s the go-live for PSD2 and GDPR in Europe, while at a global level Basel IV begins to take a firmer shape. And although the rollback of Dodd-Frank is going to hit US banks hardest, the ripples caused by this development will scurry across the Atlantic to affect firms in EMEA (i.e. those who maintain operations in Trump-land) to varying degrees too. As every boy scout knows, success hinges on being prepared.
M&A activity is back on the agenda in the search for growth
Several EMEA banks have recently installed new CEOs, and they’re sure to be seeking ways to deliver sustainable revenue growth to keep their shareholders happy. This stimulates renewed interest in M&A activity, and while the era of the mega-merger is behind us, don’t be surprised if 2018 witnesses some unlikely unions. And with Chinese companies sitting on huge cash piles, who’s to say they won’t make a series of strategic investments to gain, or strengthen, a position of potential power.
AI-fever takes hold, but some banks will lose their grip on reality
What’s that deafening sound? Oh yes, it’s the wall of noise associated with Artificial Intelligence. There’s no denying that AI – and it’s ‘extended’ features, namely machine learning and deep learning – is going to transform not just banking but the entire world as we know it. However, I’ll just inject a healthy dose of reality. AI isn’t a magic wand. It needs to be handled carefully, and that means striking the right balance between humans and computers. Let’s use AI responsibly. There’s been enough recklessness in the world prior to AI bursting forth.
Finally, there’s my perennial wildcard. This is a low probability event, but one that would have a significant impact on banking overall. Previous wildcards include President-elect Trump repealing Dodd-Frank* (2017); Apple obtaining a banking license by partnering with an existing institution (2016; an established peer-to-peer lender being acquired by a big bank (2015); and Google using its long-held banking license in the Netherlands to launch a digital-only service (2014). For 2018, I’m going to stick my neck out and say that during 2018 the UK will halt the Brexit process, having come to the sensible conclusion that any benefits are massively outweighed by the drawbacks. Sadly, I’m 99 percent certain this won’t happen, so it’s said more in hope than expectation.
For brevity, I’ve provided short thumbnail sketches as to the 2018 trends in this blog. If you want the unexpurgated version, join me for a webinar on January 25th at 4 pm (UK time) which goes deeper into the details: SAS SPEED Webinar Series for Banking
Happy New Year!
*I made this prediction prior to the Presidential election.
Over 60’s turning to digital banking up by 90% during pandemic
More than 90% of people aged over 60 have used online banking for the first time during the Covid-19 pandemic, according to a poll by iResearch Services, highlighting the importance of banks getting digital right in 2021.
In comparison, 17% of people aged under 30 said they were accessing services via an app or web browser for the first time.
The findings show how banks must adapt to help service the influx of new digital users and gain their trust, accelerated by the Coronavirus pandemic. With 97% of 18–24-year-olds trusting their bank with their data, compared to only 33% of people aged over 66.
Commenting on the findings, Gurpreet Purewal, Associate Vice President, Thought Leadership, at iResearch, said: “Our study demonstrates the lasting impact of Coronavirus on how people will access banking services from now on. Banks will be required to refocus on really understanding customer needs in order to engage with the different requirements of each individual customer.
“More than half (54%) of respondents said they are less likely to attend a physical branch after the pandemic. This demonstrates a seismic shift in the way people will access banking services now and into the future.”
In other findings, 63% of respondents said their bank acted in their best interests during the pandemic, but a third said they would consider switching their bank for better, more personalised communication.
Purewal added: “On the whole, High Street banks have emerged with great credit from the pandemic for the way they have supported their customers. As the economy rebuilds, it will be more important than ever that they communicate in the right way to help consumers through 2021 by leveraging digital platforms and understanding their needs fully.”
Asked how banks can improve their communication with customers, ‘connecting on a personal level’ ranked highest, followed by ‘more honest and open dialogue’, a ‘demonstration of how they are helping customers’, ‘more creative campaigns’, ‘consistent messaging across channels’ and finally ‘responsiveness to major events’.
Banking on the cloud to create a crucial advantage in financial services
By Rahul Singh, President of Financial Services, HCL Technologies
Once considered a revolutionary technology, cloud is now at the heart of agile and innovative businesses. The financial services industry is no exception, and has been a major adopter of cloud-based Software-as-a-Service (SaaS) for its non-core applications. Functions such as customer management, human capital management, and financial accounting have progressively shifted to the cloud. Several banks have also warmed up to using cloud for services such as Know your Customer (KYC) verification. IDC analysts say that public cloud spending will grow from $229 billion in 2019 to almost $500 billion by 2023, and a third of this will be spent across three industries: professional services, discrete manufacturing, and banking. The time is ripe for an increasing number of financial services providers to consider moving more of their core services to cloud.
Adoption is already on the rise
Earlier reluctance to move core activities to the cloud has softened, and many banks have put strategies in place to migrate services, including consumer payments, credit scoring, wealth management, and risk analysis. This significant change is driven by factors such as PSD2 and open banking, which require secure and cost-effective data sharing.
Regulators too were once cautious in their approach to cloud technology, but this is also changing. The Australian Prudential Regulation Authority (APRA), for example, whilst acknowledging the risks associated with cloud, also recognised the risk of sticking to the status quo. ARPA trusted the enhanced security offered by the cloud, and updated its cloud-associated risk advice. Wisely, APRA recommended that banks must develop contingency plans that allow cloud services to be provided through alternate means if required.
Rising pressure from new challengers
The other pressure for incumbent banks is from next generation fintech firms. These are cloud-native organisations, and are able to onboard customers remotely in minutes, roll out new services in days, and meet compliance requirements at lower costs.
As a result, the need for traditional banks to upgrade core systems and integrate the latest technologies is stronger than ever. The COVID-19 pandemic has been an additional driver, highlighting the importance of upgrading and migrating core systems to the cloud. Financial services organisations have been forced to rethink their approach to digital transformation, and pay special attention to a cloud-aligned culture. The industry is recognising how the cloud can address new and ongoing regulatory changes, meet different demands from customers, support the roll-out of emerging technologies, and enable incumbent providers to respond to the relentless competition from fintech firms.
New year, new priorities
As we enter 2021, financial services providers will need to reset their priorities, and go beyond using the cloud for scalability and cost efficiency alone. The new areas to focus on will include:
- Creating a robust digital foundation: The cloud market is expanding fast, and there is an ever-increasing number of services on offer. Whilst the big three hyper-scalers are the obvious choice, various other players are also gaining traction, such as IBM, Oracle, and Alibaba Cloud. Organisations will need a robust digital foundation to adopt cloud at scale in a secure and compliant way. A well-architected digital foundation, supported by resilient operations, ensures that organisations have continued access to their systems and data, regardless of where employees are located, or what device they are using.
- Adoption of technology platforms: Enterprises are finding ways to reduce complexity by embracing a platform approach, and increasing the speed of business IT consumption. Physical infrastructure is being abstracted into cloud-based platforms, with data consolidated into data lake platforms. Software products like Apigee are being offered as capability platforms to drive better analytics and intelligence.
- Enhancing IT security: Cloud offers organisations greater security than on-premises servers, if implemented correctly. Financial services organisations have relied on control and compliance-based security for years, but these practices are increasingly vulnerable to cyber threats. Whilst service integrators create robust cybersecurity solutions for financial services organisations, cloud providers are also looking to provision industry-specific security and regulatory measures like end-to-end data encryption – making it easier for financial services organisations to be compliant whilst migrating to cloud.
- Driving innovation: Cloud is the fundamental factor behind the ability of fintechs to innovate rapidly. Using cloud, financial services can leverage new technologies and tools like augmented reality (AR), virtual reality (VR), natural language processing (NLP), machine learning (ML) and the Internet of Things (IoT) to unlock new processes that improve customer interaction and experience with portable real-time services. Whilst fintechs have led the way in cloud-based innovation through open banking platforms, some of the leading banks are also adopting cloud to simplify their business processes, including KYC as a Service, to enhance customer experience.
- Enterprise synchronisation: Effective collaboration, both internally and with external partners, is crucial to success in the ever-expanding financial services ecosystem. Cloud allows businesses to integrate collaboration through shared tools and platforms. This is a critical ability as it leads to faster decisions and improved innovation cycles.
Legacy systems hold banks back from improving revenue generation and restrict their ability to build a responsive and resilient business. Cloud is a key factor in the success of challengers: traditional banks have no time to waste in migrating their core systems to cloud and building a secure future.
State of the Industry: optimism high in global financial services, although some key issues cause concern
- Exclusive research from Barclays Corporate Banking reveals the views of financial services leaders from across the globe on a range of key issues
- Recovery from Covid-19 is a key priority for FinTechs over the year ahead, however their number one aim shows the optimism in the sector: focussing on business growth
- Asia-Pacific may be the new focal point for expectations around Open Banking, with interest from Europe dropping year-on-year
- Firms confidence in their own cybersecurity fell 5% versus 2019, with less than half of respondents (42%) feeling satisfied with their own approach to the issue
Key players in the financial services industry are optimistic about the year ahead, according to a new ‘State of the Industry’ report from Barclays Corporate Banking, Alive to Opportunity.
Exclusive research from the bank also highlights regional differences in approaches to regulation, expectations for payment innovation and confidence in cybersecurity.
Optimism for 2021
As the official insights partner of last year’s Money 20/20 global conference series, Barclays conducted a survey of over 200 financial services leaders from across EMEA, the Americas and Asia-Pacific. From these senior executives, Barclays Corporate Banking found that optimism in the sector is high as it enters into 2021.
Whilst recovery from Covid-19 might be seen as a likely top priority for the coming year, it came in second place when respondents were asked what they would be focussing most on during 2021 – with 42% of leaders selecting it. Top spot instead went to ensuring business growth, with nearly three in five (57%) respondents picking it as their main area of concentration.
Commenting on this trend, Phil Bowkley, Global Head of Financial Institutions Group, Barclays Corporate Banking, said:
“Given that 2020 was such a tumultuous year, it is encouraging to hear FinTech businesses are confident and focused on future growth. Many firms have grasped the upheaval of the global pandemic as an opportunity. Covid-19 has driven a huge surge in ecommerce and cross-border business. This has significantly increased flows across FinTech payment providers, which have worked hard to enable cross-border trade, payments and ecommerce. At the same time, the industry has been collaborating with banks to ensure much-needed financial support from government flows to the real economy.”
Regions back themselves on innovation
In a continuation of a trend seen in 2019, respondents often rated their own region as the most likely source of future innovation. This ‘home’ bias was particularly strong in Asia-Pacific, where China, India, Japan and Southeast Asia together claimed over 83% of regional votes when considering the key sources of innovation over the next five years.
However, China’s reign as the most likely site of financial services innovation did not continue from 2019, with Barclays’ most recent survey showing that nearly one in four (24%) key industry leaders now view the United States as the most probable location for the rise of payment innovation over the next five years.
A shift eastwards for Open Banking?
Barclays’ research also suggests that Asia-Pacific may be the new focal point for expectations around Open Banking, with interest from Europe dropping year-on-year.
In 2019’s report, the impact of this key regulation was anticipated to be strongest in Europe – however, this time round just 38% of EMEA leaders now expect Open Banking to have a big impact on their business. By contrast, the majority (59%) of senior respondents from Asia-Pacific feel that the regulation will be key for their companies as we move into the remainder of 2021.
Security and resilience in a post-Covid world…
Firms’ confidence in their own cybersecurity dropped by 5% versus 2019, with less than half of respondents (42%) feeling satisfied with their business’ approach to the issue. Businesses in EMEA feel least confident about their security provisions, with one in three (33%) indicating that their own cyber security needs further investment.
The importance of resilience to customers was also a theme that many felt would rise in significance in 2020, given the recent growth in remote working as a response to Covid-19 – however just 5% of respondents viewed this issue as important when considering customer loyalty.
Steve Lappin, Managing Director, Barclaycard Business, said: “From remote working to e-commerce, coronavirus has meant that digital channels play a much greater role in working life. While this has undoubtedly presented new opportunities, it has also put additional pressure on infrastructure and heightened potential vulnerability to attacks. Therefore, it’s not surprising that confidence in cybersecurity has dropped, with many firms feeling that their rapid adoption of these new channels has left governance and control lagging behind. It’s critical that businesses remain vigilant – security may not be a key driver of customer loyalty, but cybersecurity issues are definitely a driver of disloyalty.”
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