Regulators Expect Banks to Bring Down Time Lag for Complex Reporting From 10 Days to Only One Day; More Than Six Out of 10 Banks Say Mobile Is Most Important Technology Trend
While technology is changing every aspect of banking operations, 77 percent of participants in a recent survey say the greatest impact will be on customer satisfaction and regulatory compliance. Some regulators, however, believe banks are moving too slowly. “The Benefits of Innovative Information Technology in the Banking Industry” was conducted by the Frankfurt School of Finance & Management, New York University’s Stern School of Business and Management, the University of Applied Sciences and Arts North-Western Switzerland, the Business Transformation Academy (Basel, Switzerland) and SAP SE (NYSE: SAP). The study uncovered various trends in banking, most notably a large disconnect between regulators’ expectations and the ability of banks to meet compliance and reporting requirements. However, many banks have plans to increase their budget for IT to invest in the necessary banking solutions to meet these changing requirements.
The study included extensive desk research, in-depth interviews with C-level representatives from banks and regulatory authorities and a quantitative survey. It also provided detailed insights into the technology areas considered as most important for the industry. More than six out of 10 participants (65 percent) said mobile is the most important trend for the future, followed by in-memory computing (48 percent) and cloud (47 percent).
Banks Address a New Era in Information Technology
A senior executive from a large U.S. bank who was interviewed for the report noted that 25 percent of mobile phone users access financial services content on their phone, yielding a significant market opportunity for banks in mobile banking application development.
Mobile banking is following a similar usage curve to online banking, with China, India and the United Arab Emirates leading in adoption. In emerging markets, mobile devices provide access to financial services to previously under-banked populations. As one study participant noted, “The Hispanic market have higher penetration of mobile devices relative to PCs, so that the mobile channel becomes critical to reaching and servicing this important and growing part of the population.”
Respondents also recognize the opportunity in Big Data and analytics in banking and placed a much greater emphasis on the overall comprehensiveness of information. The top two priorities in platform features noted included completeness of aggregation (84 percent) and the availability of real-time information (62 percent).
Throughout the study, banks expressed six key expectations for Big Data in process innovation. Big Data solutions are expected to:
- enable banks to tailor their offerings to the needs of individual customers
- improve the banks’ trading strategies
- provide better insights into market dynamics and improve market research
- improve banks’ ability to react to internal and external issues
- speed up high-quality decision-making processes
- identify possibilities for revenue enhancement and cost reduction
According to the study, in order to implement customer-centric banking offerings to deliver better services, institutions will need to enhance their back office support systems to ensure customers experience the same quality standard through traditional or new communication channels. By synchronizing traditional and new banking channels, successful banks can retrieve all existing relevant information at every customer touch point. Banks will be forced to deliver better online services, including offering online chat in place of telephone services. They will also need to address data security and privacy issues in a competent and diligent manner to maintain trust amongst their customer base.
Regulators Define Requirements and Expectations
Throughout the study, a clear consensus prevailed that regulatory requirements are the primary driver of business model changes. Regulators agree that required levels of risk reporting in banks cannot be met given existing IT infrastructure. As one regulator noted, “IT budgets have to significantly increase to meet the current and future requirements.” Indeed, 61 percent of survey participants expect an increase in their IT budget of at least 25 percent in the next three years.
Regulators ranked new provisions that are regarded as the main cost drivers for the future IT infrastructure for banks. According to the study, the top cost driver is the Basel Committee’s guideline on principles for effective risk data aggregation and risk reporting (BCBS 239), followed by Basel III, Dodd-Frank, the recommendations set forth in the Liikanen Report, Markets in Financial Instruments Directive and Markets in Financial Investments Regulation, European Market Infrastructure Regulation and multi-curve valuations.
Regulators defined which features will characterize a state-of-the-art IT infrastructure from a regulatory standpoint. The ability to conduct automated ad hoc stress testing is key, as well as the ability to produce timely, complete, granular balance sheet data and counterparty data for the entire bank.
In order to achieve a sustainable infrastructure, regulatory authorities and auditors recommend banks make the following improvements:
- Implementation of a central data warehouse
- Improvement of data and process governance
- Introduction of more automated processes
- Flexible and customized modules for automatic analysis, stress scenario generation and ad hoc stress testing
- Enhanced capabilities and data analytics for product valuation and bank enterprise risk management calculations
- Enhanced capabilities for legal entity- and jurisdiction-specific analytics
As banks adopt advanced technologies to decrease the time lag on reporting, regulators have laid out their expectations. For reporting on regulatory and economic capital on a group level, institutions should aim for final results within 10 business days from the effective date. Interestingly, there is a common expectation that in the near future the time frame deemed acceptable for delivery of information will not exceed one day, granting near real-time visibility.
Banks are largely in agreement that their current systems need updating, according to the study. Respondents to the online survey expressed little confidence in the ability of their current systems and processes to simulate the potential effects of business decisions on various figures, including economic capital and regulatory capital, in real time.
Despite increased regulatory pressures for banks to update their IT infrastructure, banks remain largely focused on short-term success. As one auditor voiced, “To date, many banks tend to implement work-around and small scale solutions, but this will create significant issues in meeting potential future requirements.”
The study was executed through three pillars, including extensive desk research, followed by 20 in-depth interviews of C-level managers at various global banks, regulators, auditors and consultancies from the U.S., Europe and Africa, and an online survey of more than 1,500 members of the alumni network of Frankfurt School of Finance & Management. The interviewees were restricted to the top to upper management of the respective institution or the specialized division, such as risk management, front office or information technology.
How banks can take on Google in the race for AI talent
By Nicola Sullivan, solutions director at candidate engagement tech firm Meet & Engage
The events of 2020 have made the battle for AI talent more ferocious than ever. In a volatile landscape where innovation is key, multinational firms are rolling up their sleeves for the inevitable scrum ahead.
For incumbent banks, the stakes are intimidatingly high. In one corner stand the fintech startups: the likes of Revolut and Monzo, who are snapping up AI-literate graduates while laying down pressure for capacity in exactly that area.
In the other corner, we find the Silicon Valley contenders of Amazon, Facebook and Google, who have phenomenal pay packages – not to mention glamour and visibility – on their side. And technologists with a finance background loom firmly in their crosshairs (Facebook employs hundreds of ex-banking recruits).
This unsettling picture is intensified by a chronic tech shortage: in a recent study by AI firm Peltarion, 83 percent of AI decision-makers agreed that a deficit of deep learning skills was seriously hampering their competitiveness. But, with the global impact of AI on financial services companies set to hit $140 billion in productivity gains and cost savings by 2025, banks need to find a way to break ahead and secure the AI talent they need. Here’s how:
Fish from a wider talent pool
We tend to think of AI in relation to a very niche set of qualifications. Yet in reality, it’s a fast-moving sphere that also requires a host of soft transferable skills such as problem-solving, agility, great communication and a sound analytical mind. In short, it’s less about what a candidate knows/does, and more to do with what they could know or do.
It’s worth thinking about whether you are being open-minded enough in your interpretation of tech talent. Do the AI roles you’re looking to fill need specific skills and criteria, or are they better suited to people who are inherently curious, intelligent and quick to learn?
Depending on the answer, you may want to expand your search from the bright young things of MIT or Berkeley to other related careers or older candidates with transferable skills. You may even want to look internally for the next generation of tech talent.
For example, if a bank’s customer-facing roles are declining but AI supply is not keeping up with demand, maybe this is a problem that could fix itself. The bank in question could run a two-week internal virtual AI internship to test interest, with the aim of rechanneling internal talent and avoiding redundancies. If AI is as critical as all forecasts suggest to the future of finance, investing in a more comprehensive approach like this may make a lot of sense.
Then there’s also the question of underrepresented groups. The proportion of black or latino people at major tech companies remains depressingly low, while women make up only a quarter of computing roles.
As well as driving equality, this issue of diversity is also a market gap that could be used for competitive advantage by banks. But doing so requires a deep-seated strategy that addresses the root reasons why candidates from these groups are turning away from tech. Issues such as lack of career development and accessible education need to be solved at ground level from the inside-out; an effort that begins before, or in tandem with, recruitment.
Make your recruitment process personal and transparent
When you’re fighting for top AI candidates who have the world at their fingertips, it’s not enough to bundle them through a generic Applicant Tracking System. You have to actively woo them, and get them on-side with your vision and community. This is especially important for millennials and Gen Z recruits, who are more purpose-driven than their predecessors.
Live online chat sessions hosted by high-profile speakers across the business is one tactic our banking clients have seen great success with here. For example, a shortlisted group of technologists get to meet with a bank’s CTO or Chief Human Resources Officer via a group chat (which they can join anonymously if they want to), to ask questions and find out more about a company’s technology roadmap and cultural ethos.
This is a rare opportunity to give candidates real takeaway value; even if they’re not thinking about leaving their current job, few will turn down the chance of time with the person who runs cybersecurity at a major bank. And this person will invariably be able to communicate a much better sense of culture than a third-party recruiter can.
Visibility is also important here: if you want to attract more BAME or female candidates, you need to have lead BAME or female technicians as a vocal part of the recruitment process, showing what success in your company looks like. If you don’t have people to fulfil these roles, you need to go back and address that rather than making empty statements.
Opening the doors to your company in this way is a winning strategy for tech candidates: it’s a “wrapper” to put around them and make them feel wanted, welcome and motivated – even when a recruitment process lasts a little longer than you’d like.
Talk like yourself but walk like a tech expert
Part of the openness needed to recruit key tech talent is about being authentic, too. There’s a tendency among some finance incumbents to “get down with the kids” and appear more like their disruptive competitors than they truly are. If you are a long-established brand in the banking world, with a good track record of developing careers, that alone is enough to attract AI technologists – you have a lot to offer, and you don’t need to put on a guise.
Equally, if you do have work to do in being more accessible to potential candidates, focus on real progression rather than image. This may mean putting through measures to build awareness and role modelling around recruitment diversity, or enhancing employee wellbeing.
With mental health issues on the rise in the workplace, a co-managed wellness programme of fitness and community events can make the difference between which way a candidate sways in a roomful of enticing options. This is especially true since banks – for all their boardrooms traditions – have a reputation amid technologists for a better, less brutal work-life balance than Silicon Valley.
Lastly, banks need to walk the walk when it comes to tech-enabled recruitment. However hard you try to make it personal, most candidate enrollments will involve a degree of automation at some stage – and it’s important to make that process as quick and slick as possible. For a candidate with consumer-grade tech experience, first impressions count: they want to know that this is a place that will recognise and nurture their skill set. So instead of a long, clunky application process, maybe consider a virtual assessment centre or a sophisticated chat bot, which can capture essential information in a fast, engaging way.
Recruiting the world’s top tech talent isn’t a question of magic or even necessarily a huge pay cheque. Instead you need to weave together these “micro-moments” that signal your bank’s character, integrity and technical ambition. Do this, and you stand a good chance of persuading leading AI candidates to skip the queue and come directly to you.
1.4 million customers to stop using bank branches due to COVID
8.4 million customers had already stopped visiting branches in person before lockdown
However, three quarters (74%) of customers will return to banking in branch after the pandemic
Of those who plan to return to branches, over two thirds (69%) will only return when they absolutely need to
A further 1.6 million (3%) said they don’t have an account with a high-street bank, meaning a total of 3 million Brits don’t have a need for physical branches.
This number may rise, as 8.4 (16%) million Brits had stopped using their bank’s branches before lockdown and are not sure if they will ever return.
However, not everyone has gone completely digital as 3 in 10 British banking customers (29%) have already returned to using their bank’s branches, with an additional 44% of customers planning to return soon.
Of these people who plan to return in the near future, over two thirds (69%) will only return when they absolutely need to and their problem cannot be solved online or over the phone.
While a third of those consumers (31%) are waiting for a COVID vaccine or treatment before they go back to their local branch.
This means that eventually, three-quarters of Brits (74%) will return to banking in-branch the way they did before lockdown.
However, they may face a longer journey than they previously did to find a branch. Data from ONS shows 25% of branches have closed in the UK since 2012 and this decline in branches is likely to continue if people follow through with their plans to avoid branches.
Customers in Northern Ireland will go back to banking in branches more so than those in any other region, with 85% of customers here saying they have already returned or plan to do so soon.
Interestingly, a quarter of customers (25%) in the East Midlands had already stopped banking in branches, making this the area with the most customers who no longer use branches.
Those in the North East are set to follow the same path as residents in the East Midlands, with 5% of customers in the North East saying they will stop using branches in the future.
To see the research in full visit: https://www.finder.com/uk/banking-branch-usage
Commenting on the findings, Jon Ostler, CEO at finder.com said:
“Lockdown has quickly changed many aspects of our lives and our banking behaviour was no different. Not being able to visit bank branches in person meant many consumers had no option but to start using online banking and bank’s mobile apps. These are generally easy to use and intuitive so you would expect some of these new converts to stay away from branches going forward.
“While the digital-only banks excel at their app offering, previous research we carried out found that sentiment towards these banks fell almost three times as much during lockdown than towards high street banks. This could be a sign that the quality of apps and online banking from high street banks is catching up.”
Finder commissioned Onepoll on 26 to 28 August 2020 to carry out a nationally representative survey of adults aged 18+. A total of 2,000 people were questioned throughout Great Britain, with representative quotas for gender, age and region.
Liquid Assets of a Bank
Liquid assets are tangible and movable assets which are easily convertible into cash in a crisis situation. Liquid assets are used by lenders to fund their loans. Examples of liquid assets include government bonds and central bank reserves.
To stay alive, financial institutions must have enough liquid funds to pay withdrawals and other immediate financial obligations by depositing holders of checks. But the amount of money they have in liquid form is not enough to cover these short-term obligations and their financial problems will become worse. Liquid assets of the financial institutions should be regularly replenished to make the banking system financially stable. In order to maintain a sufficient amount of money in the economy, the Federal Reserve System will always be in need of additional assets.
There are several ways in which the financial institutions can replenish their liquid assets. One of the ways is by borrowing funds from banks and credit unions. The other way is by issuing debt securities to provide liquidity for the monetary system.
Borrowing from banks and credit unions: Banks can borrow funds from other financial institutions in order to meet their liquidity requirements. However, the rate at which banks borrow funds from other financial institutions is usually very high. This high rate can only be beneficial for the financial institutions because the borrowed funds are used to purchase commercial mortgage-backed securities (CMBS). In return for providing CMBS, the banks can receive interest payments on the principal balance of the loans they have made to other financial institutions.
Issuing debt securities: The assets that a commercial bank or credit union secures as collateral for the loan from other financial institutions can also be used to liquidate its existing liquid assets. Usually, the assets used as collateral to secure loaned funds are Treasury securities, corporate bonds and treasury bills. However, as the value of these securities decreases, the banks’ ability to recover them through the redemption of their treasury bills and the federal income tax on the principal balance of these securities can increase the amount of funds they will have to pay out on short-term debts.
Securing debt securities: As mentioned above, the assets which commercial banks and credit unions can use to liquidate their liquid and non-liquid assets can also be used to secure loans made by them to other financial institutions. But it is important for the banks and credit unions to ensure that the funds they use to secure these loans are not used to purchase more securities. In order to obtain maximum gains from the sale of their assets, they should use a method to redeem the securities before the maturity date of the loan.
In addition to using these methods to secure other financial institutions’ loans, banks and credit unions can also sell their assets in order to raise the funds they need for making short-term payments. For example, if a commercial bank has a large inventory of commercial mortgage-backed securities, it may want to sell some of its assets in order to raise the capital required to make a single payment. If the purchase price of these assets is less than the total loan balance, the bank can sell its securities and cash in order to raise the necessary capital.
Although liquid and non-liquid assets can help the banking system to make its operations more stable, the loss of one type of asset can severely affect the financial condition of a bank or credit union. Therefore, even if there are many types of assets, it is important for the banks and credit unions to maintain a balanced level of liquidity in order to make sure that the economic system is not adversely affected by any one type of loss.
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