Changing consumer demands are shaking up the financial services market and will force banks to change their business models
By Mohit Joshi, President and Head of FSBI, Infosys
Top CEOs of Global Banks have been openly suggesting that they need to think and act less like a traditional bank and much more like a technology company, rapidly innovating new financial products and services and delivering these seamlessly across devices to new-age digital consumers. Ralph Hamers — CEO of the Dutch bank ING — speaking in New York last year, said it well – “INGis moving beyond just being a bank. It isnow a technology company with a banking licence”.However, ING isn’t the only bank thinking along these lines. In March 2018, JPMorgan Chase announced that it was in talks with Amazon to offer digital-only current accounts.
The market’s rapid move to an open-banking model is often presented as being a case of banks vs. fintechs. This is only partly true. Many established banks are already a long way down the road to digital transformation. The real dichotomy is between those financial-service players which are preparing for digital transformation and those which are still sitting on the fence.
Nor, in this scenario, is digital transformation an abstract phenomenon. It is driven by the changing preferences of increasingly connected consumers who want their bank to be as flexible, modular and accessible as all of the other digital services they use.
Millennialsare the first generation to grow up connected. The oldest millennial hit adolescence as the Internet was taking off in earnest. The youngest has probably never lived in a home that wasn’t equipped with broadband and Wi-Fi.
And that matters. Because the priorities and tastes of ‘digital native’ consumers are reshaping the market for financial services. In a recent survey, the majority of millennials used online and mobile banking; 58% said they thought it was reasonable to ask friends to repay small debts using peer-to-peer money transfer services (used by over 60% of millennials), rather than in cash; and over half used third-party money transfer services to pay their bills.
When technology meets consumer demands
In March 2018, the UK challenger bank Monzo had half a million current accounts, just half a year after it began offering current accounts to its customers. At the time of going to press, it looks poised to raise over $150 million in funding. And while it’s the biggest digital-only challenger bank, Monzo is not the only one. Tandem has over 21,000 accounts and Atom around 17,000.
Nor is it hard to see why customers are increasingly flocking to these digital-only challengers. Atom Bank allows customers to take out a mortgage using a mobile app. The Monzo app allows customers to view the last fifty months of transactions from their phone, and to freeze and unfreeze their account if they can’t find their mobile. Starling Bank even became the first UK bank to launch its own APIs, allowing developers to create Starling-compatible apps and offer value-add services to its customers.
These challenger banks are responding to clear signals from the market. According to a 2018 study by Oracle, most consumers in the 20-52 age bracket now prefer to open a bank account digitally and 69% of all consumers want their entire financial portfolio to be digitally accessible. Customers, particularly younger customers, want finance to work in the same way other digital services they subscribe to. It should be on-demand — available round the clock with no waiting for transactions to be completed end of day or waiting for a batch cycle to run. It should be easy to use and accessible from any device.
Over the last five years, technology has shaken the financial world to its foundations. With better systems, we can now process individual payments instantly rather than in batches overnight. This has hugely accelerated the payments market. The fintech sector has capitalised on technological advances that allow it to cut operating costs and offer better tailored products based on a more detailed and precise evaluation of risk.
Now that the Revised Payment Service Directive (PSD2) has come into force, notwithstanding a few remaining niggles about the Regulatory Technical Standards, Europe (including the UK) is well on the way to developing a truly open-banking environment.
This promises, once other banks get around to following Starling’s lead, to shake things up even more. With access to customer accounts and data, with proper customer consent (see boxout), financial-services companies and fintechs in particular will be able to offer customers better deals than ever before, potentially undercutting both the banks’ prices and their previously closed business models.
|India, interestingly, is preparing to completely reverse the data consent equation by embracing the Data Empowerment & Protection Architecture (DEPA) and India Stack. Faced with the unique challenges of managing and maximising the value of data in the world’s biggest democracy, Indian developers have started work on the world’s largest set of open APIs and the India Stack.
A key element of India Stack is DEPA’s so-called consent layer. Rather than specifying how their data may be used by each provider, users configure their data sharing settings once. All the companies using the India Stack then know how they may use each piece of that customer data. This gives the customers peace of mind and control on their data by switching from permission driven data protection to consent driven data privilege offered to businesses.
How are incumbent banks responding?
To find out what impact changing customer attitudes and demands are having on the financial services sector, and what banks are doing to adapt, technology services provider Infosys surveyed over 1,000 senior executives at international companies with revenues of more than $1billion.
In its research, Infosys was interested to see how the market — including both established and digital-only banks — was responding to the challenge posed by the shake-up caused by changing consumer expectations. Banks, we found, could broadly be divided into three categories:
- Visionaries: around 22% of respondents fell in into this category. They understand the potential of the digital revolution, can identify opportunities and change business models to seize those opportunities.
- Explorers: committed to enhancing the customer experience, this group identifies low-hanging fruit for digitisation and responds to specific customer demands but does not change business models. Explorers made up around 50% of respondents.
- Watchers: accounting for 22% of respondents, watchers see digitisation as a way to improve the efficiency of existing operations. They are less likely to think of customer experience or digital-led differentiation.
Why have banks responded differently to the challenges of their changing environment? It wasn’t, we found, because executives didn’t understand the scale of the challenge with which they are faced. Over fifty percent of respondents in all three categories classed the level of digital disruption in the industry as either ‘high’ or ‘very high’.
Interestingly, most visionaries (82%) and explorers (53%) said they planned to work with external partners, such as consultants and technology providers, to accelerate their digital transformation. Only 36% of watchers said the same. Similarly, 80% of visionaries said they would be working with external partners to break down barriers to modernising their business model. 66% of explorers were also open to working with transformation partners. But only 44% of watchers said the same.
This search for partners has led some banks to start acquiring promising fintechs. In April 2018, Goldman Sachs’ consumer banking division Marcus bought the finance-management app Clarity Money. In August of this year, Deutsche Bank took a minority stake in the payments fintech ModoPayment. Then in October, it was reported that Czech bank Moneta wasset to acquire the fintech Home Credit (HC) for €767 million.
But acquisition isn’t the only response to the rising challenge of fintech. Other banks are actively seeking partnerships with fintechs. Commerzbank, for instance, is working with start-up IDnow to provide intelligent customer authentication to its e-banking customers. In September this year, the National Bank of Canada even partnered with online lender Thinking Capital to help the national bank better serve small businesses.
This lack of openness begins to get to the crux of the difference between financial digital leaders and those who are struggling to adapt to a new reality. Visionaries had, in general, a broader and deeper view of what digital transformation meant and what it could achieve. They were significantly more likely than other categories to be engaging with emerging technologies such as Blockchain and artificial intelligence (AI). They were also more likely to rank digital-first qualities such as design-thinking capabilities, excellence in programme management and knowledge of emerging technologies (80% of visionaries said these were critical to digital transformation, compared to 60% of explorers and 80% of watchers).
What does this mean for the industry?
Traditional Banks and Financial Services companies in general need to evolve faster than before as the window of non-relevance is closing in, faster than ever before. As the Infosys survey discussed earlier suggests, the time to assume a Visionary position by moving up the digital value chain from Explorers or Watchers, is now.
Thankfully, the industry at large and the partner eco-system can help. With the right strategy, backed by good execution, Visionary banks can embrace a host of new-age capabilities that can help create a network effect of change, whether it be Accelerating their Cloud Journey, innovating new business models with Blockchain or enabling new Marketplaces with Open banking, Predicting Consumer behaviour through Insight & Analytics, offering secure banking by Assuring against Cyber threats, and underpinning all of this with best in class Customer Experience.
To start moving in this direction and creating that network effect, Banks should leverage Financial Technology Partners of scale who are also in the Visionary category with the depth and breadth of capabilities that extend across Strategy & Consulting, Design, IP/Platforms, Agile Learning, Proximity to skilled Talent and Automation/AI capabilities, all in equal measure.
To find out more about digital disruption in the finance industry, download the Infosys report “The New Champions of Digital Disruption: Incumbent Organizations” here
How open banking can drive innovation and growth in a post-COVID world
By Billel Ridelle, CEO at Sweep
Times are pretty tough for businesses right now. For SMEs in particular, a global financial and health crisis of the sort we’re currently witnessing represents a truly existential risk. Yet there is hope of a brighter future. Digital transformation is already helping organisations in countless sectors, with everything from building supply chain resilience to rolling out potentially life-saving contact-tracing schemes. Yet it’s not just delivering transformative benefits in grand projects like this.
Thanks to open banking rules, a new wave of fintech innovation is sweeping the globe, offering business leaders a new launchpad for success. Even something as simple as corporate expenses can be transformed by the power of open data — to help firms cut costs, reduce fraud risk and become more productive.
Opening up data to innovation
It’s easy to get bogged down in the technical details of open banking, and the slew of new acronyms it has ushered in: Third Party Providers (TPPs), Account Information Service Providers (AISPs), Payment Initiation Service Providers (PISPs), and Application Programming Interfaces (APIs). Yet at the heart of the open banking revolution is a simple concept: the idea that forcing banks to open up their customers’ financial data will create more competition, and fresh opportunities for market entrants to create innovative new services.
This was at the heart of the UK government’s world-leading strategy when it was introduced back in 2016. A revised EU payment services directive (PSD2) gave it legal teeth, mandating that all payment account providers in the region provide third-party access for customers that want it. The push is also about reducing banking fees and enhancing financial inclusion, of course, but it’s in competition and innovation that the benefits really shine for businesses.
Access to real-time financial data via open APIs has already resulted in a range of new services which are helping businesses ride out the current economic storm. Whether it’s capabilities that can help freelancers prove loss of income to receive targeted loans, or services designed to streamline business processes to reduce costs and fraud — examples of innovation are endless.
What’s more, it’s already global. Aside from the PSD2, open banking rules are taking shape in Australia, New Zealand, Japan, Singapore, Hong Kong, Mexico and elsewhere. According to frequently cited Gartner predictions, regulators in around half of the G20 countries will create an open banking API regime over the coming year.
In the UK alone this is set to create a £7.2 billion revenue opportunity by 2022, with 71% of SMBs and 64% of adults expected to adopt it by then, according to PwC.
Making expenses pay
Corporate expenses and travel management might not be an area one immediately associates with high levels of innovation. But here too, open banking is having a profound impact. By combining automation, in-app approvals, integration with corporate policy and secure open banking APIs, companies like Sweep are offering new ways to solve old problems.
Part of the legacy challenge relates to productivity. Managing corporate travel costs and expenses was cited last year as the biggest concern of the UK’s small and mid-sized firms. Separate research claimed that SMBs are estimated to lose over £8.7 billion annually due to the time it takes employees and managers to complete these menial tasks. By automatically integrating real-time corporate bank account information into an easy-to-use app, we can save up to 15 hours a month on data input and travel administration per employee. That’s all time they could be spending on growing the business.
Another key area of concern is fraud. According to some estimates, fraudulent expenses claims could be costing UK firms £1.9 billion each year. In the US, the figure could be approaching $3 billion annually. Whether it’s the result of submitting expense claims for personal purchases, claiming for additional mileage on work trips, or over-claiming for other items, it all adds up. What’s more, fraud tends to spike particularly during times of recession, when normally diligent employees look for ways to supplement their income.
In this use case too, there are benefits to be had from open banking-powered solutions. Traditional manual processes offer too many gaps that can be exploited by fraudsters. Submitting paper receipts to finance departments — which must then input the information into spreadsheets or accounting software — is slow, error-prone and lacks accountability. However, with modern digital systems, transactions are automatically fed through from bank account to expense management platform. Here they are seamlessly checked according to policy and automatically approved, rejected or flagged for further investigation.
The future’s open
Thanks to the power of open banking, innovative fintech use cases like this are transforming operational challenges into opportunities to cut costs and fraud risks, improve employee productivity and become more strategic. With real-time data fed through from corporate bank accounts, finance directors can better understand spending patterns, react with greater agility and gain the insight they need to run their businesses more efficiently.
So what of the future? The good news is that open banking is only just getting started. As more sophisticated machine learning algorithms are developed, it has the potential for even greater disruption by empowering SMEs with predictive analytics and forecasting tools, or more accurate fraud checks, for example. Those in Europe may benefit most as PSD2 allows businesses to use tools that work seamlessly and securely across markets, without requiring any duplication of work.
In fact, open banking is not just good for individual SMEs, it’s important for Europe as a whole if we are ever to nurture successful digital unicorns to compete with those coming out of the US and China.
Open banking been described in the past as a quiet revolution. With the right buy-in from business and the continued innovation of digital platforms, it may soon become a full-throated roar.
Banks take note: Customers want to pay with points
By Len Covello, Chief Technology Officer of Engage People
‘Pay with Points’ – that is, integrating the ability to pay with loyalty reward points directly into the online check-out process – is a trend that is growing exponentially with big-name brands like Amazon, PayPal and American Express leading the way.
The past few months have posed an unprecedented challenge in the loyalty space, especially with the pandemic’s impact on travel. The unforeseen impacts across the board have caused institutions with premier incentive credit cards to feel increased pressure to retain their loyalty members. As such, exploring innovative ways to create a personalized loyalty experience for customers is at the forefront now more than ever.
Offering the flexibility to pay with points is certainly one option that can help transform financial institutions’ (FIs) loyalty programs. With the evolution of consumer preferences – like relying on other forms of payment outside of credit and the move towards contactless payments – viewing points as currency naturally ties into the “new ways” in which American consumers bank, pay and shop.
Personalization is a win-win for banks and loyalty program members
As the world continues to evolve in light of the pandemic, consumer habits like mobile banking and shopping online for groceries are likely to carry over long-term. As a result, consumers will expect their loyalty programs to provide new incentives to fit their ever-changing needs. By offering loyalty program members the ability to pay with points for the items they want or need during the online check-out process, FIs are creating a more personalized shopping experience. This can help increase member retention, especially compared to dated loyalty programs that offer limited options for point redemption.
As we’ve learned with iPhones, tap to pay and other technologies that reduce friction, once consumers begin using a new and convenient digital service, there’s little desire to go back to the old way of doing things. By incorporating pay with points into loyalty programs sooner rather than later, FIs will be setting themselves apart in terms of meeting their member’s needs with modern payment offerings.
Outside of providing a personalized experience to loyalty program members, pay with points as a program perk also has specific benefits when it comes to a bank’s bottom line. Currently, there are billions of dollars in liabilities in the form of unused points sitting on banks balance sheets. This is in part due to loyalty program members inability to spend their points how they want. By allowing a more personal and flexible way to spend points, banks can reduce those liabilities while creating a more engaging experience for their members.
Meeting consumer demand is easier than you think
Incorporating the infrastructure to power new digital capabilities is more often than not a cause for concern: how expensive will it be? What does down time look like? How long will it take to get up and running?
Luckily for banks, the process is actually quite simple – and inexpensive. With a lightweight integration of a few APIs, banks can tap into a pool of retailers to make their merchandise available for purchase with points by loyalty program members in no time. And as the retail network expands, there’s no need for additional IT work to add new brands into the fold. Ultimately, API integrations upfront create a frictionless and scalable solution for FIs and a preferred shopping experience for members. And based on market feedback, the personalized experience that results from giving customers the option to spend points as easily as they would cash or card, far exceeds any initial inconveniences that may arise.
According to our recent Customer Loyalty Survey, 75% of customers are more likely to spend loyalty reward points to make a purchase over other payment methods. The findings also indicated that 72% of customers are actively engaged in loyalty programs because of the available redemption options.
Long-term loyalty is not just about acquisition or promotional material, but rather the experience of redemption and viewing loyalty points through a fresh lens. Customers today are well-versed in what’s available to them online. The more redemption options offered to the consumer, the more appealing the FI becomes.
Loyalty point redemption in action
In April of 2020, when the world was mostly in lockdown, we looked at how a select group of approximately 3,000 consumers spent their loyalty reward points, comparing April 2020 to April 2019. Key findings suggest that, if given the opportunity, consumers will spend their loyalty points to buy what they want or need based on their specific circumstances. For example:
- Significant increases in the purchase of outdoor items like BBQs and smokers (+3401%), fire pits and heaters (+2644%) and pool and patio accessories (+1297%) suggested people were making the most of the spaces around them.
- Consumers were focusing on their personal health and well-being with the increase in points spent on fitness accessories (+1664%), bike accessories (+1453%) and fitness trackers (+536%).
- Finally, the increase in purchases of hand-held power tools (+3076%), smart control lighting (+1750%), stick vacuums (+1096%) and specialty small appliances (+531%) suggests consumers took advantage of the opportunity to check projects off their at-home to-do lists.
We’re keeping a close eye on how loyalty point purchases evolve as more retailers and FIs get on board with viewing points as a true form of currency, especially in a post-pandemic world. Which items will rise to the top in the coming months and years as the payments ecosystem evolves? Will flight purchases or experience-based purchases regain popularity?
What’s next in the loyalty payments space?
As consumers continue to look for alternative payment methods, offering the flexibility to pay with points is the perfect opportunity for FIs looking to reinvent their loyalty programs. Engage People has always viewed loyalty points as a fiat currency, creating innovative technology that allows for easy integration that satisfies loyalty program members’ needs.
In the future, there’s a real opportunity to incorporate loyalty reward points into everyday life – extending beyond the online shopping experience. Imagine a world where you can pay for coffee, your bills, monthly subscription services like Netflix or make charitable donations with loyalty points just as you would with a credit card or cash. The future involves a mindset shift by consumers, financial institutions and the entire payments ecosystem, and that shift is viewing loyalty points as a true form of currency. Like reaching for cash, a debit or credit card, loyalty points can easily become a payment option of choice for consumers. FIs that are at the forefront of this trend now have the most to gain long term.
The Importance of Liquidity Solutions
By Justin Silsbury, Lead – Product Manager at Infosys Finacle
Economic uncertainty and business complexity have made a deep impact on corporate treasury management in recent years. With regulations getting tougher, funding becoming elusive, and profits shrinking fast, the way liquidity is managed is making a real difference to companies’ survival. As corporate treasurers around the world struggle with the challenges of liquidity management, they are turning to their banks for support; it is imperative that the industry respond with digital solutions that enable clients to manage money efficiently at low cost.
Why corporates need liquidity solutions
Corporate banking customers need a liquidity structure that maximises security, liquidity and yield. Even today, treasurers in multinational corporations lack visibility into their companies’ overall cash position across countries and currencies. Delivering returns on excess cash, although important, is not a priority for them, but making sure the money is safe and available when needed, is. Therefore, a liquidity solution should be able to consolidate a company’s cash position across all its accounts around the world, provide a unified view in real-time, as well as offer timely suggestions on maximising utilisation and yield. It should automate all these functions as far as possible to reduce both manual overheads and the risk of moving money manually on a daily basis.
Broadly, liquidity solutions are of three types – cash concentration solutions that automatically move money around the world; interest optimization solutions that reward customers based on their aggregated balances without the need to move any money; and investment sweeps that move all the consolidated funds to a money market fund or other short-term investment to earn extra returns.
And why banks should provide them
There are several reasons why banks should invest in a sound liquidity solution. The most important one is that without it, a bank can never become a customer’s principal financial institution. A large corporation will have many banking providers, each one trying to increase share of wallet; in this situation, a high involvement product such as a liquidity solution is particularly effective for building stickiness and strengthening a bank’s position vis-à-vis others. An illustration may be useful here: say a food retail chain banks with Santander in the U.K., and other banks across Europe. If the retailer chooses to consolidate its cash daily into its U.K. account using Santander’s liquidity management solution, where the excess cash can then be swept into an investment vehicle overnight, over time, Santander can cross-sell other products to the client to increase revenue and stickiness.
Technology does it
Corporate banking has historically lagged retail banking in technology adoption. It is high time that banks remedied this by digitizing their corporate solutions. Specifically, they can leverage a variety of digital technologies to provide clients instant access to liquidity, global visibility into the overall cash position, and efficient working capital management. With robotic process automation and machine learning, they can simplify and automate processes to cut cost and lead-time. Blockchain enables banks to offer fast, secure, cross-border transactions, while open APIs ease collaboration and co-innovation with Fintechs, customers and developers.
Banks need to deliver frictionless, personalized, “retail banking-like” experiences over customer-centric corporate banking channels. Instead of channel silos – one for liquidity, another for payments and so on – customers will see data from all their accounts in one place, from where they can manage liquidity, forecast cash flows, secure trade finance etc. On their part, banks can use 360-degree customer insight to issue not just timely alerts but also contextual recommendations. For instance, being able to alert a customer that a large payment is due the following week, but also suggesting the best options for arranging those funds.
Apart from improving the customer journey, a real move in corporate banking is towards cloud adoption. Many banks have started the cloud journey, but many still have some distance to cover before they are fully cloud-enabled; mainly, they are migrating monolithic, on-premise workloads to the cloud. Early adopters, such as JP Morgan Chase, HSBC and Citibank, are setting the pace by developing their own capabilities as well as procuring certain components from Fintech partners to plug into their overall solution.
One size doesn’t fit all
In the past, corporate banking solutions were largely meant for big companies, but today they are relevant to enterprises of all sizes. Internet and mobile have enabled even small local firms to scale far and wide, creating a need for solutions to manage their money across borders. Therefore, banks need to make sure their liquidity solution can accommodate the different needs of different clients. Only a flexible, componentised solution can do that.
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