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Connected Banking: The Industry’s Spoon Full of Sugar

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Connected Banking: The Industry's Spoon Full of Sugar

Jerry Silva, Global Banking Research Director, IDC Financial Insights

In the 1964 film classic Mary Poppins, the title character convinces wards Jane and Michael that cleaning their rooms can be fun, even if the task seems overwhelming.

As Mary Poppins sings, magical things happen; beds make themselves, clothes fold themselves, and toys move into their proper places.  The song becomes a musical motif for Mary Poppins as she approaches every challenge with the same attitude.  It’s a great scene that encourages the viewer to meet every challenge with the idea that even daunting tasks can be made easy with the right attitude.

Jerry Silva

Jerry Silva

Much like the metaphorical spoonful of sugar can “help the medicine go down,” some banks are approaching the perceived threat of open banking with a strategy we’ve started calling “Connected Banking” that is much more palatable.The basic tenet of this strategy is that the institution wants to proactively create a business architecture that is nimble, flexible, and open to the creation of new models of value yet allows the bank to retain control and minimizes the risks normally associated with open banking.

For context, “open banking” is a somewhat ambiguous term that refers to the presumed logical – and forced -evolution of frictionless interoperability between banks and non-banks.  Open banking was boosted by a European Union regulation called the Payments Services Directive (PSD) and more specifically, a 2015 revision to that directive, PSD2.  In a nutshell, the revised directive requires banks in the European Union to allow third-party payments processors to access customer information at the bank.  Presumably, this directive was created to create a safer and more innovative payments market in the EU, one based on improving the convenience of mobility and e-commerce.

However, the notion of allowing external organizations – particularly small payments firms that don’t have the same established history as the major players – to get access to customer information held in the institution’s data center is, at best, a large security, privacy and risk management challenge.  In light of another prevailing regulation in the EU, the General Data Protection Regulation (GDPR), which places the responsibility of safeguarding financial data for all EU citizens on the financial institution, the PSD2 directive seems at odds with the need to protect data privacy at the same time.

The threat associated with open banking comes from the not unreasonable belief that such open access will eventually apply to areas outside of payments.   For instance, could a bank be forced to provide your history of paycheck deposits to a ride-sharing company?   Could your favorite coffee house demand to get detailed shopping information from the bank’s store of payments data to find out where you buy your beans?   These are not quite Orwellian outcomes, to be sure, but for an industry ostensibly built on trust to be forced to loosen its hold on protecting data, the future of open banking isn’t welcomed without some trepidation.

So let’s flip the situation on its head.  For the purposes of modernizing its own infrastructure, many banks are transforming their technology architectures to be much more open internally.   Moving from decades-old, monolithic applications that run the business to a much more disaggregated and fluid collection of business components using open application programming interfaces (APIs) and microservices is a great way to improve the speed of development and innovation for the bank, increasing its ability to respond to market changes.   New products and services could, theoretically, be assembled as needed, instead of creating from scratch through software development.The new architecture becomes a resource for internal product developers and the lines of business to better connect products within the institution.  In the longer term, the institution can improve efficiency even further by making decisions to move non-differentiating workloads to cloud providers at a lower cost or with better service characteristics.

In turn, the ability to create a connected environment internally is very easily used to connect to external partners as well by using different API libraries with their own levels of security and governance.  The key here is that the bank is in control of with whom they choose to partner.  There are instances of partnerships between banks and non-banking organizations, for example, that have been done under legacy architectures using point-to-point integration, but in the Connected environment, institutions can practice Connected Sourcing, that is, the ability to choose partners as market demands change without onerous one-to-one software development.  What’s more, the bank has proactively created this open environment, and placed safeguarding measure in place, before it is forced to do so by regulation.  This is the essence of Connected Banking.  (Figure 1 is a high-level view of the Connected Banking ecosystem)

Creating this internal architecture serves the short-term needs of the bank to be more agile in addressing the customer’s needs, while at the same time making the institution’s operation more efficient.  And by creating a managed environment from which to connect to external ecosystems, the bank can offer unprecedented value propositions that are better aligned to the way their customers live.  Imagine being able to search for a new home on your bank’s website, within a desired neighborhood, with all the relevant information about taxes, schools, cost of typical home services like lawn maintenance, etc.  Then combine that experience with a personal dashboard on the same page based on the information your bank has about your specific financial state; savings accounts, current credit worthiness, prevailing market interest rates, and, ultimately, highlighting which of those homes on the map fall within your financial means.  Or allowing you to click on your perfect home, even if it’s slightly out of reach today, and then advising you on the steps needed to reach that potential purchase.

It sounds like magic.  But the start of this kind of ability is already surfacing at some banks today.   And just like in the movie, banks will surely find a number of unanticipated and sometimes magical benefits by embracing Connected Banking and using it as the strategic refrain to get the inevitable task of open banking done, under control, while maintaining their charter of trust.

About Jerry Silva:

Jerry Silva is research director for IDC Financial Insights responsible for the global retail banking practice.   Mr. Silva’s research focuses on technology trends and customer expectations and behaviors in retail banking worldwide.   Mr. Silva draws upon over 25 years of experience in the financial services industry to cover a variety of topics, from the back office, to customer channels, to governance in the technology shops at financial institutions.  His work for both institutions and vendors gives Mr. Silva a broad perspective in technology strategies.

Follow Jerry on Twitter @JerrySilva_PGS and read his blog posts in the IDC Financial Insights Community.

Figure 1.  Connected Banking  (if desired)

IDC Financial Insights

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UK might need negative rates if recovery disappoints – BoE’s Vlieghe

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UK might need negative rates if recovery disappoints - BoE's Vlieghe 1

By David Milliken and William Schomberg

LONDON (Reuters) – The Bank of England might need to cut interest rates below zero later this year or in 2022 if a recovery in the economy disappoints, especially if there is persistent unemployment, policymaker Gertjan Vlieghe said on Friday.

Vlieghe said he thought the likeliest scenario was that the economy would recover strongly as forecast by the central bank earlier this month, meaning a further loosening of monetary policy would not be needed.

Data published on Friday suggested the economy had stabilised after a new COVID-19 lockdown hit retailers last month, while businesses and consumers are hopeful a fast vaccination campaign will spur a recovery.

Vlieghe said in a speech published by the BoE that there was a risk of lasting job market weakness hurting wages and prices.

“In such a scenario, I judge more monetary stimulus would be appropriate, and I would favour a negative Bank Rate as the tool to implement the stimulus,” he said.

“The time to implement it would be whenever the data, or the balance of risks around it, suggest that the recovery is falling short of fully eliminating economic slack, which might be later this year or into next year,” he added.

Vlieghe’s comments are similar to those of fellow policymaker Michael Saunders, who said on Thursday negative rates could be the BoE’s best tool in future.

Earlier this month the BoE gave British financial institutions six months to get ready for the possible introduction of negative interest rates, though it stressed that no decision had been taken on whether to implement them.

Investors saw the move as reducing the likelihood of the BoE following other central banks and adopting negative rates.

Some senior BoE policymakers, such as Deputy Governor Dave Ramsden, believe that adding to the central bank’s 875 billion pounds ($1.22 trillion) of government bond purchases remains the best way of boosting the economy if needed.

Vlieghe underscored the scale of the hit to Britain’s economy and said it was clear the country was not experiencing a V-shaped recovery, adding it was more like “something between a swoosh-shaped recovery and a W-shaped recovery.”

“I want to emphasise how far we still have to travel in this recovery,” he said, adding that it was “highly uncertain” how much of the pent-up savings amassed by households during the lockdowns would be spent.

By contrast, last week the BoE’s chief economist, Andy Haldane, likened the economy to a “coiled spring.”

Vlieghe also warned against raising interest rates if the economy appeared to be outperforming expectations.

“It is perfectly possible that we have a short period of pent up demand, after which demand eases back again,” he said.

Higher interest rates were unlikely to be appropriate until 2023 or 2024, he said.

($1 = 0.7146 pounds)

(Reporting by David Milliken; Editing by William Schomberg)

 

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UK economy shows signs of stabilisation after new lockdown hit

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UK economy shows signs of stabilisation after new lockdown hit 2

By William Schomberg and David Milliken

LONDON (Reuters) – Britain’s economy has stabilised after a new COVID-19 lockdown last month hit retailers, and business and consumers are hopeful the vaccination campaign will spur a recovery, data showed on Friday.

The IHS Markit/CIPS flash composite Purchasing Managers’ Index, a survey of businesses, suggested the economy was barely shrinking in the first half of February as companies adjusted to the latest restrictions.

A separate survey of households showed consumers at their most confident since the pandemic began.

Britain’s economy had its biggest slump in 300 years in 2020, when it contracted by 10%, and will shrink by 4% in the first three months of 2021, the Bank of England predicts.

The central bank expects a strong subsequent recovery because of the COVID-19 vaccination programme – though policymaker Gertjan Vlieghe said in a speech on Friday that the BoE could need to cut interest rates below zero later this year if unemployment stayed high.

Prime Minister Boris Johnson is due on Monday to announce the next steps in England’s lockdown but has said any easing of restrictions will be gradual.

Official data for January underscored the impact of the latest lockdown on retailers.

Retail sales volumes slumped by 8.2% from December, a much bigger fall than the 2.5% decrease forecast in a Reuters poll of economists, and the second largest on record.

“The only good thing about the current lockdown is that it’s no way near as bad for the economy as the first one,” Paul Dales, an economist at Capital Economics, said.

The smaller fall in retail sales than last April’s 18% plunge reflected growth in online shopping.

BORROWING SURGE SLOWED IN JANUARY

There was some better news for finance minister Rishi Sunak as he prepares to announce Britain’s next annual budget on March 3.

Though public sector borrowing of 8.8 billion pounds ($12.3 billion) was the first January deficit in a decade, it was much less than the 24.5 billion pounds forecast in a Reuters poll.

That took borrowing since the start of the financial year in April to 270.6 billion pounds, reflecting a surge in spending and tax cuts ordered by Sunak.

The figure does not count losses on government-backed loans which could add 30 billion pounds to the shortfall this year, but the deficit is likely to be smaller than official forecasts, the Institute for Fiscal Studies think tank said.

Sunak is expected to extend a costly wage subsidy programme, at least for the hardest-hit sectors, but he said the time for a reckoning would come.

“It’s right that once our economy begins to recover, we should look to return the public finances to a more sustainable footing and I’ll always be honest with the British people about how we will do this,” he said.

Some economists expect higher taxes sooner rather than later.

“Big tax rises eventually will have to be announced, with 2022 likely to be the worst year, so that they will be far from voters’ minds by the time of the next general election in May 2024,” Samuel Tombs, at Pantheon Macroeconomics, said.

Public debt rose to 2.115 trillion pounds, or 97.9% of gross domestic product – a percentage not seen since the early 1960s.

The PMI survey and a separate measure of manufacturing from the Confederation of British Industry, showing factory orders suffering the smallest hit in a year, gave Sunak some cause for optimism.

IHS Markit’s chief business economist, Chris Williamson, said the improvement in business expectations suggested the economy was “poised for recovery.”

However the PMI survey showed factory output in February grew at its slowest rate in nine months. Many firms reported extra costs and disruption to supply chains from new post-Brexit barriers to trade with the European Union since Jan. 1.

Vlieghe warned against over-interpreting any early signs of growth. “It is perfectly possible that we have a short period of pent up demand, after which demand eases back again,” he said.

“We are experiencing something between a swoosh-shaped recovery and a W-shaped recovery. We are clearly not experiencing a V-shaped recovery.”

($1 = 0.7160 pounds)

(Editing by Angus MacSwan and Timothy Heritage)

 

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Oil extends losses as Texas prepares to ramp up output

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Oil extends losses as Texas prepares to ramp up output 3

By Devika Krishna Kumar

NEW YORK (Reuters) – Oil prices fell for a second day on Friday, retreating further from recent highs as Texas energy companies began preparations to restart oil and gas fields shuttered by freezing weather.

Brent crude futures were down 33 cents, or 0.5%, at $63.60 a barrel by 11:06 a.m. (1606 GMT) U.S. West Texas Intermediate (WTI) crude futures fell 60 cents, or 1%, to $59.92.

This week, both benchmarks had climbed to the highest in more than a year.

“Price pullback thus far appears corrective and is slight within the context of this month’s major upside price acceleration,” said Jim Ritterbusch, president of Ritterbusch and Associates.

Unusually cold weather in Texas and the Plains states curtailed up to 4 million barrels per day (bpd) of crude production and 21 billion cubic feet of natural gas, analysts estimated.

Texas refiners halted about a fifth of the nation’s oil processing amid power outages and severe cold.

Companies were expected to prepare for production restarts on Friday as electric power and water services slowly resume, sources said.

“While much of the selling relates to a gradual resumption of power in the Gulf coast region ahead of a significant temperature warmup, the magnitude of this week’s loss of supply may require further discounting given much uncertainty regarding the extent and possible duration of lost output,” Ritterbusch said.

Oil fell despite a surprise drop in U.S. crude stockpiles in the week to Feb. 12, before the big freeze. Inventories fell by 7.3 million barrels to 461.8 million barrels, their lowest since March, the Energy Information Administration reported on Thursday. [EIA/S]

The United States on Thursday said it was ready to talk to Iran about returning to a 2015 agreement that aimed to prevent Tehran from acquiring nuclear weapons. Still, analysts did not expect near-term reversal of sanctions on Iran that were imposed by the previous U.S. administration.

“This breakthrough increases the probability that we may see Iran returning to the oil market soon, although there is much to be discussed and a new deal will not be a carbon-copy of the 2015 nuclear deal,” said StoneX analyst Kevin Solomon.

(Additional reporting by Ahmad Ghaddar in London and Roslan Khasawneh in Singapore and Sonali Paul in Melbourne; Editing by Jason Neely, David Goodman and David Gregorio)

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