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DISRUPTION AND THE PACE OF CHANGE IN THE BANKING DATACENTRE

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DISRUPTION AND THE PACE OF CHANGE IN THE BANKING DATACENTRE

By Jon Leppard, Director at Future Facilities

Jon Leppard

Jon Leppard

If you’re doing new things with tech – it’s called innovation. If new tech is taking you by surprise, it’s called disruption. Innovation is just better – not only do you win the PR battle, but you can plan for it ahead of time. Few organisations can say they were genuinely prepared for disruptive trends ahead of time, even if they did cope well.

It’s fair to say that there has been a great deal more disruption going on in banking than there has innovation in the past decade. Big banks especially have focused more on disruption-management than they have on genuine innovative projects.

The mobile trend, and the demand for 24/7 access to personal and financial data in particular, has seen banks scrambling to cope with the new demands this places on their infrastructure.

What this does is create pressure to change. Either through competition (see the UK’s rising ‘challenger-banks’) or through consumer dissatisfaction seeping into politics (regulatory intervention). Banks, for survival, must move quickly and intelligently to adapt to disruption. For this to happen, they need to invest in their back-end.

But, when the pressure is on to make a change, most datacentres – banking or otherwise – are slow. There’s a lot to consider, especially when we are talking about larger facilities with mission critical workloads, multiple systems, failsafes, cooling setups etc. to take into account. The fact that a budget might be large doesn’t save them from some very complicated headaches – room may be limited, some workloads very sensitive, etc.

There is also the privacy factor to consider. Due to the extremely sensitive information that banks deal with, they are much less able to “move to the cloud” than other institutions.

Banks need to get the most out of what they have when there is little obvious room for improvement within their own private infrastructure. What this means in reality for most data centre managers, is that they are now answering questions like “do we have the capacity?” or “are we exposing ourselves to too much risk?” from senior figures in the business.

Answering them is often a combination of historic trends, experience and, well, a bit of educated guesswork. Therefore, quite rightly, the IT team, and the Facility Management team that support them, will appeal for time to assess and get things as close to “right” as possible – who can blame them? The datacentre is dealing with mission critical applications, SLA’s and customer financial data, so failure is unacceptable-but so is being unable to react to the disruption happening in the market.

The pressure is on and there’s no easy way out – it’s a trap. The banking datacentre has been disrupted, and doesn’t have enough time or resources to solve the problem. Failure is inevitable, and has at times been very public.

Ok, I told a slight lie, there is a big get-out-of-jail-free card coming on the horizon: New designs for software-defined, homogenised facilities look like they will be just the ticket for banks – able to shift workloads rapidly and intelligently without introducing unacceptable risk. The only problem here is that for the most part, the software-defined datacentre is between five and 10 years away.

So what should you do in the meantime? One option is to use Computational Fluid Dynamics to accurately map out and then predict accurately what a change will do not just in the room, but the knock-on effect that would have on the wider facility. It’s the tech designed to predict what would happen when an aeroplane moves quickly through the air, repurposed.

We call a datacentre that deploys this tech a Fluid Datacentre. It allows datacentre managers to start to get some of the preparation time back from being disrupted – able to answer accurately whether adding capacity introduces too much risk.

This might mean being able to add capacity – or saving money by turning off redundant cooling systems. But principally for banking datacentre teams, it lets them answer quickly and accurately questions that need quick and accurate answers. When IT is able to stand its corner, the question of where the industry will go next is pushed back up the chain of command to the business owners, and not being held back by lack of clarity.

Banking

Swedish Bank Stress Tests in Line with Recent Rating Actions

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Swedish Bank Stress Tests in Line with Recent Rating Actions 1

The Swedish Financial Supervisory Authority’s (FSA) latest stress test results show major Swedish banks’ robust ability to absorb credit losses. The results support Fitch Ratings’ view that short-term risks have abated in recent months, and are in line with Fitch’s assessment of major Swedish banks’ capitalisation at ‘aa-‘, which was a factor when Fitch removed the ratings of Handelsbanken, Nordea (not covered by the FSA’s stress test) and SEB from Rating Watch Negative in September.

The FSA estimated about SEK130 billion of credit losses over 2020-2022 for the three largest banks (Swedbank, Handelsbanken and SEB) under its stress test. This represents about 220bp of their loans, or about 70bp annually. However, the banks’ pre-impairment profitability in the stress test could absorb credit losses of up to about 110bp of loans annually. Fitch’s baseline expectation is for credit losses below 20bp of loans in 2020 and 8bp-12bp in 2021.

Capital remained strong under the stress test. The average common equity Tier 1 (CET1) ratio fell by only 2.8pp (1.9pp if banks did not pay dividends) from 17.6% at end-June 2020. The capital decline was not driven by credit losses, which could be absorbed by pre-impairment profitability, but by risk-weighted asset inflation.

The three banks’ 3Q20 results showed that capital has been resilient despite the coronavirus crisis. The banks had a CET1 capital surplus over regulatory minimums, including buffers, of almost SEK100 billion (excluding about SEK33 billion earmarked for dividends). SEB had a CET1 ratio of 19.4% at end-September, Handelsbanken’s was 17.8% and Swedbank’s 16.8%.

The SEK130 billion credit losses under the latest stress test are lower than under the FSA’s spring 2020 stress test (SEK145 billion), which also covered a shorter period of two years. However, they are still larger than the actual losses incurred by the three banks during the 2008-2010 crisis. This is despite tightened underwriting standards by the three banks in recent years, including, in the case of SEB and Swedbank, in the Baltics, the source of most of their loan impairment charges in the previous crisis.

In its baseline economic forecasts, the FSA assumes a harsher shock to Sweden’s GDP in 2020 and 2021 (-6.9% and 1%, respectively) than Fitch’s baseline (-4% and 3.4%), although it assumes a similar recovery by end-2022. It also assumes real estate price corrections, which appears particularly conservative in light of a 11% housing property price increase over January to November 2020.

The ratings of Handelsbanken (AA), Nordea (AA-) and SEB (AA-) are on Negative Outlook due to medium-term risks to our baseline scenario. The rating of Swedbank (A+) is on Stable Outlook, reflecting significant headroom at the current rating level following a one-notch downgrade in April due to shortcomings in anti-money laundering risk controls.

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Banking

Future success for banks will be driven by balancing physical and digital services

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Future success for banks will be driven by balancing physical and digital services 2

Digital acceleration due to COVID-19 has not eliminated the need for bank branches

Faster service (23%), smaller queues (26%) and longer opening hours (31%) are among customers’ biggest asks of their bank branch, new research from Diebold Nixdorf today reveals. But with 41% consumers saying they would be comfortable to engage with all banking services via an app, it is vital that banks respond to the full spectrum of customer needs – balancing and evolving their offerings on multiple fronts.

A third (35%) of customers say they will always want access to physical, in-branch banking services in some capacity and one in ten (10%) consumers will never bank predominantly online in the future. This demonstrates that there remains an important role for the services a branch provides. This role, however, continues to shift away from purely transactional banking:

  • A quarter (26%) value face-to-face advice when it comes to their banking needs

  • One in five (18%) seek advice on different products

  • 17% want to speak to the staff or other customers.

Matt Phillips, Diebold Nixdorf vice president, head of financial services UK & Ireland, said: “The majority of banks have spent the last decade focusing on their digital strategies and investing in improving – or establishing – their online customer experience. However, the data shows that there is still an essential role for physical branches. Banks now increasingly face the challenge of continuing to provide customers with access to a range of physical and as well as digital services, giving them the flexibility to choose the best service for them at any given moment in time.”

When looking beyond the impact of COVID-19, planned branch visits by customers are expected to rebound to 28%, following a dip to 11% during lockdown. And when asked about the new services they’d like to see inside their bank, sixteen percent of respondents said more self-service machines would improve their in-branch experience.

Matt Phillips continues: “In a world that is fast evolving and where the future is digital, there’s no doubt that high street banks must, and are, responding to the needs of highly digital customers. But not every customer requirement is digital. There is still a strong need for physical bank branches and the interaction and services they offer, and striking this balance between physical and digital is where the industry must come together to provide solutions. For example, building a strong, leave-behind strategy is something we’re seeing across the board when banks have to close branches, ensuring customers have access to self-service machines to complete all their transactional needs.”

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Banking

RegTech 2020: The rise of Open Banking

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RegTech 2020: The rise of Open Banking 3

This month on the RegTech 20:20 podcast, host Alex Ford is joined by industry experts Gavin Littlejohn, Chairman of The Financial Data and Technology Association (FDATA) and Jamie Leach, Regional Director of FDATA ANZ and Founder of Open Data Australia, to discuss developments in Open Banking, and the place of RegTech.

Today, the focus is on the digital customer experience and the insight offered indicates that there has been a major shift in the FinTech ecosystem as a source of potential innovation for banks, rather than being a direct competitive challenge.

In the podcast, Alex quizzes Jamie on the concept of sharing data and the impact of the introduction of Open Banking rules under the Consumer Data Right (CDR) in Australia. Jamie shares that it is an exciting time to be involved in the sector:

“…what we really need to consider is that Open Banking in Australia is very different to Open Banking in the UK. Really, what has spurred Open Banking in Australia under the Consumer Data Right is the pursuit of creating greater competition and greater innovation, while allowing consumers to do more with their data.”

Gavin, who has many years of experience in the industry and, as well as his role with FDATA is also a key member of the UK Open Banking Implementation Entity, speaks on the theme of advocating Open Finance in the UK.,’

Delving deeper into Open Banking, he highlights the fact that it has been an interesting journey and states that “the important thing to understand is the difference between the UK’s Open Banking order and the wider payment services directive.”

Not only concentrating on Australia, Jamie also works across the sector in the UK and, also looking at its evolvement here, she suggests that the people creating the rules are now taking notice, adding: “We are just getting started – the UK has been at it for nearly three years and it is still gaining momentum.” 

With regards to future predictions, Jamie believes “It’s going to take 12, 18 or 24 months before we see any mainstream major adoption and where the potential of Open Banking can go in this market”

Moving to the  differences between Open Finance and Open Banking. Gavin defines the latter  as “payment initiation and access to payment data, which enables a third-party provider or fintech with a customer relationship to initiate a payment and get access to the data relating to transactions.”

“…the concept of Open Banking is a bit like electricity – you don’t use it directly; you use an appliance that uses it. This could mean loans, money management apps, or cloud accounting platforms, which all use Open Banking.” 

Throughout the episode, both guests provide interesting insights and hint at the significant potential of Open Banking.and the connection to RegTech within this domain.

It is clear that what we see today is only the beginning. Despite the industry still being in the early stages of implementation in almost all cases, there is increasing interest in moving beyond this to include a far broader spread of financial products.

You can listen to the full episode at https://www.encompasscorporation.com/regtech2020-podcast/ or across all major platforms, including Apple Podcasts, Google and Spotify.

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