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FINTECH HYPE IN 2014: HOW CAN BANKS BETTER COMPETE IN THE NEW YEAR?

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Hans Tesselaar, Executive Director BIAN

It’s been a busy twelve months in the financial services sector. Between regulatory changes, innovation from alternative players and IT outages, 2014 has not been without its challenges for traditional banks. As we look ahead to 2015, how can banks tackle this increasingly competitive market?

The challenge for banks

This year, alternative financial services players have really stepped up to compete with their larger counterparts. Acknowledging the significance of this burgeoning sector, the government pledged its support in the form of trade body Innovate Finance this summer. We also saw competition stretching beyond new start-up players, with Tesco unveiling its own bank account this year. Responding to increased movement away from high street banking, the retail giant launched an online-only account solution.

FinTech activity has not been limited to the UK. The IPO of Silicon Valley based peer-to-peer (P2P) lending platform Lending Club, just this month, suggests that the value of FinTech is being realised across the globe.

Meanwhile, banks have come up against a series of challenges this year. The forex scandal that saw a number of banks facing heavy fines led to further bad publicity for many traditional banks, while regulation has increasingly moved in line with new players. The Competition and Markets Authority (CMA) launched an investigation into banking practices, while the Financial Conduct Authority (FCA) vowed to ‘unlock’ FinTech innovation through revised regulations.

Where do banks fit into the changing financial landscape?

FinTech companies have a distinct advantage when it comes to developing innovation that appeals to customers’ increasingly technology-focused expectations. Built on flexible platforms – often on cloud-based technology – these players are able to adapt and evolve quickly in line with the fast pace of the financial landscape.

In contrast, traditional banks are relying on outdated IT systems that were developed in a pre-internet era. These systems have become a convoluted mess as banks have added on layers of technology in an effort to modernise.

Such legacy issues have surfaced this year, in the form of a series of IT outages, as banks have struggled to cope with today’s financial technology requirements. On many occasions, computer failures have left customers unable to access their online bank accounts or even remove cash from ATMs. Not only is this leading to further reputational damage for mainstream banks, regulators are also starting to clamp down on such inefficiencies and this year the FCA introduced fines to the tune of tens of millions.

Financial history: an asset and a burden

For now at least, banks are relying on their heritage as a proof point of their credibility and this is a key factor that has helped them to maintain their dominant market position, despite the rise of new entrants. But as this legacy starts to translate into inefficiencies, banks will haveto fundamentally re-think their IT structures if they are to remain competitive.

A complete IT overhaul is a costly and risky undertaking, but by separating their technology into core business functions, banks would be able to make isolated improvements. This wouldenable them to offer customers the innovative service they desire, without causing disruptive and reputation-damaging IT outages.

For this to work on a wider scale, global banks need to collaborate to develop a new industry standard. By identifying the core IT business functions across the board and figuring out how these functions cooperate using a Service Oriented Architecture (SOA), banks can also identify which areas can be managed by a third party or supported by third party software solutions. This would allow financial services to ensure they are competing on the areas that matter to their bottom line – such as offering competitive loan or mortgage rates – rather than competing on the efficiency of their tech.

If banks can gain a full understanding of their business functions and how that fits into IT structures, they can also move their services into the cloud and embrace the full flexibility of technology that is enabling FinTech firms to innovate at such a rapid pace. The future of banking could look like an app store, whereby banks pick and choose the best cloud solutions to meet their business needs.

By fully maximising the potential of the cloud, banks could also explore new revenue avenues. An open banking cloud model would enable banks to look beyond traditional products to providing cloud-based solutions to customers – such asoffering alternative cash flow, peer-to-peer financing, foreign exchange, risk management and investment options to businesses.

Newer market entrants are certainly creating a lot of noise around their individual areas of expertise, but banks nonetheless still dominate their market with their overarching financial capabilities. While FinTech companies are largely technology-focused – many are founded by technology entrepreneurs – banks have the benefit of a sophisticated financial history to support them. It is important that banks value the privileged position this places them in. Long legacies and heritage may suggest to customers that banks are experts in the field, but banks will have to re-energise their technology capabilities if they are to keep customers satisfied in the New Year.

Banking

Commerzbank to lose 1.7 million clients by 2024 – Welt am Sonntag

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Commerzbank to lose 1.7 million clients by 2024 - Welt am Sonntag 1

FRANKFURT (Reuters) – Commerzbank expects to lose 1.7 million customers by 2024 as part of its current restructuring, resulting in a 300 million euro ($364 million) hit to revenue, weekly Welt am Sonntag reported, citing sources close to the bank.

The lender hopes to offset the drop by growing its loan business as well as by expanding its business with corporate and very wealthy clients, the report said, without giving any further detail of why customer numbers were expected to decline.

It also didn’t say if any specific category of client was most likely to be lost.

Commerzbank declined to comment.

According to the bank’s website it serves around 11.6 million private and small-business customers in Germany and more than 70,000 corporate and other institutional clients worldwide, so the reported loss of customers would suggest a drop of around 15%.

The bank earlier this month reported a $3.3 billion fourth-quarter loss, sinking further into the red as it continued a major restructuring and dealt with the fallout of the COVID-19 pandemic.

The bank’s restructuring plan involves cutting 10,000 jobs and closing hundreds of branches in the hope it can remain independent.

($1 = 0.8253 euros)

(Reporting by Christoph Steitz and Tom Sims; Editing by David Holmes)

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Citigroup considering divestiture of some foreign consumer units – Bloomberg Law

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Citigroup considering divestiture of some foreign consumer units - Bloomberg Law 2

(Reuters) – Citigroup Inc is considering divesting some international consumer units, Bloomberg Law reported on Friday, citing people familiar with the matter.

The discussions are around divesting units across retail banking in the Asia-Pacific region, the report https://bit.ly/3pD57WP said.

“As our incoming CEO Jane Fraser said in January, we are undertaking a dispassionate and thorough review of our strategy,” a Citigroup spokesperson told Reuters.

“Many different options are being considered and we will take the right amount of time before making any decisions.”

The move, part of Fraser’s attempt to simplify the bank, can see units in South Korea, Thailand, the Philippines and Australia being divested, the Bloomberg report said.

However, no decision has been made, according to the report.

Revenue from Citi’s consumer banking business in Asia declined 15% to $1.55 billion in the fourth quarter of 2020.

The divestitures could be spaced out over time or the bank could end up keeping all of its existing units, the Bloomberg report said.

The firm is also reviewing consumer operations in Mexico, though a sale there is less likely, the report said, citing one of the people.

Last month, New York-based Citigroup beat profit estimates but issued a gloomy forecast for expenses. Finance head Mark Mason said the lender’s expenses could rise in 2021 in the range of 2% to 3%, weighing on its operating margins. (https://reut.rs/2ZwXRB1)

(Reporting by Niket Nishant in Bengaluru; Editing by Maju Samuel)

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European shares end higher on strong earnings, positive data

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European shares end higher on strong earnings, positive data 3

By Sagarika Jaisinghani and Ambar Warrick

(Reuters) – Euro zone shares rose on Friday, marking a third week of gains, as data showed factory activity in February jumped to a three-year high, while upbeat quarterly earnings boosted confidence in a broader economic recovery.

The euro zone index was up 0.9%, with strong earnings from companies such as Acciona and Hermes brewing some optimism over an eventual economic recovery.

The pan-European STOXX 600 index rose 0.5%, as regional factory activity was seen reaching a three-year high on strong demand for manufactured goods at home and overseas.

Another reading showed the euro zone’s current account surplus widened in December on a rise in trade surplus and a narrower deficit in secondary income.

Still, the STOXX 600 marked small gains for the week, having dropped for the past three sessions as investor concern grew over rising inflation and a rocky COVID-19 vaccine rollout.

But basic resources stocks outpaced their peers this week with a 7% jump, as improving industrial activity across the globe drove up commodity prices.

“This week’s slightly adverse price action has all the hallmarks of a loss of momentum temporarily and not a structural turn,” said Jeffrey Halley, senior market analyst at OANDA.

“There is not a major central bank in the world thinking about taking their foot off the monetary spigot, except perhaps China. (Markets) will remain awash in zero percent central bank money through all of 2021 (and) a lot of that will head to the equity market.”

Minutes of the European Central Bank’s January meeting, released on Thursday, showed policymakers expressed fresh concerns over the euro’s strength but appeared relaxed over the recent rise in government bond yields.

The bank’s relaxed stance was justified by the euro zone economy requiring continued monetary and fiscal support, as evidenced by a contraction in the bloc’s dominant services industry in February.

The STOXX 600 has rebounded more than 50% since crashing to multi-year lows in March 2020, with hopes of a global economic rebound this year sparking demand for sectors such as energy, mining, banks and industrial goods.

London’s FTSE 100 lagged regional bourses on Friday due to a slump in January retail sales and as the pound jumped to its highest against the dollar in nearly three years. [.L] [GBP/]

French carmaker Renault tumbled more than 4% after posting a record annual loss of 8 billion euros ($9.68 billion), while food group Danone and German insurer Allianz rose following upbeat trading forecasts.

(Reporting by Sagarika Jaisinghani in Bengaluru; Editing by Sriraj Kalluvila and Shailesh Kuber)

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