The twentieth century witnessed a revolution in the High Street.
Where the traditional retail store kept most of its goods behind the counter, and shoppers had to wait to ask a shop assistant to fetch what they wanted, by the end of the century self service was near universal – with all goods neatly packaged on open shelves where the customer could pick and choose at will.
Who would have imagined that the decision to put the customer in control would have such far-reaching effects? How many people resisted the change? Perhaps they argued that it was not safe to allow the masses to wander around open shelves, or that no-one would want to buy goods that other people might already have handled?
On the other hand, could any Victorian grocer have foreseen the out of town hypermarkets and malls that were to come? Or the “shop ‘til you drop” retail spree that would define the late twentieth century?
Despite all this change, there remained a corner of the street that was barely touched by this revolution. It was the High Street bank. By the end of the twentieth century customers were still queuing to get to a counter so they could ask for whatever services were being offered.
From January 2018 the UK Competition and Market Authority (CMA) will require all banks to offer personal and small business customers “Open Banking” – basically, a chance to take greater control of their financial services.
Open Banking will, for example, give the customers an option to share their bank data securely with other banks and third parties, so that accounts with multiple providers can be managed through a single digital ‘app’. It means they can take more control of their funds – to avoid overdraft charges and manage cash-flow, for example – and they can more easily pick and choose between competing financial services.
Just as the open shelves of self service retail led to better, more informative packaging and detailed descriptions to attract shoppers and help them choose, so will Open Banking require banks to publish on their websites and in branches clear and objective information on their services and quality of service, so that customers can compare how each bank shapes up. It also requires banks to send out appropriate ‘prompts’ – such as announcing any increase in charges – to remind customers to review whether they are still getting the best value, and decide whether or not to switch banks.
Will Open Banking repeat the dramatic success of the self-service revolution? Or will banks resist this challenge to traditional ideas of security, will they hold on to control rather than share it with the customer? Or might customers themselves not want the option to choose from such a plethora of financial packages neatly laid out for them?
It is worth pointing out that rigid ideas about bank security had already been challenged towards the end of the twentieth century, when High Street branches started replaced heavy Victorian brickwork and massive oak doors with glass fronting. It was the realization that, in many cases, transparency can actually be more secure than secrecy – an important consideration in the move to Open Banking.
To answer some of these and other questions raised, NetEvents organised a Fintech panel Debate and a series of interviews on Nov 7th chaired by award-winning broadcaster Georgie Frost and featuring: Steve Walker, Lead Analyst at Global Data technology; John James, First Direct’s Head of Digital Product; and Scott Manson, Head of Payment Strategy, Nationwide. Also on the panel was Vaduvur Bharghavan, CEO of a US company called Ondot – and the significance of his presence will be explained later.
Open Banking: Challenges and Opportunities
At the start of the debate, Steve Walker gave the example of UK app developers that were already complaining in 2014 that the difficulty in accessing customer data from banks was “uncompetitive”. It was not that they were trying to overturn the financial world, they were simply wanting to offer a smartphone app that enabled users to scan their financial status across all their bank accounts, cards etc on a single interface instead of having to log on to each account and add up the totals. Steve pointed out the frustration caused by such restricted access: “Effectively, it was shutting down a whole innovation layer on top of bank services, around money management and financial insight.”
Sure enough, considering examples from all over the world, Steve concluded that: “Progress is not a straight line but, globally, we think we’re moving towards openness, and that’s going to change the fundamentals of the industry.” Number one consideration would be security: “It’s a well-known fact that banking receives 300, 400 per cent more cyber-security attacks than any other industry. That’s because the rewards are that much higher in terms of not only lost funds, but fraudulent identity, identity fraud, and banks have traditionally protected that by keeping the drawbridge closed.” Legally we are also entering muddy waters: “The liability model is complex. We could have a bank, we could have a payment provider, we could have a fintech firm. Who’s responsible for what data, when? It not easily resolved”.
In a subsequent interview, Georgie Frost was asked whether the public knew what was going to be offered, and she replied: “I don’t think the banks are doing nearly enough, if arguably anything, to prepare the consumer… We’re getting our letters through the post, talking about changes in Ts and Cs and, at best, people will file them in a drawer to read later, and never do. At worst, they’ll probably just file them in the bin, and then come January, no one’s really aware of what’s going on.” It was a valid point, but how could you explain to shoppers in the Edwardian era that allowing them to wander around collecting goods, instead of simply ordering them at the counter, might ultimately transform shopping into the world’s favourite pastime?
John James, on the other hand, had a vision of the immediate possibilities, and was clearly excited about potential opportunities: “First Direct, where I work, announced a partnership with a fintech called Bud to test a marketplace app that will allow customers to aggregate all their financial products together, so they’ll see what’s happening in one single log-on, and get some money management insight. But also, if they want to buy a product, they’ll see something called a ‘marketplace’, and that will allow them to access products beyond what First Direct and HSBC Group can offer them.”
The analogy with the supermarket shelves becomes very clear. Instead of having the goods handed to the customer, they will be all laid out for inspection, comparison and choice. For the vendors, that will mean open competition – and their financial products will have to be attractively packaged with clear labelling, ingredients and pricing. That is exactly what the backers of Open Banking want to see.
Also interviewed was Scott Manson from Nationwide, who said more about the way that Nationwide was preparing for the change. When asked about the thorny question of being instructed by a customer to pass data to third parties, Scott responded: “Personally, I think it’s a great idea… It’s about changing the ownership of the data from the banks and the building societies back to the customer, and I think that’s a great idea.”
So, what does Open Banking really offer?
With the panel mostly expressing high hopes for Open Banking, Georgie Frost took the role of Devil’s Advocate, pointing out that the public has not really grasped what is being offered. She even suggested that, in times of uncertain change it might only take one major cyber attack or security breach to turn the whole world against the project. But was she right to conclude: “I just don’t think customers are getting it. So, I don’t think we can look at open banking in the future unless we get this right”?
The fact is that Open Banking is not that easy to explain for the very reason suggested: that Open Banking is not so much a bank with an open door, as a doorway to a whole new world of banking. As with the self-service revolution, how can one describe a whole new world, or accurately predict where opportunities might eventually take us?
Maybe in anticipation of this challenge, a fourth speaker was included on the panel, who was neither a banker nor from the UK, but representing a US company that had independently been working on ways to help financial organisations to “return ownership to the customer”, and had already taken this a practical stage further.
Vaduvur Bharghavan is CEO of Ondot, a US company that has recently launched in Europe and the UK. He explained: “The core value proposition of Ondot is really to put consumers in control. It’s one thing to provide visibility. It’s another thing to make it actionable. The core value proposition that Ondot brings to the table is really making this information actionable.” In other words: here is an example that is already happening, rather than some future possibility.
What his company does is provide financial companies with software that enables their customers to take more control. It either provides a white-label app (branded by the issuer) that lets customers manage their accounts themselves, or else similar functionality that can be integrated into the company’s existing apps or interfaces.
So, what happens when a cardholder finds their card is missing? It usually causes some panic – when did they last use it? Where? What the issuer wants them to do is immediately inform the company that it is missing, so that the card can be cancelled before any harm can be done. But most customers wait a little, hoping it turns up. With the card management facility, however, the card holder could immediately turn the card off via their phone app, so no-one can use it and, should it then be discovered behind a cushion or in a jacket pocket, they can immediately turn it back on and sigh with relief.
There are also immediate steps that the card-holder can take to anticipate and reduce the potential fraud risk from a lostof stolen card. If, for example they only use the card to pay for meals, they can use the same app to restrict it to restaurant purchases, or they might limit its use to specific stores, restaurants, locations, or times of day. Anyone who steals the card to buy a widescreen TV will be sadly disappointed, and the card owner will be immediately notified on their smartphone. But what if one day they really do want to buy a TV and only have that card to hand? Then they simply go to the app and unblock it for the one transaction, as needed.
The fascinating thing about passing control to the customer is that people start finding new ways to use this service that even its developers had not anticipated. A parent issues cards to the children, tailored to how they should use it: so a daughter leaving home for university could have a card that only works in the university neighbourhood. A small company starts issuing company cards tailored to specific duties: so the van driver’s card will only buy fuel, and maybe only at certain stations.
So how do you summarise what this type of software is offering? The answer again is that it is actually opening a door to a whole new world, and the only way to describe that is to start experiencing it. While Open Banking lies ahead in the UK, Ondot’s version of open-ness is already giving people a taste of what might soon be available. Vaduvur Bharghavan pointed out a growing network of business partners: “We have two of the top 10 global banks in North America, where we really have a lot of market presence. We have six of the top 20 banks and six of the top 15 credit unions, and we have just over 3,000 financial institutions worldwide. So, we have significant deployments in North America, in India, in South East Asia, in Latin America, and now we are hoping to get to the European market.”
One amusing consequence of their white label sales approach is that, when pitching their solution in the US, they are increasingly getting a response along the lines: “That’s already available, it’s called Card Valet”, or “another company is offering Total Control” or “isn’t that just the same as Card Rules?” Of course, all these ‘alternative solutions’ are actually rebranded versions of their own software!
But is it good for the industry?
The benefits to the card-holder of offering this empowerment – the ability to make real-time management decisions – are patently obvious, but what does it do for the company that is giving away this power? The first answer is that it makes a compelling offering – for most customers, a card that allowed real time control would go straight to “top of wallet”. Less obvious perhaps is the way that it builds a closer relationship with the customer, it enables interactive analytics about usage and choices and it opens the door for targeted promotions.
Another potential benefit for the provider is that such added functionality might provide a means to address some of the growing demands of legislative compliance. The October 2016 Visa/MasterCard Alerts mandate, for example, requires US card issuers to offer users optional transaction alerts – just one of the many features offered by personal card management.
There is also something very important happening here. Steve Walker had referred to the massive attacks being directed at the finance industry. The challenge for financial institutions is to defend against a storm of intelligence pitted against them. There is the intelligence of the black hat hacker community, plus the intelligence or organised crime, and now the intelligence behind potential cyber warfare and industrial espionage. How much intelligence – human or artificial – can the industry afford to compete against such a focused onslaught on its security?
The answer is that Open Banking, through customer empowerment, could contribute a massive new security resource, if properly handled. Just taking the example provided by Ondot for the panel: the combined intelligence of a card-holder base that understands its own spending patterns and is now able to become actively engaged in defending its own capital and way of life is already reducing fraud costs, false declines and call centre calls, while increasing card usage, according to the finance companies that have adopted the software. What other form of authentication could possibly match that?
It is never easy to specify the benefits of something that is by nature an “opening” to a new world of potential, let alone make clear predictions about how it might develop. As John James said in the interview: “This is going to be a gradual thing. This isn’t all going to happen next year, and then that’s it. This is a long-term change.”
But VaduvurBharghavan’s example does provide a reassuring foretaste of certain ways that an Open Banking world might evolve. Just as glass walls have reassured the public that certain types of “transparency” can actually be more secure that secrecy, so does his company provide a comforting glimpse of a world where the public has greater control over their finances.
As Steve Walker, Lead Analyst at Global Data Technology put it: “I think in the move to open banking, for customers to be reassured enough to share their data, they need to have transparency around where it’s going, the ability to turn sharing on and off, and Ondot are delivering precisely that capability.”
The quoted NetEvents interviews can be experienced in full at…LINK
Dovish BOJ policymaker calls for new strategy to beat price stagnation
By Leika Kihara
TOKYO (Reuters) – The Bank of Japan must lay out a new strategy for hitting its elusive 2% inflation target at this month’s policy review, board member Goushi Kataoka said, warning the drag to growth from the COVID-19 pandemic could prolong price stagnation.
Kataoka said the pandemic’s hit to demand will likely delay Japan’s economic recovery and weigh on inflation expectations, which have been falling since the end of 2019.
“If we see a repeated rise in infections, that would negatively affect both the output gap and inflation expectations. This, in turn, will prolong price stagnation,” Kataoka said in a speech to an online meeting with business leaders on Wednesday.
The BOJ plans to conduct a review of its policy tools in March to make them more sustainable and flexible to weather what had become a prolonged battle to reflate growth and achieve its price goal. Governor Haruhiko Kuroda has stressed the review will not lead to an overhaul of its stimulus programme.
“The BOJ must examine and explain its policy strategy going forward, taking into account how the path toward achieving its price target has become unclear,” Kataoka said of the policy tools review.
Kataoka, seen as the most dovish policymaker in the BOJ’s nine-member board, has lobbied unsuccessfully for cutting interest rates and strengthening the BOJ’s commitment to take stronger steps to fire up inflation.
He repeated his calls for the BOJ to more strongly commit to keeping rates low for a prolonged period.
“It’s hard now to foresee inflation powerfully heading towards our 2% target,” Kataoka said.
(Reporting by Leika Kihara; Editing by Chang-Ran Kim and Lincoln Feast.)
UK banks face savings glut on road to pandemic recovery
By Iain Withers and Lawrence White
LONDON (Reuters) – Britain’s big four banks amassed more than 200 billion pounds ($277.52 billion) of new deposits last year as customers reined in spending through pandemic lockdowns, far outstripping extra lending to struggling businesses and households.
Full-year earnings reported by HSBC, Barclays, Lloyds and NatWest last month revealed the extent to which lenders’ finances have been upended by the crisis.
The banks now face a glut in savings, a Reuters analysis of the banks’ results show, as domestic customers of the four lenders deposited 221 billion pounds of extra cash.
By contrast, despite banks doling out billions of pounds of state-guaranteed finance to companies since the pandemic hit, their net lending growth in the UK overall was 53.4 billion pounds – a quarter of the growth in deposits.
The more limited lending growth can be explained by a fall in appetite for some lending, particularly consumer credit, where separate Bank of England data has shown Britons paid back 13.8 billion pounds in the last year.
More deposits help shore up bank finances, but are not necessarily good news for lenders when central bank interest rates are near zero, making it hard to lend profitably.
That explains the heavy focus on wealth management in banks’ strategy updates last month, as they race to earn more from fees to compensate for low lending margins.
Banks have said they expect a customer spending splurge as Britain comes out of its latest lockdown in the coming months, which may go some way to eating into the deposits pile.
Graphic: UK deposits grew much faster than lending in 2020
The bulk of UK bank profits are made on the difference between the interest gained on lending and paid out on deposits.
The crunch in consumer credit therefore severely dented lender income, compounded by the fact the Bank of England cut benchmark rates to an all-time low of 0.1%.
This double whammy can be seen in sharp drops in income at the two domestically-focused banks – NatWest and Lloyds – where income fell 24% and 16% respectively last year.
The fall was a more modest 10% at HSBC, which benefited from a more international footprint and exposure to markets in Asia that proved more resilient over the year.
Barclays bucked the trend entirely, with income overall edging up 1% thanks to a stellar year for its investment bank in pandemic-driven volatile markets that offset woes in retail.
Graphic: Bank income crunched, Barclays lifted by trading arm
The big unknown for the banks remains how severe a hit the crisis will deal to their loan books, once government stimulus packages to support consumers and businesses are phased out.
The four banks have set aside nearly 19 billion pounds worth of provisions between them for loans expected to go bad due to the crisis.
These provisions were largely front-loaded in 2020, with the bulk taken in the first half of the year – as lenders are required to book ahead of time under forward-looking accounting rules known as IFRS9.
Despite the torrid economic backdrop, the provisions in the last two quarters were back to pre-crisis levels at at least some of the banks – a reflection of the impact of ongoing government stimulus.
Britain’s Finance Minister Rishi Sunak is expected to extend support again on Wednesday when he lays out his annual budget plan that is expected to pile more borrowing on top of almost 300 billion pounds of COVID-19 spending and tax cuts.
Banks know there is a great deal of delayed pain to come and it is unclear whether their provisioning to date is sufficient.
Graphic: Bad loan provisions were frontloaded in 2020
Solving this conundrum will be key to jump-starting British banks’ share prices, which have languished in recent years over fears about Brexit and near-constant restructuring that has crimped profits.
Optimism over vaccine rollouts has seen the lenders’ shares climb back towards pre-pandemic levels since the autumn, but that still leaves them near 12-year lows.
Graphic: Bank shares since pandemic hit UK
(Reporting by Iain Withers and Lawrence White; Editing by Susan Fenton)
Data: the much-needed procurement adrenaline shot, helping banks remain competitive in the race for innovation
By Toby Munyard, Vice President, Efficio Consulting
Like a flip-switch, the pandemic saw many industries pushed over the innovation tipping point, accelerating digital transformation efforts at a pace never seen before. After all, consumer behaviour has changed dramatically – a lack of face-to-face contact with businesses has meant that organisations are having to turn to digital methods in order to keep customers engaged. Meanwhile, the sudden shift to remote working has put immense pressure on organisations to digitise internal processes.
For the world of banking, the need to continuously drive innovation has been a key pressure point for many years. And now, that pressure is building. Challenger banks, such as Monzo, Revolut and Starling, continue to cause huge waves within the financial services industry, due to their digital-first approaches. These, often start-up brands, have the advantage of operating nearly solely online, with none of the legacy systems in place to hold them back from innovation. However, even these brands haven’t been immune to the vast impacts of COVID. Consumers are getting increasingly tech-savvy, and operating on a digital-first model is no longer enough in its entirety. In today’s increasingly competitive environment, banks must modernise their entire technology functions to support both the front and back ends of their businesses.
That said, in such a competitive environment with rising cost pressures, innovation of this kind can feel out of reach for banks. After all, banks are often a low-growth environment, and optimising the cost of operations can typically take at least five years or more. Another key sticking point for banks when pursuing innovation is the added complexity and costs surrounding regulation. Unfortunately, regulation is part and parcel for any financial service. And new innovations and product offerings will only increase the need for compliance.
So, with myriad challenges facing the industry, how can banks compete in the race to innovation?
To be able to invest in a digital-first future, the journey begins with the procurement function. Whilst it is impossible to have complete control over revenue, one thing a business can control is cost.
Effectively optimising operational and business costs will be key to freeing up valuable liquidity to fund new digital initiatives. But this requires a proactive approach to supplier management. Rather than relying on supplier rebates once a deal is done, the CPO (Chief Procurement Officer) must effectively influence and ensure efficiency from the beginning of a relationship to achieve significant savings.
For existing suppliers, a step change may be required in order to steer this initiative. Getting the right supplier onboard and having forward-looking conversations about new trends in the market will be pivotal. After all, these suppliers will be key to driving digital plans forward. Suppliers providing products and services where demand is declining should not be neglected. Chances are that because of the trends in the market, they are keen to maintain and gain as much business as possible, meaning preferable deals may be available.
In addition to effective supplier management, a review of internal systems is urgently needed to aid cost-reduction on a long-term basis. Traditional banks are often made up of a range of complex legacy systems that allow for very little flexibility in a new digital age. The key here will be to simplify these systems, whilst integrating solutions such as robotics, AI, and SaaS to ensure they are running as efficiently as possible.
Data – procurement’s secret weapon
To be successful on any cost-reduction mission, however, the CPO must be aided by accurate, up-to-date, intelligent data. Without it, the long-term, sustained change needed to outmanoeuvre new market entrants, simply cannot be achieved.
After all, the intelligence derived from good, high-quality data provides the CPO with much-needed visibility in which informed decisions over cost-reduction can be made. It is only with this visibility that organisations can identify opportunities and deliver efficiencies that lead to sustained cost savings.
Architecture that can effectively connect to anything, anywhere, will be an essential tool to ensure the CPO is presented with all the relevant data – for example, linking enterprise databases, data warehouses, applications, legacy systems, and Cloud services to comparable systems at partners and suppliers. Integrating with apps, wearables, and mobile devices at an individual user level, and using an enterprise mobility strategy to link to employees and contractors and third party ‘big data’ sources, will also help to provide a complete view.
Harnessing the power of data
Whilst a necessary tool for procurement, being faced with a mountain of data can be overwhelming and actually hinder performance if it is not captured and interpreted correctly. Typically, within financial services, there is a huge amount of data being captured within Enterprise Resource Planning (ERP) and other finance-based systems that is not being analysed. As a result, efficiencies are missed, and the organisation remains stagnant in the digitalisation journey. To truly harness the power of data, the procurement team must ensure it has access to the right skills and have the right talent in place. This may require additional training, or consultancy to leverage data effectively and to execute successfully in today’s agile and fast-paced environment.
Ultimately, to remain competitive, banks must put the power back into the hands of procurement. By providing the CPO with the right tools and responsibility, the procurement function can align to the strategic targets set out across the business.
Good data, when teamed with effective procurement capability, will be a much-needed adrenaline shot for finance companies. Whilst challenger brands may only be running a 400-metre sprint in terms of digitalisation, in comparison, traditional banks are running a marathon. Stamina and the need for long-term efficiencies will be pivotal to win in a race of innovation. A
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