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Open Banking – trust in the transformation

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Open Banking – trust in the transformation

The concept of money has been in circulation for almost 3,000 years, from its origins of bartering beans for cattle to modern day transactions via bitcoin. From the outset, money has worked on one simple principle. Trust. The trust that the value of the ‘money’ you receive and exchange retains and holds equal value elsewhere. This has evolved from trusting the number of cocoa beans required to exchange for a piece of beef to trusting the £5 note given to you by the supermarket holds the same value in the pizza takeaway around the corner.

As money moves away from its physical forms with more and more banking services processed online and a ‘cashless’ revolution taking place globally, that reliance on trust is more relevant than ever before. However, has its importance been lost in the waves of new regulation – or do we just need to look slightly harder?

Opening the bank door

Ever since the outset of banking, the big banks have guarded their customers’ data and ensured its safety, but in doing so, have also ensured that they are the only ones able to access and make use of it. All that has now changed. Open banking regulations give the consumer and SMEs more visibility and access to all this data and authority on who can use it. However, the entire concept remains largely misunderstood to the very audience it’s set to benefit most, you – the consumer. Towards the end of last year, research showed that consumers were highly sceptical of it, clearly citing trust as a barrier.

The opening up of financial data, creates new data flows between Account Servicing Payment Service Providers (ASPSPs) and Third-Party Providers (TPPs) via an Application Programming Interface (API). Or in layman’s terms, you can authorise different companies looking to provide new banking services access to transaction data held by your bank to help you manage your money.

So, with the widespread adoption mobile payment apps, multiple accounts across multiple banks, and the attractive propositions offered by fintechs, why is there still a lack of trust and consumer confidence in the security of Open Banking?

But why aren’t we there yet?

There are currently quite a few significant obstacles and challenges that are in the way of creating a successful open banking ecosystem – including lack of consumer education, confidence and adoption.

Even though people are accustomed to using financial apps to keep control of their money for easy access and convenience, they seem to still fail to make any connection with open banking and its vast offering. As an illustrative example in the challenges to driving awareness and adoption of new banking capabilities for the UK. In mid-2016 there was a 75% public awareness for the ability to switch current accounts easily from bank to bank. As of April 2018, following a big advertising push at the start of the year to drive adoption and recognition, that figure remained stable at 76%.

On the flipside, it’s now very common to have different bank accounts across many different institutions (and as the research above shows, account switching has become generally accepted) – usually the result of being attracted by challenger banks with their user-friendly approaches. This further emphasises the fact that there is indeed an underlying trust in the system.

Window of opportunity

For true success, it’s vital that we, as financial participants and industry leaders, build further on this trust and allow the Open Banking system to flourish by enhancing customers’ knowledge about the services and benefits that are available to them.

For a moment, imagine instilling the kind of trust you have in a £20 note into a platform for launching a payment or a financial product – confidence in the Open Banking eco-system would be less opaque and more transparent.

This trust can be generated through pursuing meaningful partnerships within and without the industry, intelligent segmenting of customers to ensure an effectual introduction, and working with other trusted brands and interfaces to lay a base of trust for these services that will serve the ecosystem as a whole.

The simplification and streamlining of interactions between different parties, the offering of peace of mind and improvement to end user experiences in this environment. This is a system that benefits all in the ecosystem from end users to ASPSPs.

However, for it all to work, it rests on one simple principle. Trust.

Banking

Dovish BOJ policymaker calls for new strategy to beat price stagnation

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Dovish BOJ policymaker calls for new strategy to beat price stagnation 1

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.)

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UK banks face savings glut on road to pandemic recovery

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UK banks face savings glut on road to pandemic recovery 2

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 UK banks face savings glut on road to pandemic recovery 3

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

UK banks face savings glut on road to pandemic recovery 4

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

UK banks face savings glut on road to pandemic recovery 5

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)

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Data: the much-needed procurement adrenaline shot, helping banks remain competitive in the race for innovation

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Data: the much-needed procurement adrenaline shot, helping banks remain competitive in the race for innovation 6

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?

Optimising costs

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.

Toby Munyard

Toby Munyard

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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