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The banking industry and the deconstruction of its value chain. How Banking-as-a-(BaaS) service could become the key considerations for banks.

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Bertrand Lavayssiere

By Bertrand Lavayssiere, managing director, zeb

The banking industry in 2018 has reached a tipping point: banks must urgently switch from their post-crisis “recovery mode” to a new “action mode”.

Banks need to find solutions for improving cost management and increasing profitability. Set out along the wrong path and banks risk being relegated to a footnote in history. Choose the right strategy and they can be masters of their own destiny. The difficulty, as usual, lies in determining which path is the right one.[1]

One strategic move is about the deconstruction of the value chain horizontally by building utilities leveraging scale in mid/back offices and IT to streamline the operating model and to reduce costs. The German savings bank and cooperative bank sector is a blueprint for this strategic move, which is now being increasingly adopted by larger banks.

Reducing costs thus ultimately means implementing state-of-the-art IT infrastructure, digitalising processes and reducing legacy systems wherever possible – in addition to reducing personnel costs. Ultimately, this drive towards a better IT infrastructure within banks may lead to an increase in offerings such as banking-as-a-service, with some banks ultimately becoming IT companies.

Here at zeb, we have observed that large ITcentres are being built with services being outsourced both nearshore and offshored. Several banks are contemplating whether or not they should become “utility centres” for certain services. Recent discussions amongst Swedish top banks to create a utility for Know Your Customer (KYC) and onboarding processes or initial discussions amongst a consortium of German banks to build a regulatory reporting factory only highlight some of the moves that are currently being discussed across Europe.

However, it is important to remember that many of these discussions are in early stages and therefore talk of the advent of the “Amazon of banking IT services”, would certainly be premature. Rather, current forecasts show that an overall increase in IT costs of around 18 percent is expected between 2016 and 2021, consisting of a seven percent rise in 2016-2017 and a projected further rise of ten percent by 2021. The main drivers for this increase are software costs, which are expected to grow by 19 percent between 2018 and 2021, and IT service costs, which will grow by 11 percent between 2016 and 2021.

We believe that banks have two options available to them with regards to this strategic move. In both cases, processes will have to be adjusted and old ways to be parted with. As a result, banks can achieve significant cost savings. First, on top of their traditional business,banks can become service providers, selling their services to other companies – a sort of specialised “process factory”. This will mean focusing on non-differentiating parts of the value chain and pursuing excellence in these areas. For example, external firms already provide white-label securities services to around three-quarters of banks in Germany, effectively acting as utility centres for this service – dwpbank is one such firm. Other banks, such as Swedbank, have opened out its credit operations and allowed other banks onto its platform. Some of the large IT centres servicing several regional banks were originally part of individual banks themselves, such as ARZ in Austria. The benefits of becoming a service provider include economies of scale, achieved by providing services to several financial services players, and the possibility of sharing both change costs (software updates, adjustments to new regulations and so on) and run costs (competence centres, infrastructure and the like).

Second, banks can become “service buyers”. This means using external standard solutions for value chain activities that offer limited or no differentiation – typically middle-office and back-office activities. Examples include some of the large Swiss players, which use FIS Derivatives Utility for their post-trade derivatives clearing, and Commerzbank, which currently outsources its securities services to HSBC Transaction Services. The benefits of the “service buyer” approach include standardisation of processes, continuous updates and seamless release management, a high degree of automation and centralisation of expertise in competence centres. The approach also delivers a reduction in run-time for critical processes, distribution of the workload and significantly lower total costs.

The most important success factor in this approach is to first understand which valuechain components differentiators for the bank and which elements are can be standardised. This will enable the bank to take the right approach to the “make or buy” decision. Banks should focus on what really matters, asking themselves which of their products and services contribute to their bottom line and which promote the overall excellence of the organisation. Moreover, they should investigate whether their customers really value tailored offerings – and more importantly whether they are willing to pay a premium for them. On this basis they can then simplify and standardise the rest of their operations. If they choose to “make”, in other words to become a service provider, they must transform their organisation into a highly standardised, automated process factory. If they choose to “buy”, i.e. to source services externally, they must adjust their business and operating model to the standard required by the third-party service provider.

The latest advances in technology merit a reassessment of the “make-or-buy” decision for most large European banks. Cloud computing and the arrival of a plethora of “banking-as-a-service” providers – i.e. firms that offer a highly automated bundle of software programs and process functionalities – make it worthwhile for banks to analyse this strategic decision in detail. This holds true for those banks that are striving for simplification and cost reduction.

In many ways, the adoption of cloud-based service models is nothing but the next logical step in what has been taking place ever since banks first started using IT to enhance their processes. First, banks want to increase the automation of their banking functions – which comes as no surprise, given that they are essentially “information processors”. Second, they have been transferring an increasing share of their value chain to external providers, particularly with regards to developing and operating IT solutions. Banking-as-a-service pushes both of these buttons: Banking functions are provided digitally, by external providers residing in the cloud. For banks, shifting all or part of their business to the cloud could therefore be the key to reducing the complexity of their process and IT landscapes and addressing the challenges of the digital age – in one fell swoop.

[1]Reference to EBS18, see www.zeb.eu

Banking

The Next Evolution in Banking

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The Next Evolution in Banking 1

By Young Pham, Chief Strategy Officer at CI&T

Everything we know about banking is about to change. A new industry around the sharing of financial data is primed to give birth to a host of new consumer services, all thanks to Application Programming Interface (API) technology. Already known for being the safest place for money, there are opportunities for banks to expand that relationship to other aspects of the customer relationship. Banks will no longer simply be just a place to deposit and withdraw your cash, but a one-stop-shop for a range of data-sensitive services.

The passing of GDPR and the Payment Services Directive (PSD2) were the first steps in this process of banks modernising how they handled their customer data. However, incumbent institutions have so far not engaged enthusiastically. Rather, it was only after growing pressure from fintech challengers and government regulation that they were forced to open up and share their data. This should not be treated as a regulatory challenge, but rather a way to grasp the unique opportunities that banks have to reposition themselves as the most trusted resource for their customers.

Expanding offerings

It is hard to overestimate the breadth of possibilities arising from open banking, should banks choose to take advantage of this evolution. While the public rarely holds bankers in high regard, it still puts a high level of trust in banking institutions. People are more willing to hand over their sensitive data than they would be to almost any other private entity. Furthermore, banks have a unique perspective into their customers’ behaviours, needs and desires. Spending habits, income streams and risk appetites are just a few examples of the data that no other institution can tap in to.

There is certainly appetite to expand offerings. In our recent study of business banking customers, over 68% of respondents indicated that they were open to their financial institution providing digital non-banking services.  This includes services such as tax support, managing payroll, or invoicing to help them with their day-to-day businesses.

More banks should consider how open banking can maximise their digital capabilities and create a greater range of services for customers to enjoy. Such offerings could be tailored according to each bank and their particular customer audience. For instance, banks could offer everyday services for most users, such as insurance for individuals or business management tools for business accounts. Alternatively, banks could offer more exclusive and specialised services for high net worth individuals to meet their specific needs, such as art appraisal and investment management.

The idea that a firm can expand its offering into new verticals is hardly new. Many of the world’s largest tech companies, such as Apple and Amazon, already offer diverse products including hardware, software, entertainment and cloud services. They are able to do this thanks to the vast quantities of data they have gathered, which provide invaluable insights into consumer behaviour and demand. Banks are in prime position to follow the example of these top tier tech companies thanks to their monopoly on key financial data.

Disruptors vs incumbents

The business model described above is already being adopted by numerous challenger banks. These firms have led the innovative charge thus far, thanks largely to their agility afforded by their smaller size. Indeed, some fintech banks already provide a range of non-banking services to their customers. Revolut, for instance, offers users several types of travel insurance as well as access to airport lounges as part of its premium service for a monthly subscription.

These offerings are not a sign that the challenger banks are about to topple the large incumbents. Rather, these disruptors have always flagged the gaps in the market that larger institutions have been too slow to fill. It is now up to the established banks to learn from their example.

While challenger banks may have a first-mover advantage for these services, the incumbents have two key advantages: capital and credibility. Firstly, the top banks have enough cash to fund this overhaul of their business models. While the challengers have been able to afford to do so in recent years, they lack the reserves to tide them over during economic downturns such as the current pandemic.

Secondly, even though challenger banks are perceived as more convenient and are less vilified than traditional banks, the public still trusts the latter. Many of these large banks can point to their extended histories and long-term investment success – accolades young challengers simply cannot match. In short, people don’t have to like their bank to trust them with their cash and their data. These two advantages strongly suggest that large banks are better positioned to take advantage of the open banking business model in the long term, despite being slower to adopt and adapt.

What’s next?

All this opportunity is within reach. We already have the technical capabilities for data sharing, and the regulatory framework is not insurmountable. Rather, the key for this evolution of the sector lies in banks’ appetite for risk and willingness to reinvent their business model.

Banks need to take a leap of faith and leave behind the business paradigm to which they’ve become accustomed. They should embrace transparency, run towards regulation and take advantage of opportunities to invest in these areas or collaborate with outside technology firms. Only then will banks be able to make the most of their data assets, creating value for the customer and further strengthening the relationship.

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Banking

Banks talk a good game, but are bankrupt when it comes to change and innovation

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Banks talk a good game, but are bankrupt when it comes to change and innovation 2

By Erich Gerber, SVP EMEA & APJ, TIBCO Software

You hear all the time about the incredible pace of change in technology and the way that it affects business, but sometimes we kid ourselves about the real speed of that change and the depth of its effects. Retail banking is a perfect example to illustrate the yawning chasm between the illusion and the less attractive reality. In this article, I want to provide a critique of the banking sector and its failure to change fundamentally and to modernise.

Banking is an old sector: the Banca Monte dei Paschi di Siena has its roots in the 15th century and the oldest UK banks go back to the 17th century. We often talk about legacy holding companies back, restricting their speed of operations and hampering their ability to adapt. Well, established banks have legacy in spades.

They also have cultural challenges. The old saying has it that something is “safe as the Bank of England” and that is a standard for security. But today we need banks to be more dynamic and represent something more than being a deposit box for our wealth. Consumers are accustomed to the superb customer experiences in entertainment (Spotify), devices (Apple), retail (Amazon), travel (Uber) and much else. Surveys show that they want their banks to be responsive, easy to use and available across multiple channels. They’d like banks to be secure but also to be advisors, enable flexible movement of assets between accounts, provide useful data analytics, be cloud- and mobile-friendly and offer deals that are specifically targeted at their interests.

S-l-o-w progress

At their core, banks now must become digital enterprises but, frankly, it has been slow going. As Deloitte observed: “While many banks are experimenting with digital, most have yet to make consistent, sustained and bold moves toward thorough, technology-enabled transformation.”

Erich Gerber

Erich Gerber

We all know that retail banking has changed significantly: you can see that in the proliferation of apps and the fact that, in pre-pandemic times, the morning and evening commute are peak times for transactions as people arrange their finances while sitting in trains, buses and subways. Banking has become a virtual, often mobile business, thanks to new tech-literate consumers pushing banks in that direction. But my fear is that the banks aren’t moving even nearly fast enough and that’s bad for us as consumers and bad for the banks themselves.

Banks are under pressure to change because challengers don’t have the legacy constraints of incumbents and because PSD2 and open banking regulations are having the intended effect of promoting banking as a service, delivering transparency and greater competition.

Attend any business technology conference and banks will talk about their digital transformations and customer experience breakthroughs, but it’s my contention that a lot of this work is more window-dressing than platform building. Or, to put it another way, banks are injecting Botox, rather than undergoing the open-heart surgery that they really need. It’s a case of ‘look: fluffy kittens and shiny baubles’ in the form of apps and websites, but the underlying platforms remain old and creaking and that means that the banking incumbents are hampered.

To be fair, I have lots of sympathy here. They simply can’t move as fast as the challenger banks that have had the luxury of starting their infrastructure from scratch and sooner or later that will come back and bite them. Look, for example, at cloud platforms where only 10 or 20 percent of infrastructure has been migrated despite promises of cloud-first strategies and the banking data centres where monolithic on-prem hardware still reigns.

You feel that slowness of action in your interactions with banks that communicate only via issued statements, letters notifying you of changes to Ts and Cs, and threats when you go into the red. Inertia is nothing new in banking either: we like to think that technology change happens in the blink of an eye but in banking contactless NFC took the best part of 20 years to go mainstream.

This is the dirty secret of banks. They see the need to change but remain shackled. Why are the banks so slow? Historically, because it was hard for competitors to gain banking licences and the capital to really challenge so there was no catalyst or mandate for change. Also, because change is tough and fear of downtime or a security compromise to critical systems is very real. More recently, because internal wars in organisations set roundheads against cavaliers, the risk-averse against the bold, resulting in impasse and frustration.

I said change is tough and that’s why banks need to power through on the basis of Winston Churchill’s wisdom that ‘if you’re going through hell, keep going.” How? By a combination of maniacal focus on expunging legacy systems, placing maximum emphasis on superb customer interaction experiences and digitally enabling anything that moves.

Right now, the banks are surviving, not thriving; they’re rabbits blinking into the headlights of approaching traffic, frozen in the moment. But they need to disrupt themselves before others do it to them: change is painful but not as painful as the alternative. They have to do much more or they will see a decline in their fortunes due to their bankrupt capacity for innovation and their inflexible infrastructures.

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Banking

Vietnamese National Citizen Bank Rises to Excellence with Three Global Financial Awards

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Hanoi, Vietnam – Global Banking & Finance Review is proud to announce the sweeping victory of National Citizen Bank in the 2020 Global Banking & Finance Awards®. The bank was recently presented with three prestigious global financial awards: Best Place to Work Vietnam 2020, Fastest Growing Retail Bank Vietnam 2020, and Best Investor Relations Bank Vietnam 2020. The Global Banking & Finance Awards® recognize the innovation, enterprise, method, progressive and influential transformations that transpire every year within the global finance community. National Citizen Bank would like to extend their thanks and appreciation to the community and their customers for their continuous loyalty and support throughout the last 25 years.

Vietnamese National Citizen Bank Rises to Excellence with Three Global Financial Awards 3

 

The National Citizen Bank was recognized for its all-inclusive professional working environment and ongoing staff development that enhances its internal communications and employee relations. Throughout the last 25 years, National Citizen Bank has focused on the core fundamentals of regulatory modifications with the underlying goal of dividing the volume of both business and administrative tasks. As a result of this, the bank has successfully strengthened its staff’s capacity to obtain, manage outstanding liabilities, and acquire assets to negotiate and retrieve capital efficiently and reliably.

When asked what allowed the bank to triumph against the fierce competition, Wanda Rich, Editor for Global Banking & Finance vocalized, “one of the key factors that stood out to the committee is that National Citizen Bank strives to maintain and maximize profit to shareholders through the implementation of stable, sustainable business operations and advanced production methods. The bank has also remained stable, positive, and had a high growth rate in all of its activities, which is not often seen; however, it clearly indicates how prestigious and overall accomplished they are. They should be exceptionally proud of all three awards.”

About National Citizen Bank

The National Citizen Bank was initially established as a rural bank in 1995 under the name Bank of Kien River. The bank optimized its competitive standing within the global financial industry, later transforming into an urban banking institution where they reinstated their name as the National Citizens Bank. With a team of highly professional financial experts and customer service representatives, the bank embraces each customer’s diverse needs to ensure customary, efficient, and trustworthy experiences from start to finish. Over the years, the bank has prided itself on its continued emphasis on risk management and global business relations with investors, customers, and partners. For more information, please visit the National Citizen Bank.

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