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THE BATTLE OF THE BANKS: WILL THE NEW CHALLENGERS SURVIVE?

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THE BATTLE OF THE BANKS: WILL THE NEW CHALLENGERS SURVIVE?

Jason Hill, a financial services expert at PA Consulting

New challenger banks have transformed a sector once dominated by the Big Five banks. More than 50 banks now operate in the UK and over 20 banking licences have been awarded in the last three years alone.

The challengers come in many guises: mid-sized, full-service banks like Virgin Money and Tesco Bank; specialist lenders like Oaknorth and Aldermore; and digital-only businesses like Starling and Monzo. In fact, some of the businesses targeting younger, digital-savvy customers don’t even have a banking licence. They see themselves as technology companies rather than banks.

Right now, the challengers are quicker and more innovative. But that doesn’t mean their advantage will last forever. The big banks still retain the majority of customers, and they are working hard to be more innovative, simplifying and digitalising their customer journeys and building their own fintech ecosystems. In fact, there are several areas where today’s rising stars need to be on their guard.

Cyber security – the biggest threat

Cyber security is the biggest threat to the challenger banks. Especially those whose offerings are primarily digital. I’m pretty sure at least one will fail because of a major cyber security event with the potential to destroy their customer base overnight.

The biggest banks still have the upper hand in this area. They have the brand, the money, the systems, the business continuity plans and the firepower to withstand such shocks. To minimise the threat, challenger banks need to build cyber security into the DNA of their businesses right from the start and keep it as a number one Board priority.

Regulation – where scale is still an advantage

Complying with a raft of regulations is a headache for new and established banks alike. But nimble newcomers can be at a disadvantage. ‘One size fits all’ regulation creates an uneven playing field for challengers when they’re pitted against the enormous scale of the universal banks.

Regulators are trying to make things easier. The regulatory sandbox – a safe space where banks can test innovative products and services – is a great example, and something we helped design and implement. There has also been some movement on capital requirements for the smaller banks. But to thrive, challenger banks need to find a way to comply efficiently and effectively so that regulation doesn’t become a stumbling block.

Open Banking – opportunity tempered by risk

The Open Banking initiative to encourage innovation gives digitally focused challengers a great opportunity. Letting customers add new ways of managing their money to their accounts, via tools developed by third parties, is a powerful selling point. Digital-only newcomer Starling already have several third parties bolted into the Starling world.

But it’s not all plain sailing. A key risk in this arena is the General Data Protection Regulation (GDPR). Being adept at capturing, analysing and processing customer data from many sources gives a major competitive advantage. But handling this expanded data set in compliance with GDPR, and establishing the processes and controls required to remove data upon request, could be a big headache for some challengers. With the countdown to GDPR now on, challenger banks should be taking the issue seriously.

Will they all survive?

Cyber security, regulation and GDPR are the three big threats – but others abound. Consolidation will take out some of today’s challengers as they succumb to the need for scale or are bought up for their technology by bigger banks.

Others challengers will fail because they just can’t get the customer base their business plans require, either because their products aren’t differentiated enough or their systems don’t perform as expected.

I’m also very confident that a good many challengers will continue to grow and to thrive.  Ones that both grasp the opportunities ahead, whilst managing the risks around them most effectively.

Meanwhile technology giants like Apple and Amazon are dipping their toes in the water too. It’s a dangerous world out there and only one thing is certain. The banking landscape in five years’ time will look radically different to the way it looks today.

Banking

SoftBank telco unit rotates CEO, Son steps down as chairman

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SoftBank telco unit rotates CEO, Son steps down as chairman 1

By Sam Nussey

TOKYO (Reuters) – SoftBank Corp, Japan’s third-largest telco, said on Tuesday Chief Technology Officer Junichi Miyakawa would become its chief executive officer, effective April 1.

The change at the top of one of SoftBank Group Corp’s largest assets comes after two years of deliberation, with the telco emphasising the need to “pass on the strengths of its current management system to future generations.”

The rotation is likely to lead to speculation over SoftBank Group CEO Masayoshi Son’s own succession plans. The 63-year-old billionaire abandoned a previous plan to hand over the reins and went on to launch the $100 billion Vision Fund.

The son of a Buddhist priest, 55-year-old Miyakawa is a technical whizz driving projects including the wireless carrier’s 5G build-out. He replaces 71-year-old Ken Miyauchi, a key lieutenant of Son, who took up the post in 2015.

Miyauchi will take the post of board chairman from founder Son, who will remain on the board. A household name in Japan, Son joins business leaders such as former Apple CEO Steve Jobs in being the face of the company he runs.

During Miyauchi’s tenure, the telco had a bumper IPO in December 2018 to feed cash to SoftBank Group as it shifted its focus to investing in tech companies. Son has since further reduced the group’s stake after a series of high-profile stumbles.

Miyakawa takes the helm as the industry faces unprecedented political pressure to cut fees, potentially eating into fat margins in its core business.

Looking to grow sales beyond selling mobile and broadband subscriptions, SoftBank is integrating a hodgepodge of companies including online fashion retailer Zozo and message app operator Line Corp into internet business Z Holdings.

Known for blue sky thinking including flirting with the idea of making cars, Miyakawa’s pet projects include an attempt to deliver broadband via drones. Alphabet Inc said last week it was abandoning its own balloon-based attempt.

(Reporting by Sam Nussey; Editing by Tom Hogue, Shri Navaratnam and Subhranshu Sahu)

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Over 60’s turning to digital banking up by 90% during pandemic

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Over 60’s turning to digital banking up by 90% during pandemic 2

More than 90% of people aged over 60 have used online banking for the first time during the Covid-19 pandemic, according to a poll by iResearch Services, highlighting the importance of banks getting digital right in 2021.

In comparison, 17% of people aged under 30 said they were accessing services via an app or web browser for the first time.

The findings show how banks must adapt to help service the influx of new digital users and gain their trust, accelerated by the Coronavirus pandemic. With 97% of 18–24-year-olds trusting their bank with their data, compared to only 33% of people aged over 66.

Commenting on the findings, Gurpreet Purewal, Associate Vice President, Thought Leadership, at iResearch, said: “Our study demonstrates the lasting impact of Coronavirus on how people will access banking services from now on. Banks will be required to refocus on really understanding customer needs in order to engage with the different requirements of each individual customer.

“More than half (54%) of respondents said they are less likely to attend a physical branch after the pandemic. This demonstrates a seismic shift in the way people will access banking services now and into the future.”

In other findings, 63% of respondents said their bank acted in their best interests during the pandemic, but a third said they would consider switching their bank for better, more personalised communication.

Purewal added: “On the whole, High Street banks have emerged with great credit from the pandemic for the way they have supported their customers. As the economy rebuilds, it will be more important than ever that they communicate in the right way to help consumers through 2021 by leveraging digital platforms and understanding their needs fully.”

Asked how banks can improve their communication with customers, ‘connecting on a personal level’ ranked highest, followed by ‘more honest and open dialogue’, a ‘demonstration of how they are helping customers’, ‘more creative campaigns’, ‘consistent messaging across channels’ and finally ‘responsiveness to major events’.

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Banking on the cloud to create a crucial advantage in financial services

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Banking on the cloud to create a crucial advantage in financial services 3

By Rahul Singh, President of Financial Services, HCL Technologies

Once considered a revolutionary technology, cloud is now at the heart of agile and innovative businesses. The financial services industry is no exception, and has been a major adopter of cloud-based Software-as-a-Service (SaaS) for its non-core applications. Functions such as customer management, human capital management, and financial accounting have progressively shifted to the cloud. Several banks have also warmed up to using cloud for services such as Know your Customer (KYC) verification. IDC analysts say that public cloud spending will grow from $229 billion in 2019 to almost $500 billion by 2023, and a third of this will be spent across three industries: professional services, discrete manufacturing, and banking. The time is ripe for an increasing number of financial services providers to consider moving more of their core services to cloud.

Adoption is already on the rise

Earlier reluctance to move core activities to the cloud has softened, and many banks have put strategies in place to migrate services, including consumer payments, credit scoring, wealth management, and risk analysis. This significant change is driven by factors such as PSD2 and open banking, which require secure and cost-effective data sharing.

Regulators too were once cautious in their approach to cloud technology, but this is also changing. The Australian Prudential Regulation Authority (APRA), for example, whilst acknowledging the risks associated with cloud, also recognised the risk of sticking to the status quo. ARPA trusted the enhanced security offered by the cloud, and updated its cloud-associated risk advice. Wisely, APRA recommended that banks must develop contingency plans that allow cloud services to be provided through alternate means if required.

Rising pressure from new challengers

The other pressure for incumbent banks is from next generation fintech firms. These are cloud-native organisations, and are able to onboard customers remotely in minutes, roll out new services in days, and meet compliance requirements at lower costs.

As a result, the need for traditional banks to upgrade core systems and integrate the latest technologies is stronger than ever. The COVID-19 pandemic has been an additional driver, highlighting the importance of upgrading and migrating core systems to the cloud. Financial services organisations have been forced to rethink their approach to digital transformation, and pay special attention to a cloud-aligned culture. The industry is recognising how the cloud can address new and ongoing regulatory changes, meet different demands from customers, support the roll-out of emerging technologies, and enable incumbent providers to respond to the relentless competition from fintech firms.

New year, new priorities

As we enter 2021, financial services providers will need to reset their priorities, and go beyond using the cloud for scalability and cost efficiency alone. The new areas to focus on will include:

  • Creating a robust digital foundation: The cloud market is expanding fast, and there is an ever-increasing number of services on offer. Whilst the big three hyper-scalers are the obvious choice, various other players are also gaining traction, such as IBM, Oracle, and Alibaba Cloud. Organisations will need a robust digital foundation to adopt cloud at scale in a secure and compliant way. A well-architected digital foundation, supported by resilient operations, ensures that organisations have continued access to their systems and data, regardless of where employees are located, or what device they are using.
  • Adoption of technology platforms: Enterprises are finding ways to reduce complexity by embracing a platform approach, and increasing the speed of business IT consumption. Physical infrastructure is being abstracted into cloud-based platforms, with data consolidated into data lake platforms. Software products like Apigee are being offered as capability platforms to drive better analytics and intelligence.
  • Enhancing IT security: Cloud offers organisations greater security than on-premises servers, if implemented correctly. Financial services organisations have relied on control and compliance-based security for years, but these practices are increasingly vulnerable to cyber threats. Whilst service integrators create robust cybersecurity solutions for financial services organisations, cloud providers are also looking to provision industry-specific security and regulatory measures like end-to-end data encryption – making it easier for financial services organisations to be compliant whilst migrating to cloud.
  • Driving innovation: Cloud is the fundamental factor behind the ability of fintechs to innovate rapidly. Using cloud, financial services can leverage new technologies and tools like augmented reality (AR), virtual reality (VR), natural language processing (NLP), machine learning (ML) and the Internet of Things (IoT) to unlock new processes that improve customer interaction and experience with portable real-time services. Whilst fintechs have led the way in cloud-based innovation through open banking platforms, some of the leading banks are also adopting cloud to simplify their business processes, including KYC as a Service, to enhance customer experience.
  • Enterprise synchronisation: Effective collaboration, both internally and with external partners, is crucial to success in the ever-expanding financial services ecosystem. Cloud allows businesses to integrate collaboration through shared tools and platforms. This is a critical ability as it leads to faster decisions and improved innovation cycles.

Legacy systems hold banks back from improving revenue generation and restrict their ability to build a responsive and resilient business. Cloud is a key factor in the success of challengers: traditional banks have no time to waste in migrating their core systems to cloud and building a secure future.

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