Vishal Amin and Emma Allen, lead inventors at strategic innovation consultancy ? What If! explore how banks are no longer in competition with each other, but with all companies with which people entrust their money.
Financial Services is no longer a safe haven for inertia, and change is knocking on the door. Banking consumers used to be broadly static. The old challenge for marketeers was how to disturb the inertia. But, coming out of recession, something has changed. Category by category, we see that consumers are getting used to exploding their own habits and driving the change.
The internet is buzzing with articles highlighting that retail banking’s recovery from the economic downturn has been hindered by non-banking players entering their market. A whole host of start-ups, together with the Silicon Valley behemoths, are using technological advancements to introduce consumers to alternative, consumer-driven solutions to the typical current/savings account model, changing the way people save, share and spend their money.
In fact, in many cases, consumers are not even aware that they are shifting their mindsets and developing new behaviors. Take the gift card market as a prime example: it currently accounts for £5 billion a year in sales in the UK and is growing at 10 per cent a year, yet many consumers do not even acknowledge this product as competition to their high street bank account. These new technologies and behaviors will, over time, circumvent three basic banking functions; payment, storing money and transferring funds between consumers.
The bigger threat looms from players that are also competing for deposits. The risk is heightened by the fact some of the players have every day, meaningful relationships with consumers. Take Transport for London’s Oyster Card – reports recently surfaced outlining how £100 million was stored on ‘dormant’ Oyster cards, indicating that consumers are adapting new behaviors that could directly impact deposits.
Even retailers like Starbucks, who now process one third of their sales in the US through their own loyalty card platform, are thinking differently about their payment strategy, bringing to the forefront the reality that banks maybe losing the payment battle. Payments typically account for a quarter of a bank’s revenue, but the market is becoming increasingly competitive with $1.2 billion invested through the venture capital community in 2013 alone. iTunes, which has its own payment platform, recently reported estimated revenue of $16billion, with growth expected at 20 per cent year-on-year, and that is not even taken into consideration the potential impact of the new Passbook features which further revolutionize payments.
Even the more financially-focused players who were once considered niche are becoming bigger than most banks: PayPal now has over 150 million ‘accounts’, and growth was reported to be 20 per cent in Q2 this year. Take the behaviors of the next wave of SMEs, emerging from the 70 per cent of millennials who have a side ‘gig’ to earn some pocket money. The majority are leveraging online payment solutions like PayPal, instead of opening traditional business banking accounts, which seem more flexible and suited to their needs.
More far out, future challenges may well come from consumers themselves who increasingly rely on the ‘Bank of Mum and Dad’. Young consumers are more often turning to their families to provide loans to cover day-to-day spending, educational costs, even deposits for new homes. In turn, parents are having to review their financial situations with a huge market growing in ‘equity release’. This issue is further heightened by an increasingly common financial need to support elderly parents through care as our population ages these are all areas where banks were traditionally the first port of call… New businesses that support this behavior are likely to come out on top, especially given that the most recent innovation in mortgages, the offset mortgage, was introduced decades ago.
These risks have been recognised by leaders across the industry with three quarters (77 per cent according to ?What If!’s recent report, Eyes Wide Shut: Leading for innovation in post-recession Britain) of them admitting their business model rests too heavily on fading revenue streams and half (47 per cent) believing they need to fundamentally rethink their business model. However, only 17 per cent rank innovation as their top business priority. The lack of focus on innovation as the solution raises concerns, especially given that the majority of new entrants to the market are approaching the target in a radically different way: using fresh thinking and not being held back by legacy infrastructure, regulatory mindsets and crippling overheads.
Many senior leaders believe regulation will slow disruption in this market and as a result believe time is on their side, but players like Atom and Osper have different ideas. They are targeting consumers with a new tailored vision which they have paired with a supporting portfolio of digital banking services. P2P lending, which was also seen as a niche player, has continued to grow and now has been seen as a vehicle to support investment in small businesses from the UK government with Funding Circle recently receiving another £40 million. These new innovative businesses are not letting regulation limit them and rightfully so. We seem to be entering a new world where regulation will evolve and shift to fit a new consumer need and environment: the impact of taxi disrupter Uber is testament to that.
Banks have responded by developing consumer-focused marketing campaigns, becoming more ‘digital’ and realigning their infrastructure for survival. Often however, these digital movements are shallow-cutting innovations, that although act as a successful acquisition strategy, do not ignite loyal users that drive value, for example Barclay’s Ping It. This is because is not part of a joined up innovation strategy, or underlain by any iconic actions that make customers take note of an overall strategic redirection. Instead the truth is a digital offering seems often to be used as a tool to reduce branch services and, as a result, staff, rather than a real growth mechanism. The result is in fact the opposite of the objective of growth innovation. It serves to alienate those customers who are more resistant to change, and doesn’t deliver for those who are more innovation and tech-savvy.
If banks are to survive in this new age they need to fundamentally reassess their ecosystem and broaden their view of their ‘competitive set’. This will help them identify a genuine customer-centric solution that allows them to make the most of their current strengths and identify their key weaknesses. Whether this involves extending their relationship with consumers beyond the point of payments and deposits, enabling some of the workarounds that exist in the market today or maximising on the use of the vast amounts of current and historical data they own, they need to each find their edge and a reason to exist. This also needs to be overlain by a truly cut through and simplistic proposition. Simplicity is what banking consumers and crying out for. This is illustrated by the success of Santander’s 1,2,3 account with it’s easy to understand offer – Santander posted a 48 per cent increase in profits in the first quarter, 2014, which it for the most part attributed to 63,000 customers switching to this current account (Santander Press Release).
All this points to the fact it’s time to take off those blinkers that are created by old mindsets, constrained by existing infrastructures or leaning on historical competitive plays. Otherwise they will suffer the same fate as players from other related markets whose business model was turned upside down through the digital age.
Vishal Amin and Emma Allen, lead inventors at strategic innovation consultancy ?What If!
How open banking can drive innovation and growth in a post-COVID world
By Billel Ridelle, CEO at Sweep
Times are pretty tough for businesses right now. For SMEs in particular, a global financial and health crisis of the sort we’re currently witnessing represents a truly existential risk. Yet there is hope of a brighter future. Digital transformation is already helping organisations in countless sectors, with everything from building supply chain resilience to rolling out potentially life-saving contact-tracing schemes. Yet it’s not just delivering transformative benefits in grand projects like this.
Thanks to open banking rules, a new wave of fintech innovation is sweeping the globe, offering business leaders a new launchpad for success. Even something as simple as corporate expenses can be transformed by the power of open data — to help firms cut costs, reduce fraud risk and become more productive.
Opening up data to innovation
It’s easy to get bogged down in the technical details of open banking, and the slew of new acronyms it has ushered in: Third Party Providers (TPPs), Account Information Service Providers (AISPs), Payment Initiation Service Providers (PISPs), and Application Programming Interfaces (APIs). Yet at the heart of the open banking revolution is a simple concept: the idea that forcing banks to open up their customers’ financial data will create more competition, and fresh opportunities for market entrants to create innovative new services.
This was at the heart of the UK government’s world-leading strategy when it was introduced back in 2016. A revised EU payment services directive (PSD2) gave it legal teeth, mandating that all payment account providers in the region provide third-party access for customers that want it. The push is also about reducing banking fees and enhancing financial inclusion, of course, but it’s in competition and innovation that the benefits really shine for businesses.
Access to real-time financial data via open APIs has already resulted in a range of new services which are helping businesses ride out the current economic storm. Whether it’s capabilities that can help freelancers prove loss of income to receive targeted loans, or services designed to streamline business processes to reduce costs and fraud — examples of innovation are endless.
What’s more, it’s already global. Aside from the PSD2, open banking rules are taking shape in Australia, New Zealand, Japan, Singapore, Hong Kong, Mexico and elsewhere. According to frequently cited Gartner predictions, regulators in around half of the G20 countries will create an open banking API regime over the coming year.
In the UK alone this is set to create a £7.2 billion revenue opportunity by 2022, with 71% of SMBs and 64% of adults expected to adopt it by then, according to PwC.
Making expenses pay
Corporate expenses and travel management might not be an area one immediately associates with high levels of innovation. But here too, open banking is having a profound impact. By combining automation, in-app approvals, integration with corporate policy and secure open banking APIs, companies like Sweep are offering new ways to solve old problems.
Part of the legacy challenge relates to productivity. Managing corporate travel costs and expenses was cited last year as the biggest concern of the UK’s small and mid-sized firms. Separate research claimed that SMBs are estimated to lose over £8.7 billion annually due to the time it takes employees and managers to complete these menial tasks. By automatically integrating real-time corporate bank account information into an easy-to-use app, we can save up to 15 hours a month on data input and travel administration per employee. That’s all time they could be spending on growing the business.
Another key area of concern is fraud. According to some estimates, fraudulent expenses claims could be costing UK firms £1.9 billion each year. In the US, the figure could be approaching $3 billion annually. Whether it’s the result of submitting expense claims for personal purchases, claiming for additional mileage on work trips, or over-claiming for other items, it all adds up. What’s more, fraud tends to spike particularly during times of recession, when normally diligent employees look for ways to supplement their income.
In this use case too, there are benefits to be had from open banking-powered solutions. Traditional manual processes offer too many gaps that can be exploited by fraudsters. Submitting paper receipts to finance departments — which must then input the information into spreadsheets or accounting software — is slow, error-prone and lacks accountability. However, with modern digital systems, transactions are automatically fed through from bank account to expense management platform. Here they are seamlessly checked according to policy and automatically approved, rejected or flagged for further investigation.
The future’s open
Thanks to the power of open banking, innovative fintech use cases like this are transforming operational challenges into opportunities to cut costs and fraud risks, improve employee productivity and become more strategic. With real-time data fed through from corporate bank accounts, finance directors can better understand spending patterns, react with greater agility and gain the insight they need to run their businesses more efficiently.
So what of the future? The good news is that open banking is only just getting started. As more sophisticated machine learning algorithms are developed, it has the potential for even greater disruption by empowering SMEs with predictive analytics and forecasting tools, or more accurate fraud checks, for example. Those in Europe may benefit most as PSD2 allows businesses to use tools that work seamlessly and securely across markets, without requiring any duplication of work.
In fact, open banking is not just good for individual SMEs, it’s important for Europe as a whole if we are ever to nurture successful digital unicorns to compete with those coming out of the US and China.
Open banking been described in the past as a quiet revolution. With the right buy-in from business and the continued innovation of digital platforms, it may soon become a full-throated roar.
Banks take note: Customers want to pay with points
By Len Covello, Chief Technology Officer of Engage People
‘Pay with Points’ – that is, integrating the ability to pay with loyalty reward points directly into the online check-out process – is a trend that is growing exponentially with big-name brands like Amazon, PayPal and American Express leading the way.
The past few months have posed an unprecedented challenge in the loyalty space, especially with the pandemic’s impact on travel. The unforeseen impacts across the board have caused institutions with premier incentive credit cards to feel increased pressure to retain their loyalty members. As such, exploring innovative ways to create a personalized loyalty experience for customers is at the forefront now more than ever.
Offering the flexibility to pay with points is certainly one option that can help transform financial institutions’ (FIs) loyalty programs. With the evolution of consumer preferences – like relying on other forms of payment outside of credit and the move towards contactless payments – viewing points as currency naturally ties into the “new ways” in which American consumers bank, pay and shop.
Personalization is a win-win for banks and loyalty program members
As the world continues to evolve in light of the pandemic, consumer habits like mobile banking and shopping online for groceries are likely to carry over long-term. As a result, consumers will expect their loyalty programs to provide new incentives to fit their ever-changing needs. By offering loyalty program members the ability to pay with points for the items they want or need during the online check-out process, FIs are creating a more personalized shopping experience. This can help increase member retention, especially compared to dated loyalty programs that offer limited options for point redemption.
As we’ve learned with iPhones, tap to pay and other technologies that reduce friction, once consumers begin using a new and convenient digital service, there’s little desire to go back to the old way of doing things. By incorporating pay with points into loyalty programs sooner rather than later, FIs will be setting themselves apart in terms of meeting their member’s needs with modern payment offerings.
Outside of providing a personalized experience to loyalty program members, pay with points as a program perk also has specific benefits when it comes to a bank’s bottom line. Currently, there are billions of dollars in liabilities in the form of unused points sitting on banks balance sheets. This is in part due to loyalty program members inability to spend their points how they want. By allowing a more personal and flexible way to spend points, banks can reduce those liabilities while creating a more engaging experience for their members.
Meeting consumer demand is easier than you think
Incorporating the infrastructure to power new digital capabilities is more often than not a cause for concern: how expensive will it be? What does down time look like? How long will it take to get up and running?
Luckily for banks, the process is actually quite simple – and inexpensive. With a lightweight integration of a few APIs, banks can tap into a pool of retailers to make their merchandise available for purchase with points by loyalty program members in no time. And as the retail network expands, there’s no need for additional IT work to add new brands into the fold. Ultimately, API integrations upfront create a frictionless and scalable solution for FIs and a preferred shopping experience for members. And based on market feedback, the personalized experience that results from giving customers the option to spend points as easily as they would cash or card, far exceeds any initial inconveniences that may arise.
According to our recent Customer Loyalty Survey, 75% of customers are more likely to spend loyalty reward points to make a purchase over other payment methods. The findings also indicated that 72% of customers are actively engaged in loyalty programs because of the available redemption options.
Long-term loyalty is not just about acquisition or promotional material, but rather the experience of redemption and viewing loyalty points through a fresh lens. Customers today are well-versed in what’s available to them online. The more redemption options offered to the consumer, the more appealing the FI becomes.
Loyalty point redemption in action
In April of 2020, when the world was mostly in lockdown, we looked at how a select group of approximately 3,000 consumers spent their loyalty reward points, comparing April 2020 to April 2019. Key findings suggest that, if given the opportunity, consumers will spend their loyalty points to buy what they want or need based on their specific circumstances. For example:
- Significant increases in the purchase of outdoor items like BBQs and smokers (+3401%), fire pits and heaters (+2644%) and pool and patio accessories (+1297%) suggested people were making the most of the spaces around them.
- Consumers were focusing on their personal health and well-being with the increase in points spent on fitness accessories (+1664%), bike accessories (+1453%) and fitness trackers (+536%).
- Finally, the increase in purchases of hand-held power tools (+3076%), smart control lighting (+1750%), stick vacuums (+1096%) and specialty small appliances (+531%) suggests consumers took advantage of the opportunity to check projects off their at-home to-do lists.
We’re keeping a close eye on how loyalty point purchases evolve as more retailers and FIs get on board with viewing points as a true form of currency, especially in a post-pandemic world. Which items will rise to the top in the coming months and years as the payments ecosystem evolves? Will flight purchases or experience-based purchases regain popularity?
What’s next in the loyalty payments space?
As consumers continue to look for alternative payment methods, offering the flexibility to pay with points is the perfect opportunity for FIs looking to reinvent their loyalty programs. Engage People has always viewed loyalty points as a fiat currency, creating innovative technology that allows for easy integration that satisfies loyalty program members’ needs.
In the future, there’s a real opportunity to incorporate loyalty reward points into everyday life – extending beyond the online shopping experience. Imagine a world where you can pay for coffee, your bills, monthly subscription services like Netflix or make charitable donations with loyalty points just as you would with a credit card or cash. The future involves a mindset shift by consumers, financial institutions and the entire payments ecosystem, and that shift is viewing loyalty points as a true form of currency. Like reaching for cash, a debit or credit card, loyalty points can easily become a payment option of choice for consumers. FIs that are at the forefront of this trend now have the most to gain long term.
The Importance of Liquidity Solutions
By Justin Silsbury, Lead – Product Manager at Infosys Finacle
Economic uncertainty and business complexity have made a deep impact on corporate treasury management in recent years. With regulations getting tougher, funding becoming elusive, and profits shrinking fast, the way liquidity is managed is making a real difference to companies’ survival. As corporate treasurers around the world struggle with the challenges of liquidity management, they are turning to their banks for support; it is imperative that the industry respond with digital solutions that enable clients to manage money efficiently at low cost.
Why corporates need liquidity solutions
Corporate banking customers need a liquidity structure that maximises security, liquidity and yield. Even today, treasurers in multinational corporations lack visibility into their companies’ overall cash position across countries and currencies. Delivering returns on excess cash, although important, is not a priority for them, but making sure the money is safe and available when needed, is. Therefore, a liquidity solution should be able to consolidate a company’s cash position across all its accounts around the world, provide a unified view in real-time, as well as offer timely suggestions on maximising utilisation and yield. It should automate all these functions as far as possible to reduce both manual overheads and the risk of moving money manually on a daily basis.
Broadly, liquidity solutions are of three types – cash concentration solutions that automatically move money around the world; interest optimization solutions that reward customers based on their aggregated balances without the need to move any money; and investment sweeps that move all the consolidated funds to a money market fund or other short-term investment to earn extra returns.
And why banks should provide them
There are several reasons why banks should invest in a sound liquidity solution. The most important one is that without it, a bank can never become a customer’s principal financial institution. A large corporation will have many banking providers, each one trying to increase share of wallet; in this situation, a high involvement product such as a liquidity solution is particularly effective for building stickiness and strengthening a bank’s position vis-à-vis others. An illustration may be useful here: say a food retail chain banks with Santander in the U.K., and other banks across Europe. If the retailer chooses to consolidate its cash daily into its U.K. account using Santander’s liquidity management solution, where the excess cash can then be swept into an investment vehicle overnight, over time, Santander can cross-sell other products to the client to increase revenue and stickiness.
Technology does it
Corporate banking has historically lagged retail banking in technology adoption. It is high time that banks remedied this by digitizing their corporate solutions. Specifically, they can leverage a variety of digital technologies to provide clients instant access to liquidity, global visibility into the overall cash position, and efficient working capital management. With robotic process automation and machine learning, they can simplify and automate processes to cut cost and lead-time. Blockchain enables banks to offer fast, secure, cross-border transactions, while open APIs ease collaboration and co-innovation with Fintechs, customers and developers.
Banks need to deliver frictionless, personalized, “retail banking-like” experiences over customer-centric corporate banking channels. Instead of channel silos – one for liquidity, another for payments and so on – customers will see data from all their accounts in one place, from where they can manage liquidity, forecast cash flows, secure trade finance etc. On their part, banks can use 360-degree customer insight to issue not just timely alerts but also contextual recommendations. For instance, being able to alert a customer that a large payment is due the following week, but also suggesting the best options for arranging those funds.
Apart from improving the customer journey, a real move in corporate banking is towards cloud adoption. Many banks have started the cloud journey, but many still have some distance to cover before they are fully cloud-enabled; mainly, they are migrating monolithic, on-premise workloads to the cloud. Early adopters, such as JP Morgan Chase, HSBC and Citibank, are setting the pace by developing their own capabilities as well as procuring certain components from Fintech partners to plug into their overall solution.
One size doesn’t fit all
In the past, corporate banking solutions were largely meant for big companies, but today they are relevant to enterprises of all sizes. Internet and mobile have enabled even small local firms to scale far and wide, creating a need for solutions to manage their money across borders. Therefore, banks need to make sure their liquidity solution can accommodate the different needs of different clients. Only a flexible, componentised solution can do that.
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