Alfredo Bresciani, UniCredit
Digitalization brings both challenges and opportunities for banks. On the one hand, it brings technology that can help them revolutionize their services to corporate clients; on the other, it brings the threat of disintermediation at the hands of new market entrants. To see off this threat and seize the opportunities, banks must develop innovative solutions for corporate challenges and promote robust, progressive, regulation for this new technology, says Alfredo Bresciani, head of trade finance international sales at UniCredit
Digitalization is here – and it’s changing everything. Bringing dynamic and efficient new technologies, it has the potential to revolutionize banks’ services for corporate clients. Yet, at the same time, it also lays the foundation for ambitious start-ups and technology companies to gain a footing in the transaction services market – potentially disintermediating banks.
To overcome this threat and capitalize on the potential of digital technology, banks must devise innovative products and services that play to their key strengths. For this approach to be sustainable, they will also need to inform the regulatory process – promoting robust legislation that accommodates innovation.
Averting the threat of disintermediation
It’s a daunting task, but one that banks must grapple with quickly. Certainly, change is happening at a rapid pace. In 2012, Peter Ayliffe, then CEO of Visa Europe, predicted that by 2020 more than 50% of transactions would be executed via mobile phones. And in this environment of rapid change, many start-up and specialist technology firms are looking to take advantage of new possibilities to carve themselves a space in the transaction services market.
This is no small concern for banks, who now face the challenge of maintaining their intermediary position in the market as new competitors look to undercut their services with quick and cheap platforms for corporate transactions.
Even when non-bank market entrants aren’t threatening to supplant banks, they are still putting them in direct competition with one another. This is the case in trade finance, for instance, where new cross-bank bidding platforms are pitting banks against one another to provide the best rate for individual contracts.
From strength to strength
This development requires a response from banks. The key will be turning digital technology to their own advantage – using its inherent efficiencies to amplify their existing strengths. Certainly, operating in perhaps the most regulated industry in the world and with strong client relationships already in place, trust is an advantage banks can leverage by emphasising the robustness and reliability of their services.
Expertise is another key strength. In a complex market, banks stand as age-old repositories of knowledge and practical wisdom – and this expertise holds great value for corporates.
Exploiting these strengths will be critical for banks. In particular, they will want to put them at clients’ disposal in a convenient digital format – using intuitive web-based portals and IT solutions that can be seamlessly integrated into corporate value chains. Of course, integrating products in this way will require a high level of flexibility, with solutions tailored to meet companies’ individual needs. Banks must therefore develop a comprehensive toolbox of solutions – carefully selecting the necessary tools for each client.
This will require considerable investment. UniCredit, for example, plans to spend €1.2 billion on digital innovation between now and 2018, with a view to capitalizing on core strengths and bringing them to clients in a fast and convenient format.
The shape of things to come
One tool that is already building on these principles is the Bank Payment Obligation (BPO) – an innovative digital settlement tool, which enables corporates to execute payments quickly and securely. At the heart of this is the concept of bank mediation, which sees corporate counterparties transact through their respective banks, with each bank assuming only the risk of their familiar client.
In this way, the BPO provides robust protection against payment risks – a crucial benefit, yet one which is becoming dangerously scarce among global trades. Indeed, in 2014, we estimate that approximately 70% of all global exports were carried out with no risk mitigation whatsoever.
And with the volume of global trades carried out via open account settlement – which offers no risk mitigation – continuing to grow, we can expect even more unprotected trades in the future. This is undoubtedly a worrying trend, but it’s one the BPO can help to overturn. Indeed, it stands as an excellent example of how digital technology can be utilized to amplify bank strengths and resolve corporate problems.
What’s more, the BPO also generates significant quantities of data. Thanks to exponential increases in storage and processing capacity, this data can be gathered and combined with other sources of information to identify areas of weakness and potential.
Certainly, despite the much-vaunted promise of “big data”, many corporates have yet to take full advantage of the data already available to them. Banks can help them raise their game in this respect, perhaps by offering analyses of transaction data and other information in addition to existing payments services.
Of course, for digital innovation to achieve its full potential, it will require support from the industry as a whole. Common practice and conventions will need to be established in order for market participants to understand what is on offer, how products differ, and what can be expected of them.
The International Chamber of Commerce (ICC) has already made strides in this area by producing the Uniform Rules for Bank Payment Obligations (URBPO), aimed at harmonizing practices around the use of BPOs. This kind of initiative helps promote understanding and consistency throughout the market – greatly simplifying processes for all involved. Certainly, the banking industry should be looking at similar measure to cater for the full range of digital innovations on the market.
Meanwhile, as these digital practices set in, legislation will have a profound effect on the progress of digital innovation. It is not yet clear what shape any regulation would take, but, as policymakers and legislators debate the issue, it is imperative that banks take part in the discussion – setting out the importance and value of digital innovation for all involved.
In particular, the purpose of regulation – to ensure that banks are adequately capitalized, with strong balance sheets and robust risk management – must be kept in view. Banks can and must demonstrate that digital technology has no detrimental effect on these factors. In fact, digital technology brings greater transparency, harmonization and efficiency to the financial system – making it easier to uphold and check these standards.
These are points that banks need to communicate – just as they need to promote the principles of convenience, trust and expertise in their services. Certainly, if they can achieve these goals, they will have made significant strides towards an exciting future – one in which markets are more liquid, more efficient and more secure than ever before.
ECB plans closer scrutiny of bank boards
FRANKFURT (Reuters) – The European Central Bank plans to increase scrutiny of bank board directors and will take look more closely at diversity within management bodies, ECB supervisor Edouard Fernandez-Bollo said on Friday.
The ECB already examines the suitability of board candidates in a so-called fit and proper assessment, but rules across the 19 euro zone members vary, so the quality of these checks can be inconsistent.
The ECB plans to ask banks to undertake a suitability assessment before making appointments, and they will put greater emphasis on the candidates’ previous positions and the bank’s specific needs, Fernandez-Bollo said in a speech.
The supervisor also plans more detailed rules on how it will reassess board members once new information emerges, particularly in case of breaches related to anti-money laundering and financing of terrorism, Fernandez-Bollo added.
Fernandez-Bollo did not talk about enforcing diversity quotas, but he argued that diversity, including diversity in gender, backgrounds and experiences, improves efficiency and was thus crucial.
“Supervisors will consider furthermore all of the diversity-related aspects that are most relevant to enhancing the individual and collective leadership of boards,” he said.
“Diversity within a management body is therefore crucial … there is a lot of room for improvement in this area in European banks,” he said.
(Reporting by Balazs Koranyi, editing by Larry King)
Where are we with Open Banking, and should we be going further?
By Mitchel Lenson, Non-Executive Chairman, Exizent
Open Banking has the power to revolutionise the way we manage our money, but most (65%) consumers are still not aware of it, while many financial institutions continue to treat it as an obligation rather than an opportunity.
For Open Banking to truly reach its potential, consumers need to have more trust in its benefits. However, this will only happen if banks and other financial institutions start to embrace it, rather than simply accept it.
Covid-19 has proven to banks that digital banking and open finance innovation is not simply a ‘nice to have’. It is vital for their own survival. With so many challenger banks now coming into the market, many of whom have entirely digital models and therefore invest heavily in technology, banks are starting to become aware that if they don’t embrace it, they’ll get left behind.
So, fuelled by a mixture of competition and Covid-19, banks are starting to realise that Open Banking is not about giving away valuable data, but it is about collaborating with third party fintechs to explore the endless opportunities data sharing can bring – to all sides.
By making open finance easier for developers, banks can not only save time and money by improving their own services but help create useful solutions that add real value for their customers.
Open Banking for all?
There is one, yet untapped area of consumer finance that could be immeasurably improved by Open Banking, and that is estate administration.
Recent research from Which? found that many executors contend with delays, errors and poor knowledge from their banks during the probate process. Our own research shows that most legal professionals admit the process does not work as it should, and the time it takes to complete probate is unacceptable.
Like the Which? survey, we found that the main issue is the administration involved, with most legal professionals saying that the time it takes for financial institutions to get back to them with the information they need is the main cause of delays.
Given that the system is not working for consumers, something clearly needs to be done. The good news is that the technology and data is already available – we just need to harness it to create a better system.
That is why we are developing the first ever platform to connect executors, legal professionals, and financial institutions to create a better, quicker, and more secure probate experience for everyone.
Our first release of the platform – a bespoke cloud-based solution to enable legal services firms to integrate directly with financial institutions making information gathering and processing more straightforward – was released in 2020. We are now building on that foundation to accelerate our development work with financial institutions to deliver additional value for all sides.
We also see huge potential in working with banks to utilise the digital financial infrastructure, powered by Open Banking, to improve things even further. But there is one, fairly sizeable issue – currently, Open Banking consent ceases at the point of death.
Is it time for legislative change?
Open Banking is not as open as is should be for those who can give consent, so we are certainly some way off from Open Banking for the deceased. However, the more that banks acknowledge Open Banking and its potential and are prepared to collaborate with third party fintechs to develop better experiences for consumers, the more likely we are to get to a point where we can tap into that potential to improve things for the bereaved.
Many of the problems – highlighted by Which? – that consumers face when managing someone’s estate could be reduced significantly if open finance continued to apply to the deceased.
Open Banking provides a huge opportunity to speed-up and reduce friction for loved ones faced at some of the hardest moments of their lives, and there is a strong argument here for the current position to be reviewed to enable better access to a deceased person’s assets.
With our current platform, we are showing how technology is playing an incredibly significant role in dealing with the complex, tangled process that is probate and the potential of open finance in radically enhancing what we are already doing cannot be understated.
What will become of our banks and their channels in 2021?
By Mark Aldred, banking specialist at Auriga
As we embark on the new year, 2020 will hopefully become distant but sobering memories, it is time to step back and consider the lessons learnt and look to the trends likely to emerge in the banking sector in the year ahead. To stay relevant and to differentiate themselves in the current digital age, banks need to demonstrate a solid understanding of the current landscape and stay aligned with customers’ changing habits and expectations. COVID-19 may have accelerated trends that were already in play but whether they continue at the same pace is yet to be decided. It will be those that evolve rapidly that will get ahead and stay ahead. More than ever, it is not only about competitive advantage but, for some, it may be about survival.
Sharing ATM infrastructure
ATM infrastructure sharing is an active trend in markets such as the Netherlands, Belgium, Sweden, Finland, and Indonesia. In Belgium, an initiative known as Batopin, means that a network of bank-neutral ATMs, previously managed by its four biggest banks will from 2021 run on a single software platform. In the Netherlands, a similar exercise started two years earlier. There the major banks have merged their ATMs under the ‘Geldmaat’ label. These bank-neutral ATM estates are one of the responses to challenges of owning ATM and branch estates in a world where banking is more accessible and competitive than ever. This is one way banks can guarantee continuous access to cash to their customers without the cost burden of running channels, which their new competitors do not even offer. Through pooling, the industry landscape is changing, and banks’ costs are reducing.
Other technology-led approaches are delivering value, including increasing adoption of cloud-based technologies, removing the need to rely on massive on-premise infrastructure, skills, and services. The pooled ATM business model provides many benefits and as discussions progress in different markets, banks, and ATM deployers will certainly be watching with interest the progress made in Indonesia and Belgium, when considering next steps. There needs to be more use cases that prove this model can indeed reduce costs while maintaining access and improving customer experience.
Cashback for all?
Loss of access to cash when ATMs disappear has the potential to be a national scandal and an embarrassment to ATM deployers. Offering cashback at retailers of all sizes is one way of softening the blow. In Germany cashback limits and the requirement to make a purchase have long been lifted. Whilst in the UK new schemes to address this are on their way as we move into 2021, the government revealed that consumers received £3.8 billion of cashback when paying for items last year – making it the second most used method for withdrawing cash in the UK behind ATMs. This suggests that properly implemented cashback, with support from retail, could help reverse the unwelcome reductions in the accessibility of cash in remote and rural communities in particular.
That said, it is important not to fall into the trap of shifting the burden onto small businesses. They are already under their own pressure because of changing consumer behaviours and, of course, the pandemic. The benefits to the retailer should be more footfall and lower costs of cash handling. Small stores full of consumers only wanting access to cash for which the retailer cannot charge is an outcome that will not help revive communities.
Bank branch closure rates and ATM losses keep on accelerating but we have not reached peak yet. It is predicted that there will be a continued decline in the penetration of UK branches over the next four years.
To compensate for the loss of ATMs, LINK (UK’s national switch, owned by the ATM deployers themselves) has founded a delivery fund to enable all communities to request help with accessing cash. Any member of the public can get in touch directly with LINK or via their MP or local council to argue the case for an ATM to be sited (or re-sited) in their area. This is bringing out the best in some communities and several have already successfully argued that they need an ATM.
Equally, there are regional and national initiatives aimed at re-banking areas where legacy banks cannot profitably operate a branch (or even an ATM). Many of these are attracting interest and investment but the road is long, and the re-opening of branches or ATMs in many remote communities will be made to wait while some of these bodies build their alternative banks. The barriers to entry are vast, not least the requirement for a banking licence, which means the model favoured by many cannot be expected to be live much before 2024.
So, while bank branch closures continue, and alternate providers build their propositions, the only way to mitigate and manage this is to consider new, lean, and agile models. The next generation bank branch must be cheaper to run, smarter, smaller, automated, full-service, and available 24/7 to pay its way in the community.
A great example of how this could look is the way Millennium BCP in Portugal has deployed new model branches built around their MTM devices (Millennium Teller Machine). As part of its long-term plan to modernise its business and balance the books, Millennium recognised that many branches built on the legacy model could not support themselves. They recognised that consumer behaviours and habits meant that new sites should be considered for their new branch models. So, it created a new kind of customer-centric branch format for the future – a 24/7 branch supported by remote banking overnight. This resulted in greater footfall and, before COVID-19, the new style branches delivered productivity gains and increased deposits. As transactions were managed by personnel by day and remote teller assistant by night, the branch was cheaper to run – this model is now deployed around cities in Portugal to improve customer loyalty and retention score. As we emerge from the pandemic, further development of this model to accommodate new behaviours are expected to achieve great results for Millennium and its customers, who rate in the best for customer service in Portugal.
If banks do not produce lean, smart, remote, around the clock branches somebody else will – whether it be community-based or even independent ATM deployers – the principle of white labels is absolutely part of this new future. If this model is adopted, then in future it is also possible that we will see branch sharing.
In the UK there are already Business Banking Hubs set-up, a shared space providing business and corporate customers more flexibility to manage their day-to-day finances. In shared branches the user experience can “follow the customer”. Sharing the space with a third party commercial or community enterprise should lead to an upswell in community hunger for this.
AI continues to thrive
Artificial intelligence will continue to be a key business investment as financial institutions seek out amplifications of the technology. In 2021, expect the continuing slow adoption of AI to do repeatable and predictable processes. Already AI is deployed to provide cash predictions to forecast when and where cash is needed. Predictive tools are time and cost-effective, they can also be used for preemptive equipment maintenance. This facilitates the scheduling of engineering calls before a failure, improving availability, and reducing costs. We may also begin to see AI being used to monitor the mood of customers using facial recognition. This could allow banks to determine how to address the customer, what services they should promote, and when.
What next for tele-banking?
As has always been the case, the customer journey cannot be neglected. Banks need to have a good channel mix; a digital platform is not enough as they are susceptible to IT disruptions and failures. Tele-banking has always proven to be an important lifeline and back-up. Without it, customers could become disenfranchised.
Over the years, the banking experience has changed through the adoption of technologies designed to reduce costs and increase efficiencies. In fact, the unintended consequence has been that they have become more and more impersonal. Over 50 years ago, ATMs took us outside the branch. Tele-banking provided customers with remote interaction. Most recently, internet and then mobile banking mean that some demographics never engage in person with their bank and the distance between the supplier and customer even during engagement can literally be thousands of miles. This lack of human touch has reduced customer loyalty.
On the topic of channels, like many others, a first in and first out policy is seldom the right one. Banks need to evaluate each channel and see its value to customers and provide choice. Older channels, such as tele-banking, should not be the first to disappear, and in fact it could see a revival alongside video-banking in the new 24-hour branch model.
In fact, as online banking gives way to a mobile banking one could argue the case that this is the channel that might start to disappear sooner. Channel choice will differ by generation, demographic, and other factor but it remains key that choice is available and that there is always a reliable alternative available.
Branch and ATM, marriage, or divorce
Legacy ATM infrastructure needs an upgrade. Without it, the channel will not be able to modernise and play a role in the next generation of delivery channels. ATMs and assisted service devices offering a full range of banking services, not just cash, need to be in the mix. Automating all teller functions using self-service technologies, supported by video- and tele-banking, is likely to accelerate.
2021 is all about making consumers’ lives easier as they decide for themselves how they want to engage safely with their banks. Each customer journey should be able to become bespoke. Access to cash is an on-going issue but the stakeholders will need to work harder than ever to find viable solutions given the impact of COVID-19 across all industries.
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