The “Fintech Circus” known as Money20/20 came to Las Vegas recently, and it was a great opportunity to assess where the banking industry stands in relation to the innovation taking place in the area of API-based open banking. As the recent Finovate Conference in New York City also highlighted, we are seeing a shiftfrom disruption towards enablement: a fintech-powered enhancement of the capabilities of banks and processors aimed at better serving the needs of retail and corporate clients alike.
The changing role of would-be fintech disruptors signals the emergence of a new dynamic within the financial services industry: the 1990s “land grab” mentality of securing end users through in-house product development is giving way to a new ethos of co-dependence between fintech and banks. A shift like this would be welcome for the health of our financial system – and especially welcome by banks and legacy processors who have become wary of the “friends or foe?” dilemma of fintech strategic policymaking.
I’ve been following the evolving love-hate relationship between banks and start-ups since the late-1990s, and so the pattern of banks begrudgingly ceding turf to new fintechs is very familiar: from initial denial by banks of the underlying technological change (say the Internet or the current primacy of mobile), to a subsequent and short-sighted go-alone, and finally to an acceptance of banktech as an enabler of better customer experience, with the subsequent success of online banking pioneers like S-1, Corillian, and others.
Nowadays, banks’ readier acceptance of fintech is broadening into greater horizontal collaboration as well. In the early 2000s, when my team at Metavante acquired an interbank bill presentment and payments switch owned by Spectrum, the acquisition didn’t amount to much. This was because the founding banks (Wells Fargo, Chase, and Wachovia) didn’t seem to have much incentive to collaborate back then. Fast forward to 2017 with the emergence of fintech titans like PayPal, Venmo, and Stripe; and now, large banks have plenty of appetite for cooperation, both amongst themselves and with the fintechs.
As the second wave of banktech ripples through the industry, the immediate question becomes: what form will a new model of cooperation take? Interestingly, the second wave of bank-fintech cooperation is not emanating from North America and hitting the shores of Europe (as things worked in the nascent 1990s), but actually the reverse. The wave in question is open banking that is based on published APIs.
The UK, Europe, Take Initiative
As long ago as 2002, the British government has sought to wrest market dominance from the four clearing house banks and unlock innovation and competition for consumer and SME banking services. In early 2016, the HM Treasury published a report of the Open Banking Working Group (OBWG) that effectively mandated the use of open APIs to drive innovation in banking and expand competition.
Despite the overhang of Brexit on the UK banking scene, it’s clear that the UK’s stance on competition in financial services in consistent with the EU’s own Payment Services Directive-2, which among other things mandates the opening up of the bank-end systems of the large banks in order to enable the activities of account aggregation and payment services specialists.
The impact on the UK market for banking services is expected to be significant, and in fact is only the first step in the expected liberalization of competition in this realm. As the Economic Secretary to the Treasury, Stephen Barclay MP, explained recently at the Payments20 conference in London:
Open Banking will allow FinTech, Payments and E-money firms to challenge incumbents by offering tangible benefits, new products and cheaper prices to their consumers, drawing on the consumer’s own data… As the first major economy to truly adopt Open Banking, I am determined that we share our experience to help inform the development of similar initiatives.
While regulatory-driven changes in the UK banking market take shape, the situation is a bit different in the United States, where the fragmented regulatory landscape and resistance to government-mandated market structures both remain strong. A whitepaper released last year by the White House’s National Economic Council (NEC) concluded that better cooperation between all stakeholders in financial services would yield greater innovation to the benefit of all market participants and the US economy in general, as summarized below.
“A policy strategy that helps advance fintech and the broader financial services sector, achieve policy objectives where financial services play an integral role, and maintain a robust competitive advantage in the technology and financial services sectors [will] promote broad-based economic growth at home and abroad.”
Consumer-First Fintech: Good for Banks
Whether the next chapter in bank and fintech cooperation will be driven by the regulators or the free-market is not yet clear – and perhaps not as important in the long-run as the issue of how bank consumers will benefit from open banking. Regardless of which side of the pond you’re on, of more immediate concern is the readiness of the core banking systems to meet the impending demands of API-driven open banking. Back in the early days of online banking, most core banking systems were already 15 or 20 years old, and today most of these legacy systems remain in use at even the largest banks.
It is true that the legacy core banking systems have been equipped for the past 10 or 15 years with SOA-based middleware that allows for easier integration with the bank’s channel systems (including third-party applications), but the future demands placed on legacy banking systems will be far greater than what the current state of middleware will easily support.
A buzzword often invoked when speaking about open banking and APIs is microservices, which refers to the provision of access by third-party developers to the functionality supported by the core banking system at a very low-level. For example, if a developer at a payment services provider like PayPal wanted the bank’s system to perform a standard ‘AML check’ on a pending payment transaction, the bank’s existing systems could support the request; however, if the developer wanted to create a customized approach to handling the AML checks, the banking system would be unable to support this non-standard request.
While the clever individuals on the systems support staffs of large banks will initially work to create system work-arounds to support the demands of open banking platforms for microservices, in time they will realize the futility of the task and will look to transition their legacy banking platforms to modern technology that natively supports microservices. And sure enough, there is a healthy and growing community of fintech startups that have already begun the journey towards unlocking legacy banking systems and ushering these incumbent financial institutions into the new world of open banking.
As the open banking ripples spread East and West, it won’t just be the consumer that benefits from a more competitive banking environment and stricter data regulations, but also the banks that lean in and seize the opportunity. Our prediction is that someday soon we will experience a tipping point that triggers another wave of innovation based not on better mobile banking services, but fundamentally different ways of delivering banking services.
In other words, stay tuned: The fintech circus is coming to your town soon.
James O’Neill is Founding Partner and Head of Banking Investments for Motive Partners, a next generation financial technology investment firm focused exclusively on the technology-enabled companies that power the financial services industry. James is an accomplished executive with more than 25 years of banking and technology experience across general management, finance, operations, and business and corporate development.
ECB launches small climate-change unit to lead Lagarde’s green push
FRANKFURT (Reuters) – The European Central Bank is setting up a small team dedicated to climate change to spearhead its efforts to help the transition to a greener economy in the euro zone, ECB President Christine Lagarde said on Monday.
Lagarde has made the environment a priority since taking the helm at the ECB, taking a number of steps to include climate considerations in the central bank’s work as the euro zone’s banking watchdog and main financial institution.
She is now creating a team of around 10 ECB employees, reporting directly to her, to set the central bank’s agenda on climate-related topics.
“The climate change centre provides the structure we need to tackle the issue with the urgency and determination that it deserves,” Lagarde said in a speech.
She said that climate change belonged in the ECB’s remit as it could affect inflation and obstruct the flow of credit to the economy.
The ECB said earlier on Monday it would invest some of its own funds, which total 20.8 billion euros ($25.3 billion) and include capital paid in by euro zone countries, reserves and provisions, in a green bond fund run by the Bank for International Settlement.
More significantly, ECB policymakers are also debating what role climate considerations should play in the institution’s multi-trillion euro bond-buying programme.
So far the ECB has bought corporate bonds based on their outstanding amounts but Lagarde has said the bank might have to consider a more active approach to correct the market’s failure to price in climate risk.
“Our strategy review enables us to consider more deeply how we can continue to protect our mandate in the face of (climate) risks and, at the same time, strengthen the resilience of monetary policy and our balance sheet,” Lagarde said.
(Reporting by Balazs Koranyi; Editing by Francesco Canepa and Emelia Sithole-Matarise)
What to expect in 2021: Top trends shaping the future of transportation
By Lee Jones, Director of Sales – Grocery, QSR and Selected Accounts for Northern Europe at Ingenico, a Worldline brand
The pandemic has reinforced the need for businesses to undergo digital transformation, which is pivotal in the digital economy. In 2020, we saw the shift to online and cashless payments accelerated as a result of increased social distancing and nationwide restrictions.
The biggest challenge on all businesses into 2021 will be how they continue to adapt and react to the ever changing new normal we are all experiencing. In this context, what should we expect this year and beyond, in terms of developments across key sectors, including transport, parking and electric vehicle (EV) charging?
Mobility as a service (MaaS) and the future of transportation
Social distancing and lockdown measures have brought about a real change in public habits when it comes to transportation. In the last three months alone, we have seen commuter journeys across the globe reduce by at least 70%, while longer-distance travel has fallen by up to 90%. With it, cash withdrawals for payment has drastically reduced by 60%.
Technological advancements, alongside open payments, have unlocked new possibilities across multiple industries and will continue to have a strong impact. Furthermore, travellers are expecting more as part of their basic service. Tap and pay is one of the biggest evolutions in consumer payments. Bringing ease and simplicity to everyday tasks, consumers have welcomed this development to the transport journey. In-app payments are also on the rise, offering customers the ability to plan ahead and remain assured that they have everything they need, in one place, for every leg of their journey. Many local transport networks now have their own apps with integrated timetables, payments, and ticket download capabilities. These capabilities are being enabled by smaller more portable terminals for transport staff, and self-scanning ticketing devices are streamlining the process even further.
Ultimately, the end goal for many transport providers is MaaS – providing an easy and frictionless all-encompassing transport system that guides consumers through the whole journey, no matter what mode of travel they choose. Additionally, payment will remain the key orchestrator that will drive further developments in the transportation and MaaS ecosystems in 2021. What remains critical is balancing the need for a fast and convenient payment with safety and data privacy in order to deliver superior customer experiences.
The EV charging market and the accelerating pace of change
The EV charging market is moving quickly and represents a large opportunity for payments in the future. EVs are gradually becoming more popular, with registrations for EVs overtaking those of their diesel counterparts for the first time in European history this year. What’s more, forecasts indicate that by 2030, there will be almost 42 million public charging points deployed worldwide, as compared with 520,000 registered in 2019.
Our experience and expertise in this industry have enabled us to better understand but also address the challenges and complexities of fuel and EV payments. The current alternating current (AC) based chargers are set to be replaced by their direct charging (DC) counterparts, but merchants must still be able to guarantee payment for the charging provider. Power always needs to be converted from AC to DC when charging an electric vehicle, the technical difference between AC charging and DC charging is whether the power gets converted outside or inside the vehicle.
By offering innovative payment solutions to this market segment, we enable service operators to incorporate payments smoothly into their omnichannel customer experience that also allows businesses to easily develop acceptance and provide a unique omnichannel strategy for EV charging payments. From proximity to online payments, it will support businesses by offering a unique hardware solution optimized for PSD2 and SCA. It will manage both near field communication (NFC) cards and payments from cards/smartphones, as well as a single interface to manage all payments, after sales support and receipt with both ePortal and eReceipts.
Cashless options for parking payments
The ‘new normal’ is now partly defined by a shift in consumer preference for cashless, contactless and mobile or embedded payments. These are now the preferred payment choices when it comes to completing the check-in and check-out process. They are a time-saver and a more seamless way to pay.
Drivers are more self-reliant and empowered than ever before, having adopted technologies that work to make their life increasingly efficient. COVID-19 has given rise to both ePayment and omnichannel solutions gaining in popularity. This has been due to ticketless access control based on license plate recognition or the tap-in/tap-out experience, as well as embedded payments or mobile solutions for street parking.
These smart solutions help consider parking services more broadly as a part of overall mobility or shopping experience. Therefore, operators must rapidly adapt and scale new operational practices; accept electronic payment, update new contactless limits, introduce additional payments means, refund the user or even to reflect changing customer expectations to keep pace.
2021: the journey ahead
This year, we expect to see an even greater shift towards a cashless society across these key sectors, making the buying experience quicker and more convenient overall.
As a result, merchants and operators must make the consumer experience their top priority as trends shift towards simplicity and convenience, ensuring online and mobile payments processes are as secure as possible.
Opportunities and challenges facing financial services firms in 2021
By Paul McCreadie, Partner at ECI Partners, the leading growth-focused mid-market private equity firm
Despite 2020 being an enormously disruptive year for businesses, our latest Growth Index research reveals that almost three quarters (74%) of mid-market financial services companies remained resilient throughout the pandemic.
This is positive news, especially when taking into account the economic disruption that financial services firms have had to go through since the crisis began. No doubt 2021 will also hold its own challenges – as well as opportunities – for firms in this sector.
Unsurprisingly, the biggest short-term concern for financial firms for the year ahead involved changing pandemic guidance, with 42% citing this as a top concern. With the UK currently experiencing a third lockdown many financial services businesses will have already had to adapt to rapidly changing guidance, even since being surveyed.
Businesses will also be considering the need to invest in working from home operations, and there may be uncertainty over re-opening offices on a permanent basis. According to the research 30% of financial services firms are planning to adopt remote working on a permanent basis, so decisions need to be made now about whether they invest more in enabling staff to do this, or in their current office premises.
Due to Brexit, UK financial services firms are no longer able to passport their services into Europe, which may cause problems, particularly in the next 12 months as the Brexit deal is ironed out and the agreement is put into practice. Despite this, Brexit was only cited by 24% of financial firms as a short-term concern. While it’s comforting to see that UK financial firms aren’t hugely concerned about Brexit at this juncture, it is going to be vital for the ongoing success of the industry that the UK is able to get straightforward access to Europe and operate there without issue, otherwise we may see these concern levels rise.
Looking ahead to longer-term concerns for financial services businesses, the top concern was global economic downturn, of which 40% of firms cited this as a worry when looking beyond 2021.
Investing and adopting tech
Traditionally, the financial services sector has been slow to adopt digital transformation. Issues with legacy systems, coupled with often large amounts of data and a reluctance to undertake potentially risky change processes, have meant many firms are behind the curve when it comes to technology adoption. It’s therefore promising to see that so much has changed over the last year, with 45% of financial services firms having invested in AI and machine learning technology – making it the top sector to have invested in this space over the last 12 months.
One business that exemplifies the benefits of investing in machine learning is Avantia, the technology-enabled insurance provider behind HomeProtect. The business has undergone a large tech transformation in the last few years, investing in an underlying machine learning platform and an in-house data science team, which provides them with capabilities to return a quote to over 98% of applicants in under one second. This tech investment has allowed them to become more scalable, provide a more stable platform, improve customer service and consequently, grow significantly.
This demonstrates how this kind of tech can help businesses to leverage tech in order to offer a better customer experience, and retain and grow market share through winning new customers. This resilience should combat some of the concerns that firms will face in the next year.
Additionally, half (51%) of financial services firms have invested in cybersecurity tech over the last year, which allows them to protect the platforms on which they operate and ensure ongoing provision of solutions to their customers.
Clearly, there is a benefit of international revenues and profits on business resilience. In practice, this meant that businesses that weren’t internationally diversified in 2020 struggled more during the pandemic. In fact, the businesses considered to be the least resilient through the 2020 crisis were three times more likely to only operate domestically.
Perhaps an attribute towards financial services firms’ resilience in 2020, therefore, was the fact that 53% already had a presence in Europe throughout 2020 and 38% had a presence in North America. This internationalisation gave them an advantage that allowed them to weather the many storms of 2020.
Looking at how to capitalise on this throughout the rest of 2021, half (51%) of are planning overseas growth in Europe over the next 12 months, and 43% in North America. Further plans to expand internationally is not only a good sign for growth, but should further increase resilience within the sector.
While there are many concerns, the fact that financial services businesses are investing in technology like AI and machine learning, as well as still planning to grow internationally, means that they are providing themselves with the best chances of dealing with any upcoming challenges effectively.
In order to maintain their growth and resilience throughout the next 12 months, it’s imperative that they continue to put their customers first, invest in technology and remain on the front foot of digital change.
Staying connected: keeping the numbers moving in the finance industry
By Robert Gibson-Bolton, Enterprise Manager, NetMotion 2020 will certainly be hard to forget. Amongst the many changes we have come to...
How to lead a high-performing team
By Matthew Emerson, Founder and Managing Director, Blackmore Four When we think about a great team, the image we conjure...
A practical guide to the UCITS KIIDs annual update
By Ulf Herbig at Kneip We take a practical look at the UCITS KIID What is a UCITS KIID and what...
Oil prices steady as lockdowns curb U.S. stimulus optimism
By Noah Browning LONDON (Reuters) – Oil prices were steady on Monday as support from U.S. stimulus plans and jitters...
Dollar steadies; euro hurt by vaccine delays and German business morale slump
By Elizabeth Howcroft LONDON (Reuters) – The dollar steadied, the euro slipped and riskier currencies remained strong on Monday, as...
Hong Kong’s Cathay Pacific warns of capacity cuts, higher cash burn
(Reuters) – Cathay Pacific Airways Ltd on Monday warned passenger capacity could be cut by about 60% and monthly cash...
Stocks rise on recovery hopes
By Ritvik Carvalho LONDON (Reuters) – Global shares rose to just shy of record highs, as optimism over a $1.9...
Fragile recovery seen in global labour market after huge 2020 losses – ILO
By Stephanie Nebehay GENEVA (Reuters) – Some 8.8% of global working hours were lost last year due to the pandemic,...
“Lockdown fatigue” cited as UK shopper numbers rose 9% last week
LONDON (Reuters) – The number of shoppers heading out to retail destinations across Britain rose by 9% last week from...
Alphabet’s Verily bets on long-term payoff from virus-testing deals
By Paresh Dave OAKLAND, Calif. (Reuters) – For Alphabet Inc’s Verily, a healthcare venture that is one the tech giant’s...