The survival of the fittest
The survival of the fittest
Future of banking and fintech
The smartest are the fittest in the financial ecology. A decade after the financial crisis, and in a world of growing protectionism, organisations do not only battle the capricious economic environment but also carry the heavy burden of regulations.
In this issue of Business Reporter, experts investigate how artificial intelligence, machine learning, blockchain and other cutting-edge technologies can empower decision makers to turn their challenges into opportunities.
UK fintech comes of age
UK fintech comes of age
by Charlotte Crosswell, CEO of Innovate Finance
Financial technology is disrupting financial services firms throughout the world, transforming the way we transfer, borrow, protect and manage our money.
The UK is at the heart of the fintech revolution changing the face of financial services across the globe, reaching everything from capital markets to banking infrastructure. Disruption is infiltrating every aspect of financial services as we know it, touching payments, regulation, insurance and property to name but a few. We are also seeing new technologies come under the tech umbrella: artificial intelligence, IoT, and of course, cryptocurrencies and the blockchain boom.
UK fintech is coming of age. Money is flowing into the sector throughout the world, reaching record highs in 2017, with over $1.8billion invested in the UK, a 153 per cent jump on the previous year. The ecosystem employs 76,000 people and several fintechs have become household names, raising hundreds of millions of pounds, with hopes of employing more people and expanding overseas. It is now seen as a viable career choice, with high-profile execs and young professionals, from both banks and technology firms, taking the leap into a sector they believe will succeed. It is therefore vital that we invest in the pipeline to ensure we are equipping our future workforce with sufficient numbers of the right talent and skills.
But the sector is not without its challenges. Across UK fintech, many businesses have watched recent events surrounding the Brexit negotiations unfold with a growing sense of unease. For this sector to continue to thrive and succeed, shared access to cross-border data, sources of capital funding, and international skills and talent are all required.
Without such access, many tech businesses – especially those start-ups that are scaling the success of UK fintech – will struggle to maintain the impressive growth we have seen, putting jobs across the technology and finance sectors at risk.
The rapid rise of fintech has caused banks and other institutions to look inwardly and assess whether legacy systems and processes are still applicable and viable. We are now seeing the start of a new type of bank: it has fintech labs, it partners with start-ups, and recruits technologists and coders. One of the key drivers behind this in the UK was the Payment Services Directive (PSD2) and open banking. This regulation has the potential to bring about real and lasting change in the financial services industry, rethinking how products and services are offered and delivered. It has set the precedent for a new open and more collaborative way of working and consuming.
However, it is also vital in this swiftly changing landscape that we protect consumers as financial technology companies continue to grow in size, scale up and spread their wings to international markets. Regulators are grappling with how they can continue to let innovation thrive, without adding to market risk. The UK has played a leading role as the Financial Conduct Authority (FCA)’s consultation on a global regulatory sandbox has resulted in the creation of the Global Financial Innovation Network (GFIN). This will seek to provide a more efficient way for innovative firms to interact with regulators, helping them navigate between countries as they look to scale new ideas.
Charlotte Crosswell is CEO of Innovate Finance, an independent membership association that represents the UK’s global fintech community. Founded in 2014 and supported by the City of London and Broadgate, it is a not-for-profit that advances the country’s leading position in the financial services sector by supporting the next generation of technology-led financial services innovators.
More than 250 global members have joined the Innovate Finance ecosystem to date. These companies range from seed-stage start-ups to global financial institutions and professional services firms. All benefit from Innovate Finance’s leading position as a single point of access to promote enabling policy and regulation, talent development, and business opportunity and investment capital. By bringing together the most forward-thinking participants in financial services, Innovate Finance is helping create a global financial services sector that is more sustainable, more inclusive and better for everyone.
Find out more at innovatefinance.com
How the “Potemkin effect” obstructs a full digital banking transformation
How the “Potemkin effect” obstructs a full digital banking transformation
by Jost Hoppermann, VP, Principal Analyst, Forrester
From short text messages and online banking onwards, banks and their technology teams have struggled to keep up with the challenges of digital channels for more than two decades. Today, banks use technologies and business applications that allow them to support a variety of customer touchpoints such as various mobile channels and the online channel – often in a flexible, cross-channel fashion that can create great customer experience.
However, banks typically stick with existing monolithic back-end applications that are in many cases decades old. The resulting lack of flexible business capabilities does not allow for new banking products and services to be easily designed and quickly delivered, or enable banks to respond to customer information requests and transactions in near-time and connect to business partners easily. This focus on touchpoints – on the digital front end – prohibits banks from creating the seamless digital end-to-end experience that retail and corporate customers need. Forrester calls this the “Potemkin effect”.
What are the reasons? The same solutions that banks need also create transformation risks. Undocumented functional extensions, complex integrations, monolithic design and a lack of experts still knowledgeable in old technologies and languages such as RPG and Cobol make digital transformation planning difficult and its execution a risky endeavour. Forrester survey data shows that decision makers in at least one third of financial services firms prefer the reduced customer experience of the “Potemkin effect” over transformation risk.
Even if a bank’s decision-makers tend to commence a digital end-to-end transformation, there is no guarantee that it will be successful. Discontinued large-scale transformation projects such as those of Co-operative Bank, as well as painful go-lives such as – more recently – that of TSB Bank are the exception rather than the rule. But incidents such as this shape the perception of huge transformation risk and further reduce the will to transform, even though thorough planning could have avoided these disasters.
In the meantime, business requirements are stacking up.
Banks need to deliver compelling customer experiences, create innovative products, rationalise their product portfolio and comply with regulatory requirements. They also need to become more productive, increase their profits, compete with the attractive point-products of fintechs and remain competitive in the world of open banking. And they need to accomplish all that using an obsolete technology base and in a market with diminishing margins. The transformation imperative won’t vanish, but what are the options?
A bank may opt for a perfectly tailored custom-built solution to mitigate risk and maximise delivered business value. However, this is hardly an economically sustainable approach anymore. Off-the-shelf banking software packages represent one more alternative. However, only a small group within the thousands of off-the-shelf banking applications can cope with at least the majority of the stacked-up requirements – and only a small minority can easily deliver the business agility that banks will need in the next decade and beyond.
Today, banks can follow one of two similar paths. They can either design an architectural target state around APIs for business-to-consumer, business-to-business and application-to-application scenarios as well as modern technologies and concepts such as artificial intelligence (in its various flavours), embedded analytics, high coherence, lose coupling, microservices, and SaaS and hook custom-build and off-the-shelf business software capabilities into this architectural framework. Or they can opt for one of those banking software vendors that already advance in the same direction and use their architecture as a backbone.
With this solution, banks don’t need to consider the coarse business software modules of the past anymore. Application landscapes will become an ecosystem of capabilities rather than a set of hardwired and integrated software products. A banking application will become a composition of business capabilities. Software artifacts from a bank’s development team, the bank’s financial services partners, maybe a joint venture for factory-type capabilities and service and software vendors will jointly deliver onboarding and origination processes via microservices – for example (see figure), with data securely stored in the bank’s in-house vintage core banking application and further (third-party) data stores.
Forrester calls this approach digital core banking. Today, forward-looking banks define strategies to gradually shift to digital core banking – and to ease digital transformation.
Forrester is one of the most influential research and advisory firms in the world. To find out more about Forrester’s research on banking please click here.
AI makes banking faster,
easier and more personal
AI makes banking faster, easier and more personal
Financial institutions are leveraging artificial intelligence to streamline manual processes and offer a superior customer experience
According to financial research firm Autonomous, artificial intelligence (AI) will introduce more than $1trillion in cost savings by 2030, representing 22 per cent of banks’ current expense load. Many banks, however, struggle to understand when and where to apply AI to their business and reap these promised benefits.
Part of the problem is that many people fear AI will steal their jobs, a rumour that has been spread by the likes of Hollywood and sci-fi novels. In reality, the true value of AI lies not in replacing workers, but in automating their most repetitive tasks.
Think about it this way: Henry Ford’s assembly line, first introduced in the US in the 1920s, saved time and money, but it also created mind-numbing jobs for millions of factory workers. Since then, US and Japanese auto manufacturers have steadily automated the assembly process with robotics, with humans functioning in primarily supervisory, technical and quality assurance roles. Time and money are still saved but with the bonus of freeing the worker to focus on using his or her higher-level skills, such as creativity and problem solving.
What does this have to do with banking? A lot, actually.
From the banker’s perspective
Consider the financial analyst who spends a tremendous amount of time keying in details from a financial statement. What he really needs is a way to remove the tedious nature of his job so he can shift his focus to a deeper analysis of the information and take action on the results. Or similarly, with a bank’s credit policy – if an organisation knows that a certain number of loans are being waived a particular number of times, with a specific type of performance, then the institution might want to remove or change the policy because it’s costing the bank. AI offers a faster and deep analysis of that broad credit policy and empowers the bank to create a change.
When financial institutions leverage AI to automate these dull, repetitive tasks, bank employees are free to focus instead on building relationships with their customers and offering superior service. After all, a personal touch is still crucial in the financial services industry, and when it comes to making those vital connections, machines simply cannot compete.
From the customer’s perspective
The banker is not the only one who benefits from AI. Customers, too, can enjoy a faster and more convenient experience that meets the higher standards set by companies such as Amazon and Uber. For example, chatbots can enhance the onboarding process when postured as helpdesk agents, answering basic questions quickly and anticipating common requests, thus eliminating unnecessary steps for both the customer and the institution.
AI can also give bankers a deeper look at their customers’ behaviours, patterns and financial history beyond basic demographics. This can help the banker suggest real-time insights and recommendations that are backed by AI capabilities, offering the right product or service at the right time. The customer feels as if their bank truly knows them, and their resulting satisfaction and loyalty is anything but artificial.
Today’s bank executives have a choice: they can stand aside as customer expectations continue to evolve and watch nimbler competitors pass them by. Or they can think strategically and plan now for how AI will help them offer new products, deliver their services more efficiently and serve their customers better.
To learn more, download nCino’s white paper, “The Future is Now: How Artificial Intelligence is Transforming Banking”.
by Nathan Snell, Chief Innovation Office, nCino
How technology empowers
How technology empowers relationship managers
Matthias Wyss, Head of Product Development, Private Banking Technologies
Technology can bring a step-change to the relationship between clients and financial firms.
But even though industry actors overall agree with the principle of the directive, the regulatory pressure can be a burden on relationship managers, who need to invest more and more time in compliance. “It can take up to four hours for a relationship manager to prepare the right client advice to discuss during meetings,” says Matthias Wyss, Head of Product Development of swissQuant, in his interview with Business Reporter. He believes that, beyond the strict regulations, technology disruption results in a race for lower prices and more efficient cost solutions. Given the recent increased regulatory pressure and expanded transparency requirements, global wealth managers are facing declining profit margins.
While digitalisation poses a challenge, at the same time digital tools offer an opportunity that can enhance process efficiency, lower costs and increase clients’ general user experience. As such, technology could be a viable solution, says Wyss. MiFID II regulation is designed to protect investors in all asset classes, move over-the-counter trading to regulated trading venues, and, overall, increase confidence levels with investors. But this could also result in a lot of daily repetitive low-level tasks. The efficient response is automation, to enable relationship managers to focus on the valuable part of their work: assessing risk, understanding individual client needs and customising offers.
swissQuant’s full order and trade-cycle platform is the answer to questions about pre-trade compliance, post-trade disclosures, customer and trade reports and many others. By liberating relationship managers from time constraints, swissQuant can empower them to dedicate more attention and tailored advice to the individual needs of their customers.
swissQuant follows a goal-based approach. First, it finds out what customers expect from their investments. Risk-profiling and assessment is part of the process. swissQuant’s technology also empowers relationship managers to respond flexibly to sudden requests – for example, by updating their offer during the conversation.
Wyss believes that the future belongs to those who can implement a hybrid model. In an ideal scenario, technology will act as support to relationship managers – a hybrid model to enable financial institutions to deliver higher quality at lower costs.
Why choose the swissQuant over other business intelligence providers? In today’s competitive environment, we can proudly say that our products and services provide some of the quickest and most sophisticated algorithms within Europe as well as worldwide. Please visit our website and get in touch with us today, we would be happy to organise a demo of our products directly at your offices.
Getting open banking right for customers and competition
Getting open banking right for customers and competition
By Brad Carr, Senior Director,
Digital Finance Regulation and Policy, Institute of International Finance
Open banking has great potential for social and customer benefits, but it needs refinement in how it’s implemented
In the new digital economy, products and services are based on data like never before. New technologies have exponentially increased the capabilities to store, process and transfer customer data, leading to greater personalisation of products, services and marketing, and more immediate fulfilment.
It is in this context that the emergence of “open banking” frameworks for data sharing, such as the EU’s PSD2 initiative, is so significant. By granting third parties access to their bank accounts, customers can potentially access new tools and offerings, but there are accompanying risks, both for that customer and for the broader system.
The open banking policy objectives are generally to promote competition and to empower consumers (perhaps emphasised slightly differently in various jurisdictions). These are noble objectives, and ones that market participants should embrace – but they do come with some key design issues and considerations.
To highlight three of those design considerations, there is firstly the protection of that customer data. While banks are by no means immune from breaches, they have consistently outperformed other industries in protecting data, underpinned by a mix of direct and indirect regulations, supervisory oversight, and a commercial imperative to preserve their customers’ trust. In a dynamic environment where banks are increasingly required to transfer that customer data to a new player, it is critical that all market participants can emulate the same high security standards that customers have come to expect – this should be a prerequisite to being eligible to receive data under an open banking system.
Secondly, ensuring customer protection comes even more into focus when we look at compensation for victims of data breaches and unauthorised or defective payments. This necessitates having a clear framework for the assignment of liability for breaches or errors, and their consequential financial loss, and ensuring that market participants are sufficiently resourced to be able to compensate customers in such an event.
These elements have been addressed differently under various open banking models, with variable implications. The UK’s Open Banking Standard sensibly includes a Dispute Management System (DMS), although participation in the DMS is voluntary – various other jurisdictions have models that are vaguer and/or put an increased onus on the consumer. The reality is that there is not always a consistent mechanism across jurisdictions to ensure that third-party payment providers are able to settle such claims.
Where all market participants should retain sufficient resources to be able to make customers whole in such an event, this is well-established for incumbent firms in the form of the operational risk capital requirements on banks. In a major data breach with thousands of customers affected, the claims may well exceed the resources that a payment initiation service has. For this purpose, new entrants should be required to have some form of emergency resource available, whether that be via in the form of insurance or bank-like capital.
Thirdly, the design of open banking frameworks often leads to asymmetries between different types of players, with the potential to distort the very competition that they are intending to encourage. If only payments data is required to be shared (as per PSD2 in the EU), then the mandated sharing of data is decidedly one-way, from banks to new entrants such as the “BigTech” firms.
Under such conditions, a new-entrant tech firm can couple the newly accessed bank account data with its own stores of data on the same customers – be it social media content, online search queries or mobile phone records – which it can combine to generate a fulsome picture of a customer, when other providers can’t. This gives tech firms an unparalleled advantage in personalising the services that they can offer.
There are ways to address such asymmetries, for instance by adopting a reciprocal approach to the scope of data sharing – for example, ensuring that the entities that can share and receive data are effectively the same. This could enable all types of players to have access to the same amalgamated data pool, from which they could each run their own analytics and compile their own respective offerings to the customer.
The open banking concept has great potential for considerable social and customer benefits, but the specifics can throw up some design implications. In some cases, it may need some refinement in the way that it’s implemented, if it is to support its underlying competition objectives.
For more information please see our recent paper on reciprocity in customer data sharing frameworks.
A stellar year for the UK fintech sector
A stellar year for the UK fintech sector
According to KPMG, in the first six months of 2018 UK firms brought in £12.3billion worth of investment, leading the way in Europe and outshooting the US for the first time.
The UK had four of the top 10 fintech funding deals in Europe, with the biggest being the $250million raised by digital banking firm Revolut.
But it is not just investors taking a keen interest. According to the government’s Fintech Sector Strategy report earlier this year, the public is also opening its eyes. The report stated that over 42 per cent of digitally active adults now use the services of at least one fintech firm, and more than 20 million people make use of banking apps as a more convenient way of managing their finances.
Revolut increased its customer base to 1.3 million at the end of 2017, compared with 450,000 in 2016. Fellow digital bank Monzo recently signed up its millionth customer, marking a 75 per cent growth in the last six months – Monzo now represents 15 per cent of all new UK current account openings. And app-only bank Starling has also seen its personal current account numbers grow, from 43,000 to over 210,000 in the last year or so. Monthly transaction volumes exceed £200million a month.
Tom Bull, Director, Fintech Strategy at EY, says regulators supporting fintech’s banking endeavours has also helped stoke the demand. “They have been encouraging when it comes to applying for banking licences,” he said. “But becoming a bank changes the DNA of a start-up fintech. There are more elements of risk, compliance and control. It is a challenge, but the very best fintechs are finding ways of doing it.”
This growth raises the question of how traditional big banks should respond to these surging fintechs and others in the banking space. Are they competitors or potential partners?
“Banks do consider Monzo and Starling and other digital banks as competitors, but they do not see them as a genuinely considerable threat at this point in time,” says Jibran Ahmed, Managing Principal at tech consultants Capco. “These fintech banks have large social media profiles but the customer numbers are tiny. However, the banks do recognise that they have credible services and [that they] are increasingly missing out on vital customer data because of them.”
Ahmed explains that a Monzo customer, for example, often puts their salary into their main high street bank account but will then transfer a lump sum every month to the digital bank.
“The customer will then use the Monzo account to spend at restaurants or cafes, and as such it is Monzo and not the high street bank who gets their valuable spending behaviour data,” he adds. “Eventually the big banks will try to figure out how to get that data back, and that could be the trigger for partnerships or acquisitions.”
There are some signs already of partnership, but also competition.
According to a recent shareholder letter written by Starling Chief Executive Anne Boden, Starling has signed “a contract to provide payment services to support new initiatives at RBS/NatWest”.
The deal will reportedly see Starling help RBS with the ongoing development of a new digital platform through use of its infrastructure.
It is understood that HSBC and Santander are also looking to build their own digital bank brands to challenge their fintech rivals. Goldman Sachs has already created Marcus, an online platform offering no-fee personal loans and savings accounts, to customers.
“Banks are looking at building certain capabilities themselves in-house and that’s sensible,” said Ahmed. “Every bank will have to invest in AI, data science and machine learning. But they will be building their own new products and services, they won’t be trying to replicate those already on the market and performing effectively.”
The partner/competitor question is, he believes, clearer when it comes to those existing fintechs producing technological innovations in areas such as machine learning and automation rather than direct banking services. They are seen by banks as potential partners or acquisitions, says Ahmed.
“The banks see the direct value in harnessing this technology and providing additional services to their customers,” he explains. “Yes, they could replicate this technology, but why spend £100million doing it over four years when a partner can have it up and running for your customers in six months?” says Ahmed. “The fintechs in this space, even though they may have started out believing they were going to take on the big banks, are also increasingly keen to partner. They see the advantages of having the banks’ access to capital and letting them deal with compliance and regulations.”
Bull agrees that partnership is the favoured option. “Fintechs see the opportunities of getting their great innovations out to more customers by partnering with banks,” he says. “From the banks’ perspective they are getting back into growth mode and recognising that new services are changing the game. They can import these from partnerships.”
An example of this is the collaboration between Barclays Business Bank and online invoice financing platform MarketInvoice. Barclays took a minority stake to allow its SME clients access to the fintech’s “proprietary single-invoice finance product as well as broader digital-invoice finance facilities”.
Another is the partnership between Quantexa and Deloitte to identify money-laundering activity within financial institutions such as banks.
Ahmed adds: “Most banks have departments now scouting for fintechs to [either] form a loose or strategic partnership with, or acquire. Banks want a return on investment, but they also want a say in how the fintechs develop.”
That can often lead to disharmony, however.
“I can’t think of a smooth partnership between a fintech and a bank,” Ahmed states. “Fintechs are used to making decisions quickly, while banks have to go through many steps lasting months. Start-ups also get frustrated at the annual funding cycles of banks. They don’t want to wait for a green light before starting a new idea. The answer is forming a hybrid lean-and-agile operation within a large company.”
Bull believes new Open Banking rules, which require banks to share data with authorised third-party providers, can catalyse new partnerships.
“It has energised banks as they see what consumer services they need to provide. It could lead to new clever partner propositions and products,” he says.
One fintech eager to make use of Open Banking is Ecospend, which helps people plan their finances better.
“We are still a long way from major banks becoming agile or indeed innovative. We do not see banks as competition and we would love to partner with them,” says Ecospend’s managing director William Burton. “I think banks will increasingly become wholesalers of products and services to niche ‘front-end’ services like ours. Knowing your customer will become paramount and banks will be able to utilise fintechs to connect to customers indirectly.”
Ten years after the 2008 financial
crisis: the rise of regtech!
Ten years after the 2008 financial crisis: the rise of regtech!
Ten years ago the 2008 economic crisis hit rock-bottom, and everyone was in fear of what would be next. Would it get worse before it would get better? What would be the impact on our daily lives? I remember talks at the vending machine: imagine if a banker would have gone on a few weeks’ holiday to a deserted island without access to the news. The banker would have never believed the new reality of a world without Lehman Brothers, to say the least.
So many things happened after that, a butterfly effect on a large scale. The regulator stood up to the tame the beast of the financial industry. Many banks got financial backup from their governments, and many were nationalised. Indirectly, the man or woman in the street got involved too – ordinary people financing the perceived misbehaviour by banks through increased taxes. Thus the banking crisis became personal, and the traditional feeling of trust and security in the banker was lost. The general public was furious.
That’s when fintech was born, a totally new way of looking at the world. Early fintech companies where convinced that they could do better than their predecessors, the banks, by focusing on adding real value for their clients at a significantly lower cost. Although the rise of fintech has yet to overtake traditional banks, it would be wrong to say it hasn’t brought anything to the industry. The opposite is true – fintech has changed the industry at its core, bringing a new focus on the client, more agile delivery models and an acceptance of new technologies such as cloud. But above all, it has created a platform for change.
Regulators worldwide are reshaping the rules of the game by plotting new rules to work to – it’s estimated that 60,000 compliance documents have been written since the crisis, such as Dodd-Frank, Basel III, EMIR and MiFID II, predominately introduced to improve transparency, market efficiency and investor protection. Whether larger or small, businesses will need to invest to ensure they stay compliant. For example, in wealth and asset management, independent financial advisors (IFAs) have significantly fewer resources available than international private banks, even though both are subject to same MiFID II regulations.
Successful startups solve problems and satisfy real needs. This is the only way to become successful and survive the fierce competition. In my opinion, this is where fintech turns into “regtech” – solving industry issues related to regulatory matters in the financial industry. Regtech firms are not in competition with incumbents, but are fully collaborative.
Collaboration is the cornerstone of regtech: of technology, processes and people. The latest FINRA regtech report talks about five applications in our industry:
Surveillance and monitoring: the industry is investing in regtech tooling that seeks to use cloud computing, big data analytics and AI and machine learning to obtain more accurate alerts and enhance compliance and staff efficiencies, surpassing traditional rule-based models and moving into a predictive risk-based surveillance model. The increased use of AI and machine learning creates new challenges for banks, however, wherein they must account for decisions made by new technologies.
Customer identification and AML compliance: regtech startups and incumbents’ firms have started to introduce solutions for customer identification (KYC) and AML that are designed to employ technology to develop more effective, efficient and risk-based systems.
Regulatory intelligence: regtech companies are providing tools for a real-time catalogue of regulatory requirements in a user-friendly manner, including timely reminders of changes and review obligations. Natural language processing (NLP) and machine learning are key technologies used.
Reporting and risk management: solutions in this space leverage technology to develop tools to facilitate or automate processes involved in risk-data aggregation, risk metrics creation and monitoring, and regulatory reporting.
Investor risk assessment: in order to provide appropriate investment advice to clients, firms must seek information from their clients and apply reasonable policies and procedures to determine the investor’s risk appetite and tolerance.
When I look at my own day-to-day activities, the box is ticked for at least three of the above applications. Meeting various players in all shapes and forms on a daily basis, I’m convinced that strong collaboration with Regtech solutions has changed from something that’s nice to have to one you must have. In order to stay leader of the pack, you need to future-proof your business. That’s when you change compliance from a compulsory task into a real unique selling point.
Koen Vanderhoydonk is a fintech and regtech influencer – follow him on Twitter or LinkedIn.
How can traditional banks meet
the alternative bank challenge?
How can traditional banks meet the alternative bank challenge?
Jane Jee, CEO of Kompli-Global, explains how frictionless customer onboarding without compromising on compliance with anti-money laundering (AML) legislation is crucial if banks are to meet the challenge presented by the rise of agile fintechs.
Success in the field of banking is increasingly about offering the customer the best possible experience and putting them at the heart of the business. Delivering a smooth, frictionless customer onboarding experience will be particularly important.
However, to comply with AML regulations, all financial institutions, as well as other regulated entities, must carry out stringent know-your-customer (KYC) checks on all new customers before handling their money – and, in addition, they must monitor existing customers on a regular basis according to the level of risk they pose.
The regulations require comprehensive checks of all available data for “adverse information” on new and existing customers. This means searching not just media news sources but databases and watchlists, as well as the so-called “deep web” for the 90 per cent of internet data not indexed by commercial search engines.
Meeting the challenge
The initial KYC-checking process has traditionally proven difficult for banks trying to onboard customers quickly while meeting compliance obligations, for a number of reasons.
The legacy infrastructure of financial institutions means that too many are using obsolete technology and manual processes to carry out the required KYC searches. Many are using Google and similar search engines, despite their unsuitability for AML – they can’t explore the “deep web” for non-indexed data, for example, while SEO and other techniques can skew results.
Further complicating matters, many financial institutions are making use of static databases in their adverse information searches. As noted in a recent FATF report, “the information provided by third-party service providers can be out-of-date or incomplete,” with implications for KYC searches.
It’s time for them to step up their game
These factors can all lead to unnecessary delays in approving new account holders. This potentially sours the company’s relationship with customers from the very beginning, leaving the big banks vulnerable to competition from the growing number of fintech start-ups offering potentially better tailored banking services to customers.
With their cutting-edge, purpose-built technology created from scratch, this new generation of start-up banking service providers are flexible and agile enough to offer a speedy, seamless experience to customers, while at the same time meeting AML obligations.
Banks, therefore, need to step up to the plate when it comes to customer experience, without compromising on AML legislative compliance, in order to compete with the new players in the industry.
Benefiting from innovative technology
This is where the new generation of regulatory technology (regtech) experts can help banks beat the new banking services providers at their own game. Forming partnerships with innovative suppliers with dedicated cutting-edge solutions may prove a lifeline for traditional banks and save them significant costs and effort.
Advanced regtech incorporating innovative machine learning (ML) and natural language processing (NLP) technology – examples of the generic term “artificial intelligence” – have been designed specifically to help banks fully automate KYC searches to minimise onboarding times while optimising due diligence.
Kompli-Global’s search platform kompli-IQ, for example, replicates the techniques of the very best human-compliance analysts by deploying such technology. Using more than 500 search terms in multiple languages, the platform can perform real-time searches of the surface and deep web, as well as other key global databases for information on any new or existing customers.
Such technology can perform multiple KYC checks simultaneously, and unlike its human counterparts can search 24 hours a day, seven days a week, enabling it to flag any adverse media to human compliance managers the instant it appears, without delay.
In doing so, this kind of regtech can do more than help banks identify potential money launderers before they become customers. It can help streamline the onboarding process for new account holders so that applying for an account at a bank can truly be as smooth and seamless as setting one up with a start-up banking services provider.
Time to take action
The new breed of agile banking service providers pose a real challenge to the financial dominance of traditional banks. To compete, banks need to do all they can to optimise the customer experience, by streamlining the customer onboarding process.
By incorporating advanced regtech into their due diligence processes, banks can address account application delays caused by inefficient KYC protocols, while ensuring optimum regulatory compliance. In doing so they can ensure their businesses continue to thrive, all while helping to protect the wider economy from the threat of money laundering.
To find out more about how Kompli-Global’s advanced search platform kompli-IQ can help your bank optimise customer experience, visit www.kompli-global.com.
Can blockchain leave its dark past behind?
Can blockchain leave its dark past behind?
Ten years after its inception, blockchain is on the verge of developing into a fully-fledged payments technology that will facilitate a second wave of digitalisation.
Although it was originally a decentralised electronic currency designed to bypass a dysfunctional banking system, bitcoin’s short history is pockmarked with unprecedented volatility, multi-million-pound losses and hackers making off with hundreds of thousands of the cryptocurrency. So much so that the reputation of the tech behind it, blockchain, has been severely compromised by association. But it’s a technology that is now coming of age, as its potential applications beyond bitcoin grow.
Digital token economies
However, labelling all cryptocurrencies as gambling is missing the point. As investment advisors often point out, each cryptocurrency project has a specific token economy model underlying it. Much like the systems used, for example, in prisons, where good behaviour is achieved by rewarding that behaviour with tokens, blockchain systems – lacking a central authority – use digital tokens to incentivise members to maintain the existing system.
What distinguishes various cryptocurrency blockchains is the additional purposes of its tokens. In the classic case of bitcoin, tokens go to miners who verify transactions. In other blockchain ecosystems staking – saving up your tokens in your electronic wallet – becomes the desired behaviour.
There are models that lend themselves more readily to traditional business transactions than others. In Ripple’s blockchain-based remittance model, a small percentage of the tokens transferred is burnt and thus indirectly awarded to the entire network as a fee by making remaining tokens more valuable . In another model, members of the blockchain community with underused assets, such as computing or storage capacity, rent them out to those that need them. This latter model, for example, has the potential of taking the sharing economy to the next level, eliminating yesterday’s as-a-service disruptors such as Uber or Airbnb as unnecessary intermediaries.
It is due to this diversity and the fuzziness of the term blockchain that writing off its future is problematic. Incumbents who are increasingly lending credibility to the technology by adopting it seem to be cherry-picking the qualities that define blockchain: that it is accessible, distributed, immutable, transparent and comes with a cryptocurrency.
A case in point is the Ripple-powered international payment network that Spanish bank Santander has just rolled out in four countries, including the UK. Ripple is a blockchain-based remittance company that Santander already has a stake in since 2015. However, its cryptocurrency XRP has features so radically different from bitcoin that some refuse to call it a cryptocurrency at all. The first major difference is that Ripple didn’t design XPR to be an investment asset but to make the blockchain as fast and secure as possible. Ripple also did away with mining to eliminate the risks it poses and – an abhorrent idea for purists – centralised its blockchain to make its service fast and reliable as well as a highly appealing solution for big banks.
Also, the Ripple blockchain is an example of a so-called private blockchain, which isn’t accessible to anyone, and where you don’t have individuals but trusted operators at the nodes. Thus, the Ripple blockchain becomes a closed system without the inherent weaknesses of the original blockchain (sluggishness and a voracious appetite for electricity), which basically turn it into a fintech platform which leverages the best features of cryptocurrencies.
IBM’s incubator, Hyperledger (together with its enterprise-level version, Hyperledger Fabric), developed by Linux, is another step towards diminishing blockchain’s guilt by association with bitcoin. Hyperledger is a multi-project open-source collaborative effort created to advance cross-industry blockchain technologies.
Hyperledger Fabric doesn’t require any built-in cryptocurrencies. As Brian Behlendorf, the executive director of the Hyperledger Project explains, “You’ll never see a Hyperledger coin. By not pushing a currency, we avoid so many [of the] political challenges of having to maintain a globally consistent currency.”
The new mantra: tokenise!
The sporadic examples of blockchain becoming increasingly mainstream in many different shapes and forms are reinforced by the recent wave of tokenisation: the conversion of rights to real-world assets into digital tokens on blockchain. Tokenisation has the potential to solve the real-world problem of illiquidity and will lead to a considerable expansion of the global market. Intangibles like copyright, brand recognition and goodwill sound like the natural products of an intangible market, but their value is hard to peg down. Nevertheless, when intangibles are turned into tokens and their legitimacy is guaranteed, the market will attach a specific value to them.
Anything can be tokenised. Moving real-world assets (RWAs) to blockchain will make global trade much simpler and more democratic. Transactions will be secure and transparent, and commerce will be liberated from cumbersome legal and bureaucratic processes. Individuals can have partial ownership of non-fungible assets that they otherwise couldn’t afford the full ownership of.
For example, on Maecanas, an art investment platform that aims to disrupt the art auctioning market, auction participants purchased a 31.5 per cent share of Andy Warhol’s 14 Small Electric Chairs for $1.7million. According to the rules of the platform, the owner of the RWA always keeps a 51 per cent stake in the artwork and covers its storage and security costs, while micro-owners get “dividends” when artworks are on lease to museums and galleries.
Investment, also regarded as a tangible asset, is getting tokenised too. security token offerings (STOs) are the new initial coin offerings (ICOs) on today’s crypto-fundraising market, financial experts maintain. But while ICOs are often dubious operations staged by start-ups who need quick, unregulated access to crypto-currencies or fiat money – and leaving crowd-funders with not much more than utility tokens, if anything – security tokens are actual financial securities backed by something tangible such as the assets, profits, or revenue of the company.
Bitcoin and blockchain purists such as Bobby Lee, founder and former CEO of Hong Kong-based Crypto Exchange, are outraged by businesses using the term blockchain to refer to what they see as corrupted versions of the digitalised, decentralised public ledger, claiming they are nothing more than databases with a twist. While Tim Berners-Lee, the oft-cited inventor of the World Wide Web and a staunch advocate of its re-decentralisation, shared his vision of how banks could use private blockchains all over the world at Ripple’s Swell Conference, he also warned that moving everything to blockchain mustn’t result in a false sense of security. Whether blockchain can retain its anti-establishment allure or will mature into an incorruptible enabler of the tokenisation of the existing economic system, remains to be seen.
B-Hive fosters collaboration
in financial services industry
B-Hive fosters collaboration in financial services industry
Fabian Vandenreydt, Executive Chairman of B-Hive
Large financial institutions are recognising more and more the need to innovate in order to be competitive in financial services - especially with digitisation affecting every aspect of the industry. However, rather than attempting to compete against technology companies trying to disrupt this sector, these institutions are moving more towards collaborative efforts.
Enter B-Hive, a European collaborative innovation platform that connects financial services, players and technology start-ups and scale-ups to address common challenges and opportunities brought by the digitalisation of the financial services industry. B-Hive is focusing on business development and matchmaking across the different regions, setting up missions, networking events and touchpoints for its members and partners.
This collaboration helps companies identify and tackle the challenges the industry is currently facing: including cyber-security, blockchain implementation, closing the digital skills gap, big data, artificial intelligence and more. As such, B-Hive is helping connect the dots in the fintech ecosystem on a global scale.
Creating a powerful network is a large part of this, and in addition to B-Hive’s 13 financial institution shareholders, as well as support from the Belgian government, and more than 100 fintech members, it aims to connect with fintech hubs in other ecosystems to further foster this collaboration through knowledge-sharing and helping companies find the right organisations with which to conduct business.
B-Hive has set up regional offices in London, Tel Aviv and New York to provide foreign tech companies with a smart gateway to Europe – which means access to its global network and unlocking business opportunities in Europe.
Learn more about B-Hive’s programs, locations and community
Open banking: hit, miss, or too soon to say?
The fintech verdict
Open banking: hit, miss, or too soon to say? The fintech verdict
I recently chaired “Open banking: hit, miss or too soon to say?” at techUK, with my colleague Ruth Milligan, bringing together five fintechs with the members of the Open Banking and Payments Working Group, banks, the Financial Conduct Authority and the New Payment Systems Operator, to hear direct from the front line on the open banking experience thus far. We asked: where are we with open banking, and what needs to happen to ensure its success?
Tim Richards from Consult Hyperion kicked off with an overview of the state of play. There were certainly problems, he noted, but much progress has been made. “Open banking is a baby – it will take time to grow up,” he concluded “When it does, we will see real competition.”
But others were far more equivocal. Caroline Plumb of Fluidly said that her company, although authorised as both an account information service provider (AISP) and payment initiation service provider (PISP), was not currently using open banking APIs as the commercial risk is too great, at present, for three key reasons:
- The coverage is still limited to current accounts. But Plumb’s SME clients need data from across the range of accounts, from savings to corporate cards.
- The consent journey for users is cumbersome, slow and difficult to cope with, especially for SMEs where multiple directors are account signatories.
- API standards were meant to ensure consistency, but in practice each bank handles its customer flow differently, with no consistency of language, number of screens and so on.
For Ashleigh Petrie of MoneyBox, open banking should deliver great benefits, both to companies and users. She was looking forward to the extension to credit cards, and the ability to use payment initiation instead of direct debit to collect monthly savings.
However, not all was rosy. She went on to list major difficulties in connecting to a large incumbent bank. She illustrated a seven-step process for customers, different from their online banking and involving several passwords and numbers. Since Moneybox has no sight of the process after the customer leaves its app, assisting customers has been problematic and drop-off rates high. She contrasted this with Starling Bank, which has a three-click process using biometric authentication: clearly the process was far easier for a digital bank operating only through mobile platforms.
Martin Threakall from Modulr Finance was very positive about open banking. He noted the obvious: it is only insiders who are debating success or failure – the public knows little about it and are unconcerned about slow progress. He believed open banking will really deliver when it has achieved full scope and payment services are up and running. Modulr is preparing an open banking service to allow its lender customers to collect monies owed. He agreed, however, that the process must get much easier if consumers are to adopt.
For Ryan Edwards-Pritchard of Funding Options, speed and convenience for customers was paramount. Currently the speed of APIs across the CMA 9 varies from three to 22 seconds and although he didn’t expect a seamless process, it did, he said, need to be swift and standard. Likewise, the customer journey must be standardised, using language that informs and does not scare the customer off. In his view, a trust mark is needed, both to reassure customers and to give banks something to aspire to over and above the letter of the law.
The last speaker, Stefano Vaccino from Yapily , presented what may be a solution for many third-party providers (TPPs) – the integrator option. Yapily streamlines the process between TPPs and all banks, both UK and international. It does not require FCA licence under current rules but works with regulated companies. For Stefano, the main issue was how to ensure EU and international standardisation and interoperability, both of regulation and process.
The discussion focussed on payments. The fintechs were keen to use open banking for payments to provide immediacy and enhance competition. Yet several barriers were identified: the technology is currently clunkier than cards and, unless this changes, they will not be used. Push payments do not carry the guarantees that credit cards do. The must-have use-case for PISP is not yet clear – fintechs need to unearth opportunities where PISP will come into its own. Payment initiation will be more interesting when it also covers future and variable payments.
Overall, six conclusions emerged:
- It is too soon to say: open banking is not fully developed, many TPPs are waiting to see, but this will change. Banks also need more time to improve their processes.
- As the market grows, banks will better recognise the opportunities.
- There is likely to be a key role for integrators to smooth over connection issues.
- The success of open banking depends on customer adoption, which will require fewer steps, consistent user journeys, clear language and easy authentication (such as biometric). A trust mark would help.
- Standardisation in the UK is not enough – we need international standardisation.
- The “killer” use-cases still need to emerge – especially for payments
Dr Louise Beaumont works with legislators and regulators to create disruption, with corporates to cope with disruption, and with start-ups to exploit disruption
The digital branch office: how Moxtra is transforming the client experience in
The digital branch office: how Moxtra is transforming the client experience in financial services
Subrah Iyar: Co-Founder, CEO of Moxtra Inc. Former Chairman, CEO, Co-Founder of Webex Communications
The mobile lifestyle represents both a threat and an opportunity for financial institutions. As clients are becoming accustomed to the digital experience provided by apps they use in their professional and personal lives, they expect the same level of on-demand, customer experiences from their financial services providers.
This technological shift in consumer behaviour offers disrupters an opportunity to weaken the ‘stickiness’ between incumbent banks and their customers. A rapidly expanding population of customers is moving away from traditional banking relationships all together, abandoning the brick and mortar branch model in favour of the digital- only experiences provided by challenger banks. Banks can now power a branch in millions of mobile phones at the cost of a singular branch, creating serious implications for scalability and operational efficiencies.
Financial institutions are creating renewed digital customer experiences to reach, engage and retain customers. These experiences are shifting towards an ‘omni-channel’ approach, by collating multiple digital channels into a unified, customer experience.
According to a report by the British Bankers’ Association, customers are increasingly using their mobile phones as “portable banks”, managing credit cards, loans, and taking part in real-time video meetings with bankers.
However, with this digital transformation, banks risk losing the human touch. Banking clientele still want to be able to engage with a banker and manage their finances, on- demand. Customer centric digital approaches can escalate from routine processing to full-service advice for higher-touch clients with specific needs.
While delivering to today's customer expectations, solutions must also adhere ensure the highest security standards and provide a complete audit trail of all shared data. Meeting these requirements and complying with global regulations are critical prerequisites for deploying any new form of digital engagement.
“Moxtra enables you to build the branch in your app, as a turn-key solution.”
Moxtra provides an embeddable, client engagement platform for banks to deliver a mobile first, personalised experience to their customers. With Moxtra, banking clientele now have a branch in their pockets, enabling them to engage with their bank and manage their wealth from anywhere, at any time.
Moxtra was engineered to meet industry standards for security and regulatory compliance. The platform can be deployed as an on-premise, private cloud, or hybrid solution and can be deeply integrated into existing banking workflows.
For banks, ongoing success will be determined by their ability to adapt to changing customer needs. A report on Global FinTech published by PricewaterhouseCoopers (PwC) said that by “incorporating new technologies into their architecture”, financial services providers can “play a central role, operate at the centre of customer activity, and maintain strong positions even as innovations alter the marketplace.”
For more information, please click here.
The shifting frontlines of investment management
The shifting frontlines of investment management
Quants are turning out to be the false friends of human active managers.
Quants, or quantitative investment strategies (QIS), which use technology and formulas to automate the investment process, were originally seen by traditional active managers as a means of generating higher returns, and thus fending off the assault of passive investors, who have seen an inflow of $2.5trillion since 2000 – about the same amount that has been removed from active funds in the same period.
The main reason for this seismic shift of funds is the fact that passive funds are tax efficient, transparent and their fees are up to 80 per cent lower than those of active funds. Although passive funds, such as exchange-traded funds (ETFs) mirroring indexes such as the S&P500 or Russell2000, don’t promise to beat the market, they do deliver against their more modest benchmark, while the success rate of active managers – as was confirmed by the latest Morningstar Active/Passive Barometer – “was less than 25 per cent in more than half of the categories surveyed over the 10 years through June 2018”.
Until 2017 experts still expected active strategy to rebound, and maintained that traditional stock pickers need to become centaurs leveraging quant investment techniques in order to be able to reduce their fees and become more competitive – as if active managers didn’t have it hard enough.
Instead, what we see is Blackrock, the exemplar of passive investing, sack seven of its fund managers and restructure its underperforming stock-picking business through the acquisition of SAE, a $100billion computer-powered quantitative investment unit. Blackrock envisions SAE, its Systematic Active Equity (SAE) arm to operate as an incubator and develop techniques that will transform its entire investment management business. In accordance with a common quant-biased formula stating that one computer engineer can do the jobs of four traders, SAE employs 30 PhDs in computer science, physics and engineering. It is the analysts not traders that propose an investment idea, which at Blackrock is still dissected by old-guard human “referees” to test its viability.
A major milestone down the road of gradually supplanting traditional stock managers were the almost simultaneous launches of two AI-driven ETFs a year ago. The first one is AI Powered Equity ETF, which, between its inception in October 2017 and 31 August 2018, returned a promising 19.20 per cent compared to 12.12 per cent for S&P500.
AI Powered Equity ETF by EquBot uses IBM’s Watson Supercomputing to analyse the data of 6,000 publicly traded companies, ranks investments based on their “probability of benefiting from current economic conditions, trends, and world- and company-specific events”, and picks those with the best chance at outperformance in order to build the perfect portfolio of 30 to 70 stocks.
Although Toronto-based, robot-run equity ETF firm Horizon was launched a month later than AI Powered Equity ETF, it was the first to have gone global. Its AI had been back-tested over 10 years of market data and its management fee at 0.55 per cent is about half of what traditional stock pickers would charge.
How can quants gain more traction?
Fully automated quants, however, are still in their infancy and have issues of their own. With data protection making great strides, quants using AI to scour the internet for massive amounts of data to outdo humans – including satellite photos, social media accounts and data generated by credit card transactions – are an acute data protection concern. A common technique that QISes increasingly use to better comply with regulations is “differential privacy”, which entails adding noise data into the data mix in order to obscure personally identifiable information (PII) without destroying the useful features of data-sets.
“Fundamental discretionary traders account for only about 10 per cent of trading volume in stocks today.”
Another frequent charge levelled against quants is that their investment decisions are not transparent (a shortcoming they share with their human counterparts), which has led to the emergence of a new field called explainable AI, where a second layer of artificial intelligence is incorporated into the system to examine the first and work out how it came to make investments in a certain way.
Records have shown that human stock pickers came into their own and managed to consistently outperform their passive rivals only in times of big financial crises, when active managers have more wriggle room to sell and buy shares from their portfolio, while passive investors stay invested even in seriously underperforming securities.
However, they seem to be losing that edge too to the new, artificial breed of investment managers. Although some recent market volatility has already been laid at the door of AI-driven quants, and there is general anxiety about how fully automated investment funds can wreak havoc on the global financial system in the future, the first surveys seem to show that AI, due to lacking emotions and biases, will be quicker at correcting erroneous investment decision and rebalancing the market when it is getting out of kilter: a quality that has the potential of winning over sceptics.
The jury is still out
It is still early days to assess the long-term value that AI can bring to investment management. Its short, triumphant march so far is tempered by algorithmic glitches and casualties such as Sentient Investment Management, an automated hedge fund that recently closed after only two years in operation. But if JP Morgan’s estimate that “fundamental discretionary traders account for only about 10 per cent of trading volume in stocks today” is anything to go by, the odds are strongly against the long-term survival of the human active manager.
But passive trading is ready to up its game: investor guru Jim Rogers has already launched his Rogers Ai Global Macro ETF. Although in passive investment there is less room for leveraging AI ingenuity (Roger’s ETF will mostly follow US-listed single-country ETFs), it can lead to even lower margins by improving the efficiency of execution and rebalancing. So, although the antagonism between active and passive investment is here to stay, this time we shouldn’t expect a rivalry between humans and machines but rather a race between intelligent learning machines.
Moving towards asset management 2.0
Moving towards asset management 2.0
Léopold Gasteen, CEO & Founder
The term Web 2.0, coined in 1999 by Darcy DiNucci, came to emphasise the “second” evolution of the world wide web from a set of static webpages to a system of dynamic user-generated content, driven by user collaboration and interactivity.
What followed was the consolidation of several previously fragmented industries. LinkedIn disrupted recruitment, Facebook brought together friends on social media, Instagram changed the way we share photos and Twitter unified our thoughts – So isn’t it time something connected stakeholders in the asset management space – an industry managing over USD 70 trillion last year, yet operating in such an archaic, inefficient and fragmented way?
First, we need to look at the challenges facing the industry today. Alternative investments have underperformed relative to other asset classes (hedge funds lagged the S&P by 6% last year), there is pressure to comply with increased regulation and a challenge to remain competitive given the changing market dynamics brought about by the Fintech sector.
Asset management 2.0 will be characterised by AI (robo-advisors) and data-driven decision-making, necessitating the need for a centralised data-aggregating product where key stakeholders in the space can interact. At Edgefolio, this is exactly what we are building - a marketplace connecting allocators with fund managers in a compliant, secure and beautiful way.
By plugging the data gap between these players, Edgefolio equips fund marketers with data-driven insights to optimise the fund sales process, whilst giving allocators all the tools to screen for, analyse, interact with and conduct due diligence on - funds on one, compliant platform.
Edgefolio covers 90 percent of the typical allocator’s workflow in one place, offering institutional investors a solution to managing wealth at a fraction of the cost. Our machine learning algorithms generate suggestions to allocators, based on type, search history and location – leading to efficiency gains in portfolio construction. Every allocator journey on the platform is tracked, creating an auditable trail of reverse enquiry – ensuring full compliance with AIFMD.
What’s more, we are building a global product. Our vision is to serve both institutional and retail investors alike – covering a broad range of products – traditional and alternative – across the full spectrum of the asset management space.
For more information, please click here.
Fintech solutions offering a new type of service excellence
Fintech solutions offering a new type of service excellence
Theodore N Krintas, PhD, Executive Vice President, Profile Software
The financial services industry faces a lot of changes in terms of regulation and compliance, customer retention, fintech threats and profit margins. The increasing pressure from regulators along with the need to automate processes within the organisation are best met with the use of the right software that can make operations more agile, allow easy compliance to changing regulatory requirements and ultimately offer a competitive client experience that could lead to higher margins.
In terms of regulations, the financial services industry has been continuously affected by the changing regime in Capital Adequacy with Basel II/III, the processes, transparency and commissions in favour of the client with MiFID I/II as well as the continuous changes in the Alternative Finance, Marketplace Lending and Crowdfunding that now sets more parameters for the start-up and existing firms.
These changes revolve around customers and their best interest thus they keep evolving. Firms whether in the investment or banking domain are called upon to comply with the new environment. In some cases, this was done pretty fast (i.e. RDR in the UK) with ambiguous results. In other cases (i.e. Crowdfunding) it took some time for the situation to develop in its entirety, and now that the dust has settled, a more mature landscape of offering has been formed and the regulations provide greater coverage.
When an organisation has rigid operations there might be a lack of flexibility in adapting to new regulations and market trends. This creates an opportunity in the marketplace for start-up firms to emerge and deliver a new set of services. This type of firms usually has the infrastructure to quickly deploy changes in their processes much faster than established firms, thus delivering differentiated and innovative services to clients more competitively.
This is a prime reason why the fintech organisations developed their operations, ranging from the alternative finance platforms to robo-advisors, as the end result is faster customer service appealing to new age banking customers and investors. This makes existing financial institutions to re-visit their IT infrastructure and service offering to compete effectively, or as many do lately, to collaborate to gain technological know-how and thus expanding to new markets. With such “disruptors” in place, technology allows for greater flexibility.
Furthermore, regulations do not just create a burden and more expenditure, they also provide the fertile ground for long term benefits, such as MiFID II (the biggest regulatory shake-up of European financial markets in a decade), that focuses on transparency, fees management, reporting and client onboarding. To achieve this, firms would need to choose the right system that would deliver state-of-the-art technology, automation and STP and omni-channel capabilities.
Established firms can also benefit by re-visiting their existing infrastructure and evaluate their processes. The objective here is for firms to find the right software partner that would help them create added value to their business and clients thus elevating their business model to a new level and increasing their profit margins, while becoming more efficient and reducing cost!
Profile Software is among the leading fintech solution providers developing award-winning products. Apart from the investment in the technology of our platforms to meet the market needs, clients select our solutions because of our team’s ability to deliver to their needs. It is not just the software that has to comply with the regulatory framework; it is also the peripherals to this that would create a competitive advantage for the organisation. For example, a Paris-based Digital bank selected our systems because we were able to deliver exactly to their requirements and not simply suggest what everybody else is using. This is a great compliment to our service.
Our solutions cover Investment and Wealth Management, Banking (both digital and traditional), as well as Alternative Finance requirements as we have been able to implement fintech solutions to family offices and marketplace lending firms with great success to help them automate their business. The platforms are easy to use as standalone or integrate with existing systems in order to offer a seamless operational environment.
Learn about financial technology that will let your business innovate at www.profilesw.com
A fragile balance between banks and fintech might not last
Michal Gromek of Forbes gives an in-depth analysis of why banks are averse to innovation, and what fintech can do about its reputation deficiency.
Firstly, banks have the hard-earned trust of their clients – innovation is seen by them as gambling with their most valuable assets.
Secondly, as retail has never been a lucrative branch of banking, investing in better customer service for retail customers is unlikely to become a top priority. Moreover, a shift from product to customer-oriented service involves a lot of technological changes: with legacy systems still including code written on 1980s DOS operating systems, integration with cutting-edge technology can be enormously difficult.
Meanwhile, fintechs have everything incumbents do not. Their systems and operation are more straightforward, they are more agile and uninhibited by strict regulations, their revenues come from a single stream and they have no interoperability issues.
Gromek, however, argues that may prove too much for the fragile alliance between incumbents and fintechs: as soon as fintech has risen to the high-margin niche of the market and claims lucrative pieces of the banking cake for itself, incumbents will simply return to seeing them more as competitors than collaborators.
Payment solution start-up Klarna, which picked up a banking licence from the Swedish Financial Supervisory Authority a year ago, is a case in point, as well as a template for other fintech companies to follow.
How the financial crisis gave birth to fintech as we know it
In a blog post on revolut.com , Rob Braileanu traces back the origins of fintech to the collapse of Lehman Brothers on September 15 2008, an event that shook the public trust in financial institutions – particularly those involved in signing off mortgage agreements.
The mistrust of the established financial system arrived in tandem with a rapid advancement in technology, which made it easier for new companies to enter the fintech space – Braileanu points out that the first iPhone preceded the financial crisis by just a year. As banks monopolised financial services prior to the crisis, disillusioned customers had nowhere to turn to for alternatives, which presented emerging fintech companies with an opportunity to come up with more customer-oriented services enabled by cutting-edge technologies.
Not only did customers of established banks try to find new financial solutions, but drove highly skilled bankers to become entrepreneurs and repair the dysfunctional financial sector. The companies they set up challenged the way the very institutions they had been brought up with worked. Nick Storonsky, who launched Revolut – now Europe’s fastest growing fintech – in 2015, was himself a trader at Lehman Brothers.
When banks began to emerge from the crisis, they focused on reviewing their financial models and operations to prevent a future meltdown rather than investing in new technologies. The money fintech needed to thrive came from venture capitalists, who were convinced this new customer-centric approach had huge potential. As a result, investment in fintech soared from £760million in 2008 to approximately £26billion in 2018, which certainly suggests that fintech is a player to be reckoned with in the future.
Mobile payments have become a battlefield between domestic Indian and global business
Simon Mundy in the Financial Times explains how Paytm, an Indian payments company, which Alibaba also has a stake in, is losing its market-leading position to Google and Facebook .
Paytm had an unprecedented growth opportunity when Indian prime minister Narendra Modi removed cash from circulation in 2016: the company managed to add 20 million users to its clientele in five weeks. But the government’s Unified Payments Interface – the first system of its kind, which enables users to send money from one bank account to another through any compatible mobile app – put a quick end to Paytm’s first-mover advantage.
To make things worse for Paytm, the Indian government is a staunch supporter of the same market liberalisation that allowed Silicon Valley giants to join the race for Indian consumers.
Although Google’s payments app Tez has already amassed 16 million users, instant messaging platform WhatsApp – which has 200 million users in India – poses an even bigger threat by letting users send money to each other as easily as photographs with its Indian payment service.
Paytm has cried foul regarding Silicon Valley expansion on the domestic market on several occasions, but it is unlikely to be heard while the Indian government remains set on attracting foreign investment. It will be exciting to see how two completely different narratives unfold on the protectionist Chinese and the liberal Indian market, and who the long-term beneficiaries of these two fundamentally different government policies will be.
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