Challenges Facing Organizations in the Current Risk Environment

The Association for Financial Professionals (AFP) recently published its 2017 AFP Risk Survey Report of Survey Results. The survey, supported by Marsh & McLennan Companies (Celent’s parent company), provides a snapshot of the challenges organizations face in the current risk environment. Responses from 480 senior-level corporate practitioners (primarily based in the US) formed the basis of the survey.

Corporate practitioners rank the highest risk factor impacting organization earnings in the next three years as tougher competition (40%), followed by customer satisfaction (33%), and U.S. political and regulatory uncertainty (32%.) While the three top-ranked factors are similar to those in the 2016 AFP Risk Survey, the order differs.

The survey authors made an intriguing observation on the ranking of risk factors: “It is interesting that in an election year (during which this survey was conducted), finance professionals believed competition would have a greater impact on their organizations’ earnings than would any uncertainty surrounding the U.S. political and regulatory environment.”

The report of survey results goes on to discuss risk mitigation actions in direct response to various types of risk. For example, in response to geopolitical risks, 60% of respondents are most focused on maintaining adequate liquidity, with a greater share of larger companies than smaller companies paying attention to maintaining liquidity (65% to 57%).

If you are a corporate banker or treasury management professional, I highly recommend a reading of the 2017 AFP Risk Survey results. The survey data provides valuable insights into the current and emerging threats facing US corporations of all sizes.

Needless Controversy in the Branch vs. Digital Debate

In a previous post I argued for the enduring importance of human, face-to-face contact in financial services. By the reactions I received, you’d think I was purposefully inciting controversy.

  • One influential industry observer thought I was irresponsible in advocating inaction.
  • Another wrote a lengthy and snarky rebuttal.
  • Others took issue with my comparing retail banking to other retail categories, as if there is nothing to be learned by studying the broader digital commerce landscape.
  • Others took issue with aspects of the surveyed retail deposit mix data I cited to demonstrate that branch deposits remain persistently common.

Honestly, I expected a mixed response: push back from those who are invested in advancing digital banking and agreement from branch technology vendors. We all have self-serving tendencies. But, I did not expect – nor intend – to precipitate such controversy. What is so heretical to my digital brethren’s ears that they would be so obviously offended with my advocacy that banks pay attention to both digital and in-person engagement mechanisms? That was, after all, the essence of my previous post which began with “Digital needs to be a top technology priority among financial institutions”.

Needless Controversy

I think part of the issue here was addressed in a previous post, Three Mistakes Banks Make. We are at risk by oversimplifying things that are inherently complex. In so doing, we fail to appreciate diversity of customer needs or preferences. Much of the digital/branch debate speaks to binary outcomes. Reality is much more nuanced.

This tendency reminds me of a well-conducted consumer research initiative that resulted in January 2016 news that for the first time, “mobile banking exceeds branch banking”. It made quite a splash in the press, for obvious reasons. The data is both relevant and important. It offers clear evidence of the growing importance of digital banking. But the common interpretation overstated digital’s current level of influence.

My issue is not with the research, but how it was interpreted. Many trumpeted the research as evidence of the final nail in the branch banking coffin. “See, the branch is dead!” was the nominal conclusion offered by most observers I think. However, a closer look at the data invites a different interpretation. The specific metric being graphed wasn’t explicitly cited in many references to the research. Too bad, because the graph compares the percentage of randomly surveyed banked consumers over time that use the branch or mobile channel in the past week. A graph showing past three month or past twelve month usage would be rather different. It would show that a much higher percentage of banked consumers visit branches. They do – just not in any given week, day or hour! Usage intervals are longer in the branch – shocking!

The enduring relevance of the branch channel is abundantly clear in Federal Reserve Board sponsored research, Consumers and Mobile Financial Services, conducted annually since 2011 and most recently published in March 2016. The graph below from the March 2016 report compares surveyed past 12 month usage among the general banked population (all respondents) as well as smartphone owners. This equally credible research suggests that roughly one year ago, twice as many banked consumers use the branch and ATM channels than mobile banking.

Both graphs present credible research. Only one fits a certain popular narrative.

The take away for most banks in my opinion is clear and transcends the silly, either-or debate: create and sustain a compelling customer experience across all points of engagement. As customer preferences continue to change, banks will need to continually adjust operating models. Easier said than done for sure. The needless controversy isn't helping banks get this job done.

Celent Model Bank 2017 Awards: The Payments Preview

This is the next instalment of our Model Banking preview blogs, and it’ll come as no surprise that I will focus on Payments.

Reading and evaluating the Model Bank entries is always fascinating. It’s also somewhat frustrating too at times – payments, covering so much territory, often ends up with the tricky task of comparing two very different projects, and trying to decide which is best. This year was no different, with the quality of entries high.

Until we announce all winners publicly on April 4 at our 2017 Innovation & Insight Day in Boston, we’re unable to say too much more – very frustrating! In addition to presenting the award to the winners, we will be discussing broader trends we’ve seen across all nominations and will share our perspectives why we chose those particular initiatives as winners. Unfortunately though, if you’ve not already registered, it’s too late. As with every year, it’s not only sold out, there is a growing wait list too!

So until April 4th, what can we take away from the Payment entries as a whole this year?

First, the entries this year reinforce how hard it is for any single bank to come up with a cutting edge product innovation in payments. As a result, we had a number of entries submitted jointly by multiple FIs describing their initiatives on blockchain, P2P infrastructures, and other collaborative efforts.

We also saw, particularly in the retail space, the adoption of innovations in one market, transposed from another. There were a number of these, particularly in wallets and P2P. Not bad, just not new and often with a very specific market context. For example, one technology had been in place in a different country for at least 5 years, yet the impact will be huge for the bank who submitted it, and is leading edge for their market.

This perhaps serves as a timely reminder that innovation isn’t always about cutting edge technology, but doing something different. Scanning other markets for what they do, and why, is a great source of new ideas, Given that these innovations are, by definition, tried, tested and live, it also has the benefit of being easier to adopt, from the likely business benefits to the actual technology used and lessons learnt.

The second theme is the continued payments back-office renovation story, particularly around the adoption of payment services hubs, which continue apace. Whilst we have defined what is or isn’t a hub, we have always been clear that no two hub projects are exactly the same, and the entries this year reinforce that.

A few things really stood out in particular about the entries. First, some clients still consider hubs to be mainly European, yet we had entries from right around the globe. Second, whilst the details may differ, common to all was the belief that the bank had to re-engineer payments, not just for the future, but to better respond to changes that were imminent. Given the change in the last 10 years, and the likely change in the next 10, perhaps the question for many banks is more about when than if they also undergo their own transformation.

Look out for the case studies being published on April 4th for more detail!

Celent Model Bank Awards: Fraud, Risk Management, Process Automation and Flub-Free

It is my privilege to be part of the judging panel for Celent Model Bank Awards for 2017 for the following three categories:

  • Fraud Management and Cybersecurity – for the most creative and effective approach to fraud management or cybersecurity.
  • Risk Management – for the most impressive initiative to improve enterprise risk management.
  • Process Automation – for the most effective deployment of technology to automate business processes or decision-making.

A common theme across this year’s submissions for the above categories is the importance of agile technology, digital process automation, and consistent and focused practices across the organizations. A large number of the entries show that a streamlined and automated operational risk framework is critical to run a successful risk management program. Everything connects and has a consequence and unless banks can join the risk dots across their ecosystems, they will continue to spend at a very high rate with unsatisfactory and, at times, devastating results.

Improved data analysis and machine learning capabilities also featured prominently in the winning case studies. A central data platform, automated processes and improved insights have produced notable increases in efficiency, better control of costs, reduced resourcing requirements, reduced errors and false positives and have made it easier for the banks to adapt to their digital footprint, an expanding cyber threat landscape, and intense and complex regulatory obligations.

Hopefully, no flubs on the big day

Without exception, every submission is of a high-quality and we found it a daunting task to pick the most worthy award recipients. In the end, we are excited and confident about our selection of winners in the above categories, yet we are sorry that we could not recognize so many others that clearly also deserve recognition.

At the moment we are staying tight-lipped about who won the awards. We will be announcing all winners publicly on April 4 at our 2017 Innovation & Insight Day in Boston. In addition to presenting the award trophies to the winners, Celent analysts will be discussing broader trends we’ve seen across all nominations and will share our perspectives why we chose those particular initiatives as winners. Make sure you reserve your slot here while there are still spaces available!

 

How to Woo a Bank

When it comes time to choose a business partner, banks will favor those who help them execute their third party risk management (TPRM) responsibilities over those who begrudgingly comply.

The risk to a bank of doing business with a third party is real; the consequences of a risk event are not only disruptive, but often result in long-term reputational damage that can seriously affect the bottom lines of both the bank and the third party. We have all seen the media coverage. Parties who can make TPRM easier for banks by being proactive, transparent, and helpful will distinguish themselves in an ever more competitive environment.

They must show that they are compliant with the bank’s risk management requirements throughout the RFP, due diligence, onboarding processes, and lifecycle of the engagement.  OCC1 TPRM regulations alone require the bank to evaluate 16 risk dimensions when engaging with a third party. And, if the relationship involves a high or critical risk activity, the bank will carry out a much more thorough due diligence; often including an on-site visit to inspect operational risk procedures in the case of a risk event.

Furthermore, there is now an expectation that the third party will willingly take a portion of the liability of such an event.

Banks are introducing a new level of discipline and quantification around the measurement of third part risk. With this knowledge, banks can determine third party indemnification provisions and allocation of liabilities at the contract stage. You will be at a disadvantage if you do not have a way to measure and verify the scope of a potential risk event that involves your products or services.

Celent is also beginning to witness the inclusion of provisions within contracts that require a third party to reimburse the bank for out-of-pocket costs relating to data security breaches that occurred due to the third party's negligence. As banks continue to push back on third party risk liabilities, third parties need to ensure they have in place insurance policies that can fund indemnification obligations.

My recent two research reports discuss the changing and expanding landscape for TPRM and explain why banks, regulators and third parties need to commit to their significant other in the management and responsibility of risk.

Celent Model Bank Awards 2017: Banking Products Innovation

This is the next article in a weekly series highlighting trends and themes from Celent’s Model Bank submission process. For more information on how the Model Bank Awards have evolved, see the first two pieces from my colleagues, Dan Latimore and Zil Bareisis

This week’s article focuses on Model Bank entries in the Products category. Part of the criteria for this category is that the solution needs to be in production and demonstrating business benefits. The Products entries for 2017 fall broadly into four sub-categories:

  • Payments Product — for launching the best consumer or business payments product.
  • Lending Product — for the most impressive consumer or business lending or collections initiative.
  • Open Banking — for the most impressive API strategy and results so far.
  • Product Innovation — for demonstrating the ability to launch multiple innovative products.

The majority of submissions in the Products category came from banks in developing markets, with only a handful from large global banks. The Model Bank award submissions came from Argentina, Germany, India, Korea, the Philippines, Poland, Russia, Singapore, South Africa, Spain, Taiwan, Turkey, UAE, and USA.

The Products category submissions were impressive indeed:

Payments: The submissions in this area focused on modernizing existing banking and payments infrastructure. With consumer expectations growing for real-time transactions and unified information across channels, banks are layering new capabilities onto legacy frameworks. Capabilities include accelerated check clearing, enhanced mobile wallets, simplified fraud controls, and streamlined charitable donations.

Lending:  Possibly threatened by alternative lenders, banks in this sub-category are improving the speed and convenience of loans for micro and small businesses. Some entries focused on expanding application channels, both digital and physical. New digital channels include SMS/text, ATM and Facebook. Physical channels include the local coffee shop. All of the submissions featured faster loan decisions through advanced analytics and paperless (or almost paperless) loan closings.  

Open Banking: Open Banking APIs have moved beyond hackathons and proofs of concept to production implementations. While some banks are rolling out Open API development portals in response to regulations like PSD2, the Model Bank candidates in this category are using APIs to improve the customer experience. The submissions represented two approaches to Open Banking. The first is the use of open APIs to connect directly with customers and developers, enabling transactions including B2B payments, personal remittances, loan disbursements, and e-Commerce refunds. The second is the use of open APIs as the core foundation for digital-only banking models. Third-party developers then create value-added client-facing applications using the bank’s exposed API services.

Product Innovation: This sub-category features partnerships with both traditional financial technology and start-up Fintech firms to make banking more convenient, create new offerings, improve customer service, expand a bank’s digital footprint, and personalize marketing offers.  

Want to hear more about the Celent Model Bank winners for payments product, lending product, open banking, and product innovation? Join us for the 10th annual Innovation and Insight Day on April 4th in Boston. In addition to revealing the winners of all the awards, Celent analysts examine the trends that are driving innovation in Banking. I look forward to seeing you there.

Model Bank 2017: Small Business and Corporate Digital Innovation Themes

This is the fifth article in a weekly series highlighting trends and themes from Celent’s Model Bank submission process. For more information on how the Model Bank Awards have evolved, see the first two pieces from Dan Latimore and Zil Bareisis. This particular article is focused on innovations in small business and corporate banking:  two critical […]
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European Payments: Breathing a Sigh of Relief (For Now)

In our recently published report on Top Trends in Retail Payments we quoted a European payments professional: “If the publication of PSD2 gave the industry a headache, then the publication of draft RTS gave it a heart attack.” Of course, he was talking about the draft regulatory technical standards (RTS) that the European Banking Authority […]
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The Enduring Importance of Physical Engagement in Retail Financial Services

I take no issue with the growing importance being placed on digital in financial services. Indeed, it does not take extensive examination to see, in Wayne Gretzky’s words, “where the puck is going”. Digital needs to be a top technology priority among financial institutions – particularly in highly digitally-directed markets such as North America and […]
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Rethinking the Customer Experience: Themes from the 2017 Model Bank Submissions

This is the third article in a weekly series highlighting trends and themes from Celent’s Model Bank submission process. Dan Latimore and Zil Bareisis led off with two great pieces on the evolution of the Model Bank Awards.  Articles from this week on will explore some of the broader themes within each category. Customer experience […]
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