Fintech’s Beneficiaries: Two Approaches to Regulation

Fintech’s Beneficiaries:  Two Approaches to Regulation
British Prime Minister Theresa May visits the United States this afternoon to address a gathering of Republican lawmakers in Philadelphia, followed by a visit to the White House tomorrow.  Tomorrow’s meeting is noteworthy, as Prime Minister May will be the first foreign leader to meet with President Trump since the latter’s inauguration only last week. The timing is also interesting, as only two weeks ago outgoing President Obama’s National Economic Council (NEC) released a new whitepaper called A Framework for FinTech.  The NEC, a policy advisory unit of the White House established in 1993, proposed 10 high-level principles designed to move the US fintech industry forward. The FinTech whitepaper resulted from the White House’s FinTech Summit in June, 2016 that brought together a wide range of bankers, policy makers, and other interested parties, and subtext of the whitepaper was that cooperation between all stakeholders would yield greater innovation in financial services, as summed up below..
“[A] policy strategy that helps advance fintech and the broader financial services sector, achieve policy objectives where financial services play an integral role, and maintain a robust competitive advantage in the technology and financial services sectors [will]  promote broad-based economic growth at home and abroad.”
Innovation in financial services has been on the agenda of the British government dating back to 2002, when the UK Competition Commission concluded that lowering the barriers to entry in the provision of financial services to small and medium-sized enterprises (SMEs) for competitors would improve service and lower prices paid by SMEs.  The 2002 report spurred on additional studies by various UK regulators regarding the impact of industry consolidation in banking on the outcomes for retail and SME customers. Fast-forward to February of 2016, when HM Treasury published a report of the Open Banking Working Group (OBWG) that essentially mandated many of the recommendations made by the 2014 Fingleton Report that talked about use cases and potential benefits of open APIs to drive innovation in banking and expand competition.  A blog entry by my colleague Patty Hines represents an excellent summary of this report. So while both the US and the UK governments promote innovation and growth in  fintech, they come at it at a slightly different angle, as is seen in the August, 2016 follow-on report of the UK’s Competition and Market’s Authority (the successor regulator to the Competition Commission).
“[O]lder and larger banks do not have to compete hard enough for customers’ business, and smaller and newer banks find it difficult to grow. This means that many people are paying more than they should and are not benefiting from new services.”
Even as this statement hints at subtle differences in policy goals, thankfully there’s no need to take one side or the other, as ultimately innovation in financial services can achieve both goals.  Whether creating customer advantage is a stated goal or merely a collateral benefit of fintech, the movement towards opening up the banking system through more accessible APIs will ultimately benefit not only the consumer, but the financial institutions themselves. Clearly, banks need to continually work on sharpening their game in the use of emerging technologies in order to maintain their competitiveness, but for the moment the dance floor remains open for those who choose to embrace innovation rather than fear the change that is to come.

Three Common Mistakes Banks Make

Three Common Mistakes Banks Make
In my work as a research analyst, I run into three particularly common mistakes. Banks aren’t the only ones that make these mistakes. I make them too and have to be vigilant to avoid them.
1. Failure to appreciate diversity of needs or preferences
2. Failure to appreciate the shrinking half-life of facts
3. Failure to skate to where the puck is going
Let’s look at each one briefly…

Failure to appreciate diversity of needs or preferences This is utterly common. You see it in headlines all the time. “Millennials this…”, “Small businesses that…”, Community banks are…”. The trap involves extrapolating limited data to an entire population. Two current examples illustrate: The Use of AI in Banking is About to Explode. Apart from confusing AI with predictive analytics (which is more broadly used), the article asserts “explosive” future adoption of AI right around the corner. I’ll just say that this assertion vastly overstates planned adoption of AI among North American banks based on recent Celent research. Bank on Changes. Among other things, this pleasant article states “Smaller community banks like Edison, which emphasize personal service, said they have no plans to scale back drive-through or other services at brick-and-mortar locations.” While referring to a small number of community banks interviewed for the article, it projects those results on the entire community bank population.

So, are community banks planning on maintaining their current brick-and-mortar services in their entirety – despite the growth in mobile banking utilization? Some are and some aren’t. the figure below displays results a very question posed in a December 2016 Celent survey of North American financial institutions. “Compared to your current branch count, how many branches do you expect your institution will operate five years from now?” The report is not yet published. The idea is simple: banks serve diverse markets and make a diversity of decisions as well. The diversity of expected response is glaring in this data! So as not to give away too much of the report’s contents, I refrain from graphing the results of that question by asset tier. Failure to Appreciate the Shrinking Half-Life of Facts Assertions abound about customers, what they do, want and value. Some data points supporting these assertions are dated. This is increasingly dangerous. Samuel Arbesman argues for a shrinking half-life of facts in his book, The Half-Life of Facts. Most substantive change takes a while to accomplish – particularly among large organizations. I think many banks are at risk by assuming the facts as they knew them at the beginning of a protracted initiative will remain after the initiative is finished. When it comes to mobile, for example, six months is a long time and a year is eternity.

Failure to Skate to Where the Puck is Going Even those of us who aren’t hockey fans are familiar with the famed Wayne Gretzky quote about skating to where the puck is going instead of where it has been. I saw this up close and personal as part of a research effort exploring the current and likely evolution of retail delivery channel technology. Omnichannel delivery clearly remains aspirational at most institutions (I’ll defend that assertion thoroughly in the upcoming report). Yet, even as most surveyed institutions concede the importance of omnichannel delivery, the significant majority are not yet meaningfully engaged in bringing it about. How could that be? Many banks – particularly those with below industry average mobile banking customer utilization – aren’t feeling the pain yet. They are skating to where the puck has been. When they do feel the pain, it will likely be the result of much damage already inflicted.

Introducing Celent Model Bank 2017 Awards

Introducing Celent Model Bank 2017 Awards
As my colleague Dan Latimore wrote in the article that began this series, 2017 was the best ever year so far for Celent Model Bank programme in terms of quantity, quality and diversity of nominations. As we went through the judging process, we felt a range of emotions – grateful and privileged to receive so many amazing stories, and daunted by the prospect of having to pick the most worthy award recipients. In the end, we are excited and confident about our selection of winners, yet we are sorry that we could not recognize so many others that clearly also deserve recognition.

Over its ten years of existence, Celent’s Model Bank programme has always changed and evolved. In the last few years we have been awarding multiple initiatives in a small number of categories – for example, last year we had four winners in Digital Banking Transformation, the busiest of seven categories. While all the awards within the category were equal, we knew that some institutions craved for more exclusive recognition. This year, we decided to take it a step further and to introduce specific named awards with only a single winner for each award.

After long deliberations, the judging panel decided to recognise 21 initiatives as winners of the following Model Bank 2017 awards:
  • Consumer Digital Platform – for delivering an outstanding digital experience for consumers. The award is open for traditional financial institutions, digital-first, and challenger banks.
  • Small Business Digital Platform – for delivering an outstanding digital experience for small businesses.
  • Corporate Banking Digital Platform – for delivering an outstanding digital experience for corporate clients.
  • Consumer Banking Channel Innovation – for the most creative use of consumer channels, or the most effective channel integration.
  • Branch Transformation – for the most compelling branch transformation initiative, including branch format innovations and creative use of live agents.
  • Product Innovation – for demonstrating the ability to launch multiple innovative products.
  • Open Banking – for the most impressive API strategy and results so far.
  • Payments Product – for launching the best consumer or business payments product.
  • Lending Product – for the most impressive consumer or business lending or collections initiative.
  • 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.
  • Employee Productivity – for improving employee training or collaboration, incentivising employees, or enabling mobile agents.
  • Payments Replatforming – for the most impressive project to improve payments back office, e.g. payment services hub implementation or cards replatforming.
  • Core Banking Transformation – for the most compelling initiative to transform a traditional core banking platform.
  • Banking in the Cloud – for innovative approaches to implement a banking platform, e.g. deploying in the cloud.
  • Banking as a Platform – for creating an ecosystem of partners via a banking platform that connects and enables third parties.
  • Emerging Technology for Consumers – for creative deployment of emerging technologies for consumers (e.g. AI, ML, API, biometrics, wearables, voice, blockchain, etc.)
  • Emerging Technology for Businesses – for creative deployment of emerging technologies for small business or corporate clients (e.g. AI, ML, API, biometrics, wearables, voice, blockchain, etc.)
  • Most Promising Proof-of-Concept – for the most promising experiment – pilot or proof-of-concept – with emerging technologies.
  • Financial Inclusion – for efforts to bring financial services to unbanked and under-banker communities.
And of course, we also kept our Model Bank of the Year award, first introduced in 2012, which recognises one financial institution that in any given year simply stands out from the crowd and uniformly impresses Celent judges.

For the time being, only the nominees will know if they won any of these awards, as we begin working with them to distill their achievements into a series of case studies. 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!

Channel Strategy for Corporate Banking: Is Your Bank Paying Enough Attention?

Channel Strategy for Corporate Banking: Is Your Bank Paying Enough Attention?
According to the GTNews 2016 Transaction Banking Survey Report, 91% of North American corporates are evaluating their cash management partners. Of those, 27% indicated that improving availability of online and mobile banking tools were a major reason for reviewing their bank relationships, and 55% cited the need for an improved customer experience. Clearly, these responses are evidence that large numbers of corporate clients are less than satisfied with the channel tools and the overall digital client experience being offered.  Most of the banks we interviewed for recent research on this topic are hearing loud and clear that clients are looking for more streamlined, convenient, and faster access to banking services and information.  Our recent report, Strategies for Enhancing Corporate Client Experience: The Future of Attended Channels looks at strategies that leading North American and global banks are adopting to achieve the following goals:
  • Build out integrated portals to make invisible the organizational and product silos inherent in corporate banking.
  • Simplify the user experience.
  • Establish an omnichannel approach to providing consistent data and access to transactions across channels.
  • Enhance authentication options, including biometrics.
  • Expand self-service, including the ability to securely exchange documents and open accounts and new services.
While we found broad agreement on importance of the themes described above, we identified other aspects of digital channel strategy that varied widely from bank to bank.  The graphic below summarizes those opportunities for differentiation. Celent recommends that banks take the following steps to optimizing their future investments in attended channels:
  1. Define the Digital Strategy for Corporate Banking, Not Just the Digital Channel Strategy.  In the current environment, attempting to implement a successful strategy for digital channels in the absence of an overall digital transformation strategy for corporate banking is short-sighted.
  2. Understand How Attended Digital Channels Fit into Clients’ Daily Workflow.  Product management and strategy executives at many institutions are driving prioritization in channels based on a set of assumptions about client preferences that may not be valid. Mapping those client digital journeys from onboarding to servicing to managing exception situations for each client persona is critical.
  3. Reexamine the Role of Partners.  In reality, the delivery of services through attended channels has always involved multiple partners, whether the bank has developed an “in-house” solution or offers one or more off–the-shelf vendor solutions. As demands for “non-core” banking functionality grows and technology evolves to enable easier integration with multiple partners, the importance of the bank maintaining control of the user experience layer that is seen and touched by the client becomes even more critical.
The decisions being made today about attended digital channels — whether as a part of a larger digital transformation initiative, enhancing the channel user experience, or establishing a corporate banking portal — will have a significant impact on the ability of corporate banks to attract and retain clients.

Model Bank 2017: Some First Impressions

Model Bank 2017: Some First Impressions
Growing up, a family Christmas tradition was that my mother would ritualistically proclaim, “That’s the most beautiful tree ever.” It seems that way with Celent’s Model Bank awards, too. In our tenth year we’ve just been through more than 150 submissions, and just like my mother, I can say that this was the best crop yet. The quantity emphatically broke records, and the quality was outstanding. Ongoing innovation in banking technology is clearly beginning to pay off, and we’ve been privileged to learn an immense amount from all of the financial institutions that took the time to tell us about their how they’ve been using technology and innovation to serve customers better, become more efficient, and mitigate risk.

Those who’ve followed the Model Bank Awards closely will note that our awards format has evolved to follow the market over the years. As the imperative to be more customer-centric has become more pressing, it has in turn begun to blur the lines between one of the oldest ways to divide banking: channels. And lines elsewhere begin to blur, too – for instance, should a mobile payments initiative be in mobile, or in payments, or in its own category? We’ve addressed this conundrum with five categories chosen to provide a broad cross-section of the banking landscape.
  • Customer Experience
  • Products
  • Operations and Risk
  • Legacy Transformation / IT Platform Innovations
  • Emerging Innovation
The entries were exceedingly diverse, and came from repeat submitters and new participants. EMEA led the pack quantitatively, with APAC and North America roughly the same, and the strongest showing yet from Latin America. We expected to see nominations around digital banking, branch and core transformation, and payments, to name a few, and we weren’t disappointed. We were also pleasantly surprised to see intriguing initiatives involving employee productivity, cross-selling, AI, Biometrics, and Blockchain.

Inevitably some will be disappointed; there were so many worthy initiatives that the judging was the most difficult by far. It’s certain, though, that Celent analysts will have a full plate for the next two months as we reach out to our Model Banks and complete the work of distilling their rich stories into pithy case studies that illustrate the incredible innovations banks are undertaking today.

As for what you can expect between now and April 4 in Boston, look for a series of articles from the Celent analyst team highlighting some of the many insights that we’ve gleaned along the way. We’d recommend that you check back in; as we notify the winners and begin to develop our case studies, we’ll keep you posted with a series of articles like this one that detail some of the insights.

And while space is filling up fast, there’s still time to register for 2017 Innovation & Insight Day, April 4, 2017 in Boston, Massachusetts. Find out more about last year’s event here.

Megavendors and transaction banking: reinvesting in digital corporate banking

Megavendors and transaction banking: reinvesting in digital corporate banking
Earlier this month, Fiserv announced that it is acquiring Online Banking Solutions (OBS), a privately held provider of niche treasury management capabilities. OBS has seen a great deal of success in enabling community banks, credit unions and some regional banks with the digital capabilities needed to meet the emerging needs of more sophisticated business and corporate clients for treasury management services.  As a long-time observer and participant in this space, I think it is fair to say that most of the largest providers of financial services technology (megavendors) have underinvested in corporate banking, especially in modern, digital treasury solutions.  From a back-office processing perspective, Fiserv has a key collection of assets (e.g. PEP+, ARP/SMS) on which large banks in the US heavily depend to deliver their treasury management services.  The acquisition brings a suite of first-class front-office digital channel solutions to Fiserv that should allow it to be competitive in offering omnichannel solutions specifically designed for corporate treasury users and that consider the multitude of ways that corporates consume bank information and generate transactions. Celent believes that the winners in this space will have a broad transaction banking strategy that includes international services (cross border payments, foreign exchange, trade finance) bringing all commercial banking assets into a coherent go-forward strategy, if not a single organizational unit.  Partnerships to extend transaction banking functionality is a great step toward that end but they need to be well-defined and well-executed to benefit the providers’ clients.  In 2017, we think that other technology providers will follow suit and broaden their transaction banking solutions.  FIS has certainly made a mark with its 2015 acquisitions of SunGard and Clear2Pay.  Bringing these assets together and delivering on a next generation digital platform will be critical for FIS to meet the growing needs of corporate clients for global banking services.  Other providers of digital channel solutions such as ACI Worldwide, Bottomline Technologies, D+H, Q2 Software and others will be looking at these developments closely to understand the impact on their competitive positions. With the acquisition of OBS, there are no more niche providers of corporate digital channels left in North America.  Almost ten years after the great financial crisis when income from fee-based solutions was the salvation of the industry, reinvestment in the transaction banking business is finally happening.  

Thoughts on Branch Transformation 2016

Thoughts on Branch Transformation 2016
Last week, I had the pleasure of attending and presenting at Branch Transformation 2016, sponsored by RBR. The event was held in London on 6th-7th December. Unlike one once stalwart retail banking industry event in the US, RBR’s attendance has been on a multi-year growth trajectory. This year, attendance was up 20% over 2015 and included delegate representatives of 116 banks from 53 countries. It was time well-spent. [Read more…]

Goodbye PFM, Hello PFE (Personal Financial Experiences)

Goodbye PFM, Hello PFE (Personal Financial Experiences)

Personal Financial Management – PFM – has been a worthy goal pursued by many providers, yet consumers continue to ignore its possibilities. Rather than trying to incrementally expand the share of 10-12% of PFM users, banks should instead focus on the next stage in the evolution of personal finance: Personal Financial Experiences, or PFE.

We’re big fans of PFM (Personal Financial Management)…conceptually. We think that it has the potential to help people better control their finances and live happier, less-stressed lives. And yet, despite numerous efforts over the years, traditional PFM has not gained significant marketplace traction. It’s too cumbersome and inconvenient, while crucially often serving up bad news – and who wants that? At the same time, banks have recently begun to focus wholeheartedly on the customer experience of their clients, seeking to improve and coordinate the various interactions that consumers have across multiple and diverse touchpoints.

The convergence of these two trends is PFE, defined as A coordinated set of customer interactions that pushes and provides customers relevant, timely information and advice to enable them to live more informed and proactive financial lives. PFE gives customers the ability to access whatever level of financial detail they want, but focuses primarily on context and appropriate accessibility.

A variety of companies – both banks building their own, and vendors focused on developing white-labeled software – have created a wide range of PFM approaches. Most have historically required a fair degree of intentionality on the user’s part, and treat PFM as a discrete activity – a separate tab or a standalone app, for example. PFE changes that. Users will experience PFE without ever having to call it up; it will just happen to them via an alert on their mobile, an idea from a branch representative, or an unexpected landing page on their laptop. The “E” stands for Experiences, plural. PFE isn’t just one touchpoint; it encompasses the wide variety of interactions that a consumer has with her financial institution. Today’s Digital banking will, in fact, become PFE. When banks move to the end-state of PFE, customers will no longer have to choose to manage their financial lives (or by not choosing, default to unmanaged ad-hocracy); instead, financial management will happen in the background, facilitated and orchestrated by the bank, as part of the overall relationship.

Three key principles provide the foundation of a robust set of Personal Financial Experiences.
1 Automatic: Users don’t have to put much conscious thought or effort into entering the data or even asking for guidance. The system gathers that information and proactively provides nuggets of advice and discrete, concrete calls to action.
2 Intuitive: There is no learning curve. Just as kids can start using a new mobile phone out of the box without reading any sort of manual, PFE will be intuitive and user-friendly. PFE becomes normal digital banking.
3 Relevant: PFE will deliver only the information needed at the appropriate time. No longer will a user be confronted with a huge dashboard of charts and dials confusingly presented. Relevance and contextuality will rule.

The iPod wasn’t the first MP3 player; it built on and refined pioneering work done by others. So, too, is PFM the first step in the journey to PFE; we’re not there yet, but we’re well on our way, helped by advances in technology and the incremental changes that FI tinkerers continue to make. We’ll be exploring this concept in greater depth over at celent.com; please check back in, or reply to this post, if you’d like to learn more.

Banking Third Party Risk Management Requirements are a Big and Expensive Ask

Banking Third Party Risk Management Requirements are a Big and Expensive Ask

Celent, through its work with Oliver Wyman, estimates the cost to US financial institutions of undertaking due diligence and assessment of new third party engagements to be ~ $750 million per year. Institutions are paying three times as much as their third party to complete on this exercise. The average cost to an institution to carry out due diligence and an assessment of a new critical third party engagement is $15,000 and takes the institution approximately 16 weeks to complete.

The top ten US banks average between 20,000 and 50,000 third party relationships. Of course, not all of these relationships are active or need extensive monitoring. But the slew of banking regulatory requirements for third party risk management is proving to be complex, all-consuming and expensive for both institutions and the third parties involved. In a nutshell, institutions are liable for risk events of their third and extended parties and ecosystems. The FDIC expresses best the sentiment of worldwide regulators:

“A bank’s use of third parties does not relinquish responsibility… but holds it to the same extent as if the activity were handled within the institution." www.fdic.gov

If an institution doesn’t tighten its third party risk management, it is significantly increasing the odds of a third party data breach or other risk event and will suffer the reputational and financial fallout.

In the first report of a two-part series, just published by Celent, “A Banker’s guide to Third Party Risk Management: Part One Strategic, Complex and Liable”, I show how institutions can take advantage of their established risk management practices such as the Three Lines of Defense governance model, and operational risk management processes to identify, monitor and manage the lifecycle of critical and high-risk third party engagements across functions and levels. It describes the components required for a best-practice program and shows examples of two strong operating risk models being used by the industry that incorporates third party risk management into the enterprisewide risk management program.

Unfortunately, there are few institutions that have successfully implemented strategic third party risk management programs. Most institutions fall between stage 1 and 2 of the four stages of Celent’s Third Party Risk Management Maturity Curve. But continuing to operate without a strategic third party risk management practice will leave your institution in the hands of cyber fate and the regulators.

Chat Bots: Savior or Disintermediator?

Chat Bots: Savior or Disintermediator?

AI is becoming increasingly interesting to bankers.  Last year I wrote a blog about “Assistant as an App”, looking at how concierge apps like MaiKai and Penny are offering up AI-driven financial management services.  My colleague Dan Latimore also recently posted a blog on  AI and its impact.

The emergence of chat bots within popular messaging apps like Facebook Messenger, Slack, Kik, and WeChat similarly has the potential to shift how customers interact with financial institutions. Chat bots offer incredible scale at a pretty cheap price, making adoption potentially explosive. Facebook messenger, for example, has almost one billion active users per month. WhatsApp (soon to launch chat bots) has about the same.  These apps offer some extremely high engagement, and with app downloads decreasing, users are spending more time on fewer apps. According to Tech Crunch, 80% of the time spent on a mobile device is typically split between 3 to 5 apps

Chat bots give the bank the ability to automatically appear in almost all of the most used apps in the world.  The opportunity with digital assistants is immense, and given the nature of bank transactions, it’s not hard to imagine chat bots becoming a widely used engagement method.  Most of banking is heavily rules-based, so the processes are often standard.  Frequent banking requests are pretty straightforward (e.g. ‘send this person X amount of money’ or ‘transfer x amount from savings to checking’).  Bank-owned chat bots are also more built for purpose than some of the multi-purpose third-party products on the market, making the functional scope targetted. While chat bots are still very early days, it won't be long before these kinds of interactions are accessible and the norm. Bank of America already has one; many others have plans or pilots.

This video (skip to 7:30) shows what an advanced chat bot might be able to accomplish. The image below from the Chat Bot Magazine is another conceptual banking use case.  The possibilities are compelling. 

 

 

 

 

But while the opportunity with digital assistants is enormous, banks must be aware of how this affects their current ongoing digital strategy. For example, if chat bots overcome the hype and become a long lasting method for accessing financial services, then what effect will that have on traditional banking apps?  Will chat bots make it foolish to invest large sums of money in dedicated mobile apps? 

For all the promise this technology brings, banks need to be aware that this could be a step towards front-end disintermediation. The threat of tech companies (or other large retailers) stepping in to grab banking licenses and compete directly with incumbents was short lived.  The more realistic scenario was always relegating core banking functions to a utility on the backend of a slickly designed user interface created by a fintech startup.  The incumbents lose the engagement, even if they are facilitating the transactions.

Are chat bots a step towards front-end disintermediation, or are they an extension of the bank’s main app?  If you believe that chat bots are a stepping stone (or companion product) towards a world where the best UI is no UI, and where AI evolves to the point of offering significant functional value, then banks could be at risk.

This isn’t a call to hysteria by any means, nor am I calling chat bots wolves in sheep’s clothing, but banks need to be aware of the potential impact. As voice or message-based interactions become the norm, they will have an effect on a bank’s dedicated mobile app.  In this environment, the mobile app will need to evolve to become something different; non-transactional.

Chatbots will only further fragment the customer journey, requiring an even clearer understanding of how consumers are choosing to handle their finances and make transactions. Banks need to start thinking about how chat bots and AI fit into a long-term digital channels strategy, one that doesn’t handcuff the institution into a no-win proposition of competitive disadvantage versus wilful disruption.