Digital banking is ready to take off in Latin America

Digital banking is ready to take off in Latin America

Digital is the new reality in Latin America. In a recent Celent survey 100% of the participants recognized that a scenario where all financial products get digitized needs to be addressed sometime in the next 7 years and 59% of them believe it needs to be addressed immediately. There is also a general consensus that most banks are entering into Digital late, despite some are already moving in that direction. Threat of fintechs is also a reality. Over 80 fintechs in Brazil and 60 in Colombia are a good sense that the industry is already being challenged beyond incumbents.

In other geographies Banks have responded to this threat by becoming extremely digital and also neo-banks have been launched to attract those customers seeking for a more friendly and digital relationship with its financial institution. Atom Bank in the UK, Fidor Bank in Germany, and mBank in Poland are only a few to mention. In Latin America the major milestones in Digital development we had seen were Nubank (Brazil – Market Cap $500M) and Bankaool (Mexico – ~$142M in assets), until March of 2016 when Banco Original (~$1,67Bn in assets) launched in Brazil.

While Nubank is focused entirely in offering a credit card with a customer friendly personalized real-time view of expenses and modern contact channels (email, call or chat), Bankaool is mainly focused in a checking account with a debit card, SME loans and investment vehicles.

Banco Original is the 3rd step in this digital only bank strategy in the region, becoming the 1st universal digital only bank in Latin America.  As part of its strategy to position the bank as different and innovative they launched this advertising campaign featuring Usain Bolt. As part of a strategic definition in 2013 the bank started a ~$152M investment over the period of 3 years to become a digital bank. They launched in March of this year . The bank has no branches and the interaction is 100% through digital channels and a call center. This move was central to its strategy of becoming a universal bank moving away of being solely focused in agribusiness.

While most of neo-banks and fintechs looking to change the customer experience in financial services have adopted in-house development to support their digital strategy, this is not the case of Banco Original which relied in a 3rd party Open API solution. Commercially available solutions that can support a digital only bank means that as an industry we are ready to take off. There is no reason now why other banks should not follow, and software vendors will do their part pushing their offering into banks of all sizes.

I believe that we are in a tipping point were banks in Latin America will need to re-think their investments and strategies towards digital: the threat is now real.

Two upcoming reports will be covering Digital and a couple of disruptive scenarios in the banking industry in Latin America, so expect to have more information soon if you are a Celent customer. If you would like to become a Celent customer please contact Fabio Sarrico (fsarrico@celent.com).

 

Top trends in corporate banking webinar

Top trends in corporate banking webinar

Please join me on Thursday, April 21st at noon EST for an overview of the 2016 edition of our Top Trends in Corporate Banking report, which was published in March.

2016-04-18_15-40-50

Corporate banks continue to place an enormous focus on investing in digital channels to meet the ever-increasing demands of clients for enhanced tools while boosting security and fraud prevention. Despite this investment, corporate banking has lagged in terms of adoption of innovative technologies. To improve that performance, corporate banking lines of business are undertaking a broad set of initiatives to overcome the inertia that has left clients behind in terms of innovation. Among the top trends, we will examine the opportunities in trade finance and customer onboarding for improving efficiency and enhancing client satisfaction.  Other top trends include fintech partnerships, distributed ledger technology and open APIs and adapting liquidity management strategies.  I look forward to having you join us on Thursday! 

Click here to register

 

 

 

Congratulations to Celent Model Bank 2016 Winners!

Congratulations to Celent Model Bank 2016 Winners!

Last week many of us at Celent were in New York attending our Innovation and Insight Day on April 13th. It is Celent's flagship event during which we announce Model Bank and Model Insurer winners and celebrate their achievements. In addition, the program includes keynote speeches from industry leaders and Celent analysts, plenty of opportunities to network with peers, and even to experience some of the latest technologies first hand, courtesy of our sponsors.

The theme of this year's event was "Financial Services Reborn", and the Museum of American Finance on Wall Street provided an inspiring setting to celebrate innovation in financial services. Craig Weber, Celent CEO, kicked off the proceedings drawing insightful parallels between the battle of Alamo and the future of financial services. It must have been the first time in Craig's career that he had to come up on stage to the soundtrack of hip hop music, an extract from the Broadway musical "Hamilton", but it set the tone for the rest of the day – to expect the unexpected and to be open to new ideas.

Both of our guest speakers – Nadeem Shaikh, Co-Founder and CEO of Anthemis Group, and Leanne Kemp, Founder and CEO of Everledger – thrilled the audience and opened everyone's eyes to the opportunities presented by Fintech and Blockchain respectively, while our colleague Will Trout spoke eloquently about consumer-led convergence. A big 'thank you' to all the speakers, as well as the sponsors supporting the event!

The rest of the day was all about celebrating the achievements of Model Bank and Model Insurance award winners. As many of this blog's readers know, the vision for Celent’s Model Bank research, now in its ninth year, is to spotlight effective uses of technology in banking. This year we received a record number of submissions – well over 100 – that came from all over the world; the nominations were spread equally between North America, EMEA and APAC. The award winners come from four continents and nine countries and range from credit unions and microfinance institutions to the world's largest banks.

Celent Model Bank 2016 winners are:

  Model Bank 2016 Categories

  Award Winners

  1. Digital Banking Transformation

  Citizens Bank, US

  DenizBank, Turkey

  Garanti Bank, Turkey

  Santander, US

  2. Omnichannel Banking

  BECU, US

  Beyond Bank, Australia

  Standard Chartered Bank, Korea

  3. Digital Payments and Cards

  Bank of America Merrill Lynch, US

  RBC, Canada

  4. Corporate Payments and Infrastructure Modernization

  Bank of China, China

  CBW Bank, US

  5. Cash Management and Trade Finance

  CIBC, Canada

  HBL (Habib Bank), Pakistan

  6. Security, Fraud, and Risk Management

  Alfa-Bank, Russia

  USAA, US

  7. Legacy Transformation

  Sberbank, Russia

  Umpqua Bank, US

  Vietnam Bank For Social Policies, Vietnam

  Model Bank of the Year

  Eastern Bank, US

As always, we published a series of reports with detailed case studies of all winning initiatives. Celent research subscription clients can access the Model Bank of the Year and individual category reports via our website.

This year we also introduced a new award, Model Bank Vendor. We wanted to acknowledge the vendor role in helping multiple clients achieve technology or implementation excellence, one of our judging criteria, and to extend our appreciation to the entire vendor community, which is instrumental in the ongoing success of the Model Bank program. Celent recognized two companies as Model Bank Vendors for 2016:

  • EdgeVerve Systems
  • Nucleus Software

Congratulations to all our award winners! We are grateful to have been exposed to so many extraordinary initiatives and the talented individuals responsible for their success. We look forward to continuing with the Model Bank program next year to identify and award the most impressive banking technology initiatives from around the world, and will begin accepting nominations again in September – stay tuned!

 

The iPhone, the FBI, and the lessons for bankers

The iPhone, the FBI, and the lessons for bankers

With today’s news comes the interesting development that the FBI has apparently used a “tool” acquired from an unnamed third-party white hat security firm to gain access to the locked iPhone of one of the San Bernardino shooters without requiring Apple’s cooperation.  This issue had been the subject of a recent tug-of-war between Tim Cook and the US Department of Justice.

While FBI Director James Comey has been mum on the details, some in the IT security community have speculated that the new tool employs a so-called “brute force attack” on the iPhone by sequentially guessing the device’s passcode until the device unlocks itself.  While the lock-out feature is user-configurable, an iPhone running the current version of iOS will normally give the user 10 chances to input  the passcode correctly before permanently locking the user out while deleting all user data from the device.

Cloud services to the rescue.  The speculation is that the newly acquired FBI tool was able to get around this measure by simply cloning the software from the perpetrator’s iPhone — including the operating system and all of the user data files — hundreds or thousands of times and performing what is effectively a “distributed brute force attack” by repeatedly guessing passcodes from a master checklist across the clones in parallel.  When an individual clone became locked, that clone is discarded and the tool continues the guessing game with other clones on a reduced list of candidate passcodes until one of the guesses finally works.

The likely reason why the FBI has apparently succeeded is the fact that the perpetrator’s passcode was static, meaning it didn’t change during the course of the many times that the FBI tried one guess after another.  (In this context, it was important that the perpetrator was caught, as otherwise  he would have changed his passcode and/or wiped the data remotely, a capability that Apple provides to all iPhone users.)

What does this have to do with banking security?  As demonstrated by the success of the FBI’s  new white hat tool in breaking Apple’s device security, the simple reality of data protection is that no encryption technique is foolproof, particularly from the threat of a brute force attack.

Given the power of the cloud to solve a large computational problem like guessing an large encryption key using a cloud-based “divide and conquer” approach, bankers need to pay attention to the need to employ strong encryption keys while rotating their keys on a regular basis.

The definition of “regular basis” will depend on the sensitivity of the data to be protected, but one thing is for sure:  the bank that creates an enterprise encryption key once and thinks the bank is protected forever is dangerously vulnerable to a future cyber attack based on a distributed brute force technique such as the one that was quite possibly used by the  FBI’s white-hat vendor.

Given the importance of encryption to maintaining a safe and FFIEC-compliant environment for the safekeeping of NPI, and especially in light of the emergence of  services like Blockchain that are dependent on encryption for success, banks ought to be paying close attention.

There are *exactly* 608 US firms offering banking fingerprint authentication

There are *exactly* 608 US firms offering banking fingerprint authentication
Biometrics are hot. Fingerprint authentication (Apple’s version is Touch ID) is one of the most common forms of biometric verification. So, quick – how many American banks let customers log on to their accounts using this method? Based on the press, you might optimistically think a few thousand, right? And, in fact, ApplePay just activated its 1000th bank (adoption is another story, and the subject of another post). Well, as of January 31, the actual number (not an estimate, not an extrapolation, and not a piece of data from Apple) was 608. That’s 9.52% of the 6,388 FIs offering a mobile banking application. How does that compare to three months ago, at the end of October 2015? At that point just 252 FIs were offering it. That’s an increase of 241% in a quarter, certainly a sign of robust growth. Some of the increase comes from clients implementing from their hosted solution provider. Others (generally bigger banks) are developing it in-house. And yet, it’s not as popular with the large banks as one might think (of the 21 with more than $100bn in assets, only 8 offer fingerprint authentication; 3 of the top 4 have it). Bucketed Adoption Does fingerprint authentication pay off? By one measure, something we call “feature lift,” it does indeed make a difference for customers. Banks whose customers have installed fingerprint authentication have an uplift of 53% in enrolled customers per deposit account relative to banks who don’t offer it. While this is correlation, not causality, it shows that the banks who offer this feature have more customers enrolled in mobile banking than those who don’t. We’re looking forward to analyzing many more mobile banking features to see which ones offer the biggest impact on customer enrollment. Uplift How did we access this information? I’m very excited to say that Celent is collaborating with FI Navigator to analyze the mobile banking market in an unprecedented depth of detail. FI Navigator has assembled a database of every US bank and credit union offering retail mobile banking, together with the vendors who host them. We’re feverishly analyzing this trove of data to bring you a report at the end of April. It’s different from, and additive to, work made available to our existing clients; you can find the particulars here. To let you in on how the sausage is made, we originally tried to find out how many banks offered fingerprint ID by doing a standard search (which turned up press releases and the like) and by contacting a few vendors. We were able to arrive at roughly 250 banks in total, including several dozen from one vendor (from whom it was difficult to get precise answers in terms of commitments, scheduled go-lives, and actual implementations). It turns out that we undercounted by more than half. The beauty of the FI Navigator data is that it’s derived from a variety of sources – on a monthly basis – that let us deduce and infer a huge amount of actual information about the entire US retail mobile banking population, not just a subset. By integrating unstructured website data and conventional financial institution data, FI Navigator expands the depth of peer analytics and the breadth of market research to create vertical analytics on financial institutions and their technology providers. So, in addition to my excitement at this new and powerful data source, I have three takeaways about fingerprint authentication:
  1. The gap between hype and reality for fingerprint authentication is big, but shrinking;
  2. Banks don’t have to be large to do this; and
  3. More banks should be offering fingerprint authentication.
Why is your bank or credit union not offering your customers the chance to authenticate with their fingerprint?

The UK open banking API framework – more questions than answers?

The UK open banking API framework – more questions than answers?

This week the Open Banking Working Group (OBWG) published its framework for the UK Open Banking Standard. The framework seeks to create:
• An open API for data that is shared, including, but not limited to, customer data, and
• An open data API for market information and relevant open data

Secure, publicly accessible Web APIs have been around for more than ten years in the financial services sector. Many popular eCommerce platforms employ APIs to increase adoption by exposing various features of the underlying platform to third-party application developers. These include PayPal, Stripe, Authorize.Net and LevelUp. Payment APIs have grown by almost 2,000% since 2009, with Financial APIs growing at more than 470% during that time.

Banks embrace APIs to modernize and streamline back-office connectivity, especially for customer-facing digital channels. However, except for a smattering of bank API hackathons featuring mock customer account data and the well-publicized external APIs made available by digital bank Fidor, banks are reluctant to publish open, external APIs for customers or third-party to access financial data. Two major government initiatives are forcing their hands.

The account access provisions of PSD2 require Euro Area banks to open access to customer information where third-parties have the explicit consent of the customer. The UK HM Treasury Open Banking initiative strives to improve competition and consumer outcomes by giving customers the ability to share their transaction data with third party providers (3PPs) using an open API standard for UK treasury.

The UK government established the Open Banking Working Group in August 2015, giving it the remit to design a detailed framework for the development of an open API standard in the UK. The detailed framework was published this week after review by the HM Treasury.

Open Banking Framework

Sifting through the 128-page report, several key issues remain to be addressed:

Governance: The report recommends the creation of an independent authority to oversee the development and deployment of the Open Banking Standard. As co-chair of the OBWG, is the Open Data Institute vying to become that independent authority? IMHO, the banking industry doesn’t need yet another standards body. Why not engage the expertise of an existing organization like the International Organization for Standardization (ISO), the governance body of the popular ISO 20022 standard, to ensure an internationally agreed upon approach with the involvement of a diverse group of stakeholders?

Data Standard: The report recommends that existing standards, datasets and structures be reused where possible but also mentions further investigation as to whether the Open Banking Standard will need a separate reference data model. I hope that the OBWG examines the widespread adoption of the ISO 20022 financial industry message scheme and its contribution to standardizing and simplifying financial data exchange worldwide.

Data Protection: The report states that banking customers (individuals and businesses) need to understand their responsibility for informed customer consent and ensuring their data is protected. This is problematic in light of continued social engineering banking losses, an emerging global fraud threat. The report acknowledges that it is likely that cyber-criminals will specifically focus on the open API as a new attack vector. Consumer education needs to be the responsibility of the Open Banking ecosystem: Banks, 3PPs, government agencies, and consumer watchdog groups.

Developer Resources: The recommendation that a central developer hub be created to support developers is a seemingly practical idea. However, there are a number of leading API platform providers and no universally accepted RESTful API design methodology, which will lead to a scramble by the proponents of RAML, SWAGGER and Apiary.io to be the provider (and language) of choice for creation of common open APIs and developer sandbox.

Implementation Schedule: The report outlines a multi-year release schedule with the first release to be completed within 12 months of the report’s publication—February 2017. This seems to be very aggressive considering that detailed design specifications are not yet complete, nor has an independent authority been selected to oversee development of the standard.

Monetization: Respondents to the February 2015 Call for Consultation estimated the cost of developing an open API standard would range from “negligible to tens of millions of pounds.” At first glance the Open Banking initiative seems to provide all of the benefit to fintech firms with all of the cost shouldered by UK financial institutions. Celent anticipates acceleration of bank/fintech partnerships aimed at creating differentiated value propositions.

Interoperability: Banks and solution providers are closely watching the intersection of the UK Open Banking initiative and the account access provisions of PSD2. There is significant overlap between the two initiatives and industry participants hope that they will be joined up, but for now the HM Treasury is actively seeking to take the lead with its aggressive implementation schedule. Interoperability across geographies and sectors fosters sustained innovation and broader participation by third parties, contributing to the UK Treasury’s goal of improving competition and consumer outcomes.

The recommendations for implementing the Open Banking Standard will be carried out by the Open Banking Implementation Entity. Celent analysts are watching developments closely and assessing their impact across our coverage areas. We welcome your feedback—what are your thoughts about opening up customer banking data to third-party providers?

Cardless ATMs and disappointing mobile wallet adoption

Cardless ATMs and disappointing mobile wallet adoption
While I’m an outspoken advocate of financial services technology, I have been a bit of a curmudgeon when it comes to mobile wallets. My skeptical attitude reached an apex when I dropped my smartphone in a glass of merlot several years ago and hasn’t recovered. Had my smartphone been my mobile wallet, embarrassment would have been the least of my problems. Said simply, I just don’t see a compelling use-case for most consumers. Until they arise, I expect industry press to continue to publish stories of lackluster adoption. There have been many. One in particular caught my eye. A recent article in Digital Transactions makes my point in its opening statement, “The introduction of cardless ATMs, which rely on a financial institution’s mobile wallet instead of a debit card to make an ATM withdrawal, could help further the adoption of mobile wallets and mobile payments.” Said another way, if the industry offers consumers enough reasons to configure and use a mobile wallet, adoption may eventually result. This doesn’t sound remotely compelling to me. I can hear the rebuttals now. In defense of Bank of America, BMO Harris, Chase, Peoples Bank and other institutions that have invested in cardless ATM access, physical debit card usage at the ATM could pose an annoyance to mobile wallet adopters, few that they are. With ATM usage roughly twice the customer penetration of mobile banking (below), the last thing banks need is a reason for customers to be dissatisfied with their ATM experience. In my opinion, that’s a more compelling rational for investment than some vein attempt to bolster mobile wallet adoption.

US P12M Channel Usage 2014Source: Consumers and Mobile Financial Services 2015, U.S. Federal Reserve, March 2015

In the article, one banker summed up the challenge associated with mobile cash access this way: “We found the biggest struggle is explaining what it is and the benefit it offers.” If the biggest struggle is communicating a compelling value proposition, then maybe the value proposition isn’t compelling. I don’t think it is – at least not yet. Please don’t misunderstand, I think cardless cash ATM access is a reasonable initiative, but not for the reason stated in the article. I applaud efforts to better integrate retail delivery channels, and ATM cash access is a baby step in that direction. Combine cardless ATM access with other capabilities such as broader P2P payment mechanisms, geo-location and a merchant-funded rewards program, and mobile wallets begin to look compelling. Until then, banks have a bevy of higher priority initiatives to deliver in my opinion. But, even if my bank enabled cardless cash access, I still wouldn’t abandon my physical wallet. In the event of another tragic merlot mishap, traditional ATM cash access might be a real life-saver.

The paradox of digital payments

The paradox of digital payments
At Celent we run a couple of Banking research panels – one on Branch transformation and another on Digital – where any US-based bank or credit union can participate in surveys we administer on a regular basis. Last week we published the report with findings of our survey we conducted in November 2015 on Digital Payments. 42 institutions participated and answered our questions on:
  • How important are digital payments in the context of other priorities?
  • What has been the industry’s experience with digital payments?
  • Where is the industry in its EMV migration journey?
The survey results highlighted the paradox of digital payments:
  • Nearly everyone thinks that digital payments are important, but only 13% view it as strategic priority, aim to lead and invest accordingly. 63% aim to be fast followers and another 23% only invest to stay on par with peers.
  • 71% of participants agree that financial institutions (FIs) should offer branded digital payments (e.g. own digital wallet), but they are more likely to participate in third party wallets, such as Apple Pay, Android Pay and others, than to invest into their own HCE wallets – 46% have no plans for HCE.
So, what should the FIs do in digital payments? Accept that “payments are disappearing” and focus on ensuring that their payment credentials are available for customers to use wherever they want them or fight back with their own branded wallets? Does it have to be an “either/ or” choice? Can they/ should they do both? What are your thoughts? P.S. Our panels are open to any FI in the US – Celent clients and non-clients – and we share the results report with all respondents. If you’re a banker and would like to participate in future Digital Panels, please contact info@celent.com.

Banks and Fintech: friends or foes?

Banks and Fintech: friends or foes?
The question in the title of this post has become a rather hot topic lately. Earlier this week, I was kindly invited to join the panel on “what’s hot in Fintech” at Citi’s Digital Money Symposium, and it was one of the central questions we debated as a group. My colleague Stephen Greer has also discussed Bank-Fintech relationships on these very pages, for example, see here and here. The question is not necessarily new. Back in 2011, I wrote a report titled Innovative Payment Startups: Bank Friends or Foes? In the report, I looked at companies presenting at the inaugural FinovateEurope and concluded:
“Banks have little to fear from this particular group of payment innovators. Some solutions actively support the established payment systems, in particular cards. Others are expanding the market by enabling payment transactions in places where they may not have been possible before.”
There is no question that the pace of innovation has increased in the last five years since that quote. However, today we also have many startups and Fintech companies that are actively serving banks with their technology tools (from authentication and fraud management to back- and middle-office systems). Others, such as Apple partner with banks to develop propositions that “wrap around” a card transaction. In the last few months, we have also noticed an increase in stories around collaboration between banks and Fintech. Most payment unicorns (private companies with valuation of over $1bn) achieved their impressive scale and valuations mainly by competing with banks in a specific niche and focusing on being the best in class in that area. Often, it is in merchant services, such as those provided by the likes of Stripe, Adyen, Square, and Klarna, while TransferWise is successfully attacking banks in the international payments market. Yet, even among the unicorns there are those that have chosen to partner with banks, such as iZettle which has partnerships with Nordea, Santander, and other banks in Europe. TransferWise, a unicorn that has long been positioning as an alternative to banks, is now partnering with LHV, an Estonian bank, to offer its service via the bank’s online and mobile channels, and is rumoured to be in discussions with “up to 20 banks” about adopting its API. The Wall Street Journal recently quoted Ben Milne, the CEO of Dwolla, as saying, “Time humbles you. Working with banks is the difference between running a sustainable business and just another venture-funded experiment.” It has become fashionable to pronounce the death of banking. The disruption caused by Fintech is supposed to blow the old-fashioned banks out of the water. Of course, we acknowledge the disruption and recognise that banking is changing. We simply don’t agree that banks will disappear — at least not all of them:
  1. Today’s smartest banks will figure out a way to stay relevant for their customers.
  2. Some of today’s disruptors are becoming banks (e.g. Atom, Mondo, Starling in the UK)
  3. Both Fintech and banks are starting to acknowledge the value they each bring to the relationship and will learn to collaborate effectively.
My colleague Gareth Lodge and I have just published a series of reports on reimagining payments relationships between banks, retailers and Fintech. Commissioned by ACI Worldwide, the reports take a perspective of each party and explore this topic in a lot more detail. Just like a family is locked into a set of relationships, banks, retailers, and FinTech form a payment ecosystem that we believe is more symbiotic than many would want to admit.

Corporate digital delivery channels and the customer experience

Corporate digital delivery channels and the customer experience

Celent feels (and others agree) that it’s important that banks deliver an omnichannel digital customer experience, but the term means different things to different people. Based on our own research, we believe that omnichannel is about delivering a customized but consistent financial institution brand experience to customers across all channels and points of interaction.

An omnichannel experience is even more critical when delivering services to corporate clients. Each client has a unique set of business and technology requirements based on their corporate treasury organizational structure, geographic footprint, and treasury technology sophistication. A consistent financial institution brand experience is important to corporate clients, but the experience needs to be tailored to each client segment’s unique needs. For the largest, most complex organizations, an even more bespoke and customized experience is critical.

With banks investing increasing amounts of capital in technology incubators and startup accelerators, the pace of innovation in digital channels continues to grow. But for corporate clients, innovation isn’t about incubators, accelerators, or hackathons. Innovation is about simplification — increasing usability, straight-through processing, and digitization. As outlined in the new Celent report, Tailoring the Customer Experience: External Forces Impacting Corporate Digital Channels, the competitive environment, regulatory climate, economic conditions, and technology impacts are shaping the evolution of corporate digital channels. But emerging technologies will have the largest impact. External Forces Corporate digital channels are just one component of a complex treasury technology landscape, but a critical one. Corporates maximizing the efficiency and transparency of digital channels today are enabling and preparing themselves for innovative technologies for the future.