“[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.
- 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.
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.
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.
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.
Treasury management plays an important role in a corporation’s globalisation efforts especially in the areas of cash management, banking, foreign exchange risk, and investments. Treasury must address challenges with managing liquidity distributed across markets, currencies, and businesses, especially the need to keep up with regional liquidity nuances and regulatory issues.
As an outgrowth of globalisation, four key external forces impact opportunities and challenges for corporate growth and expansion: economic uncertainty, geopolitical climate, regulatory environment, and technology evolution.
Eight years on from the 2008–2009 financial crises, global economic growth remains sluggish, hovering between 3.1% and 3.4% since 2012. There are numerous examples of geopolitical events exacerbating volatility, uncertainty, and risks arising from the increasing interconnectedness of regions caused by globalization. New regulations impact treasury organizations in many ways, including in-house banking, intercompany transactions, and transfer pricing documentation.
Corporate treasury organizations continue to lean on technology to facilitate change and mitigate complexity arising from global expansion. Cloud-based treasury management systems (TMS) provide an opportunity to implement specific modules on a subscription pricing basis. Governmental agencies, banks, and fintechs are collaborating to evolve complex corporate treasury services.
As discussed in the new Celent report “Globalisation: External Forces Driving Corporate Growth and Expansion," although firms are in different stages of their globalisation journeys, they can benefit from working with their banking partners to adopt strategies and tactics that address the external factors affecting corporate growth and expansion. Universal banks understand geographic differences and nuances, and are in a unique position to advise firms seeking to expand their businesses globally. This report is the sixth in an ongoing series of reports commissioned by HSBC and written by Celent as part of the HSBC Corporate Insights program.
No one downloads a banking app from their store of choice for fun, nor do they open it up to amuse themselves. Instead, bank apps are used to accomplish specific tasks – check a balance, pay a bill, send money to a friend. Despite the undeniable utility of these apps, institutions struggle to persuade their customers to use them; adoption rates, depending on the specific measure, hover around 50% and have been stuck for a while at that plateau. Furthermore, while it’s undeniable that many customers want a better customer experience, and at least some of those customers would like more and better features, digital executives struggle to find the ROI of investment in their apps. Of course, there’s the argument that it’s analogous to malls that put up Christmas and other holiday decorations – consumers just expect it, and there’s not an explicit ROI – but that’s the subject of another post.
What if consumers could perform their basic banking tasks without ever having to open up their banking app? They could say, “Siri, what’s my bank balance?” or “Alexa, pay the water bill out of my main checking account.” While we’re not there yet, consumer desire for convenience (aka “seamlessness” or the “frictionless customer experience”) knows no bounds. My experimentation with Siri and Alexa, together with my preliminary research into Artificial Intelligence in banking, have led me to hypothesize that this scenario is a lot closer than many bankers might imagine. In the obligatory Uber example, the payment is invisible; what happens when the consumer makes this happen in all other sorts of interactions?
How are you prepared to offer your customers this new level of service? Do you have APIs that will let this happen? And is there a strategy to go beyond simply fulfilling a request and offering more insight, advice, or perspective than simply what being asked for? Like European banks facing the challenge of PSD2, all retail institutions can look at this as a moment where they’ll be relegated to the background or one where they can revamp their service models to build better, stronger, and deeper customer relationships.
This is a copy from my guest post for Finnovista that I wanted to share with you here as well.
A few years ago when we started collaborating in creating the Latin American Fintech community there were no Fintech associations, no Fintech conferences and for sure there was no mapping of Fintech start-ups at all. It has been quite a journey for all of us involved. Kuddos to the Finnovista team for being a key element and catalyser for these achievements!
What exciting moment to be in financial services! Many things going on. Banks are being unbundled; and its happening everywhere. Want to take a look? Check what’s going on in the US, Europe and in more near places across Latin America like Mexico, Brazil, Colombia, Argentina and Chile.
It’s making no distinctions, affecting personal and business banking equally. Consequently, the nature of competition is changing; and pressure is not expected to come from other financial institutions. In a recent Celent survey, to SME banking representatives from Latin American banks, most believe that fundamental changes that are expected to occur in the banking industry won’t come from other financial institutions; instead they are looking mainly to new entrants and adjacent industries.
In last year’s survey to retail banks in Latin America, Stanford University found that 47% of the banks see Fintechs as a threat. The same survey indicates that only 28% of the banks meet the needs of their digital customers. Not a position where you want to be.
Customer expectations, pressure on revenue and cost, and increased regulation don’t make the life easier for banks either. Fintech start-ups may advantage banks on responding to customer expectations and being leaner has Fintechs better positioned to pressure on costs; but they have to play under the same regulation and at some point earn revenues in excess of cost (a.k.a. be profitable).
FCA, the U.K. financial regulator, has opened its sandbox for applications from financial firms and tech companies that support financial services. Successful applicants can test new ideas for three to six months with real consumers under loosened regulations. This is something we haven’t see yet in Latin America, though regulators are increasingly open to the benefits of Fintech and innovation, particularly if it is related to financial inclusion: we have seen the support of regulators to mobile wallets across the region in the last couple of years. Mexico appointed this year an officer for Fintech development in what I see as the leading case in the region to facilitate the adoption of services provided by Fintechs under the umbrella – and supervision – of the regulator. Most lately, the Argentinean regulator has introduced changes enabling digital onboarding, and in payments facilitating competition and adoption; though no sandbox yet, but maybe a digital/branchless bank in the way? Will it be a disrupting incumbent or a new player? By themselves or in cooperation with Fintechs?
Indeed, there has been a lot of debate regarding the nature of the (best) relationship between banks and Fintechs; be it competition, cooperation or coopetition, banks need to play a different game. The ecosystem has changed incorporating a myriad of players and increased complexity. Banks must reconstruct their business models around three areas, recognizing that they are part of a broader and new financial ecosystem:
- Channels: How the bank serves customers
- Architecture: How the bank organizes to deliver value
- Innovation: How the bank delivers new ideas, products and services around both channels and architecture
Banks can innovate on their own, or partner with Fintechs or other 3rd parties; at the end of the day banks need to select and execute on the best innovation models. There is no single answer that fits all; each institution will have to discover the best combination of innovation models aligned with risk appetite, organizational culture and the target customers you want to reach.
It's hard to believe that an entire month has gone by since Oracle OpenWorld in San Francisco — but baseball fans will have noticed that things have been a bit hectic here in Chicago of late. Ironically, the Chicago Cubs clinched a playoffs berth on September 18th, the very day that Larry Ellison officially opened OPEN World with his first of several Keynote presentations.
My primary motivation for attending OpenWorld was to get an update on Oracle's two banking platforms — the new flagship Oracle Banking Platform (OBP) aimed at large retail banks and its stable mate FlexCube, the universal banking platform deployed by nearly 600 banks globally. After three days at OpenWorld, I realized that the real story of interest to banks is Oracle's emerging cloud story, which coupled with its existing core banking applications business puts them in a really interesting position to transform the core banking systems market.
Now a robust 72-year-old, Larry joked with the audience about being prohibited from climbing the stairs to the Keynote stage, but he still exhibits the intense competitive burn that served his company well during the ERP battles of the 1980s and 1990s. The difference is that these days, he's less focused on IBM or SAP as he is two new challengers: Amazon Web Services (AWS) on the IT infrastructure side and WorkDay on the applications side.
Of course, what AWS and WorkDay have in common are that they are both businesses with long-term prospects predicated on the continued growth and development of cloud services. Larry's first Keynote noted that we are witnessing generational change as companies move from "lots of individual data centers" to a smaller number of "super-data centers called Clouds". In a separate presentation, Oracle CEO Mark Hurd shared Oracle's view that within the next ten years, 80% of corporate-owned data centers will have been closed, with the remaining data centers running at 20% of today's capacity, running legacy workloads that are not easily ported to a cloud services environment (hey COBOL — I think they're talking about you!).
According to Larry, Oracle's "overnight success" in cloud services began ten years ago when it started reengineering its original ERP products — licensed software designed primarily for the on-premise market — into a new multi-client, multi-tenant architecture, as befitting a company that was pivoting to the emerging SaaS model. At OpenWorld, Larry shared how Oracle was extending its original SaaS business to embrace both the Platform as a Service (PaaS) and Infrastructure as a Service (IaaS) models — putting AWS, Google, and Microsoft all squarely in Oracle's competitive sights.
Of the three, AWS appears to be the primary target of Oracle's competitive ambitions: Oracle's new "Gen2" IaaS platform offers a virtual machine (VM) that offers twice as many cores, twice as much memory, four times as much storage, and more than ten times the I/O capacity of a comparable AWS VM. But there is a catch, according to Larry: "you have to be willing to pay less" than what AWS charges for a comparable VM. (While AWS might take issue with Larry's claims about performance and value, what is clear is that Oracle is planning a serious competitive challenge to AWS's supremacy in the IaaS race.)
In Larry's words, "Amazon's lead is over. Amazon's gonna' have some serious competition going forward."
This represents great news for the growing number of banks that have gotten past the question "Why cloud?" and have moved onto the more interesting question "How cloud?". For the largest banks like Capital One that have significant IT development capabilities in-house and with the willingness to experiment with new technologies, AWS makes a lot of sense. Banks can roll their own code, spool up a VM, and off they go. Capital One's cloud journey has been so compelling in fact, that the bank is in the process of closing down 5 of its 8 data centers while swinging many workloads to AWS. Most banks, however, are not Capital One.
For the mere mortals among us — banks coping with practical limitations on their ability to develop and host banking apps — having an IT partner with demonstrable experience on the application side and the infrastructure side can represent a real game changer in terms of the bank's appetite to make a leap into cloud-based banking services. While some banks have in the past been a bit overwhelmed by Oracle's ambitious sales pitch featuring its all singing, all dancing suite of integrated applications ("that's very impressive, but I only want a G/L!"), with Oracle's new IaaS offering a bank could mix and match Oracle applications (offered via SaaS) with third-party and in-house developed systems. That potentially a game changer for banks interested in cloud services, but overwhelmed by the complexity of going it alone with a public cloud provider.
That brings us back to OBP and FlexCube. OBP is a recently built Java-based core banking solution built for the needs of large scale retail banks. As such, OBP is aimed squarely at mainframe-based core platforms like Hogan, Celeriti and Systematics. FlexCube is a universal banking platform and has also seen some renewed investment from Oracle in the last few years. While today its primary market appears to be international banks, as a modular solution FlexCube can address specialized needs in the US market like cash management and trade finance. OBP and FlexCube continue to compete in the global core banking systems market on their own terms — with OBP having some recent success as a foundation for a new digital banking platform for Key Bank (Cleveland) and as the foundation of a complete core replacement project at National Australian Bank (Melbourne).
For larger banks intrigued by the promise of cloud services, but daunted by the complexity of building and operating their own environment, the opportunity to pull down an OBP license that is hosted in the Oracle Cloud while dragging other applications from their private data center to Oracle's IaaS platform could help achieve in one move the twin goals of core banking system and data center transformation. That's a rare 2-for-1 in a world where a widely-held truism is that every IT decision involves trade-offs among alternatives.
According to Larry, Oracle's annual revenue run rate for cloud is currently about $4 billion. Amazon recently announced that its revenue run rate for cloud services was north of $10 billion while just yesterday Microsoft announced its own revenue run rate for cloud has approached $13 billion. These are undoubtedly different businesses (AWS is more or less pure-play IaaS while Microsoft skews towards SaaS by virtue of the strength of its Office 365 business), so I won't pretend to make any apples-to-apples comparisons. The point remains that while it's still early in the cloud ballgame for Oracle — with deep financial resources, an impressive portfolio of banking applications, and Larry's intense "Will To Win" against the current market incumbents — bank CIOs need to pay close attention to what is going on in Redwood Shores.