By Muj Malik, CEO, iFAST Global Bank
In today’s multi-channel, always on, environment, customers want to shop and spend on demand, when they want to. Any delays and they will soon be off the platform and buying something else or getting a quote from another supplier. Fortunately, the rise of artificial intelligence and machine learning has enabled the whole ecommerce process to react far more quickly and intelligently; suppliers can now, in theory, both manage their risk adequately while, simultaneously, being able to offer highly personalised pricing demanded by their customers. In practice, the outcome is not always so clear cut.
One industry that has been slow to evolve is the traditional banking industry. This has led to newcomers – ‘challenger banks’ – entering the market. They are agile and nimble but have to spend time building the mandatory frameworks to comply with stringent regulation and data protection and data privacy laws, or face potentially stringent fines, as well as potential loss of reputation and customers.
Banks face a number of issues when moving to develop their digital banking products and services and extend their financial ecosystems. From the customers’ perspective, the simple availability of a seamless online account opening process is essential. In their rush to get to market, this is not always easy for them to do.
Take the following example. Offering customers a hassle-free experience can offer significant opportunities by reducing the friction and difficulties commonly associated with opening UK bank accounts, especially for overseas customers seems like something a bank would want to do in today’s global consumer marketplace. Many banks make it very difficult to accommodate such customers though or are simply appear not interested at all. At their worst, they fail to develop robust enough technology and due compliance, meaning they risk falling foul of the regulatory guidelines and incurring heavy fines. It’s obvious why barriers seem insurmountable and so they fail to evolve their services, or customer reviews are poor because of lack of services that suit how the customer wants to shop and buy.
Despite their massive potential, research by Boston Consulting Group (BCG)’s Henderson Institute found that less than one-third of the world’s largest banks are investing in financial ecosystems in a meaningful way. Nearly one-quarter aren’t investing in them at all, beyond the occasional pilot. Challengers from outside the traditional banking arena, however, such as Amazon and Google are taking action, extending the services they offer and integrating services from third-party providers, or offering additional services through API gateways.
Traditional banks need to sit up and take notice if they are not to be left behind. For example, in Asia, we identified challenges faced by customers who are overseas residents and require a UK bank account but may find it difficult to open one without an established UK presence. These customers may include migrants preparing to move to the UK, families planning to send their children to study in the UK and wishing to fund their education expenses, or global customers seeking to diversify their wealth and hold assets in a place with strong financial and political stability like the UK.
Banks need to consider what type of bank they want to be. There are three main types of banking technology platforms, BaaS (Banking-as-a-Service), BaaP (Banking-as-a-Platform) and Open Banking.
- BaaS (Banking as a service)
Traditional banks offer BaaS as a white label service to a non-bank where those companies want to offer digital banking products, but without a banking license and integrate entire services into their apps. - BaaP (Banking as a Platform)
Banking as a platform is where a fintech business offers services to a bank where it might integrate a fintech product then be able to guarantee things like smart transaction routing, meaning fewer fees, real-time POS analytics, and greater automation of POS services. Because Fintechs often have huge scope, the scalability of these technologies is key. - Open Banking
In Open Banking, non-banks access data or trigger payments, via API. Similar to BaaS, there’s the bank and the non-bank business. Often the company that supplies the API which connects the two is a specialist banking API provider.
Making a Digital Banking Platform (DBP) compatible with Open Banking allows the technology provider to connect to various fintech offerings in the industry. This offers a significant advantage to the player as it can offer a seamless experience between retail banking and investment banking or wealth management.
Customer benefits, such as the all-in-one-place multi-currency account, multi-currency deposits, etc. can make a bank even more attractive to customers who require more than just one currency. Additionally, being able to link their bank accounts with their investment account is a powerful way to make a bank stand out from its competitors and ultimately benefits customers. Offering a flexible range of banking and investment products with multiple currencies, varying interest rates such as Multi-currency accounts, Notice deposits and Fixed term deposits, linking across to a variety of investment products to a Wealth Management platform is something that consumers are beginning to recognise that not only do they want it but that they should be offered.
Direct participation in payment rails such as CHAPs, Faster Payment Services (FPS) and SWIFT can provide a bank with significant advantages in the Banking-as-a- Service space. Plug-and-play solutions to address payment needs is particularly relevant to DTB offerings.
For example, in the UK, DTB can help customers, Non-Bank Financial Institutions (NBFIs), other banks and building societies, corporates and SMEs, or e-commerce providers through offering safeguarding account facilities and GBP clearing facilities, operating bank accounts across multiple currencies as well as fixed term and notice accounts. It helps support the currently underserved UK Payment Services industry.
The next few years could be a make-or-break period for some banks. They will join the digital financial ecosystem movement—or be consumed by it. By 2030, digital ecosystems could account for a significant share of the banking revenue pool.
References:
https://www.bcg.com/publications/2023/exploring-digital-financial-ecosystem-opportunities
