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Why banks are right now at that ‘Change or Die’ crossroads

Source: Finance Derivative

Change is often difficult, time-consuming and expensive. But ignore it at your peril. For years, business change of course has centred around digital transformation, what else? Here, the banking sector is not the first thing that springs to mind, nor is it the definition of cutting edge. The truth is that banks have reached a crossroads and need to seriously adapt their businesses now or, over the next few years, some brands may disappear altogether. As the old cliche says: change or die.

It’s time for action

A report from The Financial Times Focus (FT Focus) illustrates the urgency for banks to modernise their offering. Not only do two in three banks expect to lose market share unless they embrace digitisation, but 58% of respondents predict they will cease to exist completely in the next five to ten years, if they fail to change their business models. Wow, that’s a frightening prediction and one that I don’t believe exists in any other sector, making it the ultimate driver for change.

The report goes on to say that with 74% of respondents predicting that technology giants such as Amazon and Google will hold the largest market share of the banking industry within just five years, now is the time for action. I do wonder which brands will fail to achieve enough change and be lost to history.

Making change actually stick

One major obstacle as banks transform digitally is the fact that they cannot let go of their outdated legacy systems. They look even further behind when you consider the likes of Apple, Airbnb, Amazon, Google, Netflix and Uber and how they are actually transforming modern life for all of us. And that customer viewpoint is an important consideration for banks as they have many neo-banks and fintech apps snapping at their heels ready to hoover up their customers if they are perceived to have made the slightest slip.

What is still holding banks back? With constantly shifting goalposts due to changing markets and expectations, reaching that ‘digitally transformed state’ is in reality unachievable. Rather, it becomes a process of continuous evolution as new systems/projects are introduced over the short, medium and long term.

Some banks are grabbing the headlines, for example JP Morgan Chase is moving as much as 50% of its applications and data to the cloud in 2022. Given increasing customer demands and market pressures, as well as the need to respond to world events, it makes sense that banks need to start thinking like technology companies, that’s why the same bank invests $12 billion per year on technology.

Covid sped up the digital transformation process in banking ‘a great deal’ (60% according to Statista) but it is still lagging way behind other sectors with Technology (78%), perhaps predictably topping the list, but also Healthcare (74%), Retail & Ecommerce (70%), and Manufacturing (65%).

Not only do banks appear slow to react to such a crisis, but they are still just dipping their toes in the digital water, with only 27% launching a digital transformation strategy last year.

Furthermore, according to Cornerstone Advisors, seven in 10 banks don’t plan to replace their core systems as part of their digital transformation. In addition, few have deployed—or plan to deploy—core integration/middleware platforms or payment hubs. Without these platforms and without replacing the legacy systems, the promise of real digital transformation will be difficult to attain.

It paints an even bleaker picture when we consider that 70% of transformation projects within financial institutions fail altogether and deliver no meaningful return on investment. Clearly it’s time for them to up their game and use the technology shifts in the market to their advantage.

What does Digital Transformation mean for banks?

When done right, the billions being invested in digital initiatives makes good business sense and delivers a win-win for both customers and banks. Customers enjoy better experiences and the convenience of accessing services across multiple devices; while banks see improved process efficiency through automation.

With customers able to do more online safely and securely, trust in the brand grows, and they can enjoy a more personalised offering with better customer engagement.

Banks benefit in a number of ways too. Not least, increased revenue and client satisfaction due to 24/7 always-on services. Acquisition of new customers becomes cheaper and easier. Better customer engagement stems from leveraging client data. Account management and support become easier via digitised paperwork. Digital transformation enables organisations to build an environment of ongoing innovation and adaptability vital for future growth.

Ultimately, what this means operationally is a huge number of efficiencies, not least: elimination of paperwork; less time spent servicing clients; increased productivity; organisational transparency; effective teamwork; lower operational costs; and risk reduction in core activities.

The challenges facing banks

Bank CIOs and Digital Transformation Leaders clearly do not have an easy job. But with massive budgets on the table surely they can buy their way out of this?

Arguably banks are simply playing catch-up, making investments and changes that should have been made five (or more) years ago.

Not helping the matter is the significant developer skills shortage, which makes it difficult for firms to hire the right technical resources to support projects, and the fact that some projects can take up to 18 months to complete with a traditional development approach.

Furthermore, by the time one area has been tackled, the market has often moved on once again, and the ‘new’ solution is no longer quite as new.

How low-code can help

Business Process Automation is of course vital for banks to achieve any sort of digital transformation. One solution that will help banks meet current, and future, challenges is using low-code in their automation. In fact, Gartner analyst Milind Govekar predicts that 70% of new applications will be developed using low-code or no-code techniques by 2025.

A low-code platform enables organisations to achieve a rapid rate of change with minimal effort, coupled with fast delivery. This is because low-code enables the building and updating of process applications with reduced coding. The traditional hand-coding approach is replaced with an intuitive visual development style. Here, drag and drop user interfaces are used to add different types of elements, such as connection to databases, other software applications or logic elements, and even blockchain implementations.

This reduction in code requirements drastically accelerates development timelines, both for new application builds and change requirements to existing processes. The organisation becomes more agile as a result, and is able to achieve significant gains in operational efficiency without any breaks in governance. In other words, low-code makes complex automation easy and accessible, in a highly streamlined and comprehensive workflow.

CEC Bank, one of the largest financial institutions in Romania, used the Aurachain low-code platform to accelerate digital transformation in three critical areas: an integrated system for monitoring and maintenance of the bank’s ATM and POS fleet, a fully digital onboarding process for new SME customers, and the digitalization of online trade finance solutions for SMEs. Key benefits include an automated platform that achieves high reliability, availability and maintainability of key business services for ATM/POS. In addition, the new onboarding process automates complex workflows, incorporating business rules and actions; implements a single user interface across systems and processes; can be quickly tailored to incorporate internal or regulatory governance processes.

Customer-First Priority Areas

How should banks focus their considerable budgets now to ensure digital transformation success?

The first step is vital to get right: the strategy must focus first and foremost on the customer. Here, automating processes to create a seamless CX plays a major role. In addition, customer data must be used to create more personalised services and products.

Delivering an omnichannel offering is not only important, but expected by customers. Significant technology investments are required to compete with new fintech companies, online banks and challenger banks – as well as meet ever-climbing customer expectations. Not surprisingly, finding specialised business transformation talent to develop such solutions is critical.

The Future

Within financial institutions that think they’re three-quarters of the way through their digital transformation strategy (or more), just 39% implement Robotic Process Automation; and way less are using chatbots or machine learning (according to Cornerstone Advisors). Given the fact that low code is so critical to intelligent business automation, how can they seriously be moving towards a digital future without using these technologies? There seem to be some major discrepancies, implying institutions are in fact further away from their goals than they believe.

One thing is clear. With the alternative being possible death, banks need to change now.
Those that step up and put the tech and cultural foundations in place today, including using low-code to achieve process automation, will find themselves well-positioned in the future.

As opportunities arise with more emerging technologies, these organizations will be ready to forge ahead while many others will be falling further behind in the catch-up game.

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Business

How VRPs can improve the open banking experiences of consumers

Source: Finance Derivative

Attributed to: Luke Ladyman, COO and Co-founder of Cheddar

Variable Recurring Payments (VRPs) are a new technology within Open Finance. Despite being relatively unknown outside of the financial marketplace, VRPs are at the centre of an exciting conversation around frictionless payments.

This technology enables consumers to set up specific payment instructions with regulated finance apps that are used to make a series of recurring payments. VRPs have been designed to make life easier for consumers and small to medium-sized enterprises (SMEs). However, there is still room for improvement.

Limits to VRP technology

VRPs have the potential to do far more than just simplify recurring payments but unfortunately, the efficacy of VRPs is severely limited. As they stand, VRPs are only mandated for ‘sweeping’, which is a word to describe moving money automatically between an individual’s current or saving accounts.

According to the OBIE, five million people now use Open Banking in the UK. We can expect consumers to demand greater scope in VRP services, but the infrastructure to support VRP technology is just simply lacking.

The next major step in expanding the scope of this technology will be when legacy financial institutions collectively adopt and build out VRP infrastructure. At present, only a small handful of legacy banks offer VRP services to their customers which has severely limited its reach.

Unlocking the potential of VRPs

VRPs promise to unlock countless opportunities for consumers to better manage their finances, whilst simultaneously supporting companies to build out mechanisms that allow for open banking adoption. This technology has the potential to completely transform how consumers interact with financial services and SMEs.

If mandated for more than just the sweeping use case, VRPs can give consumers complete control over their monthly subscription payments for things such as mobile top-ups or gym memberships. Consumers may even set up VRPs with taxi services to automatically charge them whenever they arrive at a destination up to a certain amount.

By expanding the scope of VRPs, consumers can enjoy hyper-personalised Open Banking experiences. And as Gen Z enters the workforce, this tailored approach will be more important than ever before. Setting payment parameters which are as easy to enforce as clicking a button will keep Gen Z happy and will give businesses access to an entirely new demographic.

Cost of living crisis

With living expenses reaching record highs for young people and working families, paying for basic utilities has become a lot more painful. At their full potential, VRPs could enable the most vulnerable in society to authorise utility providers to automatically take payments, only up to a certain amount. This would help consumers budget better for emergencies and keep up with payments.

To further cushion the effects of the crisis, consumers could also specify payment parameters to avoid any shocks to their bank accounts. This will generally lead to less errors as data is processed digitally and won’t require manual entry.

Lastly, those struggling financially will be able to automatically withdraw their consent to payments service providers (PISPs) who make the payments on their behalf. This is in contrast to credit or debit cards where consumers do not have the flexibility to automatically opt-out of transactions and cannot set specific parameters for payments.

How does this affect banks?

On the surface, the value proposition of VRPs looks to threaten certain aspects of banks’ business models. However, once you look deeper, we can see this isn’t the case – it’s actually quite the opposite.

If adopted for all use cases, VRPs can help banks significantly combat fraud as no sensitive payment information is exchanged with businesses. VRPs can act as a frontline defence with its enhanced transparency and tight controls for the consumer. PISPs can create the same experiences you get by using your debit or credit card but with the additional benefits.

By effectively addressing security concerns, banks will greatly improve customer experiences and reduce customer drop-off rates.

The future of VRP technology

We must take into consideration the current limitations of this technology as we press closer towards a completely frictionless way of banking. As things stand, the future of VRPs will rely heavily on further licensing approval from the Financial Conduct Authority (FCA) and increased approval from the Competition and Markets Authority (CMA).

If utilised effectively, VRPs can be applied across a plethora of uses to give consumers greater control over their finances as initially promised. There’s no doubt that expanding the scope of VRPs will give consumers hyper-personalised Open Banking experiences that will decrease customer drop-off rates. So, definitely watch this space!

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Business

Chained to the system – why building another pillar of wealth is key to having the freedom of choice

Source: Finance Derivative

By Marcus de Maria, Founder of Investment Mastery.

For many of us, our lives are already mapped out from the get-go. Go to school, college, then potentially university, get a job and mortgage, whilst spending the rest of our lives paying it off to enable us to have a comfortable retirement.

This is the pathway we have been led to believe we should follow, and many do blindly follow, chained to their desks to pay their mortgage or bills, spending their disposable income to get a better car, bigger house, or enjoy a couple of weeks in the sun.

But for me, I wasn’t happy with this pathway. I didn’t want to be forever paying off a mortgage and saving for a few precious weeks of holiday each year. I wanted more.

So, I took the plunge and started investing  – but fell hard and lost a lot of money. Why? The reason was I didn’t educate myself first. I didn’t have a strategy and I didn’t seek advice from others who had done it before me. Why do people go to university for 3-4 years, study to become a doctor or dentist for 5-7 years or an accountant for 4 years? Because training and education are essential, and the same can be said for the stock markets.

Once I had learned this (the hard way), I worked hard to educate myself and started building my own new pillars of wealth.

Investing isn’t a get-quick-rich scheme. For most, it is not an alternative to working or a reason to quit a lucrative career. It is quite simply another pillar of wealth that gives you the freedom to live a life of more choice. Investments will ripen over the years, and we advise starting as early as possible to ensure you have maximum funds for later in life, when children, ageing parents and retirement can all affect finances.  

The other thing to remember when investing is the level of risk. We say you should never invest any more than you can afford to lose and to keep perspective, as markets are likely to go down as well as up. Investing alongside working in a secure job role is the best option, as you can then funnel small chunks of money into your portfolio each month.

Here are some tips to build a new pillar of wealth:

Where to invest – are you interested in stocks, precious metals, commodities or Cryptocurrencies? If stocks, which Stock are you entering and why? If Crypto, do you know enough in such an unregulated or volatile asset class? Is it on a technical basis where you like the chart pattern or a fundamental basis where you think the company has long-term growth potential?

What price to get in at – I prefer buying low, so I set an order in advance and allow the price of the Stock or Crypto to fall to my entry point. Sometimes I will wait weeks, even months, for this to happen. But I wait because those are the rules.

When to exit with a profit – I know in advance when I am exiting the trade or when to exit with a small loss. So, in order to ensure I am doing the right thing when the Stock is falling, I enter with an automatic order below my entry point, called a ‘Stop Loss’ or ‘Limit Sell Order’ in some cases, to minimise my losses.

How much to invest – this is part and parcel of keeping risk low. I ensure that by the time the stock price falls to my predetermined stop loss, I will only be risking 1% of my portfolio. So, if I have £10,000 to invest, I would only risk 1% or £100 on any one trade. It’s a mathematical equation EVERYONE should know before they start trading. Unfortunately, very few people know this equation, and even fewer utilise it.

For anyone wanting to secure their financial future, increase their pension pot or simply live a life of more choice, building another pillar of wealth is key. Get educated, keep the risk low and be prepared to be in it for the long term –  you may be surprised at the results!

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Business

Resilient technology is the most important factor for successful online banking services

Source: Finance Derivative

By James McCarthy, Director of Solutions Engineering, NS1

More than 90 percent of people in the UK use online banking, according to Statista and of these, over a quarter have opened an account with a digital-only bank. It makes sense. Digital services, along with security, are critical features that consumers now expect from their banks as a way to support their busy on-the-go lifestyles.

The frequency of cash transactions is dropping as contactless and card payments rise and the key to this is convenience. It is faster and easier for customers to use digitally-enabled services than traditional over-the-counter facilities, cheques, and cash. The Covid pandemic, which encouraged people to abandon cash, only accelerated a trend that was already picking up speed in the UK.

But as bank branches close—4865 by April of 2022 and a further 226 scheduled to close by the end of the year, Which research found—banks are under pressure to ensure their online and mobile services are always available. Not only does this keep customers satisfied and loyal, but it is also vital for compliance and regulatory purposes.

Unfortunately, their ability to keep services online is often compromised. In June and July of this year alone, major banks including Barclays, Halifax, Lloyds, TSB, Nationwide, Santander, Nationwide, and Monzo, at various times, locked customers out of their accounts due to outages, leaving them unable to access their mobile banking apps, transfer funds, or view their balances. According to The Mirror, Downdetector,  a website which tracks outages, showed over 1500 service failures were reported in one day as a result of problems at NatWest.

These incidents do not go unnoticed. Customers are quick to amplify their criticism on social media, drawing negative attention for the bank involved, and eroding not just consumer trust, but the trust of other stakeholders in the business. Trading banks leave themselves open to significant losses in transactions if their systems go down due to an outage, even for a few seconds.

There are a multitude of reasons for banking services to fail. The majority of internet-based banking outages occur because the bank’s own internal systems fail. This can be as a result of transferring customer data from legacy platforms which might involve switching off parts of the network. It can also be because they rely on cloud providers to deliver their services and the provider experiences an outage. The Bank of England has said that a quarter of major banks and a third of payment activity is hosted on the public cloud.

There are, however, steps that banks and other financial institutions can take to prevent outages and ensure as close to 100% uptime as possible for banking services.

Building resiliency strategies

If we assume that outages are inevitable, which all banks should, the best solution to managing risk is to embrace infrastructure resiliency strategies. One method is to adopt a multi-cloud and multi-CDN (content delivery platform) approach, which means utilising services from a variety of providers. This will ensure that if one fails, another one can be deployed, eliminating the single point-of-failure that renders systems and services out of action. If the financial institution uses a secondary provider—such as when international banking services are being provided across multiple locations—the agreement must include an assurance that the bank’s applications will operate if the primary provider goes down.

This process of building resiliency in layers, is further strengthened if banks have observability of application delivery performance, and it is beneficial for them to invest in tools that allow them to quickly transfer from one cloud service provider or CDN if it fails to perform against expectations.

Automating against human error

Banks that are further down the digital transformation route should consider the impact of human error on outage incidents and opt for network automation. This will enable systems to communicate seamlessly, giving banks operational agility and stability across the entire IT environment. They can start with a single network source of truth, which allows automation tools to gather all the data they need to optimise resource usage and puts banks in full control of their networks. In addition it will signal to regulators that the bank is taking its provisioning of infrastructure very seriously.

Dynamic steering 

Despite evidence to the contrary, downtime in banking should never be acceptable, and IT teams can make use of specialist tools that allow them to dynamically steer their online traffic more easily. It is not unusual for a DNS failure (domain name system) to be the root cause of an outage, given its importance in the tech stack, so putting in place a secondary DNS network, or multiple DNS systems with separate infrastructures will allow for rerouting of traffic. Teams will then have the power to establish steering policies and change capacity thresholds, so that an influx of activity, or a resource failure, will not affect the smooth-running of their online services. If they utilise monitoring and observability features, they will have the data they need to make decisions based on the real time experiences of end users and identify repeated issues that can be rectified.

Banks are some way into their transformation journeys, and building reputations based on the digital services that they offer. It is essential that they deploy resilient technology that allows them to scale and deliver, regardless of whether the cloud providers they use experience outages, or an internal human error is made, or the online demands of customers suddenly and simultaneously peak. Modern technology will not only speed up the services they provide, but it will also arm them with the resilience they need to compare favourably in the competition stakes.

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