Commentaries and insightful analyses on the world of finance, technology and IT.

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September 29, 2016

Open banking over API gets a fillip with CMA measures in the UK

- by Amol Kulkarni and Harshit Tripathi

"We need banking but we don't need banks anymore" -- Bill Gates, 1997

Almost 20 years on and Bill Gates' prediction regarding the biggest transformation in the banking sector seems ever so true. It is disruptive and radical to think of banking without banks, but who knew that one day technology could undermine the existence of banking institutions themselves. Though it is just the beginning, but CMA directives to implement open banking over application programming interfaces (APIs) is set to mark a milestone in this journey.

The Competition and Markets Authority (CMA) launched an investigation and analysis of current accounts and associated services to individuals and small and medium-sized enterprises (SMEs) on November 6, 2014, costing five million pounds, to further the intention towards open banking over API that was being evangelized by the Open Data Institute (ODI) and Open Banking Working Group (OBWG).
While the CMA has set the course in the right direction, there are still a few areas where the CMA could have done better.

Key measures in the right direction:-

• Simpler charges and intimations on overdrafts
• Disclosure of service quality measures, which can be meaningful if key performance indicators (KPIs) are shaped with inputs from customers instead of banks
• Providing a common platform for price comparison and selection
• Encouraging credit agencies and banks to share the transaction history of customers, resulting in better credit deals especially for SMEs
There is a need to do more...
• Rather than attempting to refine and add value to 'what is being offered', the CMA directive is more focused on 'how it is being offered'
• It is an old ball game for banks to charge customers one way or the other. Restricting income from overdraft charges will push banks to increase charges elsewhere. There cannot be directives to avoid this fallout
• The CMA views the market in just two segments -- retail and business banking customers -- while in reality, the market is lot more segmented. Tech-savvy versus technologically-challenged are two such segments the CMA should have considered before mandating these directives

From its final set of directives, the CMA aims to promote greater market competition and enable customers to leverage open APIs and leverage the best deals for their banking needs.
The directives will not only allow customers to view all their bank accounts in just one application but will also enable them to easily compare products and services from different banks, as well as receive personalized financial advice and get the best deals. Moreover, for banks, it is not just going to be about giving the best offers and deals, but also to publish their service quality indicators, which will allow customers to evaluate between competitive price offers and quality of service.

The CMA has made it a top priority to empower tech-savvy customers in both the retail and business banking segments with more insights into pricing structure and enabled comparison. There seems to be marginal impact and empowerment for less tech-savvy customers. With this, the CMA has targeted the 'cost focused' section of Michael Porter's   strategy and has ignored the 'differentiation' factor in order to gain a competitive advantage. The CMA directives seem to have ignored the fact that value addition to the existing range of products and services could also drive competition.

The directives have shifted the focus on how to make switching banks an easier task without losing your history and Nesta's challenge for price comparison will ensure customers get the best deal.   We believe this will actually result in more of a comparative advantage, rather than a competitive advantage.

It is still early to assess the impact of the CMA's directives since a lot is dependent on how innovatively technology is used to build the new open banking ecosystem. While there are still many positives which should be encouraged; however, the timing is still in question since banks are looking to replace their legacy systems and a low interest rate environment is already marring their earnings. To top it all, open banking APIs are set to trigger aggressive price competition, which might push banks further towards lower margins of profit.

However, open banking will find its force as FinTechs and other market forces make it inevitable. Open banking over API will create immense possibilities in delivering banking services over ALEXA like AI-based assistants who can, in turn, call banking APIs that have been exposed. We can expect banking services to truly permeate our lives over unimagined touch points.

The US dilemma: To be 'SWIFT' or 'FASTER'

- by Varun Narang and Sweenie Dabas

The payments universe is evolving rapidly.  Companies and consumers are constantly trying to stay ahead of the curve to comprehend the future. In such a scenario, real-time payments may be the crystal ball. 'Real-time payments', or 'Immediate payments' allows consumers and businesses to transfer money in real-time between bank accounts at a very low cost.

Globally, about 30 countries have either implemented or are in the process of reviewing and implementing an immediate payments infrastructure. The US, however, despite being the largest economy and a technologically advanced country, has made noticeably slower progress in this regard.

The US has been in a quandary for some time now. The Electronic Payments Association (NACHA), the Federal Reserve System (Fed), banks and other players have been talking about real-time payments for the last 20 years but only recently did the Fed take concrete steps towards its implementation.

In 2015, the Fed established 'The Faster Payments Task Force' with 331 members dedicated to improve the payments system across the US. It is tasked with identifying new and effective approaches for implementing faster payments capabilities in the US and is supported by McKinsey in the effort. Instead of following the beaten track of mandatory and controlled approach, the Fed has taken a conducive approach and is encouraging various industry parties to develop solutions and letting the market discover and decide the best solutions, governed by the broader guidelines called 'Faster Payments Effectiveness Criteria'.

The central bank's move has encouraged several initiatives to enable immediate payments -

- In October 2014, the Clearing House (operator of CHIPS and EPN ACH network) announced a multi-year endeavor to build a real-time payment system. It is currently working with FIS and is set to launch a pilot in Q1 2017
- In May 2015, NACHA adopted a rule that will enable same day processing of Automated Clearing House (ACH) payments and its phased implementation will begin in Sep 2016
- clearXchange (a P2P payment network owned by member banks) has already reached more than 170 million digital customers
- Payment solution providers such as Fiserv and FIS have launched proprietary real-time payment services - Popmoney and PayNet, respectively
- Fintech startup Dwolla runs a real-time, streaming payments protocol FiSync and has already submitted a real-time payments proposal to the Fed task force. Another startup, Ripple Labs, settles transactions in real-time using distributed ledger technology
This huge and heterogeneous ecosystem will lead to rapid strides in developing real-time payments and will give banks a bouquet of options to choose from. In fact, some of the largest banks - Wells Fargo, Chase, BofA - have started offering real-time P2P payments this year.

A real-time payments system will benefit multiple stakeholders in the U.S., including retail consumers, banks, and government agencies. However, it will not be without challenges. It will require significant overhaul of the legacy systems which currently support batch transactions, streamlining of operations to provide 24/7 support, and enhanced fraud and risk management.

The vast number of US banks, 6799 to be precise, and the number of parties involved, makes this project more challenging and unique. It was relatively easier to implement 'Faster Payments Scheme' in the UK, 'SIC' in Switzerland or 'FAST' in Singapore, given the small number of institutions in these regions. But the large and dynamic ecosystem of the US underscores the need and role of technology consultants to enable the transformation and represents a huge opportunity for IT service providers. They can enable banks to make their payments infrastructures more robust by assisting in:

- Easy product related customization
- Infrastructure designing to make it highly scalable and resilient
- Infrastructure implementation and server hosting
- System integration with periphery systems
- L2, L3 infrastructure support
- Regulatory compliance Singapore's

The Faster Payments Task Force will publish its assessment of the solution proposals in early 2017. But the Fed has not made it mandatory for banks to contribute and there is no deadline attached. US banks, however, can't afford to just sit back as this represents a huge opportunity - mobile P2P is estimated to grow to USD174 billion by 2020, up from USD5.6 billion in 2014 - and savvy fintech startups are already way ahead in the race. With their global peers having reached the destination already, it is imperative for US banks and regulators to come to a consensus on establishing real-time payments system in the country, and soon.

September 22, 2016

Are commercial banks with FinTechs or not, in the innovation race?

- by Souna Uthappa and Irene Varghese

All eyes and ears were on Rio Olympics in anticipation to see who contrives the best strategy and exhibits exemplary skillset to win the race! At the end, it was the US which emerged as the ultimate winner in the game of Citius, Altius, Fortius!
Likewise, most banking executives are touting on the latest buzz - FinTech which is disrupting the financial services arena. Consumer banks have already started making strategic moves partnering with FinTech firms, so that they don't fall prey to them. Now, it's time for the less digitally-savvy commercial banks to be 'faster, higher, stronger'.

Seeing the rich banking experience enjoyed by consumer banking customers, commercial banking customers too have started demanding innovative products, platforms, and a seamless banking experience. Towards this, banks are proactively reaching out to their commercial clients in an attempt to find out their areas of concern and come up with innovative solutions, FinTech being one among them.

Recently, KeyCorp bank conducted a survey of commercial clients and found that digitizing payments is the need of the hour. Another major bank, SunTrust introduced a payment & technology unit. The objective of this unit is to focus on FinTech startups that are looking at new solutions in the commercial banking space and utilize those solution for their clients. U.S. bank  joined tech start up Plug and Play as aFinTech and security anchor partner. Leveraging FinTech, U.S. bank has also introduced mobile payment services for their aviation clients which lets its private and business pilots to pay for fuelling and services from their phone directly.

From the above examples, it is evident that commercial banks are focusing on leveraging FinTechs in digitizing their payment business. Initially, payment innovation using FinTech was the hotbed for consumer banking but now it is gaining traction among commercial banks as well. Considering the fact that commercial clients are looking for more digital payment tools and experience, it would be futuristic for banks to thread a story with FinTechs in the payment space.

Beyond the frontiers of payments, the other area which could see momentum is small and medium enterprise (SME) lending. The SME market is mainly underserved and so easier for FinTech firms to penetrate. Hence, commercial banks need to find the right approach, so that they don't lose their share of profit to FinTechs. Recently, JP Morgan partnered with OnDeck, an online small business lender; to strengthen their SME offerings by leveraging OnDeck's credit modeling expertise.

The above mentioned are just a few business areas in which commercial banks can partner with FinTechs to stay ahead. They can also be leveraged to strengthen the banks' operational efficiency in areas such as process automation, specialized services, analytics, client onboarding, etc.

FinTech is bound to stay! How well banks use FinTechs in their business model would script their future. Commercial banks who were laggards in digitization can't afford to lose out on the FinTech opportunity as well. Hence, CXOs of these banks must devise the best plan to incorporate FinTech in their business model either via partnership or acquisition, so that commercial banks touch the finishing line in the innovation race!

September 12, 2016

Social Media Banking: Are Banks Ready?

- by Chetna Narayanan and Prasanna Sekar

A trek to the bank branch / ATM to either open an account or make a payment transaction is a familiar event for most of us. But the last 5-10 years has brought about sweeping changes in banking with an array of payment channels - plastic cards, online (Internet), mobile, peer-to-peer (P2P), and more - made available by financial institutions.Gone are those days when one has to visit a branch or trek to an ATM to make payments. Online banking has enabled customers to transfer or make payments from the comforts of their home.

After online banking, P2P services and mobile cash transfers emerged as the next important frontier in payments, opening the customer's gateways to new innovative ways of payments as it connected individuals to banks, the Internet and merchants.

Today, banks are moving a step further by transforming themselves from "transactions to interactions" using social channels such as Facebook, Twitter, etc. The growing presence of banks in social media is changing the way banks engage with their customers. Banks are making themselves accessible in social media channels. Thanks to the new age 'social banking', customers can do their favorite activity, i.e., be online on Facebook / Twitter and simultaneously, get access to banking activities.

Social media channels such as Facebook, Twitter, and WhatsApp have grown over the years. These channels have a much bigger potential to act as a medium to do business for banks and not just be limited as a medium to get feedback or advertise new products. Concepts such as social media payments could change banking by allowing customers to use social media to make payments or carry out various other transactions.
The concept of social media payments is not new. However, few banks have realized its potential to be the future of banking. Things are changing now as more and more banks are starting to accept social media as a medium for payment transactions.

Consider a scenario where a customer can pay through his / her twitter handle and WhatsApp. This has already been implemented by Barclays in 2015 for their 13.5 million twitter users in the UK. ICICI bank too allows customers to pay through Twitter, and ABN Amro is leveraging WhatsApp as a medium for customers to send payment requests to another person in their WhatsApp contact list.

Facebook, WhatsApp and Twitter are not the only social media channels for banks. There are other channels such as Pinterest (Image Sharing) that banks can leverage. Banks could create boards such as "buying a car" or "holiday destination" in Pinterest and pin it with interesting images that will interest or influence customers when they are evaluating their purchase options.

Fintech are also responding actively in the social media payment space and are trying to provide integrated solutions through social media apps. For instance, Fastacash, Circle, Venmo (owned by Paypal) are leveraging social media networks and messaging apps to provide P2P payments and consider social payments to be its future.

In a world where change is the only constant, banks must change too and adopt newer ways to differentiate themselves and engage customers.

September 2, 2016

Digital core - Beyond core banking?

-by Souna Uthappa and Naveen PV

Banks are facing a lot of pressure to increase efficiencies and cut costs. But this is being hindered by the core systems that they have adopted over the years, which are amongst the oldest in the banking technology landscape and lacks agility. In today's digital environment, where digital drives customer experience, it is imperative for banks to have a digital framework at their core. A strong digital core enables customer centricity, better customer experience, a single consolidated view of the customer, real-time insights leading to quick decision-making, cost-savings, an omnichannel banking experience, improved compliance and much more. According to Forrester, one of the main differentiators of the digital core is the separation of customer interactions and data, thereby significantly reducing the amount of risk to the customer.

Many banks across the globe have already embarked upon their digital journey on the core banking front and are slowly moving away from products to platforms. Some recent examples of digital core adoption include:

• First Hawaiian Bank selected a suite of digital banking, payments and personal financial management capabilities
• Hong Kong's Fubon Bank selected  a core banking solution to enable a 24/7 multichannel operation with a 360 degree view of customer relationships
• Nordea replaced its  core banking systems in order to facilitate the digitalization of business operations
• Sweden's Länsförsäkringar Bank selected a new platform to power its transformation and to enhance next-generation digital banking services and offer a highly-personalized customer experience
• Bank of Bhutan adopted a new core  to power its next-generation banking services and to create a strong foundation for the bank's digital banking strategies
• Norway's Sparebanken Sogn og Fjordane opted for a digital banking platform (DBP) to enable its new omnichannel banking experience

Core digitalization adoption has been largely limited to new-age banks and smaller / mid-sized banks. Larger banks have stayed away from this trend, primarily due to the sheer scale of implementation, potential disruption of operations during the project, and the cost associated with core replacement and transformation.

Considering that the core transformation and replacement have a major impact on the bank's operational and financial front, banks are becoming increasingly cautious in making decisions regarding the new core as well in the core selection process. But to remain competitive, digitization has become a must; therefore banks need to innovate and extract maximum value out of their core banking and digital banking capabilities and make the necessary changes in their architecture to support this. If not, they face stiff competition from digital banks, niche vendors, mobile or online banking solution vendors, startups, and fintechs, which will eventually result in a diminished market share.