As digitisation accelerates, it has profound implications for the infrastructure that supports and connects banks to each other and the wider financial ecosystem. Anders la Cour, CEO of Banking Circle, takes up the story
Chapter 1: The path to digital readiness
THE PAYTECH MAGAZINE: You recently published research into how COVID-19 has impacted banks’ digitisation plans. What did that tell you?
ANDERS LA COUR: Banks have been embracing digital more and more in recent years. They have been working
to build more responsive and flexible businesses, centred on changing customer requirements as well, probably, as competition from fintechs and challenger banks. Regulation such as the revised Payment Services Directive (PSD2) has also been a key driver for digitisation. And banks have worked to overcome their traditional reluctance to moving to the Cloud for delivering essential transaction services.
But COVID-19 accelerated the existing plans – suddenly, customers couldn’t go into branches, employees couldn’t come into branches or call centres, or online support hubs. Banks had to adapt and switch on more digital solutions. Many were already working with third-party financial infrastructure providers for some parts of their service. A number had also launched their own digital banks as a way of digitising and not replacing legacy systems – some more successfully than others. NatWest launched Mettle; Bank Leumi in Israel launched Pepper; JP Morgan is launching a digital bank in the UK in 2021. However RBS, for example, closed Bo.
Our research among banks and payments providers across Europe, right at the start of the pandemic, showed that 90 per cent of banks and financial institutions are building technology design and architecture into their business planning. Eighty per cent of retail banks and 74 per cent of commercial banks have already worked with infrastructure providers. Close to 90 per cent of retail and commercial banks use customer data to determine demand.
Digital will continue to drive innovation and financial infrastructure. For example, innovation in customer onboarding has been largely driven by digital. The traditional way that banks used to pick documents and decide whether to open a bank account for you has shifted very significantly, as digital presents customers with a better way to do things.
The same thing is going to happen to all aspects of financial services. Digital is simply going to drive a whole lot of innovation that financial infrastructure needs to respond to, because you can’t create a very deep and joined-up user experience if your back-office is completely disconnected. So, the next bit of transformation, I think, will happen in the backend systems. Ultimately, banks can’t do everything, so they also have to digitise a much bigger supply chain. – Alex Mifsud, Co-founder & CEO of payment services provider, Weavr
Infrastructure is becoming more strategic, and banks and fintechs are building in optionality and modularising their systems and solutions, separating the frontend from the backend. More services are now consumed via application programming interfaces (APIs) and delivery models are changing. With the rise of open banking, that’s also blurring the lines between what’s inside a financial institution or a fintech, and what’s outside. So, interoperability, and the ability, for example, for banks to connect, via APIs, to fintechs to offer their services, as part of the bank’s value proposition, is much more important than it was before.
At least, the strategic optionality of doing so is, because that’s something everyone expects to increase. I think banks are realising that they may not have all the products in the future on their own balance sheet; they may not build them all themselves. So how can they build infrastructure that facilitates working or partnering with fintechs, while they may also compete with them? – Georg Ludviksson, Co-founder & CEO of digital banking software supplier Meniga
Chapter 2: The future-proof bank
TPM: Banks have been through previous financial crises, in very different circumstances, but can the lessons learned from those events be applied today, to help build more future-proof banks?
ALC: Banking has long been a tech-heavy industry – banks’ basic architecture is derived from monolithic systems. It is a significant challenge for a bank to deploy new software in an agile, easy way and apply best practice. Many banks have tried to overhaul their legacy infrastructure – but with difficulty. Now the mindset has shifted – banks are increasingly open to collaboration for the best solutions for the customer.
In 2019, Apple and Goldman Sachs launched a groundbreaking new credit card and Google is partnering with a variety of banks. Another example is Starling Bank, which has pursued partnerships with other fintechs. For example, Moneybox was one of Starling Bank’s earliest partnerships. In the context of COVID-19, collaboration has also addressed the issue of financial fraud. HSBC has become the latest bank to sign up to a biometric identification system, developed by technology firm MiTek and offered through a partnership with Adobe. This trend of collaboration should continue post-pandemic.
The most confident banks are those that have made heavy investments in their tech stack and re-aligned their financial infrastructure requirements, using third-party services and platforms to respond to changing demands. 2020 has provided excellent learning opportunities to help financial institutions of all types regain clarity and confidence.
When we talk about platforms with our clients, and with other incumbents, it takes me to the first part of a conversation: how we put an open banking platform together to be the best in financial services? Open banking is dramatically changing the way we think of infrastructure. Back in the day, banks had robust, solid infrastructures, but they were closed ones. Now we are betting on the openness of the infrastructure and the platform in order to build new services – as platform-as-a-service, banking-as-a-service, etc.
It’s a tough journey because the infrastructures that we used to have on prem, are still on prem. Most of the banks I meet are still only 20 to 25 per cent in the Cloud. Application programming interfaces (APIs) are a driving force to open banks to the ecosystem, to interact with third parties. And these third parties can be fintechs, they can be other banks and they can also be the regulators. We are all travelling on this journey together, and there are plenty of opportunities. – Juan Jiménez Zaballos, Group VP & MD for Innovation at Santander
From around the time that Starling and the other first fintechs started to come along, there has been a big shift away from the thinking that you have to have your server in your building.
Our CIO tells a story about when he was first interviewed by regulators. He was asked ‘who has the keys to the server room?’ and his answer was ‘not only do I not I know who has the keys to the server room, I don’t even know where the server room is’. At the time, that was fairly shocking for regulators. But I would argue that a Cloud-based infrastructure allows for greater security and responsibility, as long as you are clear about who has responsibility for what – and the big Cloud providers do a good job of saying where theirs lies.
One thing that digital adoption does is really encourage the growth of new features and new ways of doing things. New add-ons, and additional types of account. The best digital players in the financial services market (and I would of course include Starling as one of those!) are releasing new features all the time. It’s really difficult to keep up with them, if you’re not on the Cloud. – Jason Maude, Chief Technology Advocate at Starling
Chapter 3: A new competitive landscape
TPM: Are banks in a strong position to face the global recession, in your opinion, and how do you think they compare to fintechs and payment service providers (PSPs)?
ALC: Banks have the history to face the global COVID-induced recession. They also have their own brands and greater financial backing than fintechs. But they could learn from the ingenuity and innovative quick-thinking that is typical of fintechs to arm them well for the challenging economic conditions. History, experience and taking the long view are probably some of the reasons that just five per cent of the retail banks we questioned said they were concerned about the threat of recession, compared to 31 per cent of fintechs and 41 per cent of PSPs.
Specifically on the COVID-effect, 41 per cent said the crisis has had ‘a little’ impact, and recovery is expected to be swift.Thirty-two per cent said that the virus will affect their business ‘quite a lot’, with changes being made and cost reduction where possible. Another 26 per cent said the impact would be ‘significant and wide-ranging’.
TPM: Has the process of ‘virtualisation’ effectively levelled the playing field between new entrants and incumbents?
ALC: The playing field was already being levelled; it seems the pandemic has simply accelerated that process. But it still comes back to delivering a service that is in tune with customer need – and, to be able to do that, the financial institution needs to focus on its core skill and not be distracted by the ‘pipes and plumbing’ that underpin its service. Partnership with good financial infrastructure providers solve that problem, if incumbent banks can be open-minded enough to take that step.
The institution must make sure digitisation is simply part of the delivery and doesn’t become the service itself. The firms that will be the winners are those that use digitisation as part of the journey to the benefit of the customer – they must not make it the destination.
TPM: As levels of collaboration across the financial ecosystem increase, have the dynamics of the competitive landscape for banks changed i n turn?
ALC: The competitive landscape was already changing as the new wave of fintechs and disruptors emerged. What is changing now is a recognition that different markets require different types of service, and the competitiveness is therefore focussed on being able to address a specific market need.
Chapter 4: The strategic value of financial infrastructure
TPM: What did your research show about the challenges facing banks and other financial institutions today?
ALC: The most common challenges remain aligned to a business-as-usual world – even a global pandemic has not changed that. So, the impact of regulation was a challenge to 58 per cent, while 53 per cent cited the implications of constantly evolving customer expectations. Less than a third are now concerned about the pace of technological change in banking – dropping to one-in-six among commercial banks.
When building a digital-first relationship at scale, banks seem to struggle with the need to create both a user experience and a user interface that work for a wide range of customer types. The challenge is providing the experience rather than the underlying technology. Banking infrastructure has become a much more strategic concern – a significant number of businesses now have an interdisciplinary team looking at the latest technological innovations. This crucial decision is not simply a matter of IT selection, but something that can affect the entire business and, consequently, demands broad input and buy-in.
TPM: In what ways are new digital platforms from external providers being used by incumbent banks to tackle some of their challenges?
ALC: We, and other fintechs like us, are building systems designed from the basic understanding that technology is ever-evolving. Banking Circle architecture is decoupled, comprising smaller components and services. So, we are not just building for today, we are building for a payments world that is ever-evolving.
With a decoupled architecture, we are able to replace or update individual pieces with limited impact on the rest. We are also able to easily add more functionality. For example, we may want to add direct clearing in new geographies, which may require new connectivity, new formats and protocols, and interaction with new clearing technology providers. We are also, like most other tech firms, building our infrastructure in the Cloud from the get-go.
Using modern development tools, technology and infrastructure, together with a modern architecture, also allows for agile development and continuous delivery. That leads to us being able to bring solutions to the market quicker. A recent example of that is the launch of our payments on behalf of (POBO)/collections on behalf of (COBO) solution. Historically, business-to-business (B2B) payments have been received in the name of the payments business or bank rather than the underlying customer.
This can result in reconciliation issues which, in turn, can cause delays in settlement and impact cashflow. Our solution addresses these pain points by enabling financial institutions to offer immediate visibility of the sender’s details when processing B2B payments, and to collect funds locally into accounts in the underlying customer’s name. Payments businesses and banks can deliver this service without relying on the slow, costly and outdated correspondent banking network, or invest in their own solution.
The big challenge is staying focussed on delivering what customers need – and not relying on lethargy to retain relationships. To do that, the focus has to be on understanding and responding to customers effectively – and that means not being distracted by back office issues. That’s where financial infrastructure providers like Banking Circle fit in.