Exclusive: ‘The rise of modern banking’ – Søren Skov Mogensen, Banking Circle in “The Fintech Magazine”
Søren Skov Mogensen, Chief Growth Officer for infrastructure provider Banking Circle, believes dramatic and rapid changes to consumer habits during COVID-19 has helped bake new models into banking
When breadmaking machines started climbing up the Amazon best seller list during lockdown, Søren Skov Mogensen couldn’t help wonder how it might impact the way banks made, ermmm, dough. Not so much consumers’ new-found enthusiasm for baking their own loaves, you understand, but rather the altered transaction and purchasing behaviour that it represented.
“A global pandemic has really led to changed customer needs and situations, and every bank will need to be empathetic towards that,” he says. “Customers now sit at home ordering bread machines – many temporary habits will vanish, but some will stay. I think the inclination to shop online, and technologies supporting that, will become increasingly important.
“We see customers asking for smooth, seamless, strong solutions that can make a stressful day feel better. That means banks will have to deliver products that are easier, more digital, and more compelling to customers. As part of that, the back end of the bank’s operating systems has to be as strong and efficient as possible, and that’s where Banking Circle comes in.”
The dramatic and rapid impact of the pandemic on the way we live our lives, means the proving time for developing these solutions has never been shorter. This is putting further pressure on incumbent banks already facing a seemingly unstoppable force of digital-only challengers ready, willing and able to take advantage of open banking, facilitated by regulatory changes under the revised Payment Services Directive.
Mogensen uses the example of banks’ anti-money laundering processes to highlight how the change in working practices, brought about by the pandemic, has demonstrated the need for back-office technology like artificial intelligence (AI).
“Up to now, employees have had to go through transactions rigorously to ensure compliance on each one,” he says. “When, suddenly, staff must work from home, the dynamics in an anti-money laundering (AML) transactions monitoring office changes. With an AI-based transactions monitoring solution, the dependency on people sitting together, working collectively on transactions monitoring, is less, and we can augment the professionals’ abilities and capabilities with AI-based propositions.”
In its recent, three-part report on the future of banking after the pandemic, Ready for the Rebuild, Banking Circle concluded that most traditional banks are ready to embrace the technology revolution and adopt new ways of working.
Indeed, Banking Circle’s research found that 90 per cent of European banks and financial institutions are already building technology design and architecture into their business plans, and 80 per cent of retail and 74 per cent of commercial banks have already worked with infrastructure providers.
Mogensen says that, from his experience, established banks are ‘thoughtful’ institutions with sometimes centuries-long experience of long-term planning, but the growing importance of digital channels has shown immediate action is now required.
“I think most bank executive management groups now find that the plans they had are actually good plans; however, they need to accelerate both the front-end digitisation and the back end to cope with current circumstances.”
And that calls for flexibility within the organisational structure, with traditional management hierarchies no longer fit for purpose, and the need to employ third parties to provide cost-effective solutions never greater. The truism that people don’t need banks, they need banking, has also never been more relevant in this age of white-hot competition.
To that end, Mogensen says banks must work as flexibly as possible to quickly respond to their customers’ demands.
“Working in an agile way means one thing: listening to the customer to develop propositions for their needs. The only way to do that effectively is to collect customer data and learn from it,” he says. “So, customer data collection, application and development go hand-in-hand with the agile ways of working being adopted.”
Respected analysts McKinsey recently held a discussion about the critical importance of agile working methodologies as banks adapt to a paradigm shift amid changing markets and customer behaviours. McKinsey partner Francesco Di Marcello, based in Moscow, observed that agile ‘de-risks the digital angle of your strategy’.
“For years, banks have tried to ‘value assure’ the results of large IT programmes, after experiencing large and expensive failures,” he said. “Now, the paradigm has shifted and market and client behaviour is changing so fast, it is difficult to plan the detail of a five-year project right from the start. An agile approach allows banks to solve pain points in the client journey in a micro fashion, and build on these changes incrementally.”
To do that, they need to utilise technologies such as AI, perhaps eventually even quantum computing, to analyse customer data and quickly adapt to their needs, as well as Cloud-based platforms to overcome the limitations of outdated mainframe stacks, and maybe blockchain to securely process transactions like crossborder payments, says Mogensen. He advocates that banks look to the rapidly developing third-party fintech ecosystem to get value for money and avoid burning through budgets by trying to go it alone.
“It comes down to working out what you do best,” he says. “These big banks have a very large sum of money to invest in development every year, and you can imagine how that gets eroded by compliance and regulatory efforts, by just keeping the lights on and maintaining effectiveness, leaving only a fraction for changing the bank’s proposition.
“That’s the challenge for executives. They need to make sure that remaining amount is focussed on specific agendas. There will be things that are left behind, but it makes sense to introduce a third-party provider that focusses on one thing to build a strong proposition. It’s is a matter of taking the best from both worlds and building a stack that is compelling for the customer.”
More signs of collaboration
As many legacy banks grapple with the enormous task of digital transformation, it is clear that the role of chief financial officers, who hold the purse strings, is more important than ever. Mistakes can be enormously expensive, as evidenced last year by Nordic bank Nordea which wrote off a €735million IT impairment charge as it tried to integrate its different platforms.
There is also the risk of incurring technical debt from an accumulation of consequential costs of failures – like software outages or the simple fact customers go to a competitor because they don’t like the platform on offer. Mogensen says these vividly real risks have created a greater spirit of cooperation between legacy banks and fintechs.
“What we can say, as a third-party provider to banks, is that we see a greater openness towards working with third parties on infrastructure,” he says.
“We see a stronger commitment to take in third parties that have infrastructural propositions that, frankly, the banks often don’t have on their own. I think the propositions of both banks and fintechs are becoming more mature.
“This is something we see in our own development; that our solutions become stronger and stronger; our financial infrastructure, our access to direct clearing and settlement gets solidified with every day we work on them. And, as we grow stronger, we become more and more relevant to banks and hence they express an increasing interest in our propositions.”
So, where will this all lead?
“I think what we’re seeing here is a new situation,” Mogensen says. “We’re seeing increased evolution because customers were always going to move online, but COVID-19 has accelerated that evolution. And, as with any evolution, the survivor will be not the strongest, not the fastest, but the party that can adapt the quickest. And that’s the question; who will adapt in a fast way to the circumstances we’re in?
“I think the incumbent banks have shown their ability to adapt to circumstance very quickly in previous crises, but they are also pressured by regulatory and compliance agendas. They also have heavy legacy systems and there is a limit to their ability to just change direction or adapt quickly.
“Fintechs don’t have the same experience in handling situations like a global pandemic, but they have proved to be fast in adapting to new circumstances, and they are constantly pivoting.
“So, who’s going to win? The big organisation with a lot of experience in handling global situations or fintechs that can adapt fast?
“I think the jury is still out. If you ask me, there’s not going to be such a thing as a winner and a loser, necessarily, but there will be increased partnerships and collaborations, because incumbents and fintechs will learn a lot from each other.”