Banking on the Cloud: Why Banks Should Embrace Cloud Technology

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Cloud adoption has reached critical mass, with roughly 90 percent of businesses employing its technology in some facet of their organization. The cloud presents opportunities for enhanced efficiencies and flexibility—without any security trade-offs—so it’s no surprise that we’re seeing more organizations shift to the software as a service (SaaS) model. But while we’ve seen the healthcare, legal and insurance industries evolve, banks have been more reluctant to adopt new technologies built outside of their own walls.

Why Banks Lag at Cloud Adoption
The banking industry is not known for being nimble. As one of the oldest, largest and most vital industries in the U.S. economy, banking has, in some ways, fallen victim to inertia—relying on traditional technologies and internal networks to disseminate its services. This is in large part due to the widely-held belief that on-premise solutions are inherently more secure than the cloud because data lives in proprietary servers and systems, rather than a service provider’s environment. However, research shows that cyber attacks affect both environments, with on-premise users experiencing over twice as many web application attacks as service provider customers, on average.

Still, for many banks, the perceived risks of the cloud outweigh its forecasted benefits. In fact, 73 percent identified security concerns as the main reason for avoiding it, while 63 percent listed privacy issues as their top worry. That perception is beginning to change, as the cloud’s business advantages have become too significant to ignore. A recent study found big banks are expected to grow from as little as zero percent public cloud adoption to 30 percent by 2019—a dizzying adoption rate for an industry that still relies on legacy systems from the 1960s.

For those still wary of making the switch, here are three of the biggest benefits of moving to the cloud:

Security
Cloud technologies boost your security in ways that on-premise systems are unable to. Traditionally, to use a new offering, you install an on-premise server in your datacenter. Then you must configure network, firewall and secure access to the server. This stretches resources by increasing training requirements, which ultimately detracts from the goal of the offering. Due to economies of scale, cloud companies can own the server, the networks and the processes making the entire offering more complete and secure.

With strict protocols and security certifications like SOC2 and ISO27001 built into many services, banks can ensure that the cloud is accessed and enabled securely for any solution provider they work with.

Understanding the value of security and the benefits that cloud technology brings to banks, a handful of institutions are leading the shift and others are expected to follow. Capital One Financial Corp., an early adopter of Amazon Web Services (AWS), has steadily built its infrastructure in the cloud over the past two years. The company continues to work closely with AWS on specific security and data protocols, allowing the company to operate more securely in the public cloud than it could have in its own data centers, according to Capital One CIO Rob Alexander.

Efficiency and Scalability
The cloud enables teams to be more agile than ever. The SaaS model gives teams the ability to be flexible and enable new interations on-demand. This access to real-time commentary empowers teams to ship updates more quickly and frequently and to push the envelope so they’re constantly improving products to align with what customers are looking for.

By leveraging the cloud to store complex data, organizations can meet ever-evolving regulatory compliance and governance rules mandating data protection. A recent example would be financial institutions working to comply with the EU’s General Data Protection Regulation. The ability to meet regulations can be sped up by a number of the cloud’s features, including built-in auditability for more clarity around your compliance status, and virtual infrastructure that reduces room for error.

On top of addressing infrastructure models, the cloud allows businesses to be elastic. For instance, being able to address the mass amount of credit card purchases on Cyber Monday and expand for that specific demand, rather than having to buy new servers to address the one day-per-year demand.

Overhead Cost Savings
Switching from on-premise to cloud can mean significant savings on overhead costs.

When you work with a SaaS provider, you no longer need to invest in proprietary infrastructure. Instead, you’re able to access and maintain your data through your partner’s established environment. This cuts down on both the up-front capital costs associated with hardware and the continuous costs that eat up budget to keep hardware and software optimized and refreshed.

Rather than pay a flat fee to keep systems up and running, cloud providers offer a variety of metered, pay-per-use options. These include Salesforce and Microsoft Office 365’s pay-per-seat, AWS’ infrastructure as a service (IAAS) pay-per-hour model, and Oracle’s high integration fees.

By outsourcing services to the data center, you can also realize savings on staffing. On-premise technologies can require a team varying in size from one to dozens, depending on the bank’s size. Because your cloud provider takes on the computing, your internal team no longer has to worry about hardware refreshes or server and software updates, freeing up their time to focus on what matters most: your business. Cost savings can also be reinvested into the business to increase headcount, boost wages and drive product innovation.

Cloud technology has already been embraced by businesses in numerous industries, but banks have been slower to acknowledge its benefits. Now, as cloud’s positive impact on security, efficiency and cost come to the forefront, it’s becoming harder for banks to ignore the advantages. Already, we’re seeing early adopters reap the benefits, from a financial standpoint and innovation perspective, and in the coming years, we can expect to see banking in the cloud transition from a “nice-to-have” to a business-critical approach to moving up in the market.

Scotiabank Partners with Sensibill to Digitize and Track

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It’s tax time again, and for many people across the U.S. and Canada that entails one major headache—organizing and managing receipts. Whether it’s an individual or business, keeping, organizing and categorizing receipts is critical to maximizing tax deductions, not to mention for good general fiscal management purposes.

However, one Canadian bank is partnering with a fintech innovator to make receipt management much more of a breeze for their customers. Just last year, Toronto-based Scotiabank announced a partnership with Canadian fintech company Sensibill to offer a mobile receipt management solution called eReceipts that will to make it easier for Scotiabank customers to manage their finances. The eReceipts app serves as an extension to Scotiabank’s mobile banking application and digital wallet.

Scotiabank is one of Canada’s largest banks, serving more than 23 million customers across the dominion and 50 countries outside Canada. And at 184 years of age, Scotiabank is older than Canada itself. With over $1 trillion in total assets, Scotiabank invests more than $2 billion per year in technology initiatives. Partnering with Sensibill to create eReceipts was a natural fit, as it’s a Toronto-based startup that was incubated through Ryerson University’s Digital Media Zone initiative. Sensibill has grown to become a white-label software provider of software solutions to help banking customers better manage receipts from both desktop and mobile.

While there has been technology available to aid in receipt management, it’s still incredibly difficult to categorize and drill down into the detail of specific receipts, especially on a mobile device. What makes the eReceipts functionality so unique is that it’s the first app to automatically match specific credit and debit card transactions to the right receipt. After making a purchase, customers can take a photo of the receipt directly from their Scotiabank banking app. Then, through a combination of Optical Character Recognition and machine learning software, the receipt is matched to the proper transaction in the user’s account history. When users drill down into the transaction, information from the receipt has already been extracted, structured and presented in a clear, easy to navigate format. Scotiabank customers can see all the information about a receipt they need without ever having to look at a piece of paper.

Scotiabank customers have been interacting with eReceipts an average of 38 times per month to track both personal and business expenses. So in addition to making their customers’ lives easier, eReceipts is increasing engagement with Scotiabank’s mobile application—and with it the potential to reduce overall customer attrition rates as users continue to rely on it. Receipts can also be categorized as business or personal, and can be annotated, tagged and stored in folders. In fact, around 48 percent of users utilize folders to organize expenses. Hashtags can also be assigned to receipts for ease of search purposes, along with receipt text itself being searchable. And when tax time rolls around, all receipts can be exported in PDF format, along with a matching Excel or CSV file to make preparation easier.

Scotiabank is the first of Canada’s five largest banks to roll out an application like eReceipts that can automatically match paper receipts to the corresponding transaction. Although there are solutions on the market that can capture receipts, eReceipts is the first to extract and contextualize data on such a granular level. Sensibill’s unique deep machine learning, combined with a powerful receipt processing engine, can even associate product names and SKUs with transactions. The result is that otherwise vague transactions become extremely clear when users begin to drill down. Usage of eReceipts has exceeded initial targets by upwards of 300 percent, with positive reviews and shares springing up organically.

In the future, Scotiabank may be able to leverage this additional data to improve customer experience and enhance revenue. Having access to consumer purchase history at the item-level could help Scotiabank better understand, and anticipate, their customers’ needs and preferences. The goal is to better personalize the banking experience, and offer targeted banking products or services based on an analysis of receipt and purchasing history. For example, if Scotiabank notices that a couple is purchasing items like cribs, baby formula and diapers, it might assume there’s a baby on the way and begin marketing a 529 College Savings Plan. In fact, Sensibill is already working to add an “insights” component for partners like Scotiabank, so that customer data generated by eReceipts can be more effectively extracted, organized and analyzed.

The partnership between Scotiabank and Sensibill is noteworthy because it tackles a problem that everyone seems to face in the physical world. With eReceipts, the two companies are taking a huge step towards helping people stay organized, maximize their tax benefits and know exactly how they’re spending their money.

And perhaps most importantly, eReceipts points to a world where we can finally toss that musty old receipt-filled shoebox in the closet.

This is one of 10 case studies that focus on examples of successful innovation between banks and financial technology companies working in partnership. The participants featured in this article were finalists at the 2017 Best of FinXTech Awards.

The Time Is Now for Artificial Intelligence in Commercial Banking

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commercial-banking-4-25-17.pngYears ago, I had the good fortune to work for a bank with pristine credit quality. This squeaky-clean portfolio was fiercely protected by Ed, one of those classic, old-school credit guys. Ed had minimal formal credit training, and the bank had no sophisticated modeling or algorithms for monitoring risk. Instead, we relied on Ed’s gut instincts.

Ed had a way of sniffing out bad deals, quickly spotting flaws that our analysts had missed after hours of work. He couldn’t always put his finger on why a deal was bad, but Ed had learned to trust himself when something felt “off.” We passed on a lot of deals based on those feelings, and our competitors gladly jumped on them. A lot of them ended up defaulting.

Obviously, Ed wasn’t some kind of Nostradamus of banking. Instead, he was spotting patterns and correlations, even if he was doing it subconsciously. He knew he’d seen similar situations before, and they had ended badly. Most banks used to be run this way. It was one of those approaches that worked well—until it didn’t.

When Ed’s Not Enough
Why? Because some banks didn’t have as good a version of Ed. And some banks outgrew their Ed, and got big enough that they couldn’t give the personal smell test to every deal. Much of the industry simply ran out of Eds who had cut their teeth in the bad times. A lot of banks were using an Ed who had never seen a true credit correction.

It also turns out that humans are actually pretty bad at spotting and acting on patterns; the lizard brain leads us astray far more often than we realize. It was true even for us; Ed kept our portfolio safe, but he did so at a huge opportunity cost. The growth we eked out was slow and painful, and being a stickler on quality meant we passed on a lot of profitable business.

The surprising thing isn’t that banks still handle credit risk this way; the surprise is how many other kinds of decisions use the same approach. Most banks have an Ed for credit, pricing, investments, security, and every other significant function they handle. And almost all of them are, when you get right down to it, flying by the seat of their pants.

Bankers have spent decades building ever more sophisticated tools for measuring, monitoring, and pricing risk, but eventually, in every meaningful transaction, a human makes the final decision. Like my old colleague, Ed, they base their choices on how many deals like this they have seen, and what the outcomes of those deals were.

These bankers are limited by two things. First, how many experiences do they have that fit the exact same criteria? Usually it numbers in the dozens or low hundreds, and it’s not enough to be statistically significant. Second, are they pulling off the Herculean task of avoiding all the cruel tricks our minds play on us? The lizard brain—that part of the brain that reacts based on instinct—is a powerful foe to overcome.

Artificial Intelligence’s Time Has Come
This shortcoming, in a nutshell, is why artificial intelligence (AI) and machine learning have become the latest craze in technology. Digital assistants like Siri, Cortana and Alexa are popping up in new places every day, and they are actually learning as we interact with them. Applications are performing automated tasks for us. Our photo software is learning to recognize family members, our calendars get automatically updated by things that land in our email, and heck, even our cars are learning to drive.

The proliferation of the cloud and the ever-falling costs of both data storage and computing power mean that now is a real thing that is commercially viable for all kinds of exciting applications. And that includes commercial banking.

Banking & AI = Peanut Butter & Jelly
In fact, we think banking might just be the perfect use case for AI. All those human decisions, influenced up to now by gut feel and scattered data, can be augmented by machines. AI can combine those disparate data sources and glean new insights that have been beyond the grasp of humans. Those insights can then be presented to humans with real context, so decisions are better, faster and more informed.

The result will be banks that are more profitable, have less risk, and can provide customized service to their customers exactly how they need it, when they need it most.

Using Big Data to Assess Credit Quality for CECL

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CECL-4-7-17.pngThe new Financial Accounting Standards Board (FASB) rules for estimating expected credit losses presents banks with a wide variety of challenges as they work toward compliance.

New Calculation Methods Require New Data
The new FASB standard replaces the incurred loss model for estimating credit losses with the new current expected credit loss (CECL) model. Although the new model will apply to many types of financial assets that are measured at amortized cost, the largest impact for many lenders will be on the allowance for loan and lease losses (ALLL).

Under the CECL model, reporting organizations will make adjustments to their historical loss picture to highlight differences between the risk characteristics of their current portfolio and the risk characteristics of the assets on which their historical losses are based. The information considered includes prior portfolio composition, past events that affected the historic loss, management’s assessment of current conditions and current portfolio composition, and forecast information that the FASB describes as reasonable and supportable.

To develop and support the expected credit losses and any adjustments to historical loss data, banks will need to access a wider array of data that is more forward-looking than the simpler incurred loss model.

Internal Data Inventory: The Clock is Running
Although most of the data needed to perform these various pooling, disclosure and expected credit loss calculations can be found somewhere, in some form, within most bank’s systems, these disparate systems generally are not well integrated. In addition, many data points such as customer financial ratios and other credit loss characteristics are regularly updated and replaced, which can make it impossible to track the historical data needed for determining trends and calculating adjustments. Other customer-specific credit loss characteristics that may be used in loan origination today might not be updated to enable use in expected credit loss models in the future.

Regardless of the specific deadlines that apply to each type of entity, all organizations should start capturing and retaining certain types of financial asset and credit data. These data fields must be captured and maintained permanently over the life of each asset in order to enable appropriate pooling and disclosure and to establish the historical performance trends and loss patterns that will be needed to perform the new expected loss calculations. Internal data elements should focus on risks identified in the portfolio and modeling techniques the organization finds best suited for measuring the risks.

External Economic Data
In addition to locating, capturing, and retaining internal loan portfolio data, banks also must make adjustments to reflect how current conditions and reasonable and supportable forecasts differ from the conditions that existed when the historical loss information was evaluated.

A variety of external macroeconomic conditions can affect expected portfolio performance. Although a few of the largest national banking organizations engage in sophisticated economic forecasting, the vast majority of banks will need to access reliable information from external sources that meet the definition of “reasonable and supportable.”

A good place to start is by reviewing the baseline domestic macroeconomic variables provided by the Office of the Comptroller of the Currency (OCC) for Comprehensive Capital Analysis and Review (CCAR) and Dodd-Frank stress testing (DFAST) purposes. Because regulators use these variables to develop economic scenarios, these variables would seem to provide a reasonable starting point for obtaining potentially relevant historic economic variables and considerations from the regulatory perspective of baseline future economic conditions.

Broad national metrics—such as disposable income growth, unemployment, and housing prices—need to be augmented by comparable local and regional indexes. Data from sources such as the Federal Deposit Insurance Corporation’s quarterly Consolidated Report of Condition and Income (otherwise known as the call report) and Federal Reserve Economic Data (FRED), maintained by the Federal Reserve Bank of St. Louis, also can be useful.

Data List for CECL Compliance

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Looking Beyond Compliance
The new FASB reporting standard for credit losses will require banks to present expected losses in a timelier manner, which in turn will provide investors with better information about expected losses. While this new standard presents organizations of all sizes with some significant initial compliance challenges, it also can be viewed as an opportunity to improve performance and upgrade management capabilities.

By understanding the current availability and limitations of portfolio data and by improving the reliability and accuracy of various data elements, banks can be prepared to manage their portfolios in a way that improves income and maximizes capital efficiency.

Growing the Loan Book Through Automation

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lending-1-25-17.pngThere are a million reasons for leveraging fintech to enhance a financial institution’s small business lending experience. To name a few, there’s better efficiency, customer convenience, profitability, speed to decision, speed to capital, cost reductions and a much-improved overall customer experience. However, one that often gets lost in the fray is the impact technology will have on the day- to-day productivity, motivation and morale of the bankers who work so hard to source and sell small business loans. This “banker experience” as it is known, plays a huge role in sales performance, retention, revenue generation and employee satisfaction.

The reality of a day in the life of a small business lender is that a surprisingly small amount of time is spent on sourcing new opportunities or even cross-solving to sell deeper into an existing relationship. Because they are shackled with the responsibility of shepherding deals through the multiple steps in the lending process, the more loan deals a banker has, the less time he or she is able to spend growing the book of business. So how are they spending their time?

  • As many as 80 percent of applications come in either incomplete or with an error on them, delaying the decisioning process and requiring the banker to go back to the client again and again.
  • Unique borrowing situations prompt the back office to request additional information requiring the banker to reach out and coordinate the collection of the information.
  • The collection of documents in the “docs and due diligence” phase of the approval process is tedious and time consuming. Bankers spend a great deal of time reaching out to applicants asking for things like: entity docs, insurance certificates, tax returns and so on.
  • Multiple teams and individuals touch each deal and as a result, things get lost, forcing the banker to invest a great deal of time and energy babysitting deals and checking on their progress from application to closing.
  • Much of the processing time is dependent upon the borrower’s promptness in getting requested information back to the bank. Bankers spend countless hours making multiple calls to collect information from clients.

I ran small business sales for a $150 billion asset institution, and our data proved that whenever a banker had as little as two loan deals in the workflow process, their new business acquisition productivity was reduced by 50 percent. Bankers with five deals in the process had their acquisition productivity diminished by 75 to 80 percent. That’s because they expend all their time and energy shepherding deals through the various stages of the process, gathering additional documentation, or monitoring the progress of each deal.

All of this is challenging for one person to do… but simple for technology to handle automatically, accurately and consistently. Technology can ensure an application is complete before it is submitted. It can ping the client for any-and-all documentation or data required. It can communicate progress and monitor a deal at every step in the lending process. Technology can also facilitate the collection of more and better data and translate that data into information that enables the banker to add value by asking great questions that help solve more problems for the customer.

When technology is used end-to-end, from application to closing, bankers are able to focus on the important things like:

  • Sourcing new opportunities.
  • Cross-solving for existing customers.
  • Preparing for sales calls and follow-up activities to advance the sales process.
  • Providing clients and prospects the value that earns trust and feeds future revenue.
  • Growing their loan book, and their portfolio revenue.

Technology makes the banker’s life simpler. When bankers are able to do what they do best, which is sell, job satisfaction, performance, job retention and morale go through the roof. And that positivity translates into improvements in the customer experience, and increases in revenues for the institution.

Core Provider Ranking: FIS Satisfies More Bank Executives

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core-provider-12-30-16.pngBank executives don’t exactly give their core providers a ringing endorsement in Bank Director’s Core Provider Ranking, conducted in September and October 2016, particularly when it comes to these companies’ willingness to integrate with third party applications and their ability to offer innovative solutions.

Eighty-six executives, including chief executive officers, chief information officers and chief technology officers, rated the overall performance of their bank’s current core provider, and within individual categories that explored aspects of the provider’s service to the client bank, on a scale of 1 to 10, with 10 indicating the highest level of satisfaction. An average score was then calculated based on the individual ratings. Participants were not asked to rate other core providers. The executives surveyed represent banks between $100 million and $20 billion in assets. Forty percent of respondents indicate that Fiserv is their bank’s core provider, while 26 percent use FIS and 19 percent Jack Henry. Sixteen percent indicate that they use another provider.

While respondents express some disappointment in what is likely their biggest vendor relationship, one core provider does come out on top.

#1 FIS

Average overall score: 7.18

According to 67 percent of its customers, FIS, headquartered in Jacksonville, Florida, is the only core provider that keeps pace with innovations in the marketplace.

FIS has been the most active acquirer of the big three core providers. David Albertazzi, a senior analyst at Aite Group, says FIS has a great track record of acquiring and integrating innovative companies into the firm’s suite of products. Beginning in 2012, FIS has acquired six firms, according to crunchbase, a data firm that tracks the technology sector. These include two compliance solutions, a payments technology company and a mobile banking solution. Its most recent acquisition was the software firm SunGard, in 2015.

FIS features nine different core systems in the U.S. The company came out on top within all individual categories but one, rating highest for being a cost effective solution, communicating with clients about new products and updates, providing high quality support, offering innovative solutions and for the company’s willingness to integrate with third-party applications.

#2 Jack Henry & Associates

Average overall score: 6.63

Jack Henry, based in Monett, Missouri, came in just behind FIS in many of the individual categories, but rated highest of the three when it comes to being easy to contact and responsive when issues and problems arise. Albertazzi says customer service is a core tenet for the company, and Jack Henry regularly measures how well its IT and support staff are performing. Those efforts are clearly recognized in the industry.

Jack Henry offers a more streamlined product selection compared to FIS and Fiserv— according to Aite, just six core systems. Recent acquisitions include Banno, in 2014, a mobile account platform, and Bayside Business Solutions in 2015, which expanded the provider’s commercial lending suite.

#3 Fiserv

Average overall score: 4.97

Brookfield, Wisconsin-based Fiserv features 18 core systems, according to Aite—the most of the three core providers. That variety, along with its ubiquity in the banking space—Fiserv serves one-third of all U.S. banks and credit unions—may account in part for its low rating.

Client perceptions of their core provider’s performance can be muddied by several factors, including the age of their core system, says Albertazzi. The client bank may be loath to take on a conversion, and instead remain on an old system that the provider is no longer fully supporting. Bank Director did not rank individual systems, but rather the companies’ performance overall. A client running an outdated, basic core would be more apt to criticize a vendor than one using a shiny new system tailored to integrate with the latest-and-greatest fintech solution on the market.

If acquisitions have the potential to jumpstart innovation for legacy core companies, Fiserv could see a boost soon. Fiserv has been a significantly less active acquirer in recent years, compared to Jack Henry and FIS, with just one acquisition in 2013. But Fiserv recently acquired Online Banking Solutions, an Atlanta, Georgia-based provider of business banking technology, which promises to deepen Fiserv’s relationships with commercial banks.

As a group, other providers averaged a score of 6.07, just above the overall average for all providers of 6.02. One-quarter of retail banks could end up opting for startup providers for their online and mobile banking solutions by 2019, predicts Stessa Cohen, research director at Gartner, a research and advisory firm. Currently, 96 percent of banks rely on their core provider for services outside of core banking, according to Bank Director’s 2016 Technology Survey. As banks open up to other technology vendors, it’s possible they’ll lessen their dependency on the legacy core providers, and even open up to newer core solutions.

Blockchain Makes Digital ID a Reality

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The concept of identity has not kept pace in a world of accelerated digitization and data. Nowhere is that more apparent than the cost and friction involved in answering three basic questions simply to engage in commerce:

  • Are you who you say you are?
  • Do you have the mandate you say you have?
  • Can I trust you?

Imagine a world where once these questions are answered the first time, no one else needs to ask them again, or only a subset or new information has to be provided. Archaic identity systems aren’t just frustrating—they’re holding back innovation. The full potential of financial technology and digital global finance, so close at hand, will come about only when a global standard for digital identity does. The technology to make that happen? Blockchain.

A blockchain is a record, or ledger, of digital events, one that’s “distributed” between many different parties. It can only be updated by consensus of a majority of the participants in the system. And, once entered, information can never be erased. With a certain and verifiable record of every single transaction ever made, Blockchain provides the underlying technology to give consumers control over their own portable digital identity.

Blockchain brings digital identity into 2016 (and beyond), opening the full potential of digital innovation to change how we buy and sell goods and services, manage health and wealth, and present our digital identity to the world.

BYO ID
Identity data is everywhere—on all types of devices, applications, private and public networks—but it’s disconnected and doesn’t present a complete, accurate profile of a customer. Plus, it’s personal information: Shouldn’t each person own their identity data and choose what they share and when?

Blockchain is a universal, distributed database that can make it easier for individuals to consolidate, access and reveal what they choose about their own identity data. It’s generally considered more secure, reliable and trustworthy than previous identity solutions because it’s controlled by the user and immutable—protected by a combination of cryptology, digital networks and time stamping on a decentralized network not controlled by any single entity.

Blockchain-based digital ID brings identity into a single record—a persona—that is effectively pre-notarized and authenticated and usable almost anywhere. Individuals control their own ID, adding references and third-party endorsements to verify authenticity, so customers and banks can trust that the content is accurate and secure. It offers an extremely efficient way to capture, share and verify information, and establishes a reliable, secure but relatively easy way for individuals to open a bank account, set up utilities, pay taxes, buy a car—nearly anything requiring personal ID.

Benefits of Blockchain Digital ID
The trust breakthrough: Most customers have a rich online record of what they do, who they know, buying habits, credit—but banks and customers both need better reasons to trust the accuracy, completeness and security of identity data. With customers in control of identity data and a framework for rapid verification, blockchain enables an environment more conducive to mutual trust.

New opportunities: Blockchain provides entry into an ecosystem that increases in value as it expands, providing multiple points of ID verification while creating a more complete description of personal identity. This enables banks to “know” each customer better and offer tailored products that are valued and appreciated.

More loyal customers: Customers typically bear the brunt of inefficiencies, wasting time filling out forms, repeating conversations and gathering documentation. By increasing efficiency, security and accuracy of customer data, next generation digital ID helps make banks more attractive to existing and potential customers.

Improved regulatory compliance: Financial firms spend up to $500 million a year on Know Your Customer and Customer Due Diligence compliance. Next generation digital ID can reduce compliance costs by providing a universal, secure platform for consolidated data collection and records management.

Transparency and better controls: With users controlling their ID and every action an immutable record, you’re less likely to have problems with ID management, theft, security and inconsistency. You can also reduce risks of paper documentation left on desks or digital information with insufficient tracking and controls.

Blockchain-based digital ID fundamentally strengthens identity security and can help ease the burden of regulatory compliance. At the same time, it can improve the customer experience and establish a more solid basis for trust between banks and customers. It also transforms identity data into a rich description of a person, so banks can anticipate customer needs and offer solutions that actually make sense for each customer.

Through blockchain, digital ID is poised to completely change the way we think about and manage identity. It can solve old problems and open new opportunities for banks that are ready to embrace the change.

Taking a Chance on the Unbanked

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Financial inclusion is a hot topic in our community, and for good reason. The banking industry faces a real challenge serving those people who don’t have access to traditional banking services.

According to the Federal Deposit Insurance Corp.’s latest annual survey on underbanked and unbanked, 7 percent of Americans didn’t have access to banking services in 2015. That represents nine million U.S. households. The number gets even bigger when you consider underbanked households, which are defined as those that supplement their bank accounts with nonbank products such as prepaid debit cards.

Some banks look at this market and only see the risks; others deem it outside of their target audience demographic. In either instance, the outcome is avoidance. Fintech leaders, by contrast, see an emerging opportunity and are proactively developing innovative solutions to fill the gap. Which poses the question: Is it possible for banks to do the same?

Deciding to move forward with this type of initiative must start with the data. One of the areas that we pay close attention to is application approval rates. We’ve been opening accounts via our digital platform since 2009, and we were initially surprised by lower-than-anticipated account approval rates. Why was this happening? As the number of consumers who want to open a bank account online increases, there are inherent risks that must be mitigated. From what we’ve learned, identity verification and funding methods for new accounts, for example, pose heightened challenges in the anonymous world of digital banking. As such, we have stringent controls in place to protect the bank from increasingly sophisticated and aggressive fraud attempts. This is a good thing, as security is not something we are willing to compromise.

However, we realize that not everyone we decline is due to potential fraud, and that therein lies a major opportunity. A large portion of declinations we see are a result of poor prior banking history. Here’s the kind of story we see often, which may resonate with you as well: A consumer overdrew their bank account and for one reason or another didn’t fix the issue immediately, so they get hit with an overdraft fee. Before long those fees add up and the customer owes hundreds of dollars as a result of the oversight. Frustrated and confused, the customer walks away without repaying the fees. Perhaps unknowingly, the customer now has a “black mark” on their banking reports and may face challenges in opening a new account at another bank. Suddenly, they find themselves needing to turn to nonbank options.

I am not excusing the behavior of that customer: Consumers need to take responsibility for managing their finances. But, shouldn’t we banks be accountable for asking ourselves if we’re doing enough to help customers with their personal financial management? Shouldn’t we allow room for instances in which consumers deserve a “second chance,” so to speak?

At Radius we believe the answer to that question is “yes,” which brings us back to my earlier point around opportunity. Just a few weeks ago we released a new personal checking account, Radius Rebound, a virtual second chance checking account. We now have a way to provide a convenient, secure, FDIC-insured checking account to customers we used to have to turn down. In doing so, we’re able to provide banking services to a broader audience in the communities we serve across the country.

Because of the virtual nature of the account, I was particularly encouraged by the FDIC’s finding that online banking is on the rise among the underbanked, and that smartphone usage for banking related activities is rapidly increasing as well. Fintech companies are already utilizing the mobile platform to increase economic inclusion; we believe that Radius is on the forefront of banks doing the same, and look forward to helping consumers regain their footing with banks.

Let me be clear, providing solutions for the unbanked and underbanked is more than a “feel good” opportunity for a bank—it’s a strategic business opportunity. A takeaway from the FDIC report is that the majority of underbanked households think banks have no interest in serving them, and a large portion do not trust banks. It’s upon banks to address and overcome those issues. At the same time, nonbank alternatives are increasing in availability and adoption. Like anything worth pursuing, there are risks involved and they need to be properly scoped and mitigated. But while some banks still can’t see beyond the risks, I think ignoring this opportunity would be the biggest risk of all.

Can Watson Solve the Bank Regulatory Riddle?

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You have probably seen recent television commercials where “Watson,” IBM Corp.’s vaunted supercomputer, chats with Stephen King about novels and Bob Dylan about songwriting. And perhaps you remember a few years ago when Watson defeated two highly accomplished past winners of the game show Jeopardy! in a three-way competition. Well, IBM is now focusing Watson’s considerable talents on bank regulatory compliance.

In September, IBM announced that they were buying the consulting firm Promontory Financial Group, which is based In Washington, D.C., and was founded in 2001 by former Comptroller of the Currency Eugene Ludwig. Promontory is considered one of the leading firms providing banks with the information needed to navigate the increasingly intricate web of regulations at all levels of government. Over the years, Ludwig has hired many former regulatory officials, some of whom headed regulatory agencies and financial companies around the world. IBM is not just going to fold Promontory into its financial services practice, however. The company is thinking much bigger than that.

IBM is going to have Promontory’s 600-plus professionals turn Watson into the world’s foremost expert on financial institution regulatory compliance. Watson will then be able to expand its base of knowledge in real time as new regulations are created and studying various scenarios and situation that have developed in real world practice. Bridget van Kralingen, senior vice president, IBM Industry Platforms, described the company’s expectations for the project saying, “What Watson is doing to transform oncology by working with the world’s leading oncologists, we will now do for regulation, risk and compliance. Promontory’s experts are unsurpassed in this field. They will teach Watson and Watson, in turn, will extend and enhance their expertise.”

This can be a game changer if it works as expected. Regulatory compliance costs are growing, and there is no sign that this trend will ever reverse. In the press release announcing the acquisition, the two companies cited a report from global consulting firm McKenzie that found “More than 20,000 new regulatory requirements were created last year alone, and the complete catalog of regulations is projected to exceed 300 million pages by 2020, rapidly outstripping the capacity of humans to keep up. Today, the cost of managing the regulatory environment represents more than 10 percent of all operational spending of major banks, for a total of $270 billion per year.”

Regulatory compliance is a very hands-on process in its current form. Humans have to dig through the data, read the reports and figure out how the new information impacts their institution. If Watson can reduce the human element of compliance, then costs will come down. This could be a huge benefit to community banks as regulatory costs, which account for a disproportionally larger percentage of their overall costs than larger banks. Some of these smaller institutions have thrown in the towel and sold their bank to larger competitors rather than try and keep up with an ever-growing burden and costs of compliance.

Ludwig addressed the potential for the use of artificial intelligence combined with his firm’s existing broad level of knowledge to reduce costs for small banks. “For community and regional banks, this is a potential lifeline,” he said in an interview. “For many banks, it is an enormous burden just to keep up. Watson offers the opportunity to have a world-class partner.”

One of the keys to making this combination work is the fact that Watson is already a known entity that has had a lot of success since “going on” Jeopardy! in 2011. Watson is being used to improve clinical diagnosis and cancer treatment in the medical world, help track water usage in drought plagued parts of California and generate product suggestions for several retailers.

Those who worry that tech giants like IBM are not going to be nimble enough to keep up with the sexy, fast changing world of fintech simply do not understand the banking industry. Bankers don’t care about being on the cutting edge of technology as much as they do having technology and technology providers that are dependable. They want vendors with strong reputations that will have the staff and expertise to deal with problems that crop up at 2 a.m. on a Sunday. In banking, reputation is everything and protecting their reputation is much more important than having a sexy technology.

This combination offers them the chance to have both. Banks that might be reluctant to use compliance programs driven by artificial intelligence from a younger, more nimble fintech firm are going to find it much easier to accept the proven technology of Watson and the support provided by an industry giant like IBM. If the combination of Promontory’s in-depth knowledge basis and Watson’s artificial intelligence do in fact reduce the time used and money spent on regulatory compliance, this will be a tough combination to beat.

Plaid: Friend or Foe

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Whether customers are banking online with a big bank or trading stocks on sleek mobile platforms, their expectations for a smooth and seamless experience are constantly increasing. That’s why banks and fintech startups alike need to partner with the right companies on the back-end to make sure that their digital platforms can quickly and easily access the right data when they need to.

That’s where a company like Plaid steps in. Originally born out of a financial management and recommendation tool, Plaid eventually realized the need to provide fintech developers with an open Application Program Interface (API) that marries back-end bank data with front-end systems. In short, Plaid seamlessly connects applications with their users’ financial data housed in legacy banking systems. Without such technologies, accessing banking information within a third-party application would be nearly impossible.

Plaid has been so valuable to both banks and startups that the firm recently closed a new $44 million funding round led by Goldman Sachs to help grow the platform.

But is Plaid’s open API a boon to banks, or a threat to their survival? Let’s dive in and find out.

THE GOOD
Plaid’s platform and tools enable developers to interact with bank accounts to build financial applications. Plaid’s customers include fintech apps like Robinhood and Betterment, which rely on Plaid to give them access to back-end bank data. These applications can then access customer account data at their bank when providing mobile and web services like budgeting, investing and lending. Plaid also facilitates tokenized ACH transfers for payment processors like Stripe.

Plaid works in direct partnership with banks to make sure their customers can utilize apps like Betterment in conjunction with their accounts. However, Plaid is open (and interested) in broadening its footprint to work with banks of any shape and size in the future. And in so doing, banks that partner with Plaid give their own developers better tools to create apps that mimic the user experience of startups like Betterment and Venmo. That’s a win for banks since Plaid opens the door to developing apps in-house that could compete with fintech startups.

THE BAD
From its inception, Plaid has been focused on helping fintech startups connect their applications with banks to power their core businesses. Currently, Plaid works with thousands of U.S. banks, spanning the largest financial institutions to credit unions, whose customers want to use some of the popular apps powered by Plaid such as Venmo and Acorns.

The bottom line is that, while Plaid’s API is powerful and forward thinking, it needs to develop a track record of success with some of its larger partners in order to gain greater adoption. Plaid also needs to make a concerted effort to reach out to smaller banks and credit unions to draw those customers into the modern fintech ecosystem, with access to many of the newer apps we’ve discussed.

OUR VERDICT: FRIEND
Plaid is up against some stiff competition in the fintech API space, but its future in relation to big banks appears to be friendly. From what we’ve seen so far, Plaid is committed to working in tandem with big banks. By providing tools and resources for application developers and big banks, and expanding the number of institutions they partner with, Plaid is showing that it’s committed to a fintech future with banks still playing a huge role. Ultimately, it’s in banks’ best interests to better serve clients with better access to data, reduced online banking friction and internal innovation. And it looks like banks that work with Plaid in the future can achieve just that.