What Does Digital Transformation Mean Today?


transformation-4-17-19.pngFaced with macro-economic pressures, technology adoption decisions and quickly shifting customer expectations, banks are challenged in how to respond. Or if a response is even necessary.

But why?

For hundreds of years banks have existed to facilitate commerce, serving as a gateway to exchange and store value. Customers historically have chosen their bank for a combination of two factors: trust and convenience.

Financial institutions thrived by putting themselves at the heart of communities and centers of commerce. Branch networks expanded to be close to their customers, serving communities with products tailored to their customer footprint.

Then came the internet in the 1990s, and banks began launching online banking. By 2006, 80 percent of banks offered internet banking. Many banks believed they could begin to close bank branches, transitioning from fixed-cost distribution centers to low-cost digital channels.

But when it came to financial advice and large transactions, consumers still prefer branch locations. Instead of replacing costly branches with low-cost digital channels, banks are now faced with the upkeep of ever-changing customer expectations across multiple channels.

Pressure From Fintechs
The problem right now is traditional revenue from interest rate spreads are being strained by specialist digital providers. Instead of offering a breadth of services to customers, fintechs develop one product and continuously refine the single product to the user’s needs.

But how can a bank compete and offer the services customers want with the specialization fintechs can deliver across multiple channels?

The answer is open banking—a collaborative model in which banking data is shared with third-party services across an ecosystem of trusted providers.

As commentator and consultant Chris Skinner states in his book, “Digital Human,” “A bank that is truly into their digital journey would never build anything, but would curate everything.”

A digital transformation begins with extending bank capabilities through APIs (application programming interfaces), which open up an opportunity for banks and their customers to partner with fintechs.

But customers don’t want to vet hundreds of fintech startups. Instead, they’re looking for trust and convenience in their bank, which is the bank’s biggest advantage. While not immediately visible to customers, an important aspect of trust is the bank’s continuing role in ensuring third-party solutions handle their data securely and are in compliance with regulations.

Financial data is the currency of the next generation of banks, and the value of that currency is unlocked when segments are broken down and replaced with a platform. Only at a platform level can you extract the intelligence to deliver actionable, contextualized experiences for your customer.

In many ways, banks are already platforms, with multiple product lines around deposits, lending and insurance. APIs allow these platforms to interconnect, combining data to provide a complete financial picture of their customer. Even with the rise of technology, consumer surveys have shown they trust their banks more than Google and Amazon combined.

Customers want their bank to be at the center of their financial decisions.

The late Walter Wriston, former chairman and CEO of Citicorp said in the 1970s, “Information about money is as valuable as the money itself.”

Measuring Long-Term Success
Long-term success will be measured by the ability to refocus away from transactions in favor of becoming a trusted advisor. Banks that invest in gaining a deeper understanding of their customers’ financial lifestyle through rich data analytics can begin providing personalized, contextual advice to their customers—a valuable service customers will pay for.

Banks don’t have to embark on this journey alone. Institutions should look to technology partners equipped to allow them to think bigger by offering a customizable solution.

The bank of the future looks very similar to the bank of today—focused on core values of trust and convenience.

How Open Banking Changes the Game for Private Banks


technology-2-4-19.pngOpen banking is the most prominent response to the strong push from technology, competition, regulation and customer expectations. This begs the questions, why should a private bank’s open banking strategy be individual? What impact does it have on the IT architecture? How does it improve customer service?

The new “ex-custody 2.0” model provides the answers.

Regulation, competition from digital giants, changing client expectations, the rise of open API technology and next generation scalable infrastructure are the forces unbundling the financial industry’s business model. Open banking, or the shift from a monolithic to a distributed business model, is one strategy for banks to harness these forces and generate value.

Four strategies for private banks
While banks have traditionally played the role of an integrator, offering products to clients through their own channels and IT infrastructure, open banking provides them with more possibilities.

These include being a producer, or offering products through an application programming interface (API) as white-label to other institutions; a distributor that combines innovative products from third-party providers on their platform; or a platform provider that brings third-party products and third-party clients together.

Private banks may adopt a mix of these roles.

Two Areas of Products
The products generated through open banking can be separated into two areas. The first area includes the API data from regulatory requirements such as PSD2 in Europe. These products are dependent on payment account information as well as payment executions over the mandated APIs.

The second area of products is part of the open banking movement and use of APIs in general. The scope of potential products is much wider as they depend on more than just payment account data or payment execution. Many trend products like crowdfunding, event-driven insurance, financial data economy or comparison services are shaped by the open banking movement.

In practice, many products depend on regulatory APIs, but also on data from other sources. This has been developed into a multi-banking product dubbed “ex-custody 2.0.”

Multi-banking – The ex-custody 2.0 model shows how a client’s wealth can look if his bank can aggregate account information and other data. Technology like the automated processing of client statements or enhanced screen scraping allows, upon client consent, to gather and aggregate investment or lending data as well. The client’s full wealth can then be displayed in one place. From the bank’s perspective, what better place can there be than its own online portal? Terms like multi-banking, account aggregation and holistic wealth management have been coined by the market. We want to add another term to those existing ones:

“Ex-custody 2.0.” Ex-custody is not a new term in the industry. It refers to positions of an accounting area not banked by the bank itself, but where the bank takes over administrative custody and reporting tasks for the principal bank. Ex-custody 2.0 for multi-banking is the next step, where the principal bank does not need to compensate the custodian bank for any services. In the case of screen-scraping, it does not necessarily know the other bank.

Contrary to other multi-banking or account aggregation implementations, the ex-custody 2.0 model is not a standalone application or dashboard, but fully integrated into the bank’s core technology and online banking system. Data is sourced from fintech aggregators through APIs and batch files.

Positions are then booked in a separate accounting area before being fed to the online banking system. This allows the bank to offer innovative products to the customer that rely on integration with both a booking and an online system.

New products include:

  • Multi-banking: the service to manage one’s wealth on one portal
  • Automated advice suitability based on all connected positions on the platform
  • Dynamic Lombard lending based on bank and external investments
  • Cross-selling via direct saving suggestions
  • Risk profiling and portfolio monitoring across institutions and borders
  • Balance sweeping across the family wealth or managed trusts and businesses
  • What-if and scenario simulation through big data modules on the platform.

Conclusion
Open banking will change the business model of private banks. It is a great opportunity, but also a great threat to existing business. The opportunities consist mainly of new scalability options for products, new integration possibilities for third-party products and the creation of new products using the data from open banking.

The main threat is the loss of the direct relationship between banks and clients. However, there is no mix of the four strategies that fits every bank’s business model. It is vital for a private bank to define a position according to the four strategies discussed here and to do so in an individual, conscious manner.

Does the U.S. Need Its Own Version of PSD2?


banking-12-22-17.pngIn January 2018, the Revised Payment Services Directive (PSD2) takes effect in the European Union, requiring banks there to open their payment infrastructure and data to third parties. The consumer-focused initiative is intended to give individuals control over their financial data while simplifying the payments ecosystem. Belgium, Germany and Italy have had a common protocol for providing third-party access to account information since the 1990s, and Australia is considering measures similar to the EU’s PSD2 initiative, according to a report from McKinsey & Co. With so much momentum behind the concept of open banking, should the United States explore a similar uniform data sharing policy?

Currently, the U.S. sees data sharing between banks and third parties take place through a patchwork of one-off deals. Often, agreements are struck between a financial institution and an intermediary that aggregates data from several institutions and provides that information to third parties, such as personal financial management apps, lending platforms or other consumer-facing service providers. These types of agreements do little to further a holistic national agenda of financial innovation and inclusion.

Many stakeholders—banks and technology companies alike—believe that these one-off data sharing agreements are not enough. For banks, current methods used by technology companies to gather data from their systems can result in security breaches, and carry the potential for brand or reputational risks. These issues illustrate the need for a uniform protocol that addresses both the technical aspects of connecting with third parties and the liability issues that can arise in cases of consumer financial loss.

What’s more, while the demands of secure API implementation are huge expenditures for a financial institution, the shift to open banking can also lead to new opportunities. (An application program interface, or API, controls interactions between software and systems.) As an example, PSD2 requires that banks provide access to data, but it does not prohibit an institution from monetizing its data in ways that go beyond the statute. Banks can capitalize on this mandate by providing more detailed data than is required by PSD2, or by providing insights to accompany the raw data for a fee. In addition, the development of API expertise will move institutions closer to offering many different financial services through a digital platform. Leveraging APIs can allow institutions to efficiently provide advice and services that customers demand today. (For more on this, read “The API Effect” in the May 2017 issue of Bank Director digital magazine.)

For technology companies that require access to bank data to operate, open APIs offer more reliable, accessible data. Without a direct line to bank data, technology companies must often resort to “screen scraping” to gather needed information. This technique requires a bank customer to provide log-in credentials to the third party. Those credentials are then used to collect account information. This method is much less secure for banks than controlling an API interface would be, and it’s a lot less smooth for bank customers that want to provide the technology company with access to their data.

Also, the process of entering into data-sharing agreements with multiple financial institutions is a daunting task for even the most sophisticated technology companies. Connectivity requirements vary from bank to bank, as do security protocols. Add to that a significant price tag for each deal, and the task of building a customer’s financial profile across multiple institutions is a significant barrier to entry that prevents the delivery of innovative financial services to consumers.

While the U.S. has been slow to act on open banking initiatives, there have been some signs of life. In October of 2017, the Consumer Financial Protection Bureau released its principles on data sharing and aggregation and confirmed its view that individuals, not the companies they work with, own their financial data. While this is only guidance coming from an embattled regulator, it hints at American interest in the open banking movement.

Innovation, enhanced security and the drive for greater competition are the golden triptychs at the heart of PSD2,” wrote Alisdair Faulkner of the digital identity company ThreatMetrix, based in San Jose, California, in August 2017. Those would seem to be values that every government should strive to uphold, and with benefits for both incumbents and new technologies, perhaps exploration of a PSD2-like initiative can take hold in the U.S.