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This refers to a banking practice that gives third-party financial service providers open access to consumer banking, transactions and other financial information via application programming interfaces (APIs). The sharing of financial information has enabled customers to access user-friendly interfaces and make faster, easier and more secure payments.

It’s a modern, straightforward and highly effective approach, so it’s no surprise that open banking is so popular, particularly in light of COVID-19 which forced the industry to digitise even faster than originally expected. In the UK, for example, there are currently three million open banking users — three times more than in 2020.

One area of the finance sector that looks set to reap significant benefits from open banking is cross-border payments. Due to the various time zones, intermediaries and legal requirements involved in a transaction, sending money internationally has always been somewhat challenging. However, open banking can go some way in solving the problems financial institutions, businesses and consumers have all traditionally faced, ensuring that cross-border payment services are cheaper, faster and better for all parties involved. Stan Cole, Head of Financial Institutions at Inpay, delves into the topic.

APIs and cross-border payments

Open banking enables third-party financial services providers to access data from banks and other financial institutions, with APIs offering access to account information services (AIS) and payment initiation services (PIS), allowing apps to directly interact with bank accounts. Although APIs take a great deal of effort to design and implement, they are time-saving and cost-effective in the long term. This is because with these solutions, financial institutions don’t need to create custom solutions for every FinTech they intend to integrate with. APIs also allow new financial services to be developed more quickly around these interfaces.

So, what does this have to do with cross-border payments? Well, in our globalised world, sending money abroad is commonplace, whether that’s due to trade and e-commerce, international investments, global supply chains, or the sending of money via international remittances. And according to the Bank of England, cross-border flows are expected to grow significantly in the coming years, from $150 trillion in 2017 to an estimated $250 billion by 2027. As a result, banks, financial institutions and other global businesses must be able to facilitate these transactions with ease and efficiency if they want to attract and retain their customers. Partnering with FinTechs using APIs can play a significant role in achieving this.

The benefits of open banking for cross-border payments

Cost & speed

Open banking enables senders and recipients to bypass the intermediaries that would otherwise be involved in facilitating cross-border transactions. For instance, direct access to customers’ bank accounts means that a business or financial institution could verify their identity and creditworthiness without the help of a third party. This results in reduced fees and quicker services. Time and money can also be saved because FinTechs using open banking will provide an efficient alternative to the slow, expensive legacy systems currently in use.

Ease

Open banking can make it considerably easier to make cross-border payments. APIs can be designed to provide a streamlined, responsive user interface and thereby provide an excellent customer experience. In addition, open banking makes know-your-customer (eKYC) processes much simpler as they can be entirely digitised, gaining the required information in seconds rather than days.

Safety

As well as improving KYC processes, open banking allows banks, financial institutions and businesses to reduce the risks associated with cross-border payments. They can immediately check that customers are able to afford the transaction, for example, and set precise limits. FinTechs using APIs are also likely to have stronger cybersecurity measures in place compared to dated legacy systems.

Competition

Open banking means financial institutions and businesses can stay flexible and meet evolving customer demands, with APIs allowing them to offer exceptional customer experiences. As a result, there is increased competition, encouraging innovation and giving customers more choice over the companies and services they use.

Open banking and cross-border payments today

Open banking is already making waves in the cross-border payments sphere, with many companies already responding to the clear benefits APIs can bring. Some exciting services to have emerged include API-driven live FX pricing and API-based currency hedging automation, while many big names in the financial services sector (including Visa, Mastercard and Western Union) have teamed up with forward-thinking FinTechs in order to use open banking to improve their cross-border payment services.

The most exciting part of this is that open banking is still in its relative infancy and is continuing to evolve. With new tools regularly launching to accommodate various markets and purposes, financial institutions and businesses can take advantage of this phenomenon to provide the best possible customer experiences to anybody that needs to make a cross-border transaction. However, to do so, they must find the right FinTechs to support them as they strive to bring their financial services into the present day.

In July, the European Central Bank (ECB) announced its plans to launch a digital currency. In response to a rise in online payments and the potential threat that could come from others issuing a digital means of payment, the ECB has decided to press ahead with its own digital currency. This aims to help protect its monetary sovereignty by attempting to limit the use of rival means of payment.

This will not be a quick process. The next two years will be spent on design and tests, followed by a launch three years later. However, the announcement highlights that traditional fiat currency won’t be the sole payments method in years to come. Of course, this move does not mean the same will happen for the UK, but with Rishi Sunak and the Bank of England making warm noises about digital currencies, it’s unlikely the UK won’t follow suit.

Will Digital Currencies Work as Cash Replacements?

Of course, there are many questions swirling around digital currencies – namely if they’ll be a digital version of cash, if they will eventually replace cash or just simplify cross-border payments – but the fact of the matter is cash appears to be becoming digital, meaning banks need to get ready, even if the day-to-day reality could be years away.

Taking a step back from this new development, it’s fair to say financial services was already in flux, with the pandemic turbo-charging many of these shifts. Previously, banks, building societies, pension providers and wealth management had defined roles within the market, and whilst there was some interaction between the providers, people had their pots of money and tended not to move them around. In short, loyalty mattered. But this, like many other aspects of financial services has now changed. New entrants are flooding the market and offering platforms that bring vendors together thanks to Open Banking enablement. Therefore, consumers are flooded with choice. It’s now simple to amalgamate pensions or to transfer ISAs to get a better rate. Plus, with digitalisation, self-service is now positively encouraged. One clear example being online brokerages disrupting the investment space and allowing consumers to own snippets of companies, instead of requiring payment for full shares. Consumers are used to a digital financial life – so why not extend this to currency?

The world is moving towards a more digitised way of life – and banking, payments, savings and investments are certainly part of this shift.

No matter where a company sits within financial services, it’s clear that if digital currencies become reality, firms will need to accept them, which throws up multiple issues. Integration with fiat currency is perhaps the most pressing.  However, the growth of cryptocurrencies over the last five to ten years and their recent acceptance by large institutions, shows there’s a clear trend. Financial portfolios should no longer be cash, bonds or equities – a small exposure can be digital. For me, this coupled with the concept of digital Pounds, Euros, Dollars or Yen, signals it’s time for banks to start thinking at the very least what measures should be put in place to lay the foundations for adoption. Surely commercial entities could benefit from showing customers they’re ready to take action, and providing an alternative to investment platforms as a source and store of these assets?

But what’s required? Here are five key aspects which can help determine a starter strategy.

  1. System resilience

Like any fiat system, digital currencies would need to be considered critical national infrastructure – meaning uptime and defence are impenetrable 24/7, 365 days per year. Aside from this requirement, the new system would need to be protected from cyberattacks, whilst also handling high volumes of transactions. Systems should be able to process transactions immediately (or as instantaneously as possible) along with having strong privacy protections.

For banks looking to support and facilitate a lot of this traffic, leveraging blockchain seems the most logical choice, as the roles they will play in these transactions will be different to a normal transfer. Whilst money may well flow from one account to another, banks will also likely be responsible for updating the record of who owns which Central Bank Digital Currency (CBDC) balance. Of course, technicalities are still to be worked out as to how money will move around, but it’s likely the CBDC itself would be a cash-like claim on the central bank. This way, the central bank avoids the operational tasks of opening accounts and administering payments. Banks can continue to perform retail payment services, meaning there are no balance sheet concerns with private sector intermediaries. This in turn helps boost operational resilience, as this architecture allows the central bank to operate backup systems in case the private sector runs into technical outages.

  1. IT infrastructure

The potential introduction of digital currencies will be a testing experience for many – especially while we don’t know if it will come to fruition, or how it will work. Inevitably that will lead to a lot of speculation. One thing is for sure though, it may well require an overhaul of technology to integrate it, which will have repercussions for the IT stack. Unfortunately, technology to support such initiatives are likely to be considered ‘new’ to the majority of existing financial service organisations.

It’s well known that many banks struggle with legacy technology. They are not alone in that and big names across other industries have the same problem. The problem the banks have is that they’ll be the ones facilitating most of the transactions, whereas other players (retailers, for example) will mostly be receiving them. Whilst I don’t believe integration won’t be a problem for newer neobanks, they are in a far stronger position than their older rivals. Now is the time to get on the front foot and start thinking about what transformation will be required to help set the traditional banks on the right path. This includes safeguards which have been a criticism of cryptocurrencies – how to implement anti-money laundering protections, so the same due diligence a traditional banking service provides is applicable to its digital twin.

  1. Centralised vs decentralised finance

The whole concept of digital currency is an interesting one, based on the fact they add an element of decentralised finance to the country’s monetary policy. Of course, they will need to comply with current protocols, but they’ll also challenge how these protocols work.

To enable peer-to-peer transactions, digital currencies will need to make use of centralised governance frameworks that are authoritarian in nature — i.e., controlled by a single body. However, centralised blockchains are slower. Decentralised solutions like distributed ledger technology could make transactions quicker and more streamlined. To achieve widespread adoption, transaction speeds need to be efficient (much like an online bank transfer) otherwise consumers will not want to switch.

Decentralisation would also enable individuals to own their own wallets (akin to cryptocurrencies) and have their own private keys to help bolster security. This can help avoid data breaches and reduces risk. If a hack were to occur, it would stop one, single large fund being stolen – just a single person’s funds. Whilst this is a terrible scenario, it would be catastrophic if one pot were accessed. It would undermine any faith in the system.

  1. Payments

Simplifying cross border payments could provide benefits in terms of e-commerce, travel and the labour market. However, it will have significant requirements, such as aligning regulatory, supervisory and oversight frameworks, AML/CFT consistency, PvP adoption and payment system access. The eventual international adoption of digital currencies is also likely to proceed at different speeds in different jurisdictions, calling for interoperability with legacy payment arrangements. Whilst this sort of information will likely come from G20 discussions, banks need to start addressing how to facilitate this and how this can be achieved within the current stack.

  1. Consumer adoption

Whilst not a technical point, banks will likely share responsibility with the Bank of England in communicating the launch of any digital currency and how it will work. Provision and service is a key differentiation. We also need to acknowledge that the recent volatility in cryptocurrencies may make consumers wary of adopting digital currencies, which impacts their adoption. Being able to clearly communicate how digital currencies will integrate with current offerings and the benefits of this early, will help with customer uptake and acquisition.

Although the adoption is still conceptual, thinking about potential customer provision and how it might be integrated into current platformification/product offerings can help with service design and ultimately, user experience.

 

The world is moving towards a more digitised way of life – and banking, payments, savings and investments are certainly part of this shift. Financial institutions have had to manage this evolution already, so in some ways, a digital currency is a logical next step. For it to survive, however, the necessary infrastructure must be present for it to thrive, which banks can provide if they put the necessary building blocks in place now. The change will not happen overnight, or potentially in the next five years, but to win the hearts and minds of customers, provision will need to be seamless – placing customers at the heart.

On Tuesday, Swiss bank UBS reported a 63% rise in second-quarter net profit as markets continued to facilitate the world’s largest wealth manager generate higher earnings from managing the rich’s wealth. UBS’s second-quarter net profit reached $2.01 billion, up from $1.23 billion in the same quarter last year. The profit exceeded analyst predictions of $1.34 billion. 

The Swiss bank is pushing to improve its digital services in a bid to extend its customer reach outside the super-rich, which is currently its primary client base. According to a June report by Reuters, UBS sees potential for a new online platform that would bring in $30 billion in the next year. 

On Tuesday, UBS also reported $25 billion in new client inflows. This, in combination with strong markets, has helped to push invested assets in the bank’s global wealth management business up by an additional 4%, reaching a total of $3.2 trillion. 

Throughout the pandemic, UBS’s trade with ultra-wealthy clients also remained strong, boosting the Swiss bank’s pre-tax profits by 47% in its flagship business. 

The policy will come into effect next month in a bid to lift other Covid-related rules at the firm, such as social distancing and the wearing of face coverings. The company has already introduced “vaccine-only” workspaces within some office departments, though in the near future, employees who are not yet fully vaccinated will be expected to continue working remotely, despite calls by Morgan Stanely’s CEO James Gorman for staff to return to the office.

Currently, the policy operates on an honour system, though in the near future the bank may decide to ask its employees for proof of vaccination status. Mr Gorman has said if his employees are able to dine in restaurants around the city, then he sees no reason why they cannot return to the office. The CEO has also said that he would be “very disappointed” if US workers had not made the return by September. Several other banks are also taking a tough stance against home-working. Jamie Dimon, CEO of JP Morgan, has recently said he wants US employees back in the office from July.

When lockdown was announced more than 12 months ago – an entirely new concept that brought with it a multitude of unknowns and an unpredictable, unstable future – businesses barely stopped for breath before they adapted and pivoted to the new landscape. Small businesses, in particular, responded to the global crisis with a clear demonstration of their versatility, creativity and tenacity.

Restaurants offered take away for the first time. Retailers launched Click and Collect services. GPs switched to telephone and video appointments. Gin distilleries halted production and adjusted their production line to make antibacterial hand gel. Textile factories began producing scrubs and face coverings to protect front-line workers. Tech firms invested in building medical ventilators to help save lives. After a very long 12 months, this level of quick thinking and innovation, as inspiring as it was, already seems a rather distant memory.

However, while agile businesses made big changes to support customers and the wider community, some parts of the financial services sector found it difficult to keep up. Regulation and legacy infrastructure, along with good old-fashioned risk mitigation, meant some banks, in particular, struggled to consistently respond to changing customer needs and expectations.

However, they did not stand back and accept defeat. In fact, in crisis mode, banks rapidly changed their digital trajectory. According to research we commissioned last November, the pandemic caused more than half (58%) of banks to change their IT infrastructure plans. And to get new solutions to their customers quickly, more banks than ever saw the valuable opportunity of third-party collaboration.

Tackling the banking challenges together

Working closely together with FinTechs and financial utilities, banks have been able to deliver new digital accessible solutions to meet the needs of their retail and corporate customers. Now, looking ahead to what 2021 and beyond holds, the new challenge is to ensure the innovation and collaboration that became necessities in 2020 become the norm, rather than another distant memory or passing phase.

In November 2020, Banking Circle spoke to 300 C-Suite decision-makers at Banks across the UK, DACH (Germany, Austria and Switzerland) and Benelux (Belgium, The Netherlands and Luxembourg) to discover the specific challenges they face - internal, external and COVID-induced - in future-proofing their organisations and enhancing customer propositions. Published in a white paper Better business banking: Collaborating for success’, the research reveals that existing IT infrastructure is the biggest internal challenge holding banks back from achieving their business objectives.

Unencumbered by such legacy systems, FinTechs have been able to serve consumer and corporate customers efficiently and at low cost in many areas, often competing with traditional banks. But banks have been quietly preparing to fight back - they have been changing their business practices, culture and technology to remain competitive and provide their customers with the solutions they need for today and tomorrow.

Barriers to better banking

Banks have big ambitions; as previous Banking Circle research revealed in 2020[1], most already had digitalisation plans in place, pre-COVID. However, having been built in very different times, with vastly different technology available, not to mention almost unrecognisable customer requirements, banks now face a multitude of challenges in futureproofing their offering.

Here are a few take-outs from our November 2020 research:

2021 has brought with it many new regulatory challenges, particularly regarding cross border trade. The UK’s exit from the European Union has resulted in significant change, much of which was still to be determined at the time we surveyed European banks. On top of this uncertainty, CBPR2 electronic messaging requirements for card issuers have now come into effect, adding complexity and requiring compliance investment.

These and other operational challenges are sure to impact profit margins, affecting small businesses’ ability and willingness to pay traditional high fees for cross border payments. And with the global digital economy now vital to many enterprises’ survival, this could drive a push towards more affordable solutions from alternative providers. It is unsurprising, therefore, that 70% of the banks we surveyed consider cross border payment provision to be a core banking service. This rose to 90% among UK banks, perhaps reflecting the anticipated consequences of the country’s exit from the EU.

As the pandemic continues to call the shots around the world, recovery feels painfully slow and uncertainty persists. Now more than ever, therefore, banks need to find cost-effective ways to support business customers whatever the future brings.

Clearing the way for cross border trade

Just over half of the banks in our study confirmed that they use direct clearing through central banks to process cross border payments. A similar number use the correspondent banking network, and around one in three use the SWIFT network.

As global trade levels begin to pick back up to pre-COVID levels, banks must be ready to support businesses in their bounce-back. Access to affordable, friction-free cross border payments will be essential to that recovery, and banks able to provide this can empower even the smallest merchant to serve customers in any geography. Not only will this help small businesses and start-ups to thrive post-COVID; it will also bolster international economies at a time when they are in great need.

Working with third-party service providers is now an important part of banks’ business planning. Half of those surveyed already have partnerships or plan to work with an external provider within the next month. An additional third have partnerships on the agenda for the next 12 months.

As the pandemic continues to call the shots around the world, recovery feels painfully slow and uncertainty persists. Now more than ever, therefore, banks need to find cost-effective ways to support business customers whatever the future brings. And the support needs to be convenient, accessible and, above all, valuable. Solutions need to be investment-light yet deliver strong innovation, flexible enough to meet rapidly shifting expectations and needs.

2020 brought an increasing trend towards collaboration. Now to meet these evolving business needs, collaboration must be embraced to bring benefits for all sections of the financial services sector. Through partnerships with infrastructure providers banks gain the agility and innovation of a FinTech, while FinTechs gain compliance and security processes, enabling them to focus on building strong customer relationships.

The 2020 legacy

In the past 12 months, banks and payments businesses alike found the fastest way to get essential new solutions to their customers was to work with an expert who had already developed the solution from end to end. And to see how the banking industry stepped up and responded to the crisis was truly inspirational. Priorities and budgets were shifted overnight, digitalisation plans were dramatically fast-tracked to deliver the solutions customers needed, support staff set up call centres at home. It was far from easy, but the pandemic helped banks find the motivation they needed to future-proof their processes and solutions through collaboration.

Now is the time to reap the benefits. In the face of unprecedented challenge, banks stepped up and set the precedent for future-proofing banking. And that must be the legacy of 2020: better business banking. 

To download the Banking Circle white paper, go to https://www.bankingcircle.com/whitepapers/better-business-banking-collaborating-for-success

[1] Source: Banking Circle white paper: Bank to the Future - https://www.bankingcircle.com/whitepapers/bank-to-the-future

Walter Stresemann, Founder and Managing Director of Magnolia Private Office, a trust and fiduciary company in Geneva, analyses the new challenges and opportunities the private banking sector is facing.

What is a private bank? We usually use the term for any corporate body specialising in wealth management for High-Net-Worth individuals. The original definition, however, meant unincorporated banks – those owned by an individual or partners with unlimited liability, and therefore unlimited personal responsibility. Not banks, but bankers.

While only one of these ‘banks’ still exists – Bordier & Cie – this old definition still gets to the heart of what private banking should be about today.

Gone are the days where a client needs help accessing basic investments – anyone can now stash their money away to be run by a simple trading algorithm. Instead, the private banker must adopt a ‘family office’ approach, providing highly tailored advice to address myriad client needs, and matching the client with the most appropriate services from their networks, such as product experts, financial planners, or tax specialists.

Digital Transformation

Digitisation is surging forward. Some 85% of HNW and UHNW individuals use at least three mobile devices. They expect to be able to scan their investments and banking services at a glance, seamlessly and in real-time, on their tablet, smartphone, or computer. More than half of HNW clients over the age of 40 say they would leave their private bank if an integrated, seamless channel is not provided, and the next generation will be no less demanding.

Serving this client base effectively requires open architecture enabling collaboration between providers of diverse products and investments from equities to real estate to works of art, sourced from the banker’s or client’s network, all available within one secure digital experience.

Wealth managers are acutely aware of the apparent drawbacks of ‘going digital’: in a recent survey, more than half were concerned about being able to present data intuitively and provide clients with genuinely useful oversight. However, COVID-19 has required most clients to embrace, or at least experiment with, digital channels. Clients who might have previously dealt with their banker in person, on the phone or via email now, are now embracing more of the bank’s digital offering, thanks in large part to the requirements of the extended COVID-19 lockdowns. This means they have heightened expectations of digital-enabled private banking even after the pandemic is over.

All that said, the wealth manager who maintains a genuinely holistic view of his clients’ interests will continue to thrive in a digitally-enabled future. Personal contact, and the ‘trust factor’, are not going away – they may indeed become more important. Right now, for example, clients are confronting a host of very personal uncertainties created by COVID-19, ranging from place of domicile (where is genuinely ‘safe’?) to inheritance planning.

Clients increasingly also want access to private markets, and to dip into investments otherwise touched by private equity. The pandemic has given this a renewed salience, with a drive to hedge unstable equities and low-yield debt. These are all investment and ‘real life’ decisions best guided by the steady hand of a trusted adviser.

Expertise is still highly valued, but it needs to be well delivered.

Genuinely differentiated ‘human’ expertise was already in demand long before COVID-19. Clients themselves are increasingly savvy. Usually, they grew up with better access to information, and wider consumer choices, than their parents. They demand transparency, wanting to know exactly what they are getting for their money. They negotiate fees, with a keen eye on what competitors have to offer. Old loyalties have given way to a demand for ‘client experience’, with 45% of millennials saying they would regularly switch to alternatives in search of the best solution. So expertise is still highly valued, but it needs to be well delivered.

Structural Changes

Compliance costs represent another pressure on the sector. They currently consume 4% or more of revenues, with some warning that this toll could rise to as much as 10% in the coming years for firms who cannot enact the right efficiency savings.

Global anti-money laundering rules, spearheaded by the intergovernmental Financial Action Task Force, have been criticised as the world’s least effective policy experiment, with the amounts of laundered money seized utterly dwarfed by the costs passed on to banks and other businesses. Common Reporting Standard regulations, while yielding mixed results in the global battle against tax evasion, have burdened private banks with analysing the residence status of their clients. MiFID II has created costs as well.

All of these pressures serve to drive sector consolidation – the word on everyone’s lips for the past decade. Nowhere is this clearer than in Switzerland, with the number of independent banks primarily involved in wealth management reducing by 31% between 2010 and 2017.

The costs of servicing an increasingly global client base are also tangible. Once upon a time, Swiss bankers could expect many of their clients to come to them from abroad. Nowadays, more and more HNWIs are based in the Asia-Pacific region, forcing Europe’s more intrepid wealth management businesses to make inorganic acquisitions overseas.

In search of revenue growth, some private banks are working their way down the value scale, not to UHNWIs or HNWIs, but ‘mass affluent’ individuals with one to five million dollars in assets. What they can really offer to such clients is not always clear – is the move just a number-boosting ploy, to get more AUM on their books? If so, private banks are probably heaping more pressure on their own profit margins, since ‘mass affluent’ clients seem to be less loyal than their wealthier counterparts, adding to retention costs.

Private banks can only hold off from confronting these challenges for so long. Differentiation is surely the way forward: a ‘family office’ approach, in which wealth managers exit less profitable parts of the value chain such as custody, and focus instead on high-quality advice, good networks, and enabling the digital access and remote service that clients now expect. The private bankers able both to master the technology ecosystem and to maintain their ‘human face’ will be the ones who thrive in the years to come.

HSBC said on Tuesday that it planned to close 82 of its high street bank branches in the UK between April and September this year as its customers shift towards telephone and internet banking.

“The COVID-19 pandemic has emphasised the need for the changes that we are making,” said Jackie Uhi, HSBC UK’s head of network, emphasising that the shift was already underway before the pandemic accelerated it.

“It hasn’t pushed us in a different direction but reinforces the things that we were focusing on before and has crystallised our thinking. This is a strategic direction that we need to take to have a branch network fit for the future."

The number of customers using branch banks had fallen by a third in the past five years, HSBC said, with over 90% of customer contact being conducted over the telephone or internet.

As part of a new strategy, the bank will be altering some branches to focus on cash access and establishing “pop-up” branches in some areas. These changes will come into effect by the end of the year and will mean a reduction in services offered by some remaining branches.

HSBC will have 511 physical branches in the UK following the planned closures. The bank’s shares rose 2.1% following its announcement on Tuesday.

[ymal]

Other banks have also made plans to reassess their working spaces amid the COVID-19 pandemic. The Financial Times reported that Virgin Money and Metro Bank intend to convert parts of branches into flexible working space, and that Lloyds Banking Group would start to test similar measures from October.

These plans have caused concern among some campaigners, who say that local bank branches provide a lifeline for those requiring access to cash and face-to-face services, as well as enabling small businesses to bank without greatly disrupting their own trade.

From IT investments to the cost of compliance – banks must respond to the steady rise in operating costs. With the ongoing COVID-19 pandemic, UK domestic credit losses are estimated to rise to GBP18.5 billion in 2020. Many traditional and non-traditional players are facing the challenge of thriving in an uncertain environment with shrinking margins, increasing competition, and demanding consumers.

To survive, banks must focus on taking a strategic approach to cost efficiency and effectiveness. Traditionally, the banking sector is a tightly regulated industry, with limited scope for innovation - especially in the pricing domain. Banks have relied on a market-based approach, risk premium, or cost of funds approach for pricing factors. But these approaches are not comprehensive; missing out on crucial cost elements such as cost of technology, product development, processes, maintenance, infrastructure, and other associated costs of servicing.

Challenges to cost-efficiency

Most global banks are built on legacy systems that have become complicated over time. These systems are large matrix institutions that support core banking services. Maintenance and upkeep of these systems is a costly burden. As banks grow, new products, services, and processes are regularly added to their portfolio. Outdated systems hold back organisations from attaining the full potential of their digital initiatives. As per a survey by VMware, 62% of IT leaders say legacy systems are the biggest roadblock to multi-cloud success. Considering the disadvantages of legacy systems, the way forward for banks is to modernise the system. But modernisation is an expensive and time-consuming journey that most banks are not ready to embark on.

According to the annual Global Regulatory Outlook Survey, the cost of compliance is one of the biggest challenges that financial institutions face. Since the global financial crisis, the European Union (EU) has introduced a string of regulatory measures to protect the consumer. Keeping up with the regulatory changes is an uphill task. Banks must cover various processes that range from monitoring banking transactions to ‘know your customer’ (KYC) remediation to anti-money laundering measures.

The report states that the EU’s General Data Protection Regulation (GDPR) is estimated to have cost an average of £66 million to comply with. Add the revised Payment Services Directive 2 (PSD2) and Open Banking, and banks are re-structuring the entire industry that facilitates data sharing – increasing compliance overhead costs for data sharing norms. The cost of compliance trickles into the expanding technology landscape. Investments in regulatory technology or RegTech have significantly impacted banks bottom line.

Rising competition from FinTech and non-banking financial companies (NBFC) is forcing incumbents to embrace new and emerging technology and reorganise their IT infrastructure. Operating multi-cloud networks and delivering omnichannel experiences can create a fragmented back-office architecture. Let’s not forget that different systems are used to support legacy products that further increase costs.

To improve cost efficiencies, organisations need a strategy that reduces organisational complexity, enhances customer services, and improves customer retention. The focus for new-age banks should not be solely on cost reduction, but on improving their processes, infrastructure, and channels. 

Transforming cost reduction with technology

While investment in technology has gone up, its impact on cost reduction and efficiency is noticeable. Automation of business processes is helping banks rapidly scale up, improve process quality and accuracy, reduce cycle times, and improve compliance. A survey by Bain & Company found that companies report savings of 20% on average over the past two years due to automation. The uptake of automation has taken some time, but the application of robotics and artificial intelligence (AI) to banking processes is growing steadily. AI-powered chatbots are overtaking traditional customer support or contact centres for tech-savvy consumers. Chatbots provide 24/7 customer support with neuro-linguistic programming (NLP) that replicates human speech and resolves customer queries without human intervention. As per a study by Juniper Research, the operational costs savings from the implementation of chatbots will reach USD 7.3 billion globally by 2023.

According to the annual Global Regulatory Outlook Survey, the cost of compliance is one of the biggest challenges that financial institutions face

Robotic process automation (RPA) is another technological advancement implemented at banks for cost reduction. It has been beneficial in automating repetitive manual processes, data reconciliation, and transcription. Compared to other technologies, RPA is relatively low cost as it does not require new core IT infrastructure change or upgrades. With its lower costs and high-productivity model, RPA is on its way to disrupt business process outsourcing models. When implemented effectively, RPA can be applied to a wide variety of rules-based business processes or tasks. It simplifies communication and provides complete control of operations. Various outsourcing experts such as KMPG and Deloitte place the cost savings of RPA over outsourcing to be greater than 70%.

Reducing IT costs with DevOps best practices

With an increasing number of cloud services and digital channels, DevOps has been crucial for banks to optimise their costs when it comes to application development, deployment, and maintenance. Banking software is known to be complex and take forever to develop using traditional testing methods – delaying delivery timelines.

To meet the rigorous demand of the digital market, DevOps is being placed at the centre of all business processes. This convergence of business practice systems around DevOps is a new concept called the Emerging DevOps Superpattern. This best practice covers the business requirements of agility, holacracy, security, information technology service management (ITSM), and decentralises the role of leadership by creating a learning organisation. When implemented, DevOps best practices optimise and reduce IT costs:

One way of cost reduction with DevOps is to automate the continuous integration (CI) and continuous delivery (CD) process and provisioning of IT infrastructure. Infrastructure as code (IaC) automates the provisioning and enables the development of template-based solutions. This way the CI/CD pipeline will serve as a framework for the development team to configure and launch services rapidly – with no DevOps involvement.

Maintaining banking IT infrastructure is expensive and for most banks building their own services from scratch is not a viable option. To optimise costs, banks can use third-party services that can help reduce operational overhead. For instance, cloud infrastructure is a growing necessity for global banks. During the planning phase, DevOps practices would help you evaluate the cost-effective approach for infrastructure development. The DevOps team audits the infrastructure resources and services and decides which cloud approach (Private/Hybrid) would be best suited for the organisation. It also helps in reducing infrastructure usage by decommissioning obsolete or redundant processes.

According to PwC, as the market matures, banks must shift from a cost-plus pricing approach to a value-based pricing strategy. This approach advocates a customer-first strategy wherein the focus in on creating premium products and services that users would willingly pay for. A deeper understanding of customers’ needs is crucial for determining the pricing strategy for products. With an increased focus on product innovation and customer analytics applications, PwC asks banks to consider the following questions while deciding on pricing strategies:

Simplification of the value chain offers banks a clear focus on its IT and operations, streamlined portfolios, transparent processes, and better chances of profitability. With an effective cost reduction strategy, banks can create long-term sustainable approaches to efficiently manage costs and improve profitability.

Tens of thousands of British citizens living in the EU have received notices from their UK-based banks warning them that their accounts will be closed by the end of the year, The Times has reported.

Major banks including Lloyds, Barclays and Coutts, have sent letters British account holders living in the EU with a warning that they will no longer receive service when the UK’s EU withdrawal agreement ends at 11pm on 31 December 2020.

Several thousand Barclays customers living in France, Spain and Belgium have already been given notice that their Barclaycards will be cancelled on 16 November.

In the absence of a Brexit deal, individual UK banks will now have to decide which EU nations they want to continue to operate in. As each of the 27 member states has different rules regarding banking, it will become illegal for UK banks to provide services for customers in these states without applying for new banking licenses.

Lloyds Bank has confirmed that it will no longer operate in Germany, Ireland, Italy, Portugal, Slovakia and the Netherlands; customers in these countries will have their accounts closed on 31 December. Coutts has also confirmed that its EU customers will have to make “alternative arrangements”, and Natwest and Santander have stated that they are “considering their options”.

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Nigel Green, CEO and founder of deVere Group, slammed  the decision of banks to withdraw from EU nations and “abandon” their customers there.

“Once again, traditional banks are outrageously failing their clients who now need to take urgent steps to continue to be able to access, use, and manage their money,” Green said. “The move by these banks will be a major inconvenience to many tens of thousands of Brits living in the EU.”

“I would urge expats to now seek a financial services provider that already operates under pan-European rules,” he continued.

Accounts filed with Companies House this week have revealed that Revolut made a loss of £106.5 million in 2019, an increase from the £32.8 million loss it posted in 2018.

The loss comes despite significant growth in Revolut’s business, with its customer numbers rising from 3.5 million to 10 million over the course of the year. These customers held £2.2 billion on Revolut’s cards by the end of 2019, up from £1 billion in 2018.

Revenues also saw an increase of 180% to £162.7 million, but failed to outpace losses.

In an emailed statement, Revolut chief executive Nikolay Storonsky took an optimistic stance on the news, emphasising the past year’s growth.

While we still have some way to go, we are pleased with our progress in 2019,” he said. “We tripled our revenues, increased retail customers from 3.5 million to 10 million, increased daily active customers by 231% and the number of paying customers grew by 139%.

Despite the current economic challenges, we remain focused on our goal of moving towards profitability.”

Revolut is a London-based fintech startup that aims to build a single universal platform for its customers’ financial needs, initially beginning as an app-linked foreign exchange card before expanding into stock and cryptocurrency trading. It is currently one of Europe’s fastest-growing fintechs, and received a valuation of $5.5 billion during a funding round in February.

Revolut also disclosed in its accounts that it has assisted the government during the COVID-19 pandemic by supplying data on how its customers’ spending habits have changed across sectors while lockdown measures have been imposed.

HSBC’s profits fell to $4.3 billion for the first half of 2020, dropping from $12.4 billion during the same period last year.

The British multinational bank also confirmed on Monday that provisions set aside for potential loan losses rose to $3.8 billion during the second quarter – about $1 billion higher than analysts predicted – and revised its forecast for loan loss provisions for the full year, raising the likely figure to between $8 billion and $13 billion.

Following the announcement, HSBC’s shares fell 4.3%, reaching the bottom of the FTSE 100 and dragging the index down to its lower level since mid-May. The bank also confirmed that it would accelerate its February-announced plans to cut 35,000 jobs worldwide in an effort to save costs.

The news comes as HSBC grapples with a major restructuring of its international banking operations, while also coming under fire for its support of China’s new national security law in Hong Kong.

In a statement on Monday, HSBC’s group chief executive Noel Quinn acknowledged the bank’s precarious political situation in a statement on Monday.

Current tensions between China and the US inevitably create challenging situations for an organisation with HSBC's footprint,” he said. “However, the need for a bank capable of bridging the economies of east and west is acute, and we are well placed to fulfil this role."

Quinn noted the continuing threat posed by the COVID-19 pandemic: “We are also looking at what additional actions we need to take in light of the new economic environment to make HSBC a stronger and more sustainable business.”

As part of what is becoming a surprise leadership overhaul at the bank, a statement released Monday also suggested that former investment banker Robin Budenberg will be put in place as the lenders new chairman.  If this happens, Budenberg will replace Norman Blackwell, who had discussed leaving the bank this year.

The surprise departure of Horta-Osorio scheduled for the end of June next year, poses more problems for Britain’s biggest mortgage lender as it wrestles with the economic recovery from Coronavirus pandemic and potentially one of the deepest recessions in centuries. The 56-year-old from Portugal, was seen by many as a steady hand at Lloyds, steering the Bank to profitability and full private ownership following a bailout during the financial crisis.  Although his pay may sometimes have caused some negative column inches and discussions, the 56 year old will leave with a stellar reputation in the banking community.

In announcing the departure a year in advance, Lloyds will hope that this will leave plenty of time for the board to secure an experienced successor and ensure a smooth transition.  The annoncement touched upon the fact that the banking giant will be considering internal and external candidates as they begin their search for a new chief executive in the near future.

During his tenure, Horta-Osorio cut thousands of jobs and managed a long-running and costly response to a scandal where British banks mis-sold insurance to consumers. He also pushed into wealth management and insurance as a way to diversify a revenue stream heavily dependent on the British economy and mortgage borrowers.

Lloyds booked a provision of 1.4 billion pounds ($1.75 billion) for soured loans in the first quarter as the coronavirus lockdown crushed economic growth and caused the bank to scrap previous targets. Its shares have also suffered as the Bank of England pushed lenders to scrap their dividends amid the pandemic.

Lloyds have been due to announce their new strategic plan early next year, as their current one directed by outgoing CEO Horta-Osorio, which involved heavy investment in technology and cost-reductions comes to an end. It is unclear whether this will change their plans.

Although Horta-Osorio has suffered a few setbacks during his decade long stint at the bank, most notable when Lloyds cut his pay by 28% to 4.73 million pounds for last year and his handling of a recent whistleblower report into a fraud case, Lloyds will be disappointed to lose a chief executive who has broadly delivered excellent results throughout what has been a tumultuous time in the economic sector.

Lloyds shares rose about 2% in London trading, one of the smallest gains in a broad rally by the Whether by Horat-Osorio or the new CEO, Lloyds have some ground to make up, currently sitting 49% down this year, which ranks as the worst performance among Britain’s five major banks.

This article first appeared on our sister publication's website www.ceotodaymagazine.com

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