How are banks meant to co-exist, work with or become the initiators of fast-developing fintech when most are so caught up in legacy systems? Below Finance Monthly benefits from expert insight from Kyle Ferguson, Chief Executive Officer at Fraedom, on the potential avenues banks could focus on in the pursuit of tech advancement and the maintenance of a competitive edge.

Legacy systems are seen to be the most common barrier preventing commercial banks from developing fintech applications in-house. That was a key finding of a recent survey conducted by Fraedom. The research that collected the thoughts of shareholders, middle manager and senior managers in commercial banks revealed that more than six out of ten (61%) of banks are being held back by this technological heritage.

The banking industry has historically found it difficult to make rapid technological advancements so in some cases it is unsurprising that older systems are holding them back. However, with this in mind, smaller fintech firms have already started to muscle their way in to help assist retail banks with providing a more comprehensive range of services to consumers.

Banks now have the option to negotiate the obstacle of legacy systems through partnering or outsourcing selected services to a fintech provider. Trusted fintech firms are offering banks the chance to reap the benefits from technical applications that can lead to more revenue making opportunities, without taking the large risk of banks taking the step into the unknown alone.

However, a shift does appear to be on the horizon with only 26% of commercial banks not outsourcing any services 41% of respondents globally stated that their bank currently outsources payment solutions to fintech partners. This was in comparison to 33% who say they do the same for commercial card management solutions and 26% who claim to do so for expense management solutions.

It was also interesting to note that banks are planning to ramp up their fintech investment over the next three years, with 77% of respondents in total believing that fintech investment in their bank would increase. This feeling was especially strong in the US where 82% of the sample stated this belief opposed to 72% of those based in the UK.

This transitionary period is great news for ambitious fintech firms. Banks are starting to realise that established fintech providers can make a big difference in areas of their business by providing technical expertise as well as in-depth knowledge of local markets.

It’s all about selecting key, digital-driven services that will help retain customers and entice new ones. The ability to offer card expenditure and balance transparency can reduce risk and costs for issuing banks. It is a service that can be joined on to an existing business with little overhead costs.

This is just one of several ways that partnering with fintech firms can bring substantial benefits. This increase in agility also helps banks to speed up service choices and improve customer satisfaction.

Forming a partnership can provide banks with a way around the issue of coping with legacy systems and avoid implementation costs. By forming a partnership, outsourcing banks buy in to a product roadmap that will keep their offerings ever relevant as fintechs develop the technology required.

The partnering approach is becoming more appealing to commercial banks. They understand their customers value their reliability, trustworthiness and strength of their brand. But increasingly, they also understand the importance of encouraging innovation to remain ahead of the technology curve, while recognising it is not the bread and butter of their business.

While legacy systems appear to be the most common factor in preventing banks from creating in-house fintech applications, the study did also reveal that a lack of expertise - recognised by 56% of respondents was also a major stumbling block.

To innovate and grow, banks and fintech firms alike must have employees that understand the technology – developers, systems architects and people with a record of solving problems. Taking a forward-thinking approach to recruitment is key.

If they want to attract and retain the best talent, organisations need to be listening, adapting and trusting each other to work together to resolve issues and frustrations. We believe all the above elements will become increasingly important in any successful business.

Overall, the research represents growing strength within the fintech sector and it is great to see that more banks are beginning to see the value in partnering with a fintech provider. In turn, this is delivering a better service for banks and customers alike and it is a trend that I expect to continue as banks fight to keep on the pulse of technology in the sector.

Price comparison experts Money Guru conducted a survey of 1,000 UK credit card holders. This uncovered a deep-rooted misunderstanding of credit card agreements.

The majority of credit cards can now be signed up for online. This means with no one there to talk you through each point, the agreement needs to be detailed and cover every legal aspect. But does anyone really read the fine print? And if not, why not?

The national survey revealed that 64% of people don’t read their credit card agreement before signing on the dotted line. They also uncovered the banks with the worst readability score for credit card agreements.

Other shocking stats include:

• 60 % of people don't read any updates to their credit card agreements
• 64% of people think credit card agreements are lengthy
• Only 9% of people understand their credit card agreements
• 48% of Brits don't know when they are liable for charges made on their card by someone else
• 50% of people don't know when they must be notified of any changes to their credit card agreement
• 33% of Brits don't know that their credit card score can be affected after just one missed payment

The majority of credit cards can now be signed up for online. This means with no one there to talk you through each point, the agreement needs to be detailed and cover every legal aspect. But does anyone really read the fine print? And if not, why not?

In this age of digital consumerism, when virtually anything you want is just a click away, it’s worrying that we could be agreeing to things we don’t understand. Skipping the terms and conditions page is something we’ve all done. So, we decided to dig deeper and find out if our fears were unfounded or just the tip of the iceberg.

We conducted a survey of 1,000 credit card holders in the UK. Combined with research on the most popular credit card providers and their most popular offerings from our comparison website, we were able to find out more about the level of understanding from the British public.

How readable is your credit card agreement?

The Flesch Kincaid score is a readability test, commonly used in education. It uses word length and sentence length to determine how easy a piece of text is to read, equating it to the US school grading system. The lower the number, the easier the content is to read. We ran both standard credit card agreements for each provider through this test, as well as the card specific information on their website, given before you apply. The results were disappointing. In our research not one of the agreements was rated below 6th grade, which equates to the reading level of 11 and 12 year olds. Not bad, you may think. But the national average reading age for the UK is 9 years old.

The Flesch Kincaid Reading Ease score also takes into account syllables within a sentence and is based on a score of 0-100. The higher the score, the easier the text is to read. The UK Government advises to aim for an average sentence length of 12 words and a reading ease score of 60 or over. A higher number of syllables within a sentence indicates more complicated wording.

How complicated is the text?

In the graph above, we can see that standard agreements contain far more complicated wording, which could prove problematic for those trying to read and fully understand the text. With the exception of the Vanquis credit card, the information contained in the pre-apply pages appears less complex. While this might be great for helping you to understand the product before you sign up for it, it’s not the official document you actually agree to.

Out of 22 agreements and information that we ran through this test, only two fell below the average 12 words per sentence.

Are you bored reading it?

If you are able to understand the agreement, one thing that might still might make you skim it or not read it at all, is the length.
The reading time for standard agreements is generally much longer than the pre-apply information and it’s not surprising, given they are on average 16 times wordier than their pre-apply counterparts.

What our research told us

Our research was pointing us towards the following;

Both credit card standard agreements and the pre-apply information available on websites is not easy enough for the average UK person to read and understand well.

Pre-apply information usually contains less complicated text and is longer overall, taking more time to read.

Sentence length for both standard agreements and pre-apply information was over and above the recommended number of words.

The British public had their say

This paints a picture much like the one we thought might emerge. Credit cards agreements, terms and conditions and pre-applying information is often difficult to read for many reasons. But is this reflected in real life?

We conducted a survey of 1000 UK people. The results showed that;

• 64 % of people don't read a credit card agreement before signing up for one.
• Only 9% of people understand their credit card agreements.
• Almost half of all Brits could be paying too much on their credit card because they don't know how to dispute a charge.
• 48% of Brits don't know when they are liable for charges made on their card by someone else.
• A third of all Brits are unaware of how their credit score can be affected after missing a payment.

64% of people surveyed admitted that they didn’t read the full agreement when signing up for a credit card. 60% also said they don’t read any updates to their agreement and simply click accept.

This can be explained, in part, by how Brits view those agreements. When asked to describe their credit card agreement in one word, 12% said “confusing”, 15% thought “unreadable” and 64% called them “lengthy!”

The survey also found that 45% of people didn’t know how to dispute a charge on their credit card, which could mean that they are paying unnecessary fees. If you’re unsure of any recent charges or fees, it’s advisable to check, especially as your agreement can change at any time. 13% of our respondents didn’t know this.

When it comes to knowing how and when you’re protected from someone else using your card, almost half of those asked didn’t know their rights. In fact, if you have compromised your own security, such as losing your card and not reporting it or not using your providers authentication portal during a purchase, you are liable for any costs made to your card under those circumstances.

Your credit score or credit report details your financial history. Its purpose is to inform potential lenders how reliable you are likely to be when it comes to paying money back. If you forget to make a payment on your credit card one month, do you think it affects your credit score? Even if you’re successfully paying rent or a mortgage and other bills on time? The answer is yes! And a third of all Brits are unaware of this, thinking that missing a payment will either not affect your score or will only affect it if you miss payments repeatedly.

By Mark Jackson, Head of Financial Services, at Collinson Group – a global leader in influencing customer behavior to drive revenue and value for clients.

2018 is set to be a game changer for the relationship between banks and their customers. Driven by the European Commission’s second Payment Service Directive (PSD2), which has now been rolled out across the financial services industry, banks that operate in the EU are now obliged to provide open access to account data and payments, to correctly authorised third parties based on the consumer’s consent. Although not yet mandated within PSD2, the means of providing open access in this way will come from the wide-spread adoption of secure Application Programming Interfaces (APIs).

PSD2 is designed to encourage greater competition and innovation amidst banking and payments across the EU. Combined with Open Banking in the UK – which is the UK Treasury and CMA’s own slant on PSD2 which goes further and faster – PSD2 has the potential to fundamentally change the financial services industry, for customers and service providers alike.

Switching rates amongst current account holders are incredibly low, with just 3% of UK customers shopping around for a better deal[1]. Improved engagement, facilitated by Open Banking, could help banks attract new customers and increase the proportion of people looking to switch.

Some traditional banks have been slow to facilitate use of APIs. However, other banks on the continent are already starting to see opportunities from collaboration with FinTechs and other players in a wider banking and payments ecosystem to improve the customer experience and better integrate themselves into the channels customers want to use more regularly.

One example is Brazil’s Banco Bradesco Facebook app, which allows customers to conduct day-to-day banking via Facebook. Meanwhile, Capital One and Liberty Mutual have capitalised on the popularity of Amazon’s Alexa, enabling customers to check balances and pay bills through the voice-activated personal assistant.

1. Provides greater customer choice

Open Banking creates opportunities for banks to share banking and payment data, meaning that customer relationships are essentially ripe for the picking. Any company can compete for customers, from incumbent and retail banks, to fintechs and tech giants such as Google and WeChat. Increasing this consumer choice will shift the balance of power to customers who increasingly demand a smarter, more rewarding digital experience.

Reports suggest that a leading social media company sees its average user spend approximately 50 minutes every day on its platform[2]. In stark comparison, a leading global retail bank spends a mere 54 seconds per day engaging with the typical customer.

Banks must maximise the time given to customers by utilising the wealth of knowledge about them made available by Open Banking. The winners will be those companies that combine payment and banking information with behavioural and lifestyle data to offer new, more personalised services. The resulting experience can help secure customer loyalty and differentiate from competitors.

FinTechs working with the banks can also reap rewards, gaining access to an entirely new customer base. Many of these digital companies are in their infancy, so partnerships with large financial institutions offer scale, scope and opportunity not otherwise achievable.

2. Delivers a more rewarding digital experience

In an ever-changing digital world, customers expect an intuitive, user-friendly and flawless banking experience. Faster payment options, such as mobile wallets from technology brands like Apple and Samsung, mean that customers have become accustomed to an experience based on convenience. This represents a paradigm shift in customer expectations for rewarding loyalty. People want everything to be delivered ‘on the go’ via apps on their smartphones and other connected devices, slotting in seamlessly to their busy lives.

However, some banks are still falling short of customer expectation, not investing enough in technology infrastructure, and seeing customer satisfaction drop as a result. With the provision of open APIs, banks can encourage collaboration with innovative, agile third parties to create new customer-centric, digital propositions. Rather than only seeing FinTechs as competitors, banks should look for opportunities to collaborate and integrate with them as an extension of their own service, offering customers a more fluid approach to their finances.

3. Improves engagement through personalised offers

Customers are typically choice-rich and time-poor, so offers need to be individually tailored. The last thing they want is to be bombarded with irrelevant offers, or spend hours searching online for offers that suit them. A poorly targeted offer is more likely to drive customers away than increase brand loyalty.

Leveraging the power of mobile and data from open APIs, banks can better understand customer preferences and offer tailored rewards, sent in the right place at the right time – giving the personalised experience customers demand.

In addition to customer loyalty, providing compelling, timely and contextually-relevant offers will enable banks to create new revenue streams by upselling at optimum moments in the customer’s decision-making cycle.

Customer behaviour won’t change overnight. Two thirds of consumers in the UK say they won’t share their financial data with a third party[3], but with better education around the issue, customers will soon see the potential.

Open Banking should be embraced, not feared. This long-awaited shake-up places the customer at the centre of the experience, with a focus on engagement and brand loyalty. It could also serve to retain and grow a bank’s customer base, so long as they engage with them in the right way. Whether or not they are impacted directly by EU regulations, those that embrace the opportunities provided by Open Banking will be able to offer customers a greater choice of personalised offers and rewards, delivered ‘on the go’ via apps.

[1] https://www.gov.uk/government/news/bank-switching-to-be-overhauled

[2] https://thefinancialbrand.com/69877/digital-banks-platform-economy-trneds-open-banking-api-psd2/

[3] https://newsroom.accenture.com/news/accenture-research-finds-lack-of-trust-in-third-party-providers-creates-major-opportunity-for-banks-as-open-banking-set-to-roll-out-across-europe.htm

The financial services industry has changed significantly over the past years, and technology has been at the heart of that change. Heightened competition and rapid progress in disruptive technologies have brought about a paradigm shift in the banking experience which has accelerated in 2018.

Banks that don't invest in technology risk falling behind, as new regulation continues to level the playing field with new innovative players. Last year, many of the banks appealed to the CMA for an extension for the Open Banking initiative[1][1]. A number of banks are reaching the end of their extension period which obliges them to give banking customers more control over their financial data by allowing them to share it with challenger banks and FinTech firms.

The introduction of the open banking initiative across Europe opens the floodgates to competition - as PSD2 balances the scales between banks and digital players, banks are directing resources towards digitally transforming their operations and services.

Lloyds Banking Group recently launched a £3bn investment in a three-year strategy to strengthen its digital capabilities. It aims to slash costs to less than £8bn by 2020 and transform the banking experience for their end-customers.[2][2] The bank is driving capital towards technology and its staff to compete against mounting pressure from other traditional banks, challenger banks and FinTechs.^[3][3]

Talent and human capital provide the best value and return on investment for banks looking to diversify their digital offerings. Investment in talent and digital skills goes hand-in-hand with investment in technology solutions to help banks become more fluid and responsive to changing customer behaviours.

In a world where everything is accessible at the click of a button, customer expectations need to be matched by the experiences created by banks. Earlier this year, USB found that online banking has overtaken visiting branches for the first time. The study found 52% of all consumer transactions are now done online, making it the primary method of banking.[4][4]

Bank branches are expensive with most retail bank branches costing banks between 40-60 % of total operating costs.^[5][5] The cost savings from a reduced number of branches can be redirected towards investments into creating digital banking experiences that accommodate evolving customer habits.

With introduction of new financial technologies, the way in which people manage their money has shifted dramatically. However, the current potential of the UK financial services industry is restricted by the lack of tech and digital talent available. Firms are spending record amounts, with 85% of business executives allocating up to a quarter of their total budget to digital transformation in 2018.[6][6]

Digital Transformation goes beyond moving traditional banking to a digital world. A digital strategy is no longer limited to the IT department. In the current business environment, it transcends every aspect of a business and drives long-term success. In order to digitally transform, banks need to adopt a digital mindset. This means fostering a culture of innovation. It’s about going beyond the hype of digital trends and the latest buzz words and identifying the business impact on operations and service delivery.

Most banks still run on core systems installed in the 1970s and 1980s.[7][7] These enterprise structure are made up of a patchwork of systems with limited functionality for the current digital landscape. Fintech and challenger banks are not hindered by these systems, and have the agility to keep pace with customer expectations, which means banks are turning their attention to their business critical function and how they can re-engineer it to become more flexible.

Smart banks are taking advantage of cloud-based systems to enable staff to better communicate and interact with customers across multiple channels to accommodate all customers.

Banks definitely need to push forward with their digital strategy, but they must do so wisely, supported by a reliable digital partner. Technology is beginning to encompass all aspects of bank operations. Working with a single-source supplier that integrates digital into the DNA of the bank – from the talent to the technology solutions – is key to adopting a digital mind-set, which will support a bank’s digital transformation journey end-to-end.

[1][1] http://www.cityam.com/277814/five-uk-banks-given-open-banking-deadline-extension-cma

[2][2] https://www.fnlondon.com/articles/lloyds-puts-digital-banking-at-heart-of-three-year-strategy-20180221

[3][3] http://www.bbc.co.uk/news/business-43138764

[4][4] https://www.telegraph.co.uk/business/2018/01/10/digital-banking-overtakes-branch-use-may-fuel-closures-warns/

[5][5] http://www.economist.com/node/21554746

[6][6] http://www.digitaljournal.com/tech-and-science/technology/59-of-businesses-find-their-digital-transformation-falls-flat/article/504386

[7][7] https://www.euromoney.com/article/b143rj4dz3cd92/technology-investments-drive-up-banks-costs

Sharing confidential information is a data protection issue with more and more red tape every day. With more and more apps differentiating encryption methods, this becomes even harder to manage for authorities. Below Finance Monthly hears about the potential for banking fraud via apps such as WhatsApp from Neil Swift, Partner, and Nicholas Querée, Associate, at Peters & Peters LLP.

As ever greater quantities of sensitive personal data are shared electronically, software developers have been quick to capitalise on concerns about how susceptible confidential information may be to interference by hackers, internet services providers, and in some cases, governmental agencies. The result has been an explosion in messaging apps with sophisticated end-to end encryption functionality. Although ostensibly designed for day to day personal interactions, commonplace services such as WhatsApp and Apple’s iMessage use end-to-end encryption to transmit data, and more specialised apps offer their users even greater protection. Signal, for example, allows for its already highly encrypted messages to self-destruct from the user’s phone after they have been read.

The widespread availability of sophisticated and largely impregnable messaging services has led to a raft of novel challenges for law enforcement. The UK government, in particular, has been outspoken in its criticism of the way in which end-to-end encryption offers “safe spaces” for the dissemination of terrorist ideology.

Financial regulators are becoming increasingly conscious of the opportunity that these messaging services present to those minded to circumvent applicable rules, and avoid compliance oversight. 2017 saw Christopher Niehaus, a former managing director at Jeffries, fined £37,198 by the Financial Conduct Authority for sharing confidential client information with friends and colleagues via WhatsApp. Whilst the FCA accepted that none of the recipients needed or used the information, and the disclosure was simply boasting on Neihaus’ part, it was only his cooperation with the regulator that saved him from an even more substantial fine.

That same year saw Daniel Rivas, an IT worker for Bank of America, investigated by the US Securities and Exchange Commission and plead guilty to disclosing price sensitive non-public information to friends and relatives who used that information. One of the means of communication was to use Signal’s self-destructing messaging services. Rivas’ prosecution saw parallels with the 2016 conviction of Australian banker Oliver Curtis, an equities dealer, for using non-public information that he received from an insider via encrypted Blackberry messages.

These examples are likely to prove only the tip of an iceberg; given that encrypted exchanges are by definition clandestine, understanding the true scale of the issue, outside resorting simply to anecdote, is itself an unenviable task for regulators and compliance departments. Whilst those responsible for economic wrongdoing have often been at pains to cover their tracks – perhaps by using ‘pay as you go’ mobile phones, and internet drop boxes to communicate – access to untraceable and secure communication is now ubiquitous. It is difficult to imagine that future regulatory agencies will have access to the material of the same volume and colour that was obtained as part of the worldwide investigations into alleged LIBOR and FX manipulation.

How then can regulators respond? And how are firms to discharge their obligations both to record staff business communications, and monitor those communications for signs of possible misconduct? Many firms already ban the use of mobile phones on the trading floor, but such edicts – even where rigorously enforced – will only go so far. Neither Mr Rivas, nor Mr Neihaus, would have been caught by such a prohibition.

There may be technological solutions to technological problems. Analysing what unencrypted messaging data exists to see which traders are notably absent from regulated systems, or looking for perhaps tell-tale references to other means of communication (“check your mobile”), may present both investigators and firms with vital intelligence. Existing analysis of suspicious trading data may assist in identifying prospective leads, although prosecutors may need to become more comfortable in building inferential cases.

Fundamentally, however, such responses are likely to be both reactive, and piecemeal. Unless the ongoing wider debate as to the social utility of freely available end-to-end encryption prompts some fundamental rethink, the need to effectively regulate those who participate in financial markets – and thus the regulation of those markets themselves – may prove increasingly challenging.

Money Supermarket and MoneySavingExpert have created an effectively “duopoly” of the online search results in consumer banking, forcing competing brands to take a new approach to search marketing, according to Stickyeyes.

The two websites lead the way in driving traffic from organic search in the consumer banking sector, with competing brands now taking a more strategic approach to try and secure visibility across the key financial product areas of current accounts, mortgages, credit cards, personal loans, savings products and car finance.

The 40-page Online Consumer Banking Visibility Report produced by Stickyeyes reveals that, while price comparison sites still dominate search engine results, banking brands such as Halifax, Barclays, Nationwide, Tesco Bank and Lloyds Bank are using new search marketing tactics to keep themselves visible to consumers.

One of the reasons why MoneySavingExpert and Money Supermarket are able to achieve such strong visibility on search engines is their ability to rank for vast amount of keywords. In Stickyeyes’ analysis, MoneySavingExpert ranked for 96.7% of their keyword sample, whilst Money Supermarket ranked for 95.6%. The only other brands to rank for more than 90% were Barclays and Money.co.uk.

Rather than focusing on major traffic-driving terms largely dominated by comparison engines, banks are starting to concentrate search marketing activity on providing content around consumer advice and on keyword terms that reflect the full range of the user journey.

Banking brands have also adapted their strategy to better target terms around car financing, a product where search interest has increased by 57% since 2004. Halifax Bank and Lloyds Bank, both part of Lloyds Banking Group, each have a specific car finance proposition that will allow the customer to arrange their own finance, with the respective banks paying the dealership directly.

Other brands, notably Sainsbury’s Bank, TSB and Santander, have focused heavily on specific landing pages to capture car finance search queries, whilst still promoting what would be considered a traditional loan product.

Phil Kissane, Managing Director at Stickyeyes said: “What we have seen from our analysis is a number of brands really rethink their approach to search marketing, and change their focus to ultimately ensure that they are serving the most valuable audiences and engaging them in the most appropriate way.

Moving into 2018, mobile is likely to become a bigger influence as Google moves to its ‘mobile first’ index, and innovations such as voice search are very much on the agenda for search engines. How well brands perform for those types of searches will ultimately depend on how they can understand the conversations that they need to have with their audiences, and the content that they need to create to serve those conversations in the best possible way.”

(Source: Stickyeyes)

In July 2014 FBME Bank Ltd's Cyprus branch (FBME) was resolved by the Central Bank of Cyprus (CBC). This is a very interesting case for several reasons, as it touches on the nature of legal powers conferred on financial regulators in the area of Anti-Money Laundering and Combatting the Financing of Terrorism (AML/CFT), on the use and misuse of these and other powers, on the openness of proceedings and on the rights of response and redress of their targets. Robert Lyddon, international banking expert, explains for Finance Monthly.

There is also a perspective around the application of legislation unevenly across large and small banks, with small banks suffering resolution and even closure, and large banks escaping with impressive-sounding fines that do little to inhibit their ability to carry on business as usual.

CBC's intervention came immediately after FBME had been served with a Notice of Finding on 17th July 2014 citing FBME as an institution of "primary money laundering concern" by FinCen, the Financial Crimes Enforcement Network of the US Department of the Treasury.

Under its own governing laws, FinCen only needed to have "reasonable grounds" for its concerns, and the evidence of there being such grounds was confirmed by a judge sitting "in camera". This is not the same as having those allegations proven in an open court of law, with recourse to courts of higher instance. A lower level of proof was required in order for a sanction to be imposed which had a devastating effect on the target bank and its depositors.

FinCen proposed the imposition of its "fifth special measure": this precludes US banks from running a US$ account for the target bank or handling its US$ payments via intermediate correspondents, thus de-banking the target bank in the USA and cutting it off from the international banking system. This is tantamount to putting the target bank out-of-business.

Similarly the designation of certain categories of financial institution - Money/Value Transfer Networks - as "high risk" by the Financial Action Taskforce (FATF) has resulted in these institutions being de-banked and unable to operate. The evidence upon which FATF came to this conclusion is opaque, and there is no public forum for their designation to be challenged, FATF itself being the ultimate source of AML-related legislation.

In the case of FinCen’s notice on FBME, FBME had 60 days in which to file a response but the subject’s prudential supervisor – CBC – denied them this by resolving the branch and immediately offering it for sale to another local bank.

Allegations of AML infringements would have needed to be put through a legal process in Cyprus involving the Cypriot financial crime intelligence unit (MOKAS) as well as the AML supervisor (CBC itself), and would at most have resulted in sanctions such as fines, after due process had been gone through. It is unusual that CBC as a central bank be both the "competent authority" for matters relating to AML Directives and the "prudential authority" for bank capital and liquidity adequacy: in the UK these powers are separated.

Instead CBC cut off any due process by using, against FBME, the Law on the Resolution of Credit and Other Institutions of 2013, which was passed to resolve Cyprus' two largest banks - Bank of Cyprus and Laiki Bank - within the context of the €10 billion bailout of Cyprus by the so-called "Troika" of the European Commission, European Central Bank and International Monetary Fund.

CBC misused these powers as FBME was not a case of a bank failure. The preconditions for resolution are cumulative and are that an institution must have a shortfall of capital and of liquidity, and be systemically important i.e. its failure must do harm to the country it is in. FBME did not meet these tests: it had adequate capital and liquidity, and it was small and did not have a significant number of Cypriot depositors.

FBME was, however, an irritant to the Cyprus authorities: it was involved in challenging - commercially and in the courts - the high interchange fees applied by indigenous banks to card transactions, thereby disrupting the income stream of the major local banks.

The interconnection of FBME's case to the 2013 bailout is important because - as a quid pro quo - the Cyprus authorities agreed to remedy concerns about Cyprus' AML regime. These concerns were documented in a report dated 24th April 2013 by MoneyVal, the inspection and evaluation arm of the FATF. MoneyVal interviewed a large part of the Cypriot banking sector: 13 out of 41 banks, holding 71% of deposits and 76% of loans in the system, and including the 7 largest banks.

The 2013 MoneyVal report pointed to substantially the same issues as it had noted in the 2011 report on its Fourth Assessment Visit to Cyprus: that report's findings included that "the main risks emanate from the international business activities at the layering stage, money laundering activities usually taking place through banking or real estate transactions". These were sector-wide issues, not confined to any one bank - let alone just one small foreign bank. FinCen raised its own concerns about the AML regime in Cyprus direct to CBC in 2011.

Cyprus received the Troika's €10 billion but there is no evidence of the cessation of the state of affairs described by MoneyVal in 2011 and again in 2013, commonly termed the "Cyprus business model": Cyprus features in several schemes disclosed in the "Panama Papers", the "Paradise Papers", and the "Russian Laundromat" that post-date the bailout.

Instead FBME has been removed from the marketplace, ostensibly as a scapegoat for the allegations levelled against the Cyprus banking sector as a whole. FBME conveniently fitted the bill, and could be attacked in an area where the evidence against it need not stand up in court, and indeed where there was no open court in which FBME could defend itself.

Was the punishment inflicted as an example to the remainder of the Cyprus banks to warn them to remedy their AML deficiencies? Or was it a signal to the Troika and the US authorities, to lead them to believe that Cyprus was delivering on its side of the bailout bargain and cleaning up its act on AML?

Whether CBC had the legal power to resolve FBME, or conveniently mixed its usage of powers - applying its powers as prudential authority to an AML case where it happened also to be the competent authority - is a matter of ongoing dispute.

Of equal concern is whether financial institutions can be resolved or otherwise put out of business through the application of powers conferred on financial regulators for AML/CFT matters where the burden of proof is lower and where a subject institution's rights of appeal are inadequate. Once FinCen has issued a notice against an institution or once FATF has classified an institution into a "high risk" category, the institution is de facto out-of-business, and these authority bodies are not subject to detailed and open scrutiny as to whether their determinations are proportionate, objective and non-discriminatory.

Cashless payments and the plight of cash in society has been something of a subject over the past few years, but a conversation many aren’t having is that of financial exclusion; something that has happened in the past is likely set to happen again. Below Jack Ehlers, Director of Payments Partnerships at PPRO Group, delves into the details.

In 2016, according to a report just published by the European Central Bank (ECB), EU citizens made €123 billion worth of what the ECB calls ‘peer-to-peer’ cash payments. That’s just another way of describing the money grandparents tuck inside birthday cards, donations to charity, payments to street vendors and the hundreds of other small cash transactions people make all the time.

But even as cash remains central to the economy, cashless payment methods become more common with each year. The use of e-wallets such as Apple Pay and Samsung Pay is predicted to double to more than 16 million users by 2020. Overwhelmingly, the rise of the cashless society is a good thing. It promises greater convenience, lower risk, and improvements in the state’s ability to clamp down on practices such as tax avoidance and money laundering.

But what about those micro-payments? And even more importantly, what happens to the estimated 40 million Europeans who are outside the banking mainstream? These are the EU’s most vulnerable citizens and they have little or no access to digital payment methods.

If we don’t plan properly, the transition to a largely cashless future could see the re-emergence of financial exclusion, which we thought had been vanquished. In Western societies. Ajay Banga, CEO of Mastercard, has talked of the danger that in the future we’ll see “islands” of the unbanked develop, in which those shut out of the now almost entirely digitised economy are left able to trade only with each other.

But are we really going cashless any time soon?

The ECB report quoted above, also found that cash is still used in almost 79% of transactions. So, do we really need to worry about what will happen when we finally ditch notes for digital payments? Yes and no.

Even though contact payments are on the rise, the demand for cash is also growing. A recent study found that the value of euro banknotes in circulation has increased by 4.9% over the last five years. Given the historically low rate of inflation over the past few years, this would seem to be largely due to a cultural preference for cash. Low interest rates could also be encouraging Europeans to spend rather than save. But whatever the reason, cash isn’t going away soon.

But that doesn’t mean we can relax. Some markets are already much closer to going cashless than the European average would suggest. In Sweden, consumers already pay for 80% of transactions using something other than cash. In the Netherlands, that figure is 55%, in Finland 46% and in Belgium 37% [1]. Today, Britons use digital payments in 60% of all transactions. By 2027, that number is expected to rise to 79%. Already, 33% of UK citizens rarely, if ever, use cash.

Unless we take this challenge seriously, we risk stumbling into a situation in which the majority in these countries use cash-free payments most of the time, even if they still use cash in minor transactions. In such cases, there is the danger of many shops and services no longer accepting cash, leaving those who still rely on it stuck in the economic slow lane.

For most people, cashless payments can offer easier and faster payments, greater security, and improved access to a wider range of goods and services. But to maximise the benefits and reduce the downside, including those for strong personal privacy, we need to start thinking now about how we can manage the transition in a way that minimises the risk of financial exclusion for already marginal groups in society.

Charities and mobile payments show the way

The rise of digital payments does not have to mean the growth of financial exclusion. It is possible to create an affordable payments-infrastructure for small traders, churches, and charity shops — and, even more importantly, for economically marginal consumers.

In the UK, charities are leading the way. After noticing that donations were tailing off, the NSPCC and Oxfam sent out one hundred volunteers with contactless point-of-sale devices, instead of charity collection tins. The rate of donations trebled. The success of the NSPCC trial shows that it is possible to roll out the supporting infrastructure for cashless payments even to individual charity collectors on the street.

But that’s only half the story. While charities and shops — even small independent retailers — may be able to afford and install point-of-sale systems to accept micro-payments, normal citizens cannot. Here, mobile payments may be the answer.

The example of the Kenyan M-Pesa, a system which allows payments to be made via SMS, shows that it is possible to create an accessible, widely available and used mobile payment system that does not rely on the consumer owning an expensive, latest-model smartphone. Already, 17.6 million Kenyans use M-Pesa to make payments of anything from $1 to almost $500 in a single transaction.

An inclusive cashless future—in which mobile e-wallets and other contactless forms of payment dominate—is possible. But it won’t happen by itself. As an industry and a society, we need to plan and work towards it: starting today. The stakes for many businesses and some of the most vulnerable people in our society couldn’t be higher.

Sources: 

The use of cash by households in the euro area, Henk Esselink, November 2017, Lola Hernández, European Central Bank
FinTech: mobile wallet POS payment users in the United Kingdom (UK) from 2014 to 2020, by age group, Statista.com.
Close to 40 million EU citizens outside banking mainstream, 5 April 2016, World Savings and Retail Banking Institute​
Insights into the future of cash, Speech given by Victoria Cleland, Chief Cashier and Director of Notes, Bank of England, 13 June 2017.
Why Europe still needs cash, 28 April 2017, Yves Mersch, European Central Bank.
Europe’s disappearing cash: Emptying the tills, 11 August 2016, The Economist
UK Payment Markets 2017, Payments UK.
The Global State of Financial Inclusion, 5 March 2015, Pymnts.com

Average UK current account holder charged £152 last year in overdraft, FX, transaction and other fees, according to analysis from Plum.

Analysis of over 11,000 UK personal current accounts (PCA) has revealed that the average holder was charged £152 in bank fees last year which, if incurred by every one of the 65 million active current accounts in the UK, suggests banks made £9.9 billion from charges in 2017.

The data, collated by Plum, the automated money management chatbot, coincides with launch of its Fee Fighters function, a free tool that enables users to check in exactly what fees they are being charged by their banks. This functionality is made possible due to the implementation of Open Banking, which aims to encourage fair competition and comparison. The European-wide regulation orders banks and credit card companies to share a customer’s data with other regulated companies if requested to do so by a customer, removing the banks monopoly on customer data.

The average £152 paid per year by current account holders includes overdrafts, foreign exchange, and transactions fees, as well other unspecified fees, such as monthly account charges. This £152 average rises significantly when considering personal current accounts with an overdraft function. In this case, total bank charges were closer to £221 per current account holder with those that have at least 1 overdraft transaction per year.

In terms of what charges were applied by the banks, 56% were due to overdrafts, both from planned and unplanned usage. Foreign exchange fees accounted for 11% of the total charges, while late transaction fees made up 6%. Over a quarter, however, (27%) of the total charges were classed as “other” which included monthly account fee, unspecified bank fees, or bank subscriptions. Some of these charges can be fairly high, with an average of £5-£10 charged per bounced back transaction it is not uncommon for users to accumulate these charges without realising it, getting charges up to £75 in “Unpaid Transaction Fees”.

To help consumers be alerted to and understand the culprits of the charges, Plum has developed a free Fee Fighter tool, first of its kind that alerts users to fees. With the implementation of Open Banking, in the coming months Plum hopes to go beyond raising awareness about hidden fees and provide solutions, helping users to identify smarter deals and more cost effective products with alternative providers bespoke to their financial requirements. The tool uses TrueLayer, a secure FCA authorised service, to gain read-only access to a user’s bank account, Plums AI then processes the description of each bank transaction understanding what type of a fee it is and allocates it to a specified category. When banks hide fees in the description of the transaction rather than listing it as a separate line in the bank statement, Plum extracts the fee from the description itself.

Victor Trokoudes, CEO and co-founder of Plum, said: “For too long, banks have been guarding customer data, and have been purposely vague about the true cost of overdrafts, borrowing, and FX. But with Open Banking now a reality, people can see in real time what charges they are being asked to pay by the banks and therefore take control of their money to avoid paying them.

“Enabling people to take control is why we launched Plum and that’s why we’ve created Fee Fighter which, in less than five minutes, helps people find a better deal and avoid fees when it comes to banking. We want to help people stand-up to their banks and demand a competitive deal. The more people that switch, the more that banks will be forced to compete for their business and fight to retain loyal customers. This is just one of the ways that we’re helping people be better off.”

(Source: Plum)

S&P Global Ratings does not see competition from large technology groups or "tech titans" as posing a short-term risk to its ratings on global banks, said a report titled "The Future of Banking: How Much Of A Threat Are Tech Titans To Global Banks?" recently published.

While the barriers to entry in the banking industry are high, tech titans like Facebook or Apple possess a competitive edge over new entrants and upstart financial technology companies.

"In our view, banks will feel limited short-term pressure on their transaction fee income as they look set to benefit from the good medium-term growth fundamentals of card-based payments. This is despite bank revenues coming under possible threat from the recent growth of e-wallets and alternative payment methods," said S&P Global Ratings' credit analyst, Paul Reille.

We expect that tech titans' lending activities will remain targeted to merchants operating on their platforms and to segments currently underserved by banks due to profitability and capital reasons. Similarly, we believe that regulation will limit tech titans' ability to compete meaningfully with banks over customer deposits. In the long term, regulation is likely to remain a key factor deterring tech titans' efforts to increasingly offer the full financial services suite currently provided by banks. That said, banks could feel the biggest competitive threat from tech titans for activities where barriers to entry are low--such as transaction revenues, which could constrain their margins.

"In the short term, we don't expect competition from tech titans to have an immediate impact on the banks that we rate. However, in the long term, we think that they are well-placed to potentially disrupt certain aspects of the traditional banking industry value chain," said Mr. Reille.

In our view, payments is the main area where tech titans could potentially disrupt global banks. Although these firms are not posing any meaningful short-term pressure on fee income, we believe that they could leverage their strong customer bases and networks to potentially constrain traditional banks' payment services revenues in the longer term. We do not consider tech groups to pose any short-term threat to banks' lending or depository activities in the US or EMEA. In the short term, we don't expect competition from tech titans to have an immediate impact on the banks that we rate, but see them as well-placed to disrupt banking in certain areas in the longer term.

(Source: S&P Global)

A new study of the 50 largest banking groups in the UK and Europe calls for disruptive management strategies to reverse lacklustre profitability across the industry, warning that Return on Equity (RoE) and Common Equity Tier 1 (CET1) ratios are in danger of falling below the average market and regulatory minimum over the next five years.

The European Banking Study (EBS), recently launched by zeb, shows that European banks are lagging behind their international counterparts in profitability and operational efficiency. It goes on to predict four major trends that will dominate the European banking scene from now until 2021 in response to the current unhealthy state of the industry.

“Profitability has become the critical concern for the European banking industry,” said Bertrand Lavayssière, Managing Director UK, zeb. “Actual organic profitability of Europe’s top 50 banks has declined significantly since 2012, and their average RoE has fallen to a level that is about half of what shareholders should expect based on a standard cost of equity calculation.

“And with Brexit looming ever-closer, it’s set to be an even bumpier road ahead. Although the top 50 European banks have strengthened their capital positions with a CET1 ratio of 13.5% in 2016, upcoming regulation and a continuation of the relatively low yield environment will increase the burden on these banks. If banks do not employ disruptive strategies to reverse their own fortunes, they risk becoming targets for acquisition. Without taking decisive action quickly, banks’ profitability and financial strength could deteriorate further by the end of the decade - we could see, in a baseline scenario, RoE fall to 1.5% and CET1 ratios below the average market and regulatory minimum.”

The zeb European Banking Study includes:

• A detailed study of Europe’s top 50 largest banking groups, with performance comparison to other global markets including US, Chinese and Australian banks

• Expert analysis of the factors affecting the industry and dissection of the figures showing increased profitability of banks in 2016
• Projections by zeb on what the next five years hold for global banks, including identification of four major trends that will dominate the European banking scene from now until 2021 in response to the current unhealthy situation of the industry
• Recommendations for what is required from European banks if they are to prosper, including major changes needed, both in terms of more stringent re-evaluation of their business models and the need for more innovative approaches

You can find a copy of the report here.

(Source: zeb)

The London Assembly Economy Committee report ‘Short changed: the financial health of Londoners’, published in January makes a number of recommendations for the Mayor of London, including:

• Work with the financial services industry, schools and colleges to create a young person’s banking charter, with the aim of ensuring all 16-18 year olds has a bank account. The Charter should include a commitment from banks to provide young people with a bank account by default.
• Commission an annual survey of London households on their financial activity, in order to get a better understanding of London’s ‘underbanked’ communities.^[6]
• Hold a Money Advice Week to promote affordable credit and use TfL advertising space to promote credit unions.
• Work with schools, charities and the financial services industry to deliver high quality financial education for young people.

Some of the reports findings include:

• 44% of people in the UK, who are in financial difficulty are between the ages of 18 and 34.
• Around a quarter (27%) of 18 to 30 year olds in London say they are in debt all the time.
• A third of all users of high-cost loans are 18-34 year olds.
• 40% of 18-24 year olds are less confident about managing their money, compared to 22% of the rest of the UK adult population.

Caroline Russell AM, Chair of the Economy Committee, said: “The cost of living has increased in the capital and many Londoners are cut off from accessing affordable financial services, such as loans and credit cards. They have to turn to high-cost credit, like payday lenders to make ends meet.

The Mayor of London has committed to tackle financial exclusion in London. While technology and innovation is one part of the solution, we want the Mayor to show real leadership in improving the financial health of Londoners.

It is absolutely crucial that young people are given the right support in terms of their finances, when they leave school. For many, it is the first time they will be responsible for their own money.

Education and support are key, as actions at this critical stage can have real consequences, in terms of credit ratings and long-term financial health. We strongly urge the Mayor to target his efforts in helping this group specifically.”

(Source: London Assembly Economy Committee)