Reducing friction, increasing mobility in a digital ecosystem
In the first of a series of articles addressing the 2019 conference sub-themes, we explore the transformational impact of the new digital ecosystem on the banking industry
New customer demands and expectations in the digital economy are driving profound change across the banking sector – and nowhere more than payments.
Where retail leads, wholesale soon follows, according to Sairam Rangachari, head of open banking at JP Morgan Treasury Services. “We all expect the experience to fit into our lives – and banks’ corporate and institutional customers are no different.”
These fast-evolving requirements are also propagated through public policy. Almost 50 countries have initiated instant payment programmes to deliver on the ecommerce promise of real-time, irrevocable purchases. Hardly less transformative are open banking initiatives, such as Europe’s second Payment Services Directive, which enable sharing of transaction data via API. These are driving innovation, competition and choice to the end-user by levelling the playing field between incumbents and newcomers.
Both instant payments and open banking were primarily conceived to offer greater value and protection to individuals. Today, it is increasingly clear that they can deliver substantial benefits to larger entities. They also represent a major challenge to the operations and business models of banks’ traditional payment franchises. Where banks once built proprietary processing platforms and distribution channels, increasingly they aggregate service propositions using third-party components, becoming responsive competitors and collaborators within an evolving digital ecosystem.
“Data is a key business asset, but like oil it must be drilled and refined. Banks with a global footprint have to work with clients and regulators to make data available in a compliant manner.” - Thomas Nielsen, chief digital officer, Global Transaction Banking, Deutsche Bank
JP Morgan’s Rangachari summarises today’s corporate and institutional client priorities as real-time visibility, easy consumption of data, and comprehensive automation – the essential ingredients of digital transformation. Delivering on any one of these is a major undertaking in its own right. Real-time visibility of balances and transactions, for example, across all payment types and geographies, requires significant process re-engineering to support automated decision-making, especially if it entails similar levels of oversight over account access. Delivering on all three will require significant ongoing investment by banks, collectively and individually, he suggests.
“Our customers have always wanted greater speed, ease, transparency and certainty in how they move and manage their cash. But as business models evolve, customers want even more flexibility over how they manage payments, and new technology means we can provide numerous options,” says Tom Halpin, global head of payments, HSBC. “As a result, customers can drive more of the interaction with their banking providers, rather than being presented with a standard set of options. Payments can be instant, or on set dates – it’s up to the customer.”
Value chains are becoming value networks as streamlined interoperability allows more efficient interaction between multiple counterparties, where once were bilateral relationships. The tech-fuelled extension of choice that started in the consumer space, via Amazon, Uber, Netflix et al, has been fully embraced at the B2B level, with firms rapidly adopting platform-based business models.
Lisa Robins, global head of transaction banking at Standard Chartered, points to the Trade Information Network as just one example of how collaborative platforms are addressing long-standing challenges in trade finance. The network aims to provide financing earlier in the supply chain by enabling corporates to submit and verify purchase orders and invoices to request trade financing directly with banks of their choice. “We’re becoming connectors,” says Robins.
Client business models do not need radical change for the hyper-connected world to give rise to new needs. “As the world becomes more connected, it also becomes smaller. It’s reasonable for corporate clients to expect to view their positions on a global scale,” says Thomas Nielsen, chief digital officer, Global Transaction Banking, Deutsche Bank.
But the reasonableness of the request does not make the task any easier. “Data is a key business asset, but like oil it must be drilled and refined. Banks with a global footprint have to work with clients and regulators to make data available in a compliant manner. Clients are focused on security, auditability and quality of the data we deliver. At the same time, they are using data from multiple other banks and service providers, so we need to use APIs to ensure flexibility at their end,” he explains, noting collaborative efforts on API standardisation such as the Berlin Group.
Open for business
“As our clients use technology to move closer to their clients, they have a greater need for a seamless, frictionless service. Banks must meet these expectations…. a good solution is to partner with fintechs that can be more agile and quicker to market.” - Samuel-Ogbu, EMEA head of payments and receivables, Citi
As retail-level expectations drive wholesale change, open banking and instant payments are forcing the pace.
Open banking will prompt a slow erosion of margin and market share rather than a rapid exodus, both in the retail and SME space and among larger entities, according to Mike Walters, chief product officer at Form3, a cloud-based payments technology provider. The mobility of transaction data under open banking is critical, because potential lenders, for example, can access a customer’s actual financial history, rather than less-reliable credit models.
“Today’s technology allows customers to easily switch between and interact with multiple providers. Without high-margin business, banks’ existing business models are much harder to sustain,” says Walters.
Corporate and institutional clients have much more complex banking relationships, but the building blocks of the emerging digital ecosystem will make these more mobile and flexible. “The shift of banking toward platform-based models, the development of interconnected rails for new services and the use of APIs to expose internal systems to third parties are all making it much easier to break relationships down into their multiple parts,” he adds.
Nevertheless, banks are strongly placed to thrive in the new environment, by virtue of their proven ability to deliver financial services at scale, across multiple sectors and jurisdictions. Banks have distribution, brand and domain in their favour, says Walters, but they need to be much more agile in how they deploy technology to bring services to market.
“Banks must be more proactive in this space,” agrees Ireti Samuel-Ogbu, EMEA head of payments and receivables, Citi, who sees opportunities “to thrive in a new ecosystem”. But she also concurs that banks cannot go it alone in an environment in which digital technologies have democratised data and empowered the consumer.
“As our clients use technology to move closer to their clients, they have a greater need for a seamless, frictionless service. Banks must meet these expectations, but they cannot change overnight,” says Samuel-Ogbu. “We believe a good solution is to partner with fintechs that can be more agile and quicker to market.”
Samuel-Ogbu cites a partnership with HighRadius to develop Citi Smart Match, which uses machine learning to help high-volume clients match receivables with expected payments.
Migrating to the digital age
The ubiquity of instant payment schemes lies mainly in their contribution to governmental efforts to migrate economically and socially to the digital age. Their B2B appeal lies in but the promise of real-time transaction data. “We’re moving rapidly to an environment in which firms will have a comprehensive, real-time and platform-neutral view of their working capital,” says Robins.
Whereas open banking obliges banks to share data via APIs, instant payments presents perhaps a more fundamental technological challenge. How can banks deliver instant movement of funds on a 24/7 basis using systems designed for batch processing, with weekends and other down times reserved for essential maintenance? Increasingly, banks are rebuilding their payment stacks from scratch, piecing them together from cloud-based components.
“Cloud-based services have matured to the level where it’s possible for banks to build a scalable, secure and compliant payments platform in the cloud, and do it much faster and cheaper than previously,” says Walters.
Few banks have migrated their payment services wholesale to the cloud. But that time is close at hand. In March, Standard Bank of South Africa announced a deal with Amazon Web Services to migrate its IT architecture to the cloud for all business units as part of its digital transformation strategy.
As Halpin suggests, the hyper-connectivity offered by today’s technology empowers consumers to choose between providers, then seamlessly switch again as their needs evolve. But technology also confers similar powers to banks, plugging into the network of services that best support their value proposition to customers. Banks are being challenged, but they’re also being liberated. “Banks are adopting new business models to take advantage of the opportunities that are emerging. We need to be more than our legacy selves,” he notes.
Rangachari says JP Morgan has adopted a more partnership-led approach to investment in infrastructure and innovation, hiring from the fintech sector, as well as investing in and collaborating on solutions with fintech firms. “How do you build a digital ecosystem? You need to have other players too!” he remarks. “All our clients are served by multiple providers, so it’s in all our interests to fit in together seamlessly. Banks are also re-thinking the distribution of their services through various channels. Now we must deliver our services to where the client wants it, which might mean leveraging other distribution channels, including ERPs, treasury management systems, and fintechs. Those that can eliminate the friction in the ecosystem stand the best chance of success.”
“Successful firms have always cannibalised existing business to generate new revenues. The key difference today is the extent of collaboration and not just with other banks.” – Lisa Robins, global head of transaction banking at Standard Chartered
In this fast-changing environment, banks cannot rely on the continued longevity of existing sources of value and differentiation. Banks have always collaborated, especially in the transaction banking space, but technology innovation and customer expectation are accelerating and intensifying these efforts as the basis of competition evolves. “Banks’ core strength should no longer be in proprietary technology, but in adding proprietary value to clients by leveraging common platforms and standards,” says Robins. “Successful firms have always cannibalised existing business to generate new revenues. The key difference today is the extent of collaboration and not just with other banks.”
Further, banks’ payments infrastructures must be nimble enough to adapt to foreseeable developments such as the integration of national instant payments on a global scale or the convergence of card schemes and account-based payment services.
“There is no point investing in something that won’t bring you competitive advantage,” insists Walters. “You can stay in the arms race of consistently investing in technology upgrades. Or you can work with shared infrastructure providers that enable banks to focus their investment effectively on differentiators. You can’t compete on the old basis in the new world.”