banking industry Archives - International Finance

Revival of banking sector after COVID era

IFM Correspondent — Thu, 20 Apr 2023 05:00:21 +0000

The COVID-19 lockdown took people indoors and took them online. Everything from grocery shopping to paying bills was online as social distancing norms were enforced. This was the time when fintech and tech-fin firms came to their own as more and more people and organizations depended on their services to make and receive online payments securely. Several shadow banking firms who had been early adopters of fintech found themselves in a strong position to weather the storm of the pandemic and recover from the slump in business quickly. However, when it came to the main banking sector, a sense of disarray prevailed.

One of the most crucial institutes of human civilization found itself in troubled waters as it got hit from multiple angles. Both personal and institutional banking activities came to a near standstill as everyone experienced a financial crunch. The term used by S&P to describe the effect was ‘Screeching Halt’, which spoke volumes for the state of things. However, it was not the pandemic alone that affected banks. The pre-COVID banking sector was already under pressure in two main areas: competition from large and small fintech and tech fin firms, and low-interest rates.

The situation was only exasperated by the crisis, providing a stark reminder that it was time for banks to up their game.

Issues that plagued the banking sector due to COVID-19 pandemic

Banks saw a drastic reduction in investment levels while also experiencing market volatility. Activities like M&A/SPAC also saw a drop, further affecting income streams. And finally, the underutilization of brick-and-mortar bank facilities added to costs without substantial revenue to justify the spending. The aim of the banking sector in the post-COVID world was not so much about surviving – that was well within its capability, but more about how quickly it would get back on its feet.

Fortifying for the post-COVID era

There are a few areas that the sector can focus on to be better equipped for the post-COVID era. The first is digitalization. This is where fintech got it right, right from the start. If banks can digitalize and automate as many processes as possible, it could be a leap forward in getting back on track. Digitalization does not only streamline operations and makes them faster, but it also helps to lower the error rate to even zero. Automating processes helps free up resources that would otherwise be tied up doing mundane tasks. Reallocating these resources can have a considerable positive impact on the everyday running of the banking sector.

Personalized experience for customers

While going digital and moving processes online, it is also important to maintain a personalized experience for customers. Improved telephonic and video communications for customer interactions could be exactly what both banks and customers need to retain good relationships and provide reassurances in the sector’s ability to build momentum in the ‘new normal’.

In a world where many non-banking financial companies (NBFCs) already have a head start in online payments and processing of financial transactions, banks do not have to start from scratch. Collaborative ventures or even mergers and acquisitions of small yet well-equipped NBFCs could speed the process along.

Interests on loans have been the major source of revenue for banks over the decades. However, the COVID-19 crisis rocked this model to the core. Loss of jobs, and businesses collapsing made it impossible for a vast number of borrowers to pay back their loan amounts. As the number of non-performing loans (NPLs) increased, banks found themselves incurring greater losses with a diminishing capacity to absorb these losses over time. This situation is unlikely to change at a rate that would help banks recover quickly.

Focusing on alternate sources of income

One way that the banking sector could start recovering from this outcome is to focus on other sources of income. A fee-based model for revenues should be the next step to protect and stabilize the business. Developing new products and improving existing products would help to enhance fee-based revenue-generating streams. Whether we are looking at digital products like e-wallets and e-credit cards or more traditional products like lockers, Guarantees, and pay orders, increasing their attractiveness and accessibility for the customers is a move in the right direction.

COVID-19 was a shock to the system of transactional banking, which has led to a change in the business model. This new model combines and integrates technology into the survival strategy. There has no doubt been progress, and things have been looking up to an extent. However, while it is now behind us, COVID has left us with a rocky road ahead, fraught with significant recessionary and geopolitical factors that continue to influence the banking industry.

In this light, the future needs to be navigated with caution, but also with imagination and innovation playing a significant role. An attitude of openness to collaboration with various players is necessary in order to thrive and should be looked at with a fresh perspective. Typical low activities like consolidation and joint ventures are essential if banks are to emerge stronger in a post-COVID world.

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With new vision, GFT enters US digital banking market

International Finance Business Desk — Tue, 08 Nov 2022 06:48:35 +0000

With the digital banking industry being in a saturated state of affairs in the United States, GFT now enters the playing field with a promise of offering financial institutions a new perspective.

Marco Santos, CEO of USA and LATAM at GFT, said, “In the United States, the current mindset is fear-based: If banks don’t become like their digital challengers, they’ll fail. We see the opportunity as much greater than simply ‘not failing.’ It’s about building better banks than have ever existed before.”

“We’ve found that too many United States banks, the idea that they can not only keep up with competitors and remain relevant, but ultimately outpace them in the market, initially seems unrealistic and intangible–yet quickly becomes highly appealing,” Marco Santos commented further.

GFT, which reportedly has operations in some 15 countries, works with leading global banks, fintech and insurance companies to “transform their digital visions into tangible realities through a sustainable approach to digital transformation,” as per Marco Santos.

Talking about the digital challenges faced by the US banking sector, Marco Santos said, “Right now, banks’ mindset around transformation is their number one limitation. They’re scrambling to keep up with competitors and remain relevant, rather than focusing on a greater goal: Building better banks. Another challenge we see is that, from a technical standpoint, consulting and implementation of digital banking projects are often handled separately.”

Elaborating more on the future of the digital banking industry in the US, he said, “Digital transformation is a catch-all phrase that means different things to different companies and industries. In the banking world, our goal is to elevate digital transformation efforts beyond simply digitizing systems and processes that banks have had in place for decades. Instead, we approach it as an opportunity for banks to future-proof themselves by building more efficient, opening never-before-possible opportunities, and introducing more sustainable processes.”

Photo credit: www.gft.com

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Millennial-approved banking paves the way for dynamic industry shift

Bharath Kumar — Mon, 14 Jan 2019 08:05:36 +0000

If you were Internet savvy in the late nineties, you would have most probably encountered PayPal, a money transfer service developed by US-based company Confinity. It needed you to have a PayPal account to pay money electronically. It is also likely that you did not use it. However, as Bengaluru-based Deepthi Rajan, Head Technology Upskilling and Communication, Corporate and Investment Banking Technology at Societe Generale notes, “PayPal was the first alternative to traditional banking.”
Now fast forward to the present. On the afternoon of a business trip, a millennial lawyer in Mumbai was at the airport sans her credit card. An accompanying senior colleague paid for her air ticket. To return the money, she asked if he had Google Pay. He didn’t. Two weeks later, she had yet to return the money. “I have to do net banking, set up the third party account, and….” she said, by way of explanation. Google Pay meant she just had to log on to the app on her smart phone, enter a passcode (or fingerprint) to open the app, search for his name and transfer the amount. “It’s convenient because there is no need of a wallet, like Paytm wallet, and the money is directly transferred from my bank to his without the need for an intermediary.” A study by the American Banks Association had one standout of millennials’ banking habits. 71 per cent of those who participated in the study would rather go to the dentist than listen to what banks were saying.
But fintech or Financial Technology, in the hands of disruptive entrepreneurs, has changed banking entirely. It is an innovative use of technology in the design and delivery of financial services be it AI, peer to peer lending, digital payment; just to name a few of its services. In fact, fintech start-ups have attacked every part of banking, from wealth management, trading, retail banking and savings. As of now, they are the front end of banking while the boring part is still the traditional banking system. Rajan illustrates with an example of Bank ‘B’ and fintech company ‘F’. If Bank B has a cumbersome paper-based mortgage process and Fintech F has just the solution – a fully digitised product spanning the entire mortgage process from application to approval, complete with a super easy to use interface. F needs customers – a banking license would be good but customers are essential. B’s API gives F access to B’s customer data.
Soon, B’s customers have a hassle-free experience applying for mortgages and F has access to a well-established customer base. BaaS (Banking-as-a-Service) can often result in point solutions such as personal finance management tool, accounting software, interest calculators or ATM locators being developed by third parties. These solutions can be sold as standalone applications, be part of an app store, or integrated into a product suite, all of which may or may not be owned by the banks. This is apt for the millenials since the above mentioned studies show that at least 23 per cent of them feel that the main barrier to banking was the lack of mobile apps.
“Importantly, Fintech is removing the need for bank branches or any physical infrastructure, just like ATMs removed the need for human beings to act as bank tellers to give people money,” says Vikram Gulati, a MBA (Finance) student from Stern, NYU, “It is enabling a much larger customer base, as people can live and work far away from their actual “branch” and is allowing not only faster services like instant money transfers but also instant investments into mutual funds/fixed deposits. It is also allowing lots more people to have access to credit, as analytics on spending etc. can help drive credit scores (still experimental). Other innovations include buying of insurance online, filing tax returns easily and so on. Millennials would rather use such apps.”
Now, thanks to fintech, banking is perhaps just as easy as hailing an Uber taxi. In the US alone, Facebook has 50 different regulatory licenses that will allow its users to transfer money by the messenger app. In Britain, for some of the millennials, Monzo is close to being a cult. WeChat in China takes it further by allowing the user to not only buy insurance, make payments, invest in funds, but also book doctor’s appointments, donate to charity, and even set up dates.
While fintech companies deliver personalized experience through a deep and focused understanding of the pain points in customers’ banking journey, what does it actually mean for customers and banks? Rajan notes that for customers, it’s a great deal; access to better products, elegant user interfaces and enhanced services. But the downside is that customers must deal with a fragmented set of service providers for different services – loans from one company, investment advice from another, deposits from a third and so on. For the millennial lawyer, that is not much of a big deal. “I can choose,” she says.
But how do the traditional banks deal with fintech? Fintechs with their narrow offerings, minimal regulatory obligations and zero legacy technology infrastructure are an uncomfortable reality unless, as Rajan notes, the traditional banks acquire a fintech (BBVA’s acquisition of Simple) or partner with one (HSBC with Tradeshift). “But many such relationships are largely driven by a zero-sum mentality, where one party wins often at the expense of the other smaller player,” she points out.
Industry experts like Henri Arslanian, who teaches the first fintech university course in Asia, have stressed that as banks try to integrate fintech to bridge the gap between customer experience and what they traditionally offer, the role of the future banker will be very different from the present day.
“The skill sets will be different,” he said in his TedTalk. “There will be designers and programmers rather than traders or compliance officers.” Already, it is estimated that in the next ten years, about 30 per cent of the banking jobs will disappear. A grimmer outlook estimates it as 50 per cent. But, no matter what, fintechs are providing banking to millennials in a way they actually like.
We would, however, like to leave with this reminder by quoting Douglas Adams:
We are stuck with technology when what we really want is just stuff that works. Fintech companies should keep that in mind.

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What can the banking industry learn from the rise of Netflix?

Bharath Kumar — Thu, 31 May 2018 06:13:07 +0000

London has long been known as an international centre of fintech innovation. In fact, the UK Treasury recently announced its commitment to the sector by launching its first ever Fintech Sector Strategy – a comprehensive plan designed to build on the nation’s existing credentials as a global player in the financial technology industry. This announcement comes in the wake of the eagerly anticipated regulatory compliance measure, the Second Payment Services Directive (otherwise known as PSD2) which came into force on January 13, 2018.

The regulation, requiring banks to open up their payments infrastructure and customer data assets to third-parties, has made way for a wave of layer companies – that sit between a user and their bank account – to use this data to create a host of new information and user-experience-focused products and services. This has helped lower the barrier to entry for firms operating in the sphere. And with this more agile environment, we’ve seen a huge increase in the number of businesses working to optimise the way that consumers and businesses interact with their banks. Indeed, public statistics to date suggest that these initiatives have been largely successful.

Whilst it may be too soon to deem PSD2 an outright victory in its ability to boost innovation, studies have shown that UK financial services firms registered a record number of trademarks in the last year alone. The growing number of fintech firms are joining challenger banks to offer an upgrade in user-experience to customers of traditional banks in the hopes of luring them away from accounts with one of the ‘big nine’. One cannot help but wonder… should the big banks be worried?

It’s also important to note that banks are no longer exclusively competing against each other.

Over the past decade, technology giants like Amazon, Google, and Netflix in particular have worked to revolutionise customer experience. From real-time location-based travel insights to two-hour delivery times, data-sharing has made services previously thought of as impossible, a reality. Whilst all have looked to value-added services to bolster customer engagement and ultimately up their user-acquisition rates, their use of subscription-powered services has worked to strengthen their bottom line and ultimately, power their growth.

Here’s what banks can learn from Netflix which has successfully adopted this new way of doing business:

Enhance the use of data to support product development

The meteoric success of Netflix has been attributed to an array of factors. But the prevailing victor has consistently been their ability to leverage customer data from subscriber IDs to provide personal experiences. By establishing a subscription-based business model, each user is constantly providing the platform with valuable insights on viewing habits. In essence, the experience from their service is built around a user’s identity. Rather than simply storing this information, the company famously uses it to improve content production, distribution, and event marketing decisions.

The sheer amount of customer data that financial institutions hold, whilst incredibly sensitive, has the potential to be used to great effect. An existing example of this can be found in challenger bank, Monzo, which recently eclipsed £250 million in spend via its app. The mobile-first bank works to categorise users spending to provide them with a detailed report of their consumption habits at the end of each month.

By processing this data in a meaningful way, Monzo demonstrates its value to its user base. Monzo’s ability to show what it can do beyond pure functionality as a payments provider not only gives consumers something they otherwise wouldn’t have had access to, but also gives a glimpse of the overall strategic vision of the company.

Increase engagement to form closer customer relationships

Over the past 20 years, whether it’s been through the introduction of a mobile application or simply the advent of telephone banking, retail banks have sought to reduce branch interactions. Designed to be more convenient for customers, it can in fact have the opposite effect. Whilst we often to prefer to message brands via social media channels, 42% of consumers expect a response to their query sent within 60 minutes, and 24% believe they should hear back in half that time. With businesses today ecruing followers and subsequently messages in their tens of thousands, meeting these kinds of customer expectations simply isn’t possible.

A recent survey from leading consumer body Broadband Subscriber Survey found that 92% of consumers often stay loyal to companies that resolve queries quickly and effectively, with some even choosing to up their spending. This focus on customer contact has been capitalised on by artificial intelligence-powered fintech firm Cleo, which recently announced the closing of its £2 million funding round. The company has created a chatbot that analyses spending habits to provide recommendations to aid customers in reaching specific savings goals. In providing this tailored level of service, Cleo has been able to convert its customers into loyal brand advocates that take to social media to profess their admiration for the app that helped them to save for holidays and pay off credit cards.

The 2008 financial crisis had a huge impact on customers’ trust in larger retail banks and financial institutions. The damage done here has made it more important than ever for banks and fintech providers alike to succeed at effective customer communication in order to broker meaningful, and less transaction-led relationships with customers.

Demonstrate scalability of offering

Over and above the capacity to add value and build loyalty through meaningful customer interactions, the new era of banking stands to give financial institutions the ability to create entirely new revenue streams.

If we explore the purely financial side of Netflix’s success, its recurring revenue-based model provides the company with a reliable stream of income, and the ability to scale its offering to include optional ‘bolt-ons’. By pricing unlimited access to subscribers at different levels based on the number of devices, or users per account, the company can tier its customer-base and employ a different range of acquisition strategies to reach critical mass.

Jhon Phillips, VP EMEA, Zuora

Whilst banking institutions won’t be able to suddenly charge fees for services that its customers have grown accustomed to over the years, they can, under PSD2, work with an array of layer companies to provide optional ‘bolt-on’ services that seek to take customer experience to an entirely new level.

Despite the varying ways Netflix seeks to maximise on customer engagement, whilst diversifying its revenue streams through the addition of non-financial added-value services, the company’s intelligent use of its subscriber data has worked to entirely overhaul the way that customers interact with technology platforms. By creating a valuable product that’s entirely personalised and scaled based on usage, the company has risen to become one of the most-loved brands in both the UK. In order to strengthen their reputations with millennial audiences and use the latest in regulatory measures to their market position, large financial institutions need to apply a truly data-lead strategy and work in cohesion with, and not against, changing consumer habits.

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