Critical Software on digitalisation in European retail banks
Digital transformation is the term of the day when it comes to European retail banking. But what does it actually mean?
The digital customer
Digital is, bit by bit, taking over every aspect of our lives. From ordering products online to hailing a taxi, there’s an app for that. In financial services, things are no different. ‘Digital transformation’ is the generic term employed by most financial services companies to denote the gradual implementation of digital solutions to their internal and external activities.
But is there a meaning behind the ‘digital transformation’ buzzword?
The simple touch
Customer journey simplification has been noted and acted upon by various retail banks across Europe. One major UK retail bank has introduced a single customer view enabling customers to view their pensions and savings products alongside their current account. Similarly, Scandinavian banks have come together to offer customers an API gateway, allowing access to their accounts through one app even if they are with different banks.
If there was ever an opportunity for banks to promote integration between accounts and services, it’s now. The Payment Services Directive 2, whose deadline for implementation in the European Union is 31 December 2020, democratises retail banking by encouraging Open Banking, in itself compelling traditional banks to allow fintech and digital-first challenger banks to access customer accounts. In this changing landscape, it’s likely new apps integrating customer accounts and services will become more common, simplifying banking for all.
Making it personal
Integration is the first step towards making the customer’s journey more amenable. The next step is to personalise that journey. Traditional banks are finding that, in order to compete with neobanks and fintech, they must allow the customer as much control over the personalisation of their finances as possible. These may not just involve services directly related to managing their finances, but also more peripheral services like financial advice tools and upcoming payment alerts. Indeed, a major UK retail bank has introduced a bespoke financial advice tool accessible via a customer’s smartphone, offering guidance on financial issues ranging from mortgages to savings planning.
The main reason traditional retail banks are keen to personalise is that FinTechs and challengers are already one step ahead. One digital-first challenger bank founded in the UK in 2014 has adopted personalisation as the cornerstone of its operations. From security measures based on customers’ biometric data (including face and voice recognition) to the ability to change the app’s logo and name, there’s no question banks like this are leading the way when placing customer experience at the heart of their operations.
The cloud uncovered
As well as being personalised and easy to access, the software banking customers use needs to be quick. One way expedient services can be achieved is through implementing cloud data storage practices. But what else can the cloud offer?
One theme across the retail banking sector is the adoption of cloud platforms to manage customers’ personal and financial data. Traditional banks, previously reluctant to introduce cloud technology due to cybersecurity fears, have become more open to the prospect of cloud platforms, aiming to unlock their data processing and storage capabilities as well as their product development opportunities.
One major UK bank has developed a storage facility for customers’ documents, be it bank statements or travel insurance confirmation, powered by the cloud, while another has used the cloud in their online open banking application, including card control, password management and customisable expenses tracking. Other large banks have started to use the cloud to decrease obsolescence risk, with a software-as-a-service based approach to the cloud enabling consistent updates when needed.
Traditional banks have been slow in introducing the cloud to their working practices, mainly because of cybersecurity concerns. But now there’s no question that – with verifiably secure software-as-a-service (SaaS) providers becoming more prevalent – these concerns are starting to be assuaged. It’s no wonder the forecast for digital transformation in retail banking over the next decade is that there’ll be plenty of cloud.
How can a bank transform digitally?
With the rise of the digital customer and the growth of challenger banks and fintechs, incumbents must ensure this investment is not superficial and encompasses all aspects of digital transformation.
But investment may not be practicable or even enough. Open Banking means that traditional banks will need to be more willing to work with fintechs and market entrants to develop solutions for dealing with their customers. This is a culture change more than anything; if banks are not willing to accept the need to engage with their evermore digital customers, they are likely to be left behind.
To discover how banks can stay ahead of the curve, read Critical Software's white paper on its work in helping financial institutions to digitally transform their products and services.
Zafin: Banking is now in the era of the tech ecosystem
The development of tech ecosystems is placing the future of post-COVID banking in jeopardy. At a time when Big Tech can replicate the functions of traditional financial institutions, what can banks do to retain a grip on the market?
John Smith, EVP Ecosystem at Zafin, has a few ideas. A SaaS cloud-native product and pricing platform for financial institutions, Zafin is preparing the next generation of banks to cope with this precise challenge.
Smith is responsible for the strategic and tactical management of the company’s ecosystem, including the creation of new business models to support growth and differentiation. We asked him four questions:
Q. Have the events of the pandemic caused an irreversible shift in the digitalisation of banks? If so, is COVID the sole cause or are there other factors?
It’s a great question and one that I am asked a lot. Without a doubt, the COVID-19 pandemic has driven a significant shift in the acceleration of digital. In fact, I’ve seen some estimates show there to have been as much as four to six years of digital adoption growth since the initial lockdown started.
While the pandemic may be the primary reason for this growth, two other drivers include fintech disruption and the high costs of operating a traditional retail bank. Both of these factors have caught the attention of banking executives as they set their minds on accelerating digital transformation with a focus on high return, low risk.
Q. Some commentators believe banks must learn from Big Tech in order to survive. Do you agree? Please expand.
I agree completely; we’re living in the era of the ‘ecosystem’. All the seismic shifts we’re seeing in technology, be it aggregation, embedded finance, DeFi or hyper-personalisation are all enabled by the foundation of an ecosystem.
When financial institutions work with a strategic partner like Zafin, which has made the strategic investments in a best-in-class ecosystem, they’re able to capitalise on opportunities more quickly and safely, and will be better positioned for growth now and at the other side of the pandemic.
Q. What are currently the obstacles to adopting Open Banking? Is it more likely to 'take off' in some regions rather than others?
I would argue that Open Banking has been in the US for some time and will only continue to grow there. By definition, Open Banking is about the secure sharing of financial information that customers are aware of and have authorised. Under that definition, we’re seeing aspects of this well underway even though its full potential remains to be seen.
Third-Party Providers are a natural outcome of Open Banking, whereby they can create propositions beyond what a bank normally does to enable banking functions such as payments, borrowing, saving and so on. Once again, some of these are already present through industry-led initiatives, whereas regions such as the EU have taken the pathway of regulation such as PSD2.
The industry-led initiatives we’ve seen in the US have also had the added advantage of guard-rails that regulatory bodies like FFIEC and CFPB provide. There are also other technology-led initiatives such as API definitions that are set out through the FS-ISAC.
I would argue the future of Open Banking in North America will be through the natural evolution of the guidelines and API definitions that have been published, as well as the natural progression of industry initiatives.
Q. Are there any other bank tech trends you'd like to discuss?
Coreless banking. Zafin has been pioneering some of the work around externalising functions out of the legacy core to drive a more ‘fintech nimble’ bank, while not having to deliver a ‘heart and lungs’ core bank replacement.
Real life examples of this include moving some of the core functions of a banking system, such as product and pricing to a platform like Zafin. Origination, onboarding, KYC, risk, and compliance are all other examples of externalising banking functions for added agility.