Nobody can possibly play down the reforms that have recently altered the financial services industry. We have seen ‘competition’ give way to ‘collaboration’ as 20 of Britain’s biggest Banks and insurers came together in this critical area to combat cybercrime. In his announcement, Stephen Jones, chief executive of the trade body UK Finance, said: “The UK has the opportunity to be world-leading but those participating would require to trust each other and share sensitive information”.(1) Such collaboration was also seen in 2016, when the UK Banks collectively invested in an image-based cheque clearing system, slashing processing time from 6 working days to 24 hours. Operating from a single platform that provides real time transactional data, enabled the customers to withdraw funds no later than 11.59pm on the next weekday, driving real and important benefits for the Banks. This is a model created for the Banks by the Banks which transformed incumbent transactional process into thriving financial ecosystem.
Dictated by the new economics of banking and growing demand for greater connectivity and accessibility, Banks are now turning to Application Programme Interface (API) based initiatives to transform outdated legacy functions into customer-centric platforms. It has been publicly acknowledged that Lloyds Banking Group has already set aside £3 billion(2) for its digital transformation plans, while Nationwide said it would spend £4.1 billion over the next five years(3) on building new technology platforms for its business.
It is clear that the sheer complexity of the legacy transformation, in recent years has turned the banking industry into an attractive market for Fintech companies. In 2018 we saw online digital bank N26 being made available to British customers after 50,000 Britons joined a waiting list to open an account with this progressive German Bank. Having only been operational for 3 years, their growth is exceptional with 1.5millon customers across 17 European countries and a market capitalisation value of c.$1.7 billion. This is a real threat and in order to maintain market share banking giants will have to start thinking about third party solutions, which can offer customer centric and asset light digital platforms.
To reform global banking for the digital age, HSBC, Santander, BNP Paribas, Citi, Deutsche Bank, ANZ and Standard Chartered have already announced a joint initiative to build a digital “Trade Information Network”. Which will become the first global multi-bank, multi-corporate network in trade Finance.
In early 2019 we are also expecting six of the world’s biggest Banks to launch the “Utility Settlement Coin” for clearing and settling financial transactions over blockchain, the technology underpinning bitcoin. These collaboratively designed platforms have the potential to speed up back office settlement systems and free billions in capital tied up in supporting trades.
Many Banks claim that their internal APIs are already operating efficiently and automation is at the heart of their bank of the future vision. Yet as it stands the average direct cost of Finance for running banking operations is 2.4% and therefore the next logical solution for the Banks will be further collaboration or switch to a third party platform which could offer a digital solution for less than 1.5%. Perhaps the introduction of Service Companies to UK core banking in 2019 presents the perfect opportunity for this transition.
Generic service companies for the industry may still be out of reach, but domain specific industry utilities (i.e. Stress testing, regulatory reporting, IFRS 9) could be right around the corner, due to the scalability of cloud technology. Pre trained API solutions can be developed and adapted to meet individual banks needs and hosted via third party providers, giving rise to the following benefits:
Financial services have embraced integrated industry technologies in recent years such as Open Banking and image-based cheque clearing, leading to an increasingly collaborative environment. Whilst the support and appetite for change remains, there are still challenges along the way towards developing shared utility platforms that go beyond technology such as:
Research shows that by taking full advantage of back-office automation, Banks can often generate an improvement of more than 50 percent.
However, due diligence into this approach has highlighted several barriers relating to cost, time and resources if the Banks were to initiate these individually. Hence the urge for banking collaborations on asset-light digital platforms.
Drawing from the expected gains from collective investment in an image-based cheque clearing system, Trade Information Network and Utility Settlement Coin, there is a significant opportunity for the Banks to leverage from yet another technology based common platform where operating Service companies can drive great synergies and efficiency.
Even though Fintechs such as Transferwise, Ripple and mobile only Banks have so far only made a slight impact on the Banking giants, with the mounting pressure to do more with less from stakeholders and customers, digital transformation is no longer an option. It is a race against a digital clock!