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INDEPENDENT PUBLICATION BY 22 / 01 / 2017 #0429 raconteur.net 13% 9% 12% 7% 8% 6% 6% 4% 6% 4% 4% Global banking is set for further adjustments as the levers of America's financial sector change hands Despite their smaller size, challenger banks have survived the buffeting of Brexit and gather speed As hackers grow evermore adept at cyber safe -cracking, is the future of banking really secure? BANKS MUST ADAPT TO THE DIGITAL AGE OR DIE REGULATING THE FINANCE SECTOR POST-TRUMP CHALLENGERS GET A LIFT IN TURBULENT MARKETS CAN BANKS STAY AHEAD OF THE CYBER GANGS? Financial technology startups are disrupting big banks that must adapt to survive 03 05 07 08 FUTURE OF BANKING Although this publication is funded through advertising and sponsorship, all editorial is without bias and spon- sored features are clearly labelled. For an upcoming schedule, partnership inquiries or feedback, please call +44 (0)20 8616 7400 or e-mail info@raconteur.net Raconteur is a leading publisher of special-interest content and research. Its publications and articles cover a wide range of topics, including business, finance, sustainability, healthcare, lifestyle and technology. Raconteur special reports are published exclusively in The Times and The Sunday Times as well as online at raconteur.net The information contained in this publication has been obtained from sources the Proprietors believe to be correct. However, no legal liability can be accepted for any errors. No part of this publication may be repro- duced without the prior consent of the Publisher. © Raconteur Media DAN BARNES Award-winning business journalist, he specialises in financial technology, trad- ing and capital markets. OSCAR WILLIAMS-GRUT Senior reporter for Business Insider UK and fintech spe- cialist, he worked for the London Evening Standard and The Independent as a stock market reporter. IAN FRASER Author of Shredded: Inside RBS, The Bank That Broke Britain, he was business editor at The Sunday Times in Scotland. DAVEY WINDER Award-winning journalist and author, he specialises in information security, contributing to Infosecuri- ty magazine. SAM SHAW Freelance writer and editor, she covers a range of topics, including busi- ness, finance, technology and travel. FINBARR TOESLAND Freelance journalist, he specialises in technology, business and economic issues, and contributes to a wide range of publications. DISTRIBUTED IN R E S E A RCH PA RTN ER BUSINESS CULTURE FINANCE HEALTHCARE LIFEST YLE SUSTAINABILIT Y TECHNOLOGY INFOGRAPHICS raconteur.net/future-banking-2017 RACONTEUR PUBLISHING MANAGER John Okell DIGITAL CONTENT MANAGER Jessica McGreal HEAD OF PRODUCTION Natalia Rosek DESIGN Samuele Motta Grant Chapman Kellie Jerrard PRODUCTION EDITOR Benjamin Chiou MANAGING EDITOR Peter Archer CONTRIBUTORS TOP REASONS FOR HAVING ADDITIONAL FINANCIAL PRODUCTS* Source: Competition and Markets Authorit y 2015 Banks shape up for high street battle in 2017 This is the year when big banks must embrace the digital revolution as the banking sector is blown apart by challengers offering better products and services through smartphone apps OVERVIEW DAN BARNES A battle will be pitched on the high street in 2017. Competition is being forced upon banks by the Competition and Markets Au - thority. Customers will be able to use rival services without switching bank accounts. Rivals to the big banks – both smaller challenger banks and financial technology firms – will be able to build services on the back of customers' existing accounts. The Open Banking Initiative, as it is called, will affect banking for small and medium-sized enterprises and consumers. It is mandated to be in place within the first three months of 2018. According to Andrew Hauser, executive director for banking, payments and fi - nancial resilience at the Bank of England, banks must decide "whether to take on competition with chal - lenger firms head on or partner with them to develop and imple- ment the most promis- ing forms of technolo- gy internally" because "doing neither is a risky approach". Banks have always been more like bee- hives than machines, buzzing with a common purpose, but little central con- trol. When they stopped making honey in 2007-08, it became clear they were too complex to be restructured or repaired easily. Since then authorities have tried to make them more industrial by imposing waves of rules and tests upon them. They have developed a somewhat more deliber - ate shape as a result. Now the pressure is coming from the consumer. In the digital age, banking's organic structure is looking positively an - tiquated. Facing pressure from consum- ers and regulators, banks must embrace digitalisation. Their capacity to do so will determine their cost base, their abil- ity to handle risk and make a profit from tighter margins. The smartphone is the weapon of choice for the bank customer of today. Research firm eMarketer estimates that, among 18 to 24 year olds in the UK, 94.4 per cent will own a smartphone while, among 25 to 34 year olds, the number is slightly lower at and 93.1 per cent. Many new banks are operating digital-only models, lowering the cost of cus - tomer acquisition significantly by reaching out to smartphones via an app, to give their customers a full range of banking services. Banking is not an easy business to get into even with these advantages, yet challengers including Metro Bank, Virgin Money and One Savings Bank posted strong results at the end of October. Atom Bank, an app-on - ly bank, plans to begin offering mortgages in 2017. Santander launched a 30-minute mortgage application via smartphone at the end of 2016. Within the wholesale and investment bank - ing business there is a growing demand for more efficient trade confirmation and set - tlement. Distributed ledger technology, which is used to settle trades in bitcoin auto - matically at the point the order is agreed, has been adapted for use with other instru- ments to satisfy risk reduction. The biggest macro-economic threat to UK banks is Brexit. Access to the single market is key for many banks that trade in the UK and for many of the businesses they have as customers. The direct impact will largely be to change the way banks are regulated, their form and legal structure. All of that brings cost, which will affect the competitiveness of both UK banks and European Economic Area banks that trade here. The great uncertainty it brings will affect mainstream banks, challenger banks and specialist lenders, with big question marks hanging over commercial real estate and the private property market. Investment banking will be even more sig - nificantly affected, as domestic capital mar- kets in Europe have been broken wide open via European Commission directives and reg- ulations to encourage pan-European compe- tition. Those same regulations are demanding a more transparent investment process with asset managers and the banks that support them moving towards greater levels of elec - tronic trading and more detailed reporting. For years banks have been shedding staff and talking about breaking down silos within their operations. Now that is begin - ning to happen, with more consolidated views of their trading and risk positions, it is giving banks more insight into their busi- ness and this is being passed on to custom- ers in the form of better services. There is a cost to achieving these greater levels of insight. They are enabled by data and an increasingly digital business. The risk of data breach or loss is ever-present and the ability to handle data without placing it at risk is fundamental to maintaining confidence in the banking system. The recent account breach at challenger Tesco Bank is a stark re - minder of the risks institutions are exposed to. Taking the wealth of data that is availa- ble from an increasingly online world and using it to support customers is both a tech- nological and cultural challenge. For large banks with legacy IT systems, replacing their technology for mortgages, loans and current accounts with an online platform to which products can be added is a nirvana. Big data technology is making the capture and processing of different types of data far more viable, while machine-learning and algorithms can use that information to fuel everything from financial advice and invest - ment to fraud prevention. However, the scale of the transformation needed is enormous. A key group of influencers on the future of banking are shareholders. With incum - bent banks struggling to deliver a high return on equity, shareholders will look for those banks that are able to make the move into the digital-first environment, engag - ing with customers on the basis of greater service, better value and importantly with home-grown technology that can help a firm differentiate itself from the rest. Mr Hauser's advice for incumbent banks to go head-to-head or partner is already being born out. France's mutual lender Groupe BPCE announced last July its acquisition of chal - lenger bank Fidor, which chairman François Pérol said was a key step in the acceleration of the digital transformation of the group. Such partnerships do not represent a suppression of the new, but the embrace of things to come. Share this article online via raconteur.net Facing pressure from consumers and regulators, banks must embrace digitalisation WITH THE SAME BANK *UK current account holders chose the main reason for either having financial additional products with the same or different providers Bank offers better products/deals than others Prefer not to have multiple products with the same bank Good customer service Different providers for different purposes Convenience Always had an account with them/long time Easier to manage/transfer Want to use the same online account for everything Recommendation of friends/family WITH DIFFERENT BANKS 49% 55% Like to have everything with the same bank Offered a better product deal Had account with them before/always had them Minimise risk Partnerships do not represent a suppression of the new, but the embrace of things to come HAVE YOU SEEN THE NEW RACONTEUR.NET?

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