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Future of Banking 2017 Special Report

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22 / 01 / 2017 RACONTEUR raconteur.net 3 FUTURE OF BANKING oping technology to allow banks to trade directly with each other and thereby reduce costs by cutting out intermediaries. "I think within three years the land - scape will be almost unrecognisable," says Peter Randall, SETL's chief executive. "Think about what John Cryan [Deutsche Bank chief executive] said the other day. He reported that they have 5,500 separate technology platforms at the bank. Those 5,500 have to be skinnied down and a dis - tributed ledger is an extremely good way of doing that." According to Capco, there is a fourth, more radical alternative, to the "build, buy or borrow" approach – the "phoenix" option. This involves carving out a new, rival organisation within the bank that aims to cannibalise it from the inside. He points to First Direct, the telephone-only bank launched by Midlands Bank, later ac - quired by HSBC. Again, this has precedent in the tech world – Facebook's induction handbook implores staff to build the prod- uct that will one day destroy it. Better they do than someone else. Banks must adapt to the digital age or die Financial technology startups are disrupting the big banks that now face the challenge of reinventing themselves to survive FINTECH OSCAR WILLIAMS-GRUT S oftware is eating the world," Silicon Valley venture capital- ist Marc Andreessen declared in a famous article five years ago. After munching through advertising, media and transportation, software's ap - petite is now being satisfied by banking and finance. Banks today face competition from a vast array of financial technology or fintech startups that are meeting customers' needs faster and cheaper online. The question is how do the big banks respond? "There's no logical reason why any of the big banks shouldn't be able to turn this around," says digital banking expert Jason Bates. "But if you look at other industries that have been overtaken by technology, whether that's the music industry or news - papers, there's very few of them that you could point out that have made the turn." Mr Bates co-founded two digital challenger banks in the last five years, Monzo and Star - ling, and now works for 11:FS, a startup digital banking consultancy. It's startups like Monzo, Starling and their ilk that are fuelling fears that traditional banks could be reduced to "dumb pipes", a phrase floated by Citi research analysts in a note at the start of last year. The theory runs that innovative new fintech companies, or indeed tech giants like Facebook or Google, will win over customers with zippy websites and apps. The banks will be reduced to providing the underlying products, invisible to the consumer. The upstarts cream off the ma - jority of the profits thanks to their direct relationship with the customer, while tra- ditional banks compete among each other for business with these new platforms, driving down margins. These fears are being driven not simply by new market entrants, but also by legis - lation. Both UK and European regulators are pushing "open banking", a new regime that would force lenders to share otherwise hidden data, making it easier for consumers to compare banks and products. This mandated data-sharing and adop - tion of APIs – essentially digital ports that allow third parties to plug in to the underly- ing services – will allow companies to build products on top of the bank's infrastruc- ture, as well as opening the way for market- places like those that have taken over the insurance market. Think GoCompare, but for current accounts or mortgages. "Banks are going to be forced into being not just an average provider of all products," says Chris Geldard, managing partner at fi - nancial services consultancy Capco. "They have to be best in class and they'll have to switch some things off. With open banking, it's going to be a much more competitive market." How exactly can banks navigate this brave new world? The challengers themselves may prove the best guides. "There's always this impression that banks and fintechs are enemies, which is wrong." says Shane Williams of UBS. "Ac - tually, the banks see fintechs as a great way to understand what they're doing and how to advance." Mr Williams is the co-head of UBS's new online wealth management product SmartWealth, launched to compete with a new breed of investment startups dubbed "robo advisers". He developed the concept in close consultation with UBS's innova - tion lab, located in London fintech office hub Level39. "What the banks have recognised is that fintech and technology companies are showing ways to operate and technologies that support the client experience," he says. "Technology for technology's sake is no good for anyone. Where you can use technology to facilitate the client experience and add benefit to the customer, this is where I think everyone will start to move to." Building in-house products inspired by fintechs, as UBS has, is one approach to the new innovation onslaught. Another is buying the smart upstarts. "Facebook, Microsoft, Google do that all the time," says Mr Bates. "They make acqui - sitions both to protect themselves and also to grow their internal capabilities, and keep that entrepreneurial culture." Spanish lender BBVA is the most high-profile example of this model, buying US online bank Simple, Finnish startup Holvi and taking a significant stake in app-only British banking start - up Atom in recent years. "BBVA decided quite early on they were no longer a bank, but a financial services software provider, as they put it," says Nicolas Parmaksizian, head of digital at Capco. A third route is partnering with nimble new players. This is not only easier than trying to ape the startups, but also presents opportunities for cost-cutting, something banks desperately need to do in the current low-revenue environment. Mr Parmaksi - zian says: "I had some clients who said, of all our core competencies, the only thing we want to retain in-house is our risk function. Everything else, from front-office distribu - tion to back office, we'll outsource or we'll partner. It's very much about understand- ing what are you great at?" The most obvious area where outsourcing can cut costs is in capital markets. Dozens of startups are trying to apply distributed ledger technologies, also known as block - chain, to markets like securities and bonds. London startup SETL, for example, is devel- It's really about the courage, vision and leadership to change who you are Share this article online via raconteur.net Spain's biggest bank by assets, BBVA was one of the earliest movers among the big banks when it came to fintech. BBVA's chairman told the Mobile World Congress in early-2015 that BBVA would be a software company in the future and not simply a bank. To this end BBVA has pulled off a string of acquisitions in the fintech space, most notably spending $117 million on US digital bank Simple in 2014, and last year spun out a $250-million fintech- focused venture capital fund, Propel. Clearly, BBVA is a believer in the "buy" model, rather than building in-house fintech products or partnering with startups. But chief executive Carlos Torres Vila, who ran digital banking before taking the top job, says digital transformation is about more than just nifty technology. "Transformation has to be accompanied by a cultural shift, because it is people that make it possible," he told December's IESE Business School's Banking Industry Meeting. "We are doing a lot, but we still have a lot to do." He called for "an end to so-called management silos" and a global, rather than local, approach to banking. BBVA acquired Silicon Valley design firm Spring Studios in 2015 to work across the banks entire product line to give it a unified feel and universal logic, just one example of global thinking at the bank when it comes to digital. "Technology and innovation are for the ultimate benefit of financial services' consumers," he concluded. A bank's precise approach to digital will depend on its priorities. "At NatWest our aim is to be number one for customer service by 2020," says Kevin Hanley, the bank's director of innovation. "A huge part of reaching this goal will depend on delivering great products and services to our customers. "To achieve this we need the very best in cutting- edge technology and this will only be delivered by partnering and collaborating with the most innovative companies both at home and abroad." NatWest has a network of scouts in the UK, Israel and Silicon Valley, constantly on the look out of the most promising startups that the bank could work with to meet customer needs. The bank has also partnered with tech accelerator RocketSpace in London. The tie-up lets it keep an eye on the pipeline of innovation in the sector in return for mentoring tech startups. Mr Hanley says: "In just the last few months we have worked with Facebook, conducted trials in artificial intelligence and explored quantum computing." He adds that NatWest recently partnered with an Israeli security firm called BioCatch that was spotted by the scouting network. "The partnership will enable NatWest to monitor how people use online and mobile banking so that we can detect the difference between genuine customers and fraudsters," says Mr Hanley. "Our board and senior management team now meet every month to discuss the latest technological innovations within the bank. I can assure you we'll be unveiling many more exciting updates in 2017." BBVA: SOFTWARE COMPANY AND BANK NATWEST: TECH DRIVES CUSTOMER SERVICE Capco is currently working with an Ameri- can bank pursuing this path, launching a mo- bile-only bank targeted at millennials run by an entirely separate team within the bank. Mr Parmaksizian won't name the lender. Ultimately, there's a spectrum of ap - proaches to digital. Different solutions will work for different problems. A bank may want to start an internal challenger to tackle the problem of current accounts, out - source back-office functions to a blockchain startup and partner with an online lender for business loans. "The future is uncertain," says Mark Mullen, chief executive of app-only chal - lenger bank Atom. "At a conceptual level it's more important that you engineer agility and flexibility into your business than it is for you to know the future." The important thing, he says, is that banks are willing to try and willing to fail. The experts agree that the biggest chal - lenge for banks when it comes to digital may have nothing to do with technology at all. "For us, it's all about mindset." says Mr Gel- dard. "It's about a different way of approach- ing things, a different way of working." Mr Parmaksizian concludes: "It's about a culture geared towards growth, a cul- ture geared towards innovation, speed to market, product development. It's really about the courage, vision and leadership to change who you are." DIGITAL LENDERS Source: Competition and Markets Authority 2015 Source: Competition and Markets Authority 2015 * Numbers may not add up to 100 per cent due to rounding Source: Competition and Markets Authority 2015 Every day Once a week or more Two to three times a month Once a month Once every two to three months Once or twice a year Less often FREQUENCY OF CURRENT ACCOUNT SERVICES BY CHANNEL SATISFACTION WITH CURRENT ACCOUNT SERVICES HOW MOBILE BANKING HAS CHANGED THE WAY CUSTOMERS MANAGE THEIR FINANCES HOW OFTEN UK CURRENT ACCOUNT HOLDERS USE THE FOLLOWING FEATURES WITH THEIR BANK APP BRANCH 56% 26% 23% 21% 16% 13% 4% I AM MORE IN CONTROL OF MY FINANCES NOTHING HAS CHANGED I PAY MY BILLS ON TIME MORE OFTEN I USE INTERNET BANKING MUCH LESS I AM SAVING MORE I AM OVERDRAWN LESS OFTEN THE WAY I MANAGE MY MONEY HAS GOT WORSE TELEPHONE INTERNET Very satisfied Very dissatisfied Don't know/have/use Fairly satisfied Fairly dissatisfied Neither BRANCH TELEPHONE INTERNET APP 57% 69% 42% 51% 24% 22% 32% 34% 12% 4% 19% 6% 2% 1% 4% 5% 2% 1% 2% 3% 3% 3% 1% 1% 0% 27% 20% 10% 21% 11% 10% 15% 27% 17% 22% 8% 9% 1% 16% 10% 50% 4% 17% 1% 2% 30% 8% 44% 3% 9% 2% 4% BANKING MILESTONES REACHED Survey of global retail banks Source: GFT 2015 Set up a digital banking platform Integration of a digital banking solution with existing infrastructure Launched a mobile payments service Co-operation with fintechs or complementary providers Modernised the branch experience (interactive personalisation) Launched a personal finance management offering Implemented a real-time decisions solution 59% 55% 44% 36% 32% 29% 16% BUSINESS DRIVERS FOR DIGITAL BANKING STRATEGY (%) Survey of global retail banks Source: GFT 2015 100 80 60 40 20 0 100 80 60 40 20 0 Important Unimportant Somewhat important Relatively unimportant Neutral Increase customer satisfaction Gain competitive advantage Increase customer loyalty/reduce churn Increase revenue growth Increase profitability A D B E C A B C D E

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