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Future of Fintech Special Report

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FUTURE OF FINTECH RACONTEUR.NET 04 27 / 09 / 2017 COMMERCIAL FEATURE High street banks must grasp open banking opportunity The words "innovation" and "banking" are not often seen in the same sentence, but a new programme of change is reinvigorating the industry O pen banking, as it's called, is designed to give consumers more control over their money – where they put it, how they track it and even what they spend it on. The new initiative means improving customer service by opening up banks' APIs (application programming inter- faces) to third parties in the financial technology (fintech) space. By putting their information to work, customers can do anything from seeking inde- pendent financial advice to paying bills and arranging overdrafts through user-friendly apps. These third parties are often plat- form businesses, which provide better interfaces and improved user-experi- ence without direct access to private data. They can offer complementary non-banking services to help people or- ganise what they do and get more out of their everyday lives, by syncing financial and non-financial activities effortlessly. The measures are enshrined in the revenue, whereas others see it as red tape; something they must comply with, but not necessarily take advantage of." Institutions that hesitate could be in for a shock. According to Mr Berger, the industry has entered a period of flux in which there is more choice and cus- tomers are gaining new controls. Historically speaking, banking has been a slow-moving sector. For years, young people would sign up for a standard current account, perhaps a savings product too, and then stick with the same provider their whole lives. Switching banks was time consuming and people worried about taking what they perceived as a bold step. The risk seemed to outweigh the reward, but things have changed. Competition in the marketplace is hotting up with challenger banks and fintech compa- nies grabbing market share. In the UK, millions of customers have changed banks in the four years since new rules made the process easier. With more competition and new en- trants, this trend is likely to increase in the short-term future. "Some banks underestimate how quickly industries can change," ex- plains Mr Berger. "They think 'I'm OK today' and fail to grasp the speed at which innovation is happening. Cus- tomers are asking for new services; the banks can help, or someone else will. "There are many precedents across industry sectors in retail with Amazon, hospitality with Airbnb, transport with Uber and television with Netflix. Bank- ing is the new focus and big technolo- gy brands like Google or Amazon could disrupt the market quickly because of their sheer scale and customer base." Mr Berger cites the example of Na- tional Australian Bank – a customer – which was losing market share and saw the opportunity to grow by part- nering with fintech companies. In a matter of months, he says, the bank revolutionised its customer journey with a range of new services, both financial and non-financial, that provided added value to its existing line of products. This changed the bank's image, bringing it into the 21st century, and provided new revenue streams as the bank monetised its API. Turnover in- creased as a result and the bank has successfully managed its reputation as a traditional yet forward-thinking outfit. This was a coup for the bank and good news for customers too. Accord- ing to Mr Berger, it is this kind of innova- tion that can set businesses apart from each other. Banks are putting a new focus on customer service to encourage loyalty, while giving fresh incentives for new ac- counts. But an increasingly competitive market means customers are demand- ing even more from their providers. He says: "We have seen a gradual change in advertising campaigns, from ads looking to attract new customers at the beginning of their careers to a focus on loyalty among existing ac- count holders. Traditional banks are not digital natives, so they have to work harder in the face of competition from newer players." Banks have taken note of the threat from startups in the fintech space and, for some, the response has been to acquire these fast-growing firms or acquire large stakes in them to miti- gate a perceived risk. But Mr Berger sees this as a short-sighted approach because in some cases the deals are struck to remove a threat, rather than grab an opportunity. "There are a few examples of banks buying fintech startups to remove them from the competitive landscape," he explains. "The smaller business gets absorbed into the larger business's infrastructure, but it doesn't affect change. Innovation slows down, the strategy stays the same and the start- up is swallowed up." This, clearly, is not a sustainable ap- proach to maintaining market position. But it also misses the point of the fin- tech revolution. Banks must grasp the opportunity of partnering with fintech in a mutually beneficial way. Banks that ignore it risk being surpassed by rivals and Sopra Banking Software helps them avoid being bypassed. "Banks need to move quickly," says Mr Berger. "Fintech is the future and, by creating partnerships, banks can ensure they stay relevant and useful. It's a huge opportunity for the market. "Open banking may be a tough tran- sition, but the rewards will be significant. Innovation is happening right now, so it's vital that banks get on board." For more information please visit www.soprabanking.com/ Revised Payment Services Directive (PSD2), approved by the European Parliament in 2015. The rules apply to the UK before it formally leaves the European Union and, due to the global nature of banking, they will almost cer- tainly apply afterwards as well. It's a brave new era for the industry. A fresh banking environment is about to take shape and financial institutions across Europe are working to comply with the EU standards. But according to Stéphane Berger, head of innova- tion and digital at Sopra Banking Soft- ware, not enough of these institutions have grasped the full opportunity. "In recent years, we have seen a huge amount of innovation in fintech compa- nies," he says. "They have the potential to revolutionise personal finance and we have partnered with them to offer services to high street banks. "But the response in the banking sector is mixed. Some institutions un- derstand that this is a chance to im- prove customer relationships and drive Fintech is the future and, by creating partnerships, banks can ensure they stay relevant and useful

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