Over the past year credit risk has accumulated across portfolios, volatility in market rates has led to increased levels of interest rate risk, and yield curve inversions have become a serious concern for banks. Operationally, retail banks have had to adapt to difficult conditions in the face of mounting competition and pressure on bottom lines. With a changing fintech ecosystem, vendor-bank engagement has altered dramatically, even over the course of the past twelve months, according to market participants, consultants and lawyers.
While some assert that relations across the market have been, in the recent past, “challenging”, “frosty”, and “unproductive”, fintech vendors and some consultants suggest 2019 saw many turn over a new leaf.
“Not very long ago, the bank and fintech landscape was marked by indifference and denial or even rejection, but like global warming, the industry’s climate has changed rapidly,” says Elias Ghanem, global head of market intelligence, financial services at Capgemini.
“2018 was the year of mutual discovery where banks and fintechs realised that they need to have more than a vendor relationship. 2019 evolved quickly into the year of collaboration, where banks and fintechs acknowledged their interdependencies and formed strategic partner relationships with shared risks and benefits,” he says. “2020 will be the year where these partnerships become solidified as they need each other to fend off the bigtech threat while finding a joint path to delivering benefits at scale.”
At the beginning of this year, a collection of the big four consultancy firms’ 2019 predictions for banking – both retail and investment – were focused largely on the growth of their technological capabilities: the use of data and AI for personalisation would be huge, said Mckinsey, while Accenture heralded the year of voice-first banking. Banks taking a digital-only route was touted by all and sundry, and cyber security and open banking took up column inches – though perhaps few considered just how entwined those two themes would play out over the year. With that myriad of change expected, some argue that banks of all sorts have been looking at their regtech providers as a necessary component of their business rather than a necessary evil.
“Over the past year, we’ve seen a shift in mindset towards the belief that a vendor is no longer an IT supplier but more of a strategic partner,” says Simon Wood, CEO at Ubisecure. “With so many changes in regulation, open data initiatives and a heightened consumer demand for user friendly and secure services, banks need long term partners that can help them gain real business benefit or competitive advantage from technology innovation. Put simply, the relationship between banks and vendors is no longer a supplier relationship, but instead a close, strategic partnership.”
A host of initiatives and rules has pulled banks and fintech vendors together – from the deluge of regulations and their reporting obligations in Europe to the potential growth of the so-called challenger banks and bigtech. The past few years has been a period of unease for major banks.
“Many banks are looking for more innovation from vendors as their market becomes more disrupted,” says Dan Somers, CEO of Warwick Analytics. “Some of the newer and smaller fintechs are finding this easier than the larger traditional banks.”
This has had a major impact on vendors, and will continue to do so. Paul Ford, CEO of Acin believes as banks have started to increase their reliance on third-party service providers, regulators have in turn made vendor management risk their number one priority.
“The regulatory framework for vendor management has been in place for years, but it is largely subjective, with individual institutions left to decide on their implementation approach themselves,” he says.
“This means many programmes have ended up lacking in clarity, effectiveness or oversight, recently prompting banks to strengthen their focus on this area. They have now begun to recognise the imperative of determining whether the risks of outsourcing are appropriately identified, mitigated and aligned with their business plans – justifying the vendor relationship and ensuring it runs smoothly.”
The way banktech providers have traditionally operated is also under pressure to change. Many banks are looking for incremental change: rather than ripping out large legacy systems or tearing out the back office, they’re looking for minor - though well constructed - tech services from nimble players. For established fintech vendors, that could require a change in approach. The market is also starting to feel the tremors of movements from a host of new players, in the shape of the banks themselves who, having built parts of their tech stack in-house, have started to sell them on to the market. BBVA, Fidor and others have followed Starling in producing state of the art tech for the market. With bigtech cramming into the banktech market on the back of the cloud invasion, it’s become a crowded space.
Setting a high standard are the neobanks – digital-only, flexible and tech savvy institutions aiming to offer a high calibre of customer service and unique product offering. From Monzo to Starling and Revolut, Tide and Atom, these new banks are setting about revolutionising the retail sector – with consumer and more recently business banking markets seeing penetration.
“Consumers for the last few years have been flocking to the new neobanks all around the world, which give them new banking products and provide a digital experience unrivalled by most incumbent institutions,” says Steve Lucas, head of customer experience at Receipt Bank. “Revolut, Monzo, N26 & Monese have more than 12 million accounts in Europe. This is incredible growth considering most of these businesses are less than five years old and all done ahead of the Open Banking revolution that is still in its infancy.”
The changing marketplace in which competition continues to grow is likely to force “concrete and significant changes in relationships” between banks and fintechs”, says Capgemini’s Ghanem.
“There will either be a focus on improving operational efficiencies as banks urgently need to optimise costs or to provide enhanced customer experience so customers don’t desert traditional banks for challenger banks and bigtechs,” he says. “But the most important change will be in the mindset of banks on how they perceive open banking. After considering it as a compliance requirement, banks will finally start to consider this as an opportunity to share their data and resources with fintechs to create shared marketplaces for a win-win scenario.”
With that changing marketplace, however, regulators have become alert to the need to monitor risks in the system with a wider range of fintechs embedded into the banking ecosystem. That could be set to continue, with many firms struggling with Europe’s second Payments Directive (PSD2)’s strong customer authentication (SCA) this year, and some requiring assistance from fintechs when the new deadline hits at the end of 2020.
While PSD2 and the UK’s Open Banking initiative paved the way for abstract cooperation between market participants, and the US Office of the Comptroller of the Currency attempting to make progress to boost fintech involvement in the banking sector, some suggest regulatory intervention is to be expected to keep the system well-guarded. Others suggest existing rules may appear to become stagnant, given the pace of technological change.
“As digital banking continues to replace traditional high-street banking, outdated regulations have the potential to hinder the industry in 2020 and continue to impose a high cost of compliance,” says Isabelle Corbett, head of regulatory affairs and govtech at R3.
“This major transformation within the banking sector will require banks to adapt their business plans and models and continue to embrace technology that will lower the cost of compliance. In order to ensure business success continues, it is imperative to take action to prevent falling behind in digital transformation.”
For others, data will remain to be a key driver in shaping the market. With Europe’s General Data Protection Regulation (GDPR) seemingly bringing control to consumer information, other rule makers are following suit. Not least in the US, where California’s Consumer Protection Act (CCPA) is expected to go live in 2020. It presents a challenge to those doing business in the world’s five largest economy.
“2020 will be the beginning of getting to privacy maturity,” says Kristina Bergman CEO of Integris Software. “The last couple years have been about establishing basic processes to comply with the key requirements of privacy regulations. Organisations are now realising that CCPA is just the beginning and more regulations will follow.
“Banks, like other organisations, have painfully realised that people using manual processes cannot comply with regulations adequately and their needs are not repeatable without a huge resource drain,” she says. “Data is constantly changing; people make mistakes and things can easily go wrong. Full accountability requires proper data governance and use of technology to achieve it.”
That will factor heavily into a much wider agenda to tackle cybercrime, says Capgemini’s Ghanem.
“Another regulation that will be an area of concern for banks, is cybersecurity. Financial institutions are at the forefront of bearing the brunt of cybercrimes. Legislators are keeping pace by introducing new privacy and cybersecurity laws. Regulatory bodies across Europe, North America, and Asia are already enacting regulations on banks with much more to come.”
It’s fair to say that the banking sector has undergone a shock in terms of technological change over the past few years, but utilisation rates are not what they could be. According to a Mckinsey report from October, 60 percent of banks are not generating returns on equity, with only 35 percent of IT budgets set aside for innovation and reinventing strategies. That’s half of the budget set aside by fintech players. Crucial to success next year however is directing resources to the right technologies rather than investing in multiple directions, says Tim Ayling, vice president of EMEA, Buguroo.
“Technologies that enable banks to hit their PSD2 requirements will drive our market. That will likely include the phasing out of older technologies, such as SMS authentication, and a drive towards biometrics of all forms,” he says.
While artificial intelligence, blockchain and machine learning may grow in application and importance throughout 2020, it seems age old hurdles will continue to receive attention. Compliance and risk-based security concerns have been and continue to be of significant importance for firms – as is the ability for fintechs and banks to show that they are in control. These, tied with cloud developments, could underline the banktech agenda throughout 2020.
“We can expect regulatory efforts to intensify to ensure safe and sound bank operations and performance. In turn, there will be a continued desire among banks for better, more insightful data from their vendors to ensure they withstand regulators’ increasing scrutiny,” says Acin’s Ford.