Outlook for Global Bank Strategies in the face of historic disruption – Part 2

Goldman Sachs recently forecasts that $4.7 trillion traditional financial services revenue could be at risk from disruption. As new entrants, supported by a $12 billion investment in Fintech, disrupt existing business models, using new technology fuelled strategies, I thought we could reflect on what counter strategies banks might adopt that could help and not hinder.

This blog builds on my previous one, “Global Bank Disruption and Potential Counter Strategies” where I share highlights from my interview with Penny Hembrow of CGI.

In what is arguably the greatest period of disruption in the history of money, I set out to understand possible counter-strategies being considered by global banks, through  interviews with leading experts and study of recent bank roadmaps and publications from European institutions and bank associations.

Weighty customer and client expectations

In retail banking recent surveys indicate an overwhelming change in customer expectations, as they seek to maximise convenience and satisfaction in the rapidly changing digital economy. Similarly large corporate client expectations have also changed.

This is creating significant disruption in both consumer and corporate financial services, driving banks to seriously set out strategies for transformation, modernization and innovation, in order to avoid being commoditised as new entrants carve away valuable chunks of what would traditionally be bank business.

So what are the global banks doing about this?

Could there be a one-size-fits-all solution?

Transaction banking in particular has important relevance for global banks as it helps lower the cost of capital, leverage client base and improve return on equity. Now increased competition and a change in corporate expectations creates an imperative for innovation in services to make them faster, cheaper, more convenient and of course, ubiquitous.

As transaction banking gets further impacted, it seems to me that a "one size fits all" approach may not work. I understand from what experts tell me, and my own work in this area that transaction banking does not enjoy as high levels of standardization as other areas of banking do.

Now new trends in real-time payments and increased interest in new technologies such as blockchain are also adding to the roadmap of global banks such as RBS, BBVA and others, to simultaneously meet new needs from consumers and corporates.

Caution

A host of competitors, way beyond traditional

Global banks are no longer simply competing with each other.

In each part of their business, they face new entrants, relatively unencumbered and with much less to lose - freeing them to make choices that may not be open to the banks.

For instance in the foreign exchange business, new international payments providers are employing increasingly sophisticated strategies. Increased need for low-cost cross border payments is driving new types of solutions in each part of the world, but achieving ubiquity had so far proved elusive.

At the same time that consumers and small businesses are turning to P2P lenders and crowd funding marketplaces, corporates are looking at what could save costs to cope with additional pressure on their own business models.

Now as real-time payment systems gain adoption, this is for the first time solving first mile and last mile issues across emerging and developed markets in a way that gives serious pause for thought.

If disruption is the problem, can blockchain be the solution?

With respect to payments, bank roadmaps indicate that Ripple and blockchain are under investigation with a range of leading global financial services organisations who hope these could be significant game changers.

Just as consumer expectations have changed, corporate business is also vulnerable to various peer-to-peer solutions. 

However if banks are to implement blockchain, they must find a way to do so that maintains transaction privacy and meets a host of transactional requirements, but more importantly manages onerous responsibilities to do with money-laundering.

Imperative for banks to validly reposition on trust

Recent publications from European banking associations suggest that banks carve out a niche for themselves by offering identity related services that percolate through all layers of the service architecture, while allowing new OTT entrants to play only on the surface layers.

Banks arguably have a good understanding of our true identities. Experts I discussed this issue with felt that banks have an opportunity to better reposition themselves by treating KYC as a strategic opportunity rather than a regulatory burden, and finding ways for consumers to protect themselves against cyber security and identity loss, or better manage their finances.

If banks are to better utilise customer data, they must first of all restructure their data to transcend current silos.  As hard as it may seem for them to free the data from silo representations, what may be harder still is not angering clients and consumers in the way they use data they possess.

Outlook for 2015-2016

Too much seems to have already been said about bank disruption. The task at hand now is positive action, making lean budgets stretch across legacy maintenance and innovative projects.

My research indicates that banking disruption right now is distinctly different, regionally and based on the nature of banks as well as other criteria. So for instance, it could be dangerous to make presumptions about Asian banking based on what we see in Europe/US. Banks in Singapore seem to have embraced FinTech phenomenon, with banks and tech companies collaborating to find was to reduce cost and use technology as an enabler. Could FinTech be the platform that helps Asian banks find top spots in the banking scene?

According to a recent statement from CEO Piyush Gupta, DBS is spending billions of dollars digitising the bank, with less than 10% in frontend apps. In the same article Anju Patwardhan of Standard Chartered makes a good point on how banks can leverage regional trends, and developments across ASEAN and Asia. 

In my view, using disruptive change as a lever for growth will need the very best management skills, within both banks and regulators in order to achieve balance under highly sensitive circumstances, and ensure actions taken continue to rebuild and safeguard client and consumer trust along the way.

What's your view on disruption to global banks? Do you see potential counter-strategies at work and how successful are they, in your part of the world?

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Global Bank Disruption and Potential Counter-Strategies

 

 

In this exclusive interview with Charmaine Oak of Shift Thought, Penny Hembrow, vice president of global banking for CGI, talks about the global shifts in banking and trends that are influencing banks, shares insights from CGI’s recent global banking survey, and discusses options and actions global banks can take when looking to expand their banking and payments products and services.

 

 

Penny, thanks for taking time out to share your insights with us. As context for this interview, could you please share a bit about CGI , its clients and services, and your role?

CGI is the fifth largest independent IT and business process services company in the world. Today, we provide business consulting, systems integration, and outsourcing services and also run systems on behalf of our clients, with 68,000 professionals in 400 offices across 40 countries.

I look after our banking business globally. Financial services represent around 20% of our CA$10.5 billion in annual revenue. We run our operations via a client proximity model, working in the same community as our clients. Our key focus is always local. Today, we work with 24 of the top 30 banks globally, as well as the top 10 European and top 10 Canadian banks.

Hi-tech analysis  

From your unique perspective, how have you seen the needs of global banks change over 2014-2015?

As part of our strategic planning process, we interview face-to-face nearly 1,000 clients through a structured questionnaire each year to identify industry trends and better understand the business and IT priorities of our clients. I can share a few highlights of what we found during our 2015 exercise.

In retail banking this year, there is an overwhelming change in customer expectations, as they dive deeper into the digital economy, creating significant disruption in financial services. It is driving banks from simply saying this is something we have got to do—we’re developing our mobile channels—to this year saying more concretely, this is how we are accelerating transformation and are developing digital and here is how we are looking to modernise legacy infrastructures (branches, operations, technology).

 

That’s very interesting, and how about transaction banking?

Since the crisis, transaction banking has been a significant focus, especially for global banks. It helps them to lower the cost of capital, leverage their strong client franchises, and improve their return on equity.

This year, our survey uncovered a crowded marketplace with many new competitors. We also found that corporate expectations of banks are shifting and this is driving innovation in services. Transaction banking is also impacted by payment trends around the world, but doesn’t have the level of standardisation that other parts enjoy. Transaction banks are looking to update and consolidate platforms and move to best of breed platforms. They are also dealing with significant technology issues, as well as the need to manage real-time payments and new technologies such as blockchain.

 

What kind of new competitors do you see entering this space?

First of all, the banks are competing with each other. Second, we are seeing some fast movers by way of new entrants, especially in the FX world. Third, in the payments world, Ripple and blockchain could prove to be significant disintermediators. Finally, corporates are exploring various peer-to-peer solutions.

 

You mentioned blockchain. Do you believe the transaction speed it drives could match existing Visa/MasterCard processing speeds?

We are seeing a significant interest in blockchain, not just because of Bitcoin but for global reconciliation and synchronised ledgers. In payments between two points, this could potentially result in less overall cost and more effective reconciliation. The technology, for instance, could help ensure you don’t have duplicate invoices, and it has many different applications, including new means of settlement.

A payment is basically a value exchange between two recognised entities and must be trusted and convenient. If you look at the new entrants, they are all innovating in the area of convenience, not so much in trust. Trust is where banks play a key role as they manage trusted identities.

 

Talking of customer trust, how does the need of bank customers for transaction privacy stack up in case of blockchain, which we associate with implementation through a public ledger?

Blockchain may be open source code but it is not necessarily open. Bank implementations would require a way to maintain transaction privacy.

If banks can effectively manage privacy through new technologies and keep things secure and data protected, consumers will be more likely to stay with them rather than transitioning to providers such as PayPal, which only move money.

 

With respect to customer data, banks have customer data but are not expected to use it as new entrants such as Google might do. Do you see this changing?

New entrants such as Google and Amazon appear more advanced in the way they make use of customer data. Banks, however, actually have more information about our true persona, perhaps more so than even the government. At the same time, we as individuals are becoming more conscious about how data about us is being used.

However, banks have been largely keeping the data in silos. What consumers are looking for is the ability of providers to understand them as a whole and help them fulfil their financial goals. There is great opportunity within the banking industry to provide that kind of intelligence.

 

That is interesting what you are saying; by looking across silos, banks could have a better understanding of customers, which would add to what you said earlier, banks knowing identity?

Yes, exactly. “Knowing your customer” is not a regulatory burden, but a strategic opportunity. We found that one in four people would pay their banks to protect them against cyber security and identity loss. Services such as these could go hand in hand with identity.

Today, consumers have their money across a number of bank accounts, credit cards and other funds. They can search online for advice but it is all very fragmented in terms of guidance required for financial well-being. Banks can help in this respect because they know us well.

 

Do you think the separation between good bank / bad bank would come in the way?

Not really. The rules are about making sure consumer money is protected. If you’re assuming a bank will have everything in house, that is clearly not the case. Banks are the holders of identity and deposits. Through their APIs, banks could also help third parties offer additional services.

 

Would that not create weak links, for instance when third parties access our banking data?

I expect with all this being new, regulators have not yet covered all these areas yet. Services such as Nutmeg and Mint currently do not take that risk.

 

Does it make banks less competitive as compared to new entrants, as there are some methods they can’t use that could make their business models work, yet new entrants can?

Banks feel overly regulated, as compared to newcomers that are not trying to be banks. Newcomers are coming in to cherry pick parts of the business—crowd funding, retail convenience payments, FX trading, back office processing—and they are not regulated like banks.

 

Could you share a bit about potential disruption to transaction banking and what this might mean for bank strategy?

Transaction banking refers to the services banks provide to corporate and government sectors. This includes cash management, trade finance, short- and long-term lending, treasury capabilities and more.

People get paid by corporate and government entities. Company growth drives economic growth and having certainty through the supply chain is critical. It is about accelerating the economy, as supply chains link up due to payments going real time. In the UK, the view is that real-time payments could add2% to GDP. Faster payments is a significant improvement that helps small businesses to physically get money when a service is delivered, instead of waiting two days for the bank to open on Monday and for the money to clear.

If you look at the corporate market, the better they can understand risk around supply chain and the finance they put around it, the more efficient they become. The more efficient corporate entities become, the more they can predict their cash flow worldwide and optimise working capital management, and hence be more willing to invest in economic growth.

So this is all about economic growth, as the collective economy operates in real time, offering information across operations for corporate entities to make better decisions. This is the reason why so many countries are looking to move to real-time payments.

 

So where would you advise banks to focus, and what initiatives and technologies could help them stay relevant in the face of disruptive new entrants?

In transaction banking, rather than focus on their own products, leading banks are innovating in how services are delivered to customers. Corporate entities are looking for full dashboards that help in their decision-making. Banks that help to knit together dashboards are driving this market and trying to do this very fast.

 

In terms of regional performance, which regions are leading in the transformation of banking and how?

In terms of retail banking, Europe as a region and the Nordics show strong innovation. In terms of digital disruption, I’d say Europe, Singapore and Australia. Digital consumerism has not yet hit North America, but it is coming.

In terms of transaction banking, this is based on institutions rather than regions.

 

What in your opinion is the outlook for 2015-2016?

Many banks are now focused on stepping up to the new digital paradigm. There are a number of challenges to stepping up, including internal resistance to change. The biggest challenge, however, are legacy infrastructures. Many banks are running on complex legacy platforms, and if you decide to buy a new platform or system for core banking, it can take up to six years to implement. Projects also often run over time and over budget.

So banks are trying to do three things at once: first, perform open heart surgery on their legacy infrastructures; second, maintain or improve their return on equity; and third change their banking model.

Yet the majority of banks don’t have enough to invest. So what is important is they look at different models of modernising legacy.

 

This has been really interesting Penny. Thank you so much for sharing your insights and I wish you the very best for the future.

 

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Penny Hembrow is Vice President of Global Banking for CGI.

Penny is responsible for the growth of CGI's global banking business through the development of thought leadership and the delivery of aligned services and solutions with major clients worldwide. She has a wealth of experience in banking from her key roles at RBS, Barclays, Deutsche Bank, Experian and PwC.

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