While 2018 promised to bring in a new era of digital banking with the introduction of open banking and PSD2 regulations, the reality is a landscape that looks much the same, with very few needle-moving developments. By Scott Carey
It is still early days though, and the major banks have all made moves of varying degrees to become more open and digitally competitive in the face of challenger banks and fintech disruption.
In the foreword to the latest MoneyLive Future of Retail Banking report, Juliet Knight, director at Marketforce, sums up the current industry mood: “Of all the forces weighing on the banking industry, from open banking to Brexit, there is perhaps none as fundamental as the change in consumer behaviour. For decades, banks have relied on customer inertia as a valuable component in the business model; even mis-selling scandals and the launch in the UK of the seven-day switching service have failed to prick customer apathy.”
So what can we expect in the year ahead? With no major new regulations on the horizon we hope to see banks continue to innovate and learn from their nimble fintech siblings, with more open banking-enabled features and products hitting the market and perhaps even some innovative ideas that aren’t simply borrowed from the fintech sector.
Here’s what to expect in banking technology in 2019:
The banks hit back
Whether the average person on the street knows what open banking is or not is less relevant when the big banks are releasing new digital products that make regular interactions simpler.
This year both Barclays and HSBC made it possible for customers to see multiple accounts from their mobile apps, regardless of if that account is held with a rival bank, just in slightly different ways. While HSBC created a whole new app, first as a Beta then as the Connected Money app, Barclays has baked the feature into its core banking app for all customers.
On the business lending side, Natwest launched a standalone digital business current account under a new brand called Mettle. Meanwhile Lloyds earmarked 2,000 new digital roles to speed up its innovation curve.
“We’ve seen the bar continuously raised on what you can do with a truly digital proposition,” David Brear, CEO of financial services consultancy 11FS told Computerworld UK. “I think we’ll increasingly see banks copycatting of fintech features, possibly to incumbents detriment if they don’t get their underlying core technology sorted out to deliver digital, not digitised experiences.”
Elsewhere, Nationwide didn’t launch anything of note this year but did announce its technology strategy, including more than £4 billion in investment. We also wait with baited breath to see if rumours on a standalone digital bank materialises from the corridors of RBS in 2019.
“It seems this work is already making an impact: two out of three of our respondents believe the gap in the quality of the digital experience between traditional banks and fintechs has narrowed over the last two years,” as the MoneyLive Future of Retail Banking report for 2018/19 outlines.
Less patience with digital failures
This year saw an unprecedented number of major IT failures at UK banks, with Barclays, HSBC, NatWest, RBS and TSB all hit with significant outages, something the government, and consumers, are clearly losing patience with.
The Treasury Select Committee announced in November that it will investigate whether banks are sufficiently prepared for outages, and if regulators such as the Financial Conduct Authority and the Bank of England are equipped to hold them to account.
Nicky Morgan MP, chair of the Treasury Committee, said at the time: “The number of IT failures at banks and other financial institutions in recent years is astonishing. Millions of customers have been affected by the uncertainty and disruption caused by failures of banking IT systems. Measly apologies and hollow words from financial services institutions will not suffice when consumers aren’t able to access their own money and face delays in paying bills.
“The committee has launched this inquiry to consider the causes and consequences of these failures, and will examine what industry and regulators are doing to promote operational resilience.”Add to that the fact that recent figures from the Current Account Switch Service showed TSB had the sharpest decline in net customers following its most recent IT failures and it would seem that customers also have little patience for IT issues.
Chris Huggett, senior vice president for Europe and India at Sungard Availability Services puts these issues down to pressures on banks with legacy systems to adapt to digital disruption.
He said: “As the trend of technology becoming ever more focused on the end-user continues into 2019, so too will the trend of legacy IT systems burdening the digital transformation efforts of high street banks with downtime and disruption.
“This year, botched efforts to both migrate legacy systems from 50-year-old COBOL-run IT infrastructures to the cloud, and to embed new applications into a tangled web of new and old software were exacerbated by protracted periods of downtime for customers whilst the high street banks have scrambled to bring services back online.
“With customer-centred digital transformation efforts high on the agenda in 2019, disruption to banking services will be inevitable given the complex web of new and old in the IT systems of traditional banks.
Having the resilience to recover from inevitable IT fiascos without customers being affected will be vital to ensuring operational continuity and services for customers, helping to stem the flow of customers moving to digital native challenger banks.”
What will happen with open banking?
The much-lauded open banking ‘revolution’ will enter its second year in 2019, and while YouGov research from August showed that 72 percent of adults in the country had still never heard of it, that sort of statistic is overblown. Open banking is an inherently difficult thing to market, and its success is far less reliant on name recognition than it is on adoption, but concerns over data security still need to be met for the regulation to be considered a success.
Jed Murphy, UK head of strategy and innovation at Cardlytics put it best when he said: “Most people knew there wouldn’t be a ‘big bang’ moment with open banking. But even as we approach the end of 2018, it is some way off from effecting real consumer change. Old habits die hard when it comes to your personal finances, particularly around privacy. If entrenched customer behaviour is going to change, concerns must be tackled head-on, with industry-wide changes and truly compelling propositions.”
Jake Ranson, CMO at Equifax UK, added: “January 2019 marks the first anniversary of open banking, and we can expect it to play a central role in the banking sector for the year ahead. As more companies evolve the new technology into live customer journeys, consumers will really begin to experience the full benefits of the proposition and demand for open banking will increase.
“Of course, challenges remain – there is still an educational deficit regarding how open banking can improve consumers’ financial lives, as well as understanding data’s positive predicative capabilities.”Nick Caley, VP of financial services and regulatory at ForgeRock says “there’s plenty to celebrate,” though. “We’re only 11 months into building a new financial ecosystem and there are already 86 Third Party Providers (TPPs) registered with the FCA to provide either Payment Initiation or Account Information services based on the UK Open Banking Standard,” he said.
Imran Gulamhuseinwala, the implementation trustee for open banking also, naturally took an optimistic spin on the first 10 months of open banking, telling Computerworld UK: “Some really exciting products have been introduced into the market, which are beginning to show how – powered by open banking – people are having the opportunity to more easily and securely move, manage and make more of their money.
“But with the line of sight we have into the open banking “pipeline”, this is going to considerably ramp up in 2019. We expect the ecosystem to develop with even greater momentum and pace not least as we see greater conformance with the implementation of the Standards as well as greater innovation in the market.”
Take the UK fintech Iwoca as a success story, which announced new open banking connections to Barclays and HSBC in December, adding to an existing connection with Lloyds Bank. This allows small businesses that bank with those lenders to apply for loans or a credit facility quickly and easily by giving them direct access to five years of transaction history instantly.
SenthilRavindran, EVP and global head of xLabs at Virtusa added: “Open banking has been ‘in the wild’ for almost a year now, and though we’ve seen a handful of consumer apps, it’s largely failed to spark the promised revolution, mostly down to banks’ reluctance to give away data to fintech rivals.” He predicts that this will change in 2019, “with competition giving way to collaboration”.
Finally, Frank Jan Risseeuw, CEO at Yolt believes that “the combination of innovative technology and legislation is generating a growing openness to cross-industry partnerships and a more established sharing economy”.
It has been hailed as the next big banking channel for years now, but voice services could see a spike in adoption in 2019 if the MoneyLive Future of Retail Banking report is anything to go by.
The report reads: “More than four out of five (84 percent) of our bankers believe that voice-activated digital assistants will become the next major consumer channel and 78 percent think the majority of digital natives, those who have grown up with internet-related technology, will embrace voice as a banking channel within the next two years.”
This sort of adoption hinges on security and reliability however: “For more serious situations involving money, such as shopping or payments, consumers prefer more traditional channels, with almost half not trusting the voice assistant to correctly interpret and process their order or feeling uncomfortable sending payment through a voice assistant.
Martin Ewings, director of specialist markets at Experis added: “Voice technology risks becoming the next big IT skills gap and a real barrier to innovation. The value of the market is forecast to reach $8.3 billion by 2023 – but this rising demand is set to have an impact as early as next year. While voice technology has been around in the consumer world for the past few years, enterprise adoption is the next major focus for organisations.”
That adoption curve isn’t just for customer service queries either, with the bankers surveyed expecting almost half of balance checks and a third of payments to be activated via voice within five years.
Hilda Jenkins, digital product director at Barclays also sees voice as an increasingly important channel.”With advances in user experience and user interfaces, I suspect we’ll start to see more complex customer needs surfaced on mobile platforms, such as investments, trading and mortgages,” she said. “I expect conversational UI will bring smoother experiences for customers completing these complex actions on mobile, and help them manage their finances more effectively.”
American banks are certainly ahead of the curve on voice, with US Bank offering voice services on all three major voice platforms (Amazon, Google and Apple) and Capital One has had Alexa skills available for over a year now.
Of course Brexit is set to continue to cause turmoil for one of the UK’s largest industries.
Charlotte Crosswell, CEO of Innovate Finance made a statement on the current state of negotiations after PM Theresa May pushed back the key vote in December: “The turmoil in the Brexit process means confusion continues for companies across the fintech ecosystem. Our own membership reflects this, with a split variety of views as to which would be the best option.
“Whatever the outcome, we will be working to protect the interests of fintech businesses and the people that work within our community, so we can provide practical help and advice going forward to make sure the UK fintech sector continues to thrive.”
In more positive news, the banks performed well under the Bank of England’s stress test ahead of what is widely expected to be a chaotic period in March.
Lee Thorpe, head of risk business solutions at the UK and Ireland office of analytics vendor SAS said:
“Following the UK banks’ poor performance in the European Banking Authority’s stress tests earlier this year, their showing in the Bank of England’s tests paints a more encouraging picture ahead of next year’s increasingly likely post-Brexit chaos.
“Banks must make a greater effort to automate and industrialise their risk analysis capabilities to ensure they have sufficient technical capabilities and capital to survive during rapidly changing and potentially
extreme economic circumstances,” he pitched.
AI has been hailed as a potentially transformative technology across industries, but we have yet to see a truly impactful application in banking.
The Future of Retail Banking report outlines a utopian vision of AI for financial services, stating: “AI will be a powerful tool in converting a transactional relationship, defined by apathy and distrust, into an engaged partnership, where banks truly understand a customer’s individual needs and design smart solutions to meet those needs.”
That being said, concerns remain in what continues to be a conservative industry. The report states: “Of course, these are valid concerns but they are not insurmountable. Leaders need to have the vision to understand the potential of AI, and then make the right decisions to rapidly overcome the data management and governance hurdles.”
One thing that is for certain is that if the financial services industry were able to leverage machine learning in a meaningful way, it’s the banks which have a head start. “Incumbents have the scale and the historic data to feed algorithms with huge amounts of data in order to build real granularity into their models and offer customers highly personalised experiences,” the report states.
James Smith, Nationwide Building Society’s director of mobile and digital said: “Greater processing power and larger data volumes will power new use cases for machine learning in the industry. These might include fraud identification, robotics, virtual money managers and digital assistants.”
Big banks have been talking about the potential threat of the tech titans Google, Apple, Facebook and Amazon (GAFA), for years now, but none have truly entered the financial services arena, yet.
“This year has seen many tech giants dipping their toes into the space, for example the Amazon and AMEX collaboration, or Google with Tez. They’re a looming threat and due to their brand and scale cannot be ignored. Amazon appears to have a bigger opportunity with AWS; something like 90 percent of fintech is based on AWS, so it will be interesting to see what they do,” David Brear from 11FS said.
The Future of Retail Banking report goes into some depth on this topic, stating: “The tech titans are a threat to both the challengers and incumbents – and it is a threat that is being taken seriously. After all, surveys suggest nearly a third of UK consumers would choose Amazon, Google, Facebook or Apple for banking services, and that rises to almost half of those aged 18 to 34. Industry insiders have long feared the intentions of Amazon, which in March 2018 was reported to be in talks with big banks about setting up a current account-type product for younger customers and those without a bank account.”
That report points to regulatory hurdles as the main barrier for the GAFA companies, but the real issue is whether they even want to become banks.
“They do, however, want to grow their businesses by facilitating seamless social and commercial connections – and frictionless payments, just-in-time credit and in-transaction insurance are all part of this ambition,” the report states. “This is not head-to-head competition with the banks but instead a gradual erosion of banking value chains that may prove difficult to withstand.”