Bank collaboration: winning the tug-of-war
Caught between competitive threats and strategic partnerships, bank collaboration can be a thorny topic. Nevertheless, as FX-MM’s Eleanor Hill discovers, forward-looking banks are now seeing the benefits of working with third parties start to outweigh any initial concerns – delivering some impressive and surprising results…
As much as bank collaboration has been a buzzword for years, the incentives for banks to join forces – not just with each other, but with new entrants too – are only becoming more compelling. In fact, a new study released by Temenos in mid-March goes so far as to say that in an era of ever-more intense competition from fintechs, only those banks that collaborate “will be the ones to survive.”
Even where regulation is the underlying driver for collaboration, banks have a conscious decision to make between basic compliance or leveraging regulatory change to put in place a new digital business model. The EU’s revised Payments Services Directive (PSD2) is a prime example of this in action.
Even where regulation is the underlying driver for collaboration, banks have a conscious decision to make between basic compliance or leveraging regulatory change to put in place a new digital business model
Designed to increase competition, innovation and transparency, PSD2 comes into force in January 2018 and will update the current framework on payment services, extending its scope to previously unregulated providers. According to James McMorrow, Head of Payment Strategy, Global Transaction Banking at Lloyds Bank Commercial Banking, “PSD2 has the potential to reshape the financial services industry as we know it, and so it’s no surprise that many banks are acting now to ensure they are best placed not simply to comply, but to take strategic advantage of the opportunities that different parts of the directive will create.”
One of the most significant changes under PSD2 is the Access to Account rule (XS2A), which signals a broader move towards open banking in Europe. XS2A means that third-party providers who are regulated and authorised by customers will be able to receive transaction and balance information from the account holding bank, potentially proving aggregation services, for instance.
Consequently, “the opening up of bank data will undoubtedly create new entrants into the space and new partnerships; whilst existing incumbents will need to consider how they can best continue to meet client needs,” says McMorrow. This may well involve more collaborative and strategic partnerships with third parties that banks have traditionally seen as competitors.
As Danny Healy, Financial Technology Evangelist at MuleSoft explains: “Open banking is, as the name suggests, about banks opening up the way they deliver their products today and no longer being the sole provider of those services to end-consumers. Instead, banks are being encouraged to share their capabilities with third parties and integrate them as part of the product experience. That third party could be a fintech, such as a peer-to-peer lender, but equally it could be a POS manufacturer.”
Nevertheless, the major focus in the market is arguably on fintech/bank collaboration since “Fintechs have the advantage of being able to focus on one specific area of the customer journey, and getting that just right for the consumer; whereas banks tend to have a finite number of rigid channels for interacting with customers, which can be quite limiting,” notes Healy.
And by sharing their in-house capabilities with third parties like fintechs, banks have the opportunity to open up new channels. “In the way that Amazon opens its platform up to third parties, we see banks like Barclays heading down that route,” he confirms. In this way, certain banks, Healy says, “are looking to act more like fintechs as they know it is becoming increasingly difficult to hold on to sustainable, competitive advantages.”
Banks are therefore leaning towards APIs as a means to become more agile around launching digital solutions, he adds. “As and when an opportunity appears, they need to be able to react with speed.” Although APIs in the PSD2 space are “quite commoditised since they all deal with account information or transaction information,” Healy does see “see some banks looking to productise their APIs, by designing them with third party developers in mind.”
Of course, APIs are not just for PSD2. Banks have been using them for years, but some are now investing in even more exciting ways to leverage them. As Healy observes, “Forward-looking banks are increasingly seeking to adopt an API-led connectivity approach. This essentially involves creating connectivity building blocks that can join together systems or data that have traditionally been separate – a common predicament in banks.”
The API economy
One bank that is actively using APIs to deliver further value for customers is Bank of America Merrill Lynch (BofAML). Tom Durkin, Managing Director, Digital Channels, BofAML says that the bank expects to support an open strategy for all its applications going forward – not just those in the payments space.
“With our corporate customers in mind, we have been deploying APIs to become more data-centric and change the way that customers consume the data. For instance, we’re collaborating with TMS vendors to ensure that our customers can pull incremental data from the bank directly into their TMS, rather than having the traditional back-and-forth,” says Durkin. This, he notes, opens up the data so that it’s no longer about the bank pushing a file out or encouraging the corporate to use the bank’s portal – it’s a new channel.
“Another project we’re working on is moving our Cash Pro Accelerate cash positioning tool online. Its whole backbone is built on an API which utilises Microsoft’s Office 365 because our corporate customers frequently use Excel spreadsheets to monitor their cash positions.” While Cash Pro Accelerate has been available as a proprietary app for several years, the bank is now making it so that a corporate customer can go to the Microsoft store online, download the app and consume the data inside Excel.
In addition to these collaborations with third-party vendors, Durkin says that there is collaboration happening between banks and corporates too. “Corporates are turning to their banks for help in reducing fraudulent payments, for example. APIs are perfect for validating payment information and making sure that the beneficiary’s account details are correct.”
Combating financial crime
Indeed, fighting fraud and financial crime is a significant focus of broader bank collaboration efforts right now. One such collaborative initiative was launched at the beginning of March by the Australian Transaction Reports and Analysis Centre (AUSTRAC). Dubbed the ‘Fintel Alliance’, it is being touted as a “world-first private-public partnership to combat money laundering and terrorism financing.”
According to AUSTRAC, the alliance involves industry and government agencies co-designing solutions that will transform the fight against terrorism financing and organised crime. It will also focus on developing ‘smarter regulation’, including streamlining the anti-money laundering and counter-terrorism financing (AML/CTF) regulatory framework for the banking industry.
Most banks view these partnerships as being a positive evolution, and any effort to work collaboratively to use standards and technology should be welcomed
“The Fintel Alliance is the latest in a number of initiatives that have been created over recent years,” says Paul Taylor, Director of Compliance Services at SWIFT. He points to the UK’s Joint Money Laundering Intelligence Taskforce (JMLIT) as another good example.
“Most banks view these partnerships as being a positive evolution, and any effort to work collaboratively to use standards and technology should be welcomed,” says Taylor. “JMLIT was established in May 2016, and already claims a multitude of successes based on their approach, and is working on further AML typologies to further deter criminals from using the UK financial system,” he adds.
In fact, even between May and July 2016, JMLIT contributed to 37 arrests of individuals suspected of money laundering; the instigation of 186 bank-led investigations into customers suspected of money laundering; the closure of 114 bank accounts suspected of being used for the purposes of laundering criminal funds; and the restraint of £145,000 of suspected criminal funds – among other wins.
Despite impressive results from national programmes such as JMLIT, the true challenge with AML/CTF initiatives is the cross-border nature of activities. What is ideally required is sharing of financial intelligence between countries and between organisations. But there are of course jurisdictional barriers to this, which are heavily influenced by country views on data privacy requirements, says Taylor.
Nevertheless, if financial intelligence sharing is considered a priority, then Taylor says that “companies need to feel that they are able to share data both between their own entities (that may sit in different data jurisdictions), and between their entities and public bodies. There is a view that opening up these barriers will lead to being able to better combat bad actors in the financial system.”
RegTech to the rescue
So, how might this happen in practice? According to Taylor, “In addition to public-private partnerships further working toward data-sharing initiatives, banks could also ride on the wave of the multitude of developing RegTech initiatives. Efficiency is a key concern for the industry, with billions now being spent on compliance, seeking a more efficient technology-driven way of handling the processes, and achieving further control should be a key priority.”
As well as assisting with AML, RegTech initiatives are also becoming popular in the know your customer (KYC) space. A number of start-ups are looking for ways to work with banks, helping them reduce the operational and fi nancial burden of KYC. A US-based company called Tradle, for example, is offering a blockchain-based KYC platform on which it builds “a global trust provisioning network to give retail, wealth, SME and institutional customers of financial institutions faster access to capital and risk allocation.”
This is just one of many RegTech-powered KYC solutions, however, and most are still very nascent.
It is understandable, therefore, that the industry is still investing significantly in KYC utilities. “We are entering the third year since the invent of KYC utilities, yet the adoption of the many utilities that were initially announced is hard to judge,” says Taylor.
“For SWIFT, we count nearly 3,700 entities live at this point, which we feel shows great progress in our elected focus space, which was essentially correspondent banking and funds distribution.” Of the other utilities, some of the smaller start-up companies have ceased, and other larger company backed utilities have started to converge – Thomson Reuters recently acquired Clarient Global, for example.
“Many utilities still seek a tipping point in terms of coverage of their target market, and evidenced efficiency savings off the back of that tipping point,” says Taylor. “For SWIFT, we have a number of data points suggesting a third saving, in terms of efficiency of process upon using the registry and embedding it in their process. For banks that continue to grapple with collating and gathering KYC data points, which can take over 200 days for some banks for some high-risk entities, the efficiencies can be significant.”
A better way
This observation points to one of the main aims of collaboration within the banking sphere, namely to find a smarter way of operating. But for banks to do that alone can be very challenging, as Liz Lumley, Managing Director of Startupbootcamp FinTech’s accelerator programme in London will attest. “The financial services industry is quite unique in that banks rarely undertake any R&D. The reason for this is that a whole raft of legacy and regulatory issues make it very difficult for banks to undertake R&D in a live customer environment,” she notes.
“Banking products have to be fail-proof when they’re launched; whereas bugs in fintech solutions tend to be fixed through user-testing.” So, by collaborating with fintechs, banks can essentially outsource R&D, she says, since fintechs are in a position to do that customer testing and validation.
Sensing the potential of such a set-up, Lloyds Banking Group was the first partner of Startupbootcamp FinTech in 2014. “We recognise the collaboration between fintechs and banks as being a key point of our digital strategy,” says McMorrow. “This is an opportunity for our colleagues to be mentors or ‘bankers in residence’, whilst the fintech start-ups bring a different culture and set the benchmark in terms of customer experience for the most digital-savvy customers.”
Dare to be different
The key to working with start-ups though, says Lumley, is to not make the measure of success all about return on investment. “Whenever a bank looks to partner with a fintech, the only measurement they should be looking at is ‘what can we learn from this experience?’”
It’s also about thinking outside the box in terms of applications of fintech and the potential benefits for banks. As McMorrow explains, for Lloyds Bank, one of the key successes of being part of Startupbootcamp FinTech “has actually been implementing a coffee ordering app across some of our offices, devised by Worapay, an alumnus of the accelerator programme. This is saving our colleagues a huge amount of time in waiting in queues.”
And as clichéd as it may sound, banks will only be able to take full advantage of collaborating with vibrant fintechs – and indeed other third parties – if they are prepared to challenge traditional thinking and processes. Some banks are already doing a good job of this, in particular in geographies such as Scandinavia, where innovation and creative thinking are practically national pastimes.
For the largest global banks, however, people and processes are deeply entrenched. While young, fresh talent is rising through the ranks, it is today’s leadership that requires a shake-up. As such, “it’s now not unusual to see banks bringing in talent from Silicon Valley to take up the CTO role. Equally, many have come from large online retailers or internet companies, rather than having a traditional banking background,” says MuleSoft’s Healy.
This, he concludes, means that “they not only know new ways of doing things, but they also don’t know the old ways,” which can be very useful when it comes to making a success of collaborative projects.