In the first part of this series, we touched on how the coronavirus pandemic turbo-charged the digitisation of banking services and highlighted pieces from the FT about the longer term impact on the operating models of banks around the world.
The theme of digital innovation in banking is not only highly topical, as banks and financial institutions look to build on recent momentum, but it’s also hugely broad. The second post in our series, What should banks be reading? identifies some of the key priorities in terms of banking’s digitisation and points readers to the FT’s expert commentary and analysis.
What role can banks play in the payments revolution?
What was once regarded as a fairly dull back-office function at heavily regulated banks, has been transformed by innovative technology and shifting consumer preferences. The payments sector has grown rapidly over the past decade, and technology groups, payment-processing companies and financial institutions are all vying for market share.
The FT’s Robert Armstrong and Nicholas Megaw identified size as a core driver for a wave of consolidation in the payments space at the beginning of 2020. Those companies processing higher volumes of payments enjoy higher margins, and with more transactions than ever taking place online, this previously unloved business is now highly lucrative to those who can achieve the greatest scale. Private equity firms were quick to seize on this opportunity, as observed by FT correspondents Kaye Wiggins and Silvia Sciorilli Borrelli, but what are banks doing to re-engage in a space they used to dominate?
A clear path for achieving growth in the payments space is through takeovers and joint ventures. Frankfurt correspondent Olaf Storbeck reported that Deutsche Bank’s newly formed “Merchant Solutions” payments processing business was eyeing up potential targets. Other lenders such as Royal Bank of Scotland have instead invested in their own payments businesses. In light of tighter regulations following the collapse of German payments group Wirecard, are more tie-ups between banks and smaller payments firms now likely?
How important is data in defining how banks work in future?
FT deputy editor Patrick Jenkins says banks have undergone a “tech awakening” since the onset of the coronavirus pandemic, and the race to find ways to use big data and artificial intelligence in finance is heating up.
FT commentators have long written about how AI will change the way we manage money, and increasingly there are more examples appearing of the technology upending the finance sector. US editor-at-large Gillian Tett used a tie-up between Barclays and Amazon as a case in point, but also cautioned the need for greater regulatory oversight to combat the potential costs, such as the susceptibility of AI to embed bias, including racism, into decision making.
While data science is being used more by banks to help customers compare products, find deals and receive tailored guidance, Viral Acharya, former deputy governor of the Reserve Bank of India, highlighted its application in emerging markets, where suitable financial products can be offered to the large ‘unbanked’ population.
AI applications are reliant on huge volumes of data, and the storage and management of that data is key. Cloud computing is one area that’s been enthusiastically adopted by other sectors but the banking space has taken longer to be convinced of its merits. Patrick Jenkins explained however that the big banks’ shift to the cloud is now accelerating, as long standing nervousness around security has gradually started to dissipate.
Pre-pandemic, the banking sector was more reluctant than most to move to the cloud.
FT deputy editor
For an industry that has struggled with profitability since the financial crisis, innovation in the use of data provides many exciting opportunities. How great a role might this play in deciding the future winners in banking?
How can banks combine experience with innovation and new ideas?
Prior to the pandemic, the FT’s banking editor Stephen Morris had already identified a shift in the way that big banks work with fintech firms. With more cash required to upgrade ageing systems and the valuations of more mature fintechs heading skywards, banks were exploring partnerships over majority ownership stakes.
As the world went digital amid the coronavirus crisis, even traditionally “technology-shy regional lenders” in countries such as Japan began to use partnerships as a means of accelerating innovation. Asia business editor Leo Lewis commented that important partnerships with major tech firms announced by Japan’s three biggest banks could be a sign that digital banking in the country may be normalising.
Banks and fintech groups are setting up partnerships to combat the use of doctored video and audio content by fraudsters.
Regulation correspondent
We’ve also seen banks using partnerships to respond to emerging cyber threats. Regulation correspondent Matthew Vincent reported that banks and fintechs were working together to combat ‘deepfake’ fraud - an issue that had become more prevalent with less face-to-face contact possible because of national lockdowns.
Back in 2018, then FT banking editor Martin Arnold cited partnerships as one of five ways banks could respond to the fintech threat. Several years later, are bank-fintech partnerships now the preferred route for banks to merge their experience with new innovations?
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