Banking technology predictions 2020

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The banking industry is now 10 years clear of the global financial crisis of 2008, but the shockwaves of that event are still being felt across the sector. Next year will see open banking regulations bed in after being firmly established in 2018, and a newly minted majority Conservative government is also starting to crank up pressure on the sector for its persistent IT failings.

"The global industry approaches the end of the cycle in less than ideal health with nearly 60 percent of banks printing returns below the cost of equity. A prolonged economic slowdown with low or even negative interest rates could wreak further havoc," according to consulting firm McKinsey's Global Banking Annual Review 2019.

"This is likely the last pit stop in this cycle for banks to rapidly reinvent business models and scale up inorganically. Imaginative institutions are likely to come out leaders in the next cycle. Others risk becoming footnotes to history," it adds.

With stakes that high, here's what we and the industry expects from 2020.

Challengers to come of age?

As highlighted by McKinsey, the UK's biggest banks need to continue to innovate to meet rapidly changing consumer expectations if they are to bypass major risks to their already fragile business models.

David Brear, group CEO of the consultancy 11:FS believes that 2020 will be the year that challenger banks will break into the mainstream and become "just banks".

"The one pushback has always been 'yeah great but the numbers’ aren’t mind-blowing,'" he told Computerworld. "But the continued growth, the TV adverts that are raising awareness to the wider population, the expansion of their offerings will make the likes of Barclays, HSBC and Lloyds finally admit they are losing customers and revenue due to the presence and performance of Monzo, Starling, Revolut and Tide. Admitting this is the last bastion of the incumbents who until now have been deniers."

Andrew Stevens, global banking and financial services specialist at customer experience technology vendor Quadient, tends to agree.

"As a result, these banks will begin to pick up the critical minimum number of customers to become profitable, taking away share of wallet from the incumbents. This is set to unsettle traditional, incumbent banks, forcing the realisation that it’s no longer viable to just put a thin customer experience marketing veneer over traditional cost saving and revenue generation projects," he said.

James Smith, director of Nationwide Digital, sees this threat not just from the challenge banks but the wider technology industry at large.

"As we have already seen with Apple launching their own credit card, major tech players will make a more direct move into retail banking. With Google, Uber and Facebook already circling the industry with several small recent announcements designed to dip their toe in the consumer finance world and companies, like Alibaba, already offering financial services to their users, the attraction of managing your finances in the same apps that you message friends, shop online or play games could be very appealing," he said.

Read next: How Megan Caywood wants to bring a fintech mindset to Barclays

Of course the incumbent banks are fighting back, with major technology investment earmarked by the likes of Nationwide, Lloyds and Barclays, as well as a slew of new digital propositions, many of which are lightly veiled fintech copycats.

Open Banking to go mainstream?

The mainstream moment for open banking has been predicted and argued over every year since the inception of the regulation in 2016, so why should 2020 be any different?

First there are the numbers, which are starting to reach hockey stick curve levels. In its latest highlights release the Open Banking Implementation Entity (OBIE) outlined that it now has 188 regulated providers operating in the open banking ecosystem, contributing towards 180.6 million API calls in the month of October.

Those numbers may signal progress but the issue with open banking will continue to revolve around actual customer-facing propositions, of which more than 50 are now live.

Commenting on the October highlights, trustee of the OBIE, Imran Gulamhuseinwala said: “It is great to see so many more third-party providers using open banking technology month on month, enabling SMEs and consumers to manage their finances more flexibly."

Recent examples include small business accounting apps integrating directly with customer's banks to streamline operations, and American Express, which has launched a new 'pay with bank transfer' feature powered by open banking.

The dream of open banking as it was first conceived was to give consumers more choice, and force the whole financial sector, from the big banks to smaller fintech startups, to collaborate and innovate using these newly open data streams, but some of the people responsible for this at the big incumbent banks certainly don't believe the industry is close to achieving that yet.

Read next: The big UK banks talk about open banking successes and failures so far

Earlier this year, Hetal Popat, head of open banking and PSD2 at HSBC put the onus on fintech startups, and not big banks like his employer, to realise this.

"Remember the point of this is not for the banks to be innovators, the point is that there should be fintechs who are supposed to be the entrepreneurs and innovators, you're supposed to be building on top of us, not us using you as middleware and offering propositions, that wasn't the dream the market had," he said.

"So far I can't think of any commercially sound propositions in the market," he added. "There's nothing out there that I've seen that is actually making money because of the open banking rail. Has anyone got a commercially viable proposition that they can launch using what we have built to date? If not, we should be very careful about putting more into it."

Bye bye passwords?

Despite the confirmed delay to the implementation of Strong Customer Authentication (SCA) under PSD2 until 2021, banks must continue planning for a world where customers will be expected to undergo multi-factor authentication for online purchases.

James Smith, director of Nationwide Digital predicts that "2020 will be the year the industry gets SCA ‘done’".

What he means is: "The creation of a seamless experience that works for everyone, whether they wish to authenticate payments digitally via their phone or their watch or ‘offline’ via a token.

"Continuing to support customers who don’t use digital banking, ensuring they remain protected and can transact online as easily, is essential to ensure that the implementation of SCA is seen as a success and that no consumer anywhere is seemingly 'left behind'," he added.

As Nick Caley, VP of financial services and regulatory at the digital identity specialist ForgeRock predicts, 2020 is more broadly about "going passwordless".

By which he means: "Going beyond biometrics and into real-time, contextual behaviours and mapping relationships with trusted devices that are being used to secure payments, fund transfers and trades. In such an environment, the use of AI to deliver greater personalisation, whilst also adapting to unusual patterns of behaviour and geo-location, will enable quicker, more seamless and secure financial services experiences."

Small business banking, the next big battleground?

As the Banking Competition Remedies (BCR) from the RBS bailout have all been dished out now, the way this money is going to be deployed by the various beneficiaries is starting to become clear. These awardees are now in the execution phase required to shake up the way they lend money to SMEs by leveraging new technology and data streams to do away with manual loan approval processes, reduce the risk of defaults and get cash into the hands of business owners more quickly.

Pair this with a new industry-wide commitment to openness and partnerships, and we should soon see a far simpler route to finance for small business owners, with quicker access to cash, less form-filling and fewer rejected applications.

Read next: Why SME lending is the big battle for the future of business banking

This of course will require a change in mindset from traditional players as they learn how to interoperate with partners in an ecosystem and find ways to protect their bottom line while doing so, which is why we expect to see far more partnerships in 2020 than ever before.

Greater scrutiny of IT failures

The UK government has been cranking up the rhetoric around clamping down on banks that fail their customers due to IT failures and outages for years now, but fresh off the back of a general election win, the banks might be sweating a little more for the year ahead.

Read next: The government has outlined its recommendations to cut bank IT failures

In its IT failures in the Financial Services Sector report, published in October, the House of Commons Treasury Committee deemed the UK's financial services sector to be responsible for unacceptable levels of IT failures, adding: “The current level and frequency of disruption and consumer harm is unacceptable.”

The suggested solutions range from linking senior pay to operational resilience levels, to issuing best practice guidance and fostering better industry-wide collaboration, to help avoid firms making the same change management or technology procurement mistakes as one another.

"Holding individuals and firms to account when IT failures happen is essential, not only to prevent individuals making the same mistakes again, but also to focus the attention of senior management on the risk of incidents and incident management," the report stated. "The regulatory mechanisms to ensure accountability for failures must have teeth, and equally as importantly, be seen to have teeth."

Now, with a freshly minted majority, it's safe to expect the government to double down on these promises.

Mortgage and wealth management disruption

In terms of financial services that are due a digital disruption in 2020, we predict mortgages and wealth advice to see significant change, driven by both fintechs and incumbent players.

As the McKinsey report suggests: "As advanced analytics and artificial intelligence continue to improve, digitisation of paper-intensive businesses such as mortgages, [Capital Markets and Investment Banking], and commercial and transaction banking will increase."

David Brear at 11:FS sees 2020 as the year "wealth management stops being for the wealthy," especially as the US success story Robinhood plots its entry to the UK market.

"Revolut and Freetrade are already in the mix, while incumbents are responding to the changing market, with Charles Schwab acquiring TD Ameritrade. Expect to see a lot more activity in this area," he predicts.

Add to that the news that Goldman Sachs is plotting a move into digital wealth management services for individuals with as little as $5,000 next year and disruption is clearly coming for the industry. Goldman has already invested in the UK digital wealth advisor Nutmeg, and the FT reports that the investment banking giant is set to launch a tax-free investment account under its Marcus brand in the UK next year.

Then there is mortgages, which have longe been due a digital makeover. There are already some innovative startups making waves with mortgages, from the first wave of digital mortgage brokers Trussle and Habito, to better advice with Mojo Mortgages even incumbents like Nationwide tinkering around with APIs for mortgage brokers, means there is plenty of change coming.

Keeping a lid on data bias

Innovate Finance CEO Charlotte Crosswell sees an increased risk in the year ahead as more financial services companies turn to data science techniques to make key decisions regarding customers, and calls for the industry to closely monitor this dangerous precedent.

“As the use of technology continues to increase in delivering innovation to our financial services in the UK, data bias and its impact will remain at the forefront in 2020 and the upcoming decade," she said.

"The rapid growth and adoption of fintech is uncovering issues around biased data that algorithms are amplifying and multiplying, resulting in discrimination on certain groups of people.

"We are already starting to see algorithms being built that determine what financial products/credit levels you might be offered based on your gender, social background, web searches, health and where you live in the world."

The answer, for Crosswell, is ensuring that companies hire diverse talent to build and monitor these systems: "Companies need to equip themselves with a workforce from diverse backgrounds, nationalities and ages, and ensure their leadership teams (including boards) are aware and ready for the change."

Copyright © 2019 IDG Communications, Inc.

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