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Digital Transformation in Financial Services

Digital Transformation has been underway in the Banks for some time. While Online Banking was transformative in that it brought for the first time a real alternative to the branch and enabled customers to access banking 24×7, it could be said that the first deployment of what people would regard as ‘Digital’ services was Mobile Banking. The phenomenal rate at which mobile was adopted to become a major channel for the banks, in response to consumer demand, has certainly changed how they look to provide consumer services. The mantra “Mobile First” now drives many projects. This uptake was driven by the surge in Smartphone adoption which coincided with a re-architecture of many banks internal systems allowing new vendors to integrate more easily.

The popular adoption by consumers of digital banking is clearly reflected in the strong growth in transaction activity across all digital channels.  As the latest BPFI Payments Monitor shows, over 21 million transactions were undertaken here in Q2 2017 alone, representing a 19.4% year-on-year increase.  Over the same period there’s also been explosive growth in contactless card transaction volume (up 138%) and value (up 149%).  Almost €0.7 billion was spent through contactless payments in Q2 2017.

Now it is Regulation that is driving competition, especially in Europe. Directives such as the Payment Services Directive (PSD2) mandate the banks to provide access to authorised third parties to allow them to execute payments and retrieve customer data – with their permission of course. This is seen as a game changer for the industry and the expectation is it will stimulate a wave of digital innovation, allowing new financial services players to enter the market.

This presents several challenges for the Banks:

  • New, nimble single service FinTechs who focus on a single service and compete by providing slick user experiences;
  • Digital only Banks who develop a core account platform and then use open Application Programming Interfaces (APIs)to integrate the best-of-breed single product FinTechs. This partnering for services will allow their product catalogue to be almost infinitely extendable at little development cost to them;
  • Large Digital Players will utilise this new, rich payment data to become aggregators of financial services, positioning themselves between the banks and their customers. Francisco González, BBVA’s Executive Chairman since 2000, believes that sooner or later these giants of the internet—Amazon, Facebook, Google—will be his main rivals. In a recent Economist article, he said “the digital world doesn’t allow many competitors”, and that in 20 years the ranks of banks worldwide could be thinned considerably as they will need scale to survive.

However, regulation bites both ways. New entrants often fail to understand the complexity, time and effort required to achieve authorisation and continue to meet on-going obligations. It can be a long expensive road for FinTechs before they can onboard their first paying customers.

The Banks on the other hand are particularly skilled in working to these standards and already have large customer bases. As a result, we are seeing an increasing level of cooperation. The FinTechs are nimble, focused and digital, but have shallow revenues and small customer bases. Banks understand regulation and have the customers, but are lumbered with legacy systems. Cooperation makes sense on many levels.

A surprise benefit of this new mandated regulation is that the Banks have been pushed into creating open APIs earlier than they might have planned. Having these tools now is giving them the means with which to compete in this new digital world. Many Banks are now asking why they can’t become FinTechs themselves.

Richard Walsh is Head of Digital Banking & Payments with Banking & Payments Federation Ireland (BPFI), the representative body for the banking and payments industry in Ireland.