FinTech Impact on Banks and Payment systems Towards a more contestable market

Transcription

1 FinTech Impact on Banks and Payment systems Towards a more contestable market Keith Saxton December 4th

2 Agenda Why is there a need for change? Modernisation of banking systems - the challenges Technology implications FinTech Futures FinTech opportunities Payments and Commerce Summary Q & A 2

3 Why is there a need for change? EXTERNAL Market share at risk Threat of systemic failure (via business model and technology) Regulator demanding protection for customers and economies Many customers demanding a better service New competitors making inroads better economics, brands, technology Shareholders wanting better returns Governments demanding better behaviour INTERNAL Margins under pressure cash constraints and changed markets Cost/income ratios out of kilter - most banks way off a target of 50% Businesses too diversified Systems under stress Change has been too slow 3

4 The modernisation challenge - complexity Banking technology infrastructure complexity Source: IBM Many financial institutions are trying to run services on disparate systems whose complexity and inflexibility make it difficult to respond to regulatory demands. Decades of ad hoc technology investment, combined with merger and acquisition activity, has left them with disconnected silos of information and duplicative processes. Systems that were developed in an attempt to stay ahead of the game when they were implemented are now holding firms back. JWG Group (March 2012) 4

5 The modernisation challenge catch 22 budget for innovation, addressing infrastructure challenges etc Therefore... Technology estate maintenance ( run the bank ) Regulatory requirements ( change the bank ) Customer centric innovation ( change the bank ) Source: techuk members 5

6 Drivers, Obstacles and Enablers of Change Revitalising the brand Better use of data Better customer engagement Personalisation Ways forward Strategic focus, portfolio renewal Concentrate on value-add Better use of technology, labour Drivers of change Customer demands Competition Regulation Return on Capital Shareholders Obstacles to change Breadth of operations Culture, Legacy IT, Workload Org. structure, Breadth Capital, Margin, Budget Competing priorities 6 Change is risky, and difficult too Past track record, No trust in outsourcing Loss of control, career risk? Management Clear strategy Precise objectives Decisive action

7 Risk & Regulation forces change Basle Risk Data Aggregation forces an integration of risk data and analytics Impacted Domains RDA Requirements IT capabilities and infrastructure Data governance Risk management (processes/business architecture) Corporate governance (organization/processes) Supervision & controls & (business /operations) Policies & procedures, documentation Business activities & processes (other) Required Capabilities Metadata Management Entity / Reference Data Integration Exposure Aggregation Enterprise Reporting Risk Appetite Management Process Support Data and Process Governance IBM Confidential 7 Risk Process Control & Supervision

8 Three areas of change in IT Core Systems Enable the bank to be agile and to improve CX and service Clear review of alternatives - build business cases Kicking the can along the road only goes so far Identify key must haves - outsource the rest Systematically increase resilience on third parties Build consensus at Board level - tell shareholders Support Services Focus on the key areas and increase agility Determine key differentiators, reduce system scope Minimise inter-dependencies Agile, composeable capabilities with cloud delivery Shared service models from best-in-class partners Cut staff and system count Customer facing systems Modernise the end-user facing portfolio Focus of investment change the bank Farm data, remove stovepipes, increase analytics Omni-channel investment balance branch decline Build effective 2-way communication Broaden range of advice provided to the customer 8

9 Building a vision for change What does a bank do and how does technology enable it? Today in Theory Today in Practice! 9

10 Focusing to enable change What does a bank HAVE to do? How SHOULD technology enable it? Concentrate on customer inter-actions Control balance sheet Manage the loan book Everything else you can outsource (A. Thompson, Co-Founder Metro Bank) Simplify the problem Utility models in the middle and back office Outsource technology provision Cloud services Opportunities for vendors, bank consortia and governments to set up shared service models Parallel operations to enable migration Internal: key elements of value adde Shared Services, Internal Ops Completely Outsourced 10

11 Overarching trends The technology industry is itself undergoing a paradigm shift... 2 fundamentally important trends that mean inaction will be detrimental to financial institutions Consumerisation of technology Cloudification of everything 11

12 Computational needs for banks are changing dramatically Trying to analyse past customer behaviour Cognitive computing Trying to fix batch processing of banking operations Real-time banking offering superior customer experience Analysing and processing system of records Customer Account Location Product Listening Capabilities Cognitive Capabilities Filtering Capabilities Discovery Capabilities Event Management Building systems of engagements and insight To own building of banking services To source banking services on cloud Source: IBM 12

13 The Importance of Cloud for dealing with Legacy systems IBM Next Generation Cloud Platform API Economy External Ecosystem API analytics API commerce API collaboration API location API data API services Software as a Service Marketplace App Solutions API API Cloud Operating Environment Services & Composition Patterns developmen t operational mobile data security API & Integration Services application services Traditional Workloads Platform as a Service Software Defined Environment Software Defined Compute Workload definition, Optimization, & Orchestration Resource Abstraction & Optimization Software Defined Storage Software Defined Networking Infrastructure as a Service 13

14 Vision of the Bank of the Future Mobile Banking/Commerce Direct access for clients all channels real time Born in the Cloud banks Real time liquidity and counterparty risk Collateral Optimisation Phases of technology Major Banks building their own integration across silos for regulatory compliance and better risk management - and allegedly better customer service Born on Cloud banks and banking subsystems, banking analytics software products. Cloud based Market Service Utilities Regulatory/Risk Data, Surveillance, Fraud Transparency, Regulatory Compliance, Cross Silo Integration, Market Interoperability 14

15 FinTech Futures - five key groupings of technology advancements 1 Machine Learning and Cognitive Computing 2 Big Data Analytics / Optimisation / Fusion 3 Distributed Systems / Mobile payments / Peer-to-Peer Applications 4 Cyber security, Compliance and Authentication 5 Crypto-currencies and Blockchain FinTech Impacts People and Policy, Business Models, Globalisation, Financial Regulation 2014 International Business Machines Corporation 11 15

16 Specific technology focus of the industry - opportunities for FinTech Here and now Data management Data increasing exponentially but where s the insight? Driven by need for greater insight and monetisation of existing data Need to mitigate impact of analytical silos within financial institutions Digital (not just mobile) payments Consumerisation of technology is driving change Customer is now (finally) at the forefront of considerations Wearable technology could pose opportunities in the longer term Cyber security Not just financial institutions & FinTech companies but their supply chain De-perimeterisation of infrastructure is posing challenges Data protection regulation change will increase demand for cyber solutions 16 P2P lending/crowdfunding Explosion in alternatives to traditional bank lending However, a paradox in the UK Govt supportive of the principle, but impending regulation seen to be constrictive Cloud innovation Enable secure database outsourcing to the cloud Hybrid clouds for data analysis Challenger banks especially open to anything that reduces sunk costs of technology Real time risk monitoring Monitor risk in real time to support regulatory compliance Joining up information silos is key Rapid response to threats (e.g. Cyber, AML, liquidity, etc)

17 Specific technology focus of the industry - further opportunities for FinTech Possible future areas of innovation Identity & Authentication Fraud levels still high how do you increase the sharing of fraud data? UK Govt keen on financial institutions tying in with efforts to reduce benefits fraud How do you improve the user experience i.e. Reduce multiple logins and passwords? The insider threat is increasingly prominent how to mitigate? Cypto currencies Virtual currencies just too unpredictable, but what about as an asset register? Potential to change the payments infrastructure? But regulatory uncertainty might block any progression Collaborative (central) utilities & shared services Central utilities have been in existence since 80 s Legacy is dead future is collaborative infrastructure & data sharing platforms Open source infrastructure such as the Open Compute Project starting to gain traction Building a platform for greater competition (reducing barriers to entry) 17

18 Non-Bank Banks are active in most market categories Retail Transactions Personal Lending and Saving Venture Capital 18 Invoice Finance / Supply Chain Finance

19 Retail Commerce and Payment in the midst of massive mobile disruption Mobile PoS Proximity Sensing Social Checkin 19 Self-Scan & Mobile Payment

20 Payments Threat & Opportunity for the Banks Threat New entrants, such as PayPal, Apple, Google are focussed on the data opportunity created by mobilisation of commerce They undermine banks : Customer relationships Brand relevance Privileged regulatory status Data and customer insight Salary mandates Revenues Opportunity Banks leverage their key assets Trusted brand Customer data Servicing To capitalise on Emergence of new commerce channels Enter new product areas Generate new revenue streams 20

21 Anyone can do payments now 21

22 In Summary - Ongoing Questions Have the banks got a strategy yet or are they just reacting? Demands a strategy requires vision and domain expertise Prioritisation where to start? Can banks change fast enough? How can they reduce complexity? Is there a half-way house? E.g. future proofing with lower risk? Are banks problems unique? Can other sectors provide insight? Can banks rely on third party suppliers to solve the problems? Can governments help to reduce the risk of change? What legal framework is necessary to enable change? Does digitalisation help or hinder the process of change? How can the banks migrate customers off legacy services and systems 22

23 Thank You Keith Saxton BIO Keith Saxton is an experienced executive leader who has a deep understanding of the Financial Services industry, and the role that technology plays in developing and executing business strategy. He is an expert in how business risk can be changed and managed by technology, and understands the risk of technology - a combination providing a unique perspective and executive capability. Until recently Keith was leading IBM Research's Financial Services strategy and go to market efforts globally, with a focus on industry and line-of-business research, alongside traditional technology efforts. He also worked with regulators, central banks and supervisors, along with the major firms, on the implications of monitoring systemic risk and addressing the demands and implications of ongoing regulatory reform. During his career at IBM Keith carried out various industry focused leadership positions for a number of business units at a country, regional and global level. Prior to joining IBM he worked in the industry for over 20 years and held a number of executive positions in the front office of major global banks. including Managing Director of Fixed Income Capital Markets at a North American bank, Board Director and Head of Fixed Income at a Japanese investment bank, and Head of Fixed Income Trading at a major European wholesale bank. Responsibilities covered day to day management of the front office, including trading, sales, capital markets, risk, as well as longer term strategic business planning. In a non executive role Keith is Chairman of the Financial Services and Payments Programme for techuk, the UK trade association for the technology industry, and is an Expert Panel Member of a UK Government Office for Science FinTech Futures review. He is well published in mainstream and industry press, is a frequent key-note speaker or Chair at industry conferences. keith.saxton@outlook.com 23