This year has seen a great deal of instability in the financial services industry caused by new regulations and disruptive technologies, but is this set to continue? Graham Lloyd, Director and Industry Principal of Financial Services at Pegasystems, reveals the challenges and opportunities that lie ahead in 2018.
1. Successful social media
Social media content and its practices are notoriously untrustworthy, and banks are fearful to use these channels as they might contribute to further distrust towards their profile. However, with its increasingly prominent presence and real-time impact in our lives, it is a channel that simply cannot be ignored.
The issue is further augmented by several underlying changes including cookies being denied, adverts blocked and customer identification rates plummeting. The optimal use of social media in the financial services industry would entail first party data being the main input, to ensure correct customer identification with real-time updates. Though this is feasible, it would require an entirely novel approach to social media; the bank would have to take the driving seat. If done successfully, this would enable the bank to re-establish its integrity in the customer eye.
2. Evolving customer engagement
Although social media is a huge part of customer engagement, there are other components far more important. Namely, these concern digestibility, cost and effectiveness. The outputs generated via data mining are so great in number and can therefore only be referred to as ‘big insights’. This creates the inevitable problem that is how to leverage those insights into useful data within the constraints of budget and time.
Essentially, the traditional approach to driving customer engagement was to mine all the available data and consequently ‘see what pops up’. This approach unavoidably requires compromises like cached decisions, a vaguely formulaic but subjective selection process, or the use of advanced tools for inadvertent means.
An abstract way of defining this approach could be described as “ready, fire, aim”. To correct the analogy, banks need to begin by specifying their objectives, followed by collecting relevant data, and lastly, taking action. Not only would this be far more efficient and logical, it would result in a forward-thinking approach, where the desired outcome is always considered – i.e. the customers’ priorities on the receiving end of the engagement. Moreover, the combined forethought and speed would help ensure that the information the CSO and customer receive is both in real time and highly relevant.
3. Time to tackle trade finance
As trade finance risk-weighting is becoming protocol in March 2019, we are entering the home straight for finalising the necessary business changes. In response, most players will attempt to offset some of the costs of introducing capital requirements in this previously largely unweighted portfolio by making the usual productivity and processes further efficient. Although there are improvements to be made, only a small fraction of these will originate from what we are doing now, a little better.
Trade finance structures have stayed roughly the same over the past few centuries and so the March deadline may present the perfect opportunity to evolve into the present. For instance, a case management and decisioning system that drives and checks documentation and payments in nanoseconds as well as handling open account and documentary credits with equal rigour. This process could be outsourced if required, either to an automated clearing house, or it may present the opportune time to embrace distributed ledger technology (blockchain).
4. The truth is out about challengers!
Thus far, challengers and Fintechs have been portrayed as somewhere between a benediction and a panacea, apparently largely on the back of the virtue that – “we’re not a traditional bank”; they have fought all sorts of issues, from low take-up to sub-optimal IT, to almost-but- not-quite products, with hardly a question asked. However, their honeymoon period may be coming to an end, and even their combined market share is yet to have any serious impact on the position of traditional banks.
Some have indeed achieved more than others, but only a few are indicating promising, sustainable growth. Although some argue that their reason for being is to close a gap in the market or to provide an alternative, they still need to show profitability or good take-up to survive in the long run. It’s only a matter of time before an economic event or milestone means they have to take some hard decisions – foreclosures on small businesses in a depressed part of the Midlands, anyone?
Understanding and redefining the reality of what these firms can actually do will benefit all the parties involved. A more transparent financial industry will encourage a shared, single operating model, with efficiencies for all as well as more freedom to concentrate on customer needs and products. Furthermore, a more realistic understanding of the value Fintechs will actually bring should help articulate their brand and product set. Few Fintechs have an evident track record of continuous success but most have one great USP. These businesses may find greater acceptance and success as excellent components in the financial ecosystem rather than potential unicorns.
5. Possibilities of PSD2
The second Payment Services Directive is cause for sizeable revenue opportunities for a bank that establishes itself as the ‘destination of choice’ for PISPs (Payment Initiation Service Providers). New stakeholders will be attracted to banks offering a higher service standard at the least hassle, since these effects will ripple through to the PISPs’ own customers and their expectations of security, certainty and convenience. Banks stand to recapture not only some of their own lost transactions, but also some which have flowed out of their competitors.
From now on, the most successful players in financial services are likely to be those with greatest flexibility and ability to embrace the use of technology to their advantage, as these are the keys to keeping up with the ever-evolving market. While new technologies and regulations can be daunting, banks should leverage them to their advantage to differentiate themselves from competitors and safeguard their survival in the financial sector.
Written by Graham Lloyd, Director and Industry Principal of Financial Services at Pegasystems