Author: KritiGupta

Is COVID-19 Accelerating Responsible Investing in the Financial Services Sector? | Blog

Climate risk discussions and regulations had been gaining great momentum in the past six months as there had been increasing pushes from regulatory bodies and central banks to start stress testing climate risk scenarios. While the discussions have been somewhat back-burnered due to the pandemic, they will begin again in earnest during the post COVID-19 recovery period. And they will jump to the top of financial institutions’ (FIs) risk management agendas, instead of continuing to be considered a CSR activity.

Why COVID-19 will accelerate ESG reporting

Given the erosion in investment value across asset classes over the last couple of months, investors are looking to get better returns, and Environmental, Social, and Governance (ESG) funds have performed better. Indeed, a Morningstar analysis of 206 responsible investing funds found that 70% of these equity funds outperformed their peers in Q1 2020.  As the social component of ESG brings to focus companies’ relationships with their employees and customers, the governance aspect will also gain attention. Dedicated risk committees and boards of directors will set the tone for firms’ communication and branding strategies.

Another driving force will be the rising influence of millennial investors. As they move toward more socially responsible investing, firms that achieve high ESG scores will be the preferred choice for these investors. FIs won’t want to miss out on this growing segment and will look to align their portfolios accordingly to be an attractive investment opportunity. This change will spur the ESG reporting initiatives at these institutions and lead to evolution of the industry ecosystem as well.

Evolution of the industry ecosystem

FIs have ramped up hiring as they build their sustainability teams and task forces. Credit rating agencies and data firms like Moody’s and S&P have started to acquire climate risk analytics firms to enhance their coverage of ESG data reporting. Stock exchanges around the world are launching multiple ESG indices to measure listed companies’ commitment to ESG. Asset management firms are gradually incorporating ESG factors into their investment strategies while announcing divestment from industries that are considered problematic from an ESG reporting perspective. We are also seeing an uptick in the demand for sustainability consultants at financial services firms, with more than 15% year-on-year growth as demonstrated by job postings for sustainability roles in the financial services industry.

Current challenges for financial institutions

No clear framework has yet been institutionalized for FIs to start reporting their climate disclosures. Only broad frameworks exist that can serve as a baseline for them to start initiating stress tests and checking their exposures. Further, they face two major problems with consolidating and analyzing the right data sets. One is identifying the right data sources and the kind of data needed for analysis. The other is defining the methodology they should use to analyze these data sets. FIs’ existing analysis models and scenarios have been built with a timeline of five to 10 years. But incorporating climate risk into them requires scenario planning that looks 15 to 25 years into the future and into past data records as well.

So, what are the implications for FIs as climate talks and green investing discussions gain momentum?

  • Uptick in demand for data science teams and AI/machine learning themes FIs will need to set up extensive data warehouses and data lakes to analyze large and complex data sets to make efficient decisions. AI and machine learning themes will help in identifying correlations and anomalies in the comprehensive company data. There will be a rise in demand for AI programs and NLP algorithms that can help in assessing these data points.
  • Talent conundrum for executing sustainability initiatives In addition to the technology talent needed to tap into the data sets, there will be demand for sustainability consultants, ESG portfolio managers, and analysts who can act on the data insights. FIs will need to tap young talent from premier institutions and grow in-house talent to scale the talent landscape for sustainability initiatives.
  • Incorporate ESG data from partners into risk management FIs will have to embed ESG analysis into various facets of risk management like credit risk calculations and use it to identify and quantify the impact of emerging risks. The need for comprehensive climate risk data is fueling the emergence of ESG ratings data by start-ups and credit ratings firms like S&P. Partnering with one of these vendors will provide access to these scores that FIs can incorporate in the broader analysis.
  • Investments in communication and branding initiatives Given the rise of millennial investors who prefer to align their investments with their values, FIs will need to substantially invest in building a socially responsible brand to bring forth the right narrative. Thus, FIs will need to review their portfolios to align with ESG values and bring in the right industry leaders to drive the sustainability agenda.
  • Increased interest in service providers’ carbon footprints Increasing pressure on FIs for responsible and green investing will soon start to impact their sourcing decisions. Outsourcing and vendor management teams should start to assess their vendor portfolios on sustainability considerations like green procurement policy, waste management, carbon management, etc.

Everest Group’s take

Purpose-built platforms that are digital and cloud-ready for FIs to cost effectively scale their ESG strategies are currently in their nascent stages. There’s an urgent need to fill this gap.

There’s no single source of truth for the ESG data and the methodology to analyze it. FIs are unsure which data scores to utilize in their analysis and are increasingly setting up in-house ESG platforms to analyze ESG data and manage the end-to-end product value chain. This is a greenfield opportunity for vendors to gain first-mover advantage in this dynamic scenario and onboard FIs onto their platforms.

The current health crisis has only reinforced the need for sustainable investing, and governments have mobilized efforts to stress test their financial services sectors. As supply chains across the world are disrupted, investors are looking for safe havens in the form of companies that can weather such crises. FIs need to act fast to capture market share from the new generation of investors and tap into returns from ESG funds or risk being disintermediated in the long run.

What’s your take? What technology and data analytics challenges have you faced in your ESG journey? Please write to us at [email protected] or [email protected] to share your experiences, questions, and comments.

The Google, Citigroup Partnership: Another Sign that the Banking Ecosystem is Evolving | Blog

On November 13, Google announced that it will partner with Citigroup and a credit union at Stanford University to launch a checking account that will be linked to Google Pay.

Citi and the credit union will be taking care of the financial and compliance aspects, while Google will ensure that customers can access their accounts via the Google Pay app. This partnership is similar to others – like Apple’s co-branded credit cards with Goldman Sachs, and Uber and BBVA joining hands to launch banking accounts on the Uber app for drivers – wherein big technology companies make inroads into the financial services sector by front-ending the program while the bank manages the finer aspects of regulations and compliance.

This partnership is yet another sign that the future of banking is slowly changing as BigTechs enter into the financial services industry. Indeed, tech firms’ ability to consume the APIs that are exposed from the banks’ core systems is rendering banking a plug-and-play service. Banks are now providing an as-a-service platform to help third parties integrate with them. The focus is on enhancing the customer experience and bringing in a single view of the customer. This is turning banks into ecosystem enablers, while the technology companies are entering and embedding themselves in this ecosystem.

The value of these partnerships for banks: gain/retain their customer base

Even though banks are rich data houses, they struggle with analyzing and gaining insights from data. Because of their demand for digital experiences, customers are increasingly embracing the financial services offered by technology companies. Banks understand the need to partner with these companies to remain in the ecosystem and retain their customers. Indeed, the Stanford credit union defined its recent partnership with Google as “critical to remaining relevant and meeting consumer expectations.”

The value of these partnerships for tech firms: access to customers’ financial data

By their very nature and design, the BigTechs have built a comprehensive ecosystem that gives them access to data on their customers’ behavior, choices, and habits. However, the data on customers’ finances still eludes them. As strict regulations and managing compliance prove to be barriers, collaboration is the only way they can get a foot in the door.

What will happen next?

The partnership trend will continue, because both the banks and the tech firms stand to gain so much from them. But the tech firm side of things is a bit troubling. Getting access to the goldmine of banking customers’ financial data will make them nearly invincible. They’ve targeted the front-end of banks’ target operating model, where customer-facing applications, and thus customer stickiness, live.

Further, what is stopping technology players from offering other allied banking services like issuing loans and providing interest payments? Even though lawmakers and regulatory bodies would meticulously scrutinize such models, we are fast-moving to a world where alliances between technology firms and banks will become more frequent.

Of course, it remains to be seen how customers adapt to this new way of working. We are already seeing privacy concerns arise over the financial data in such partnerships. This will lead to the emergence of a data exchange platform to control data access and set terms of use.

The next wave of change in the banking ecosystem will be when banks move to an as-a-lifestyle model. In that model, banks will define an IT strategy with customers at the center, and integrate with allied businesses. But to be successful, banks would need to ensure that they are able to influence the customer experience over all channels…theirs and third parties’. With technology players entering the financial services space, the banking IT landscape is already undergoing a shift. To remain relevant, banks will have to move upstream and coordinate the entire ecosystem while getting integrated into everyday transactions.

Future of Credit Unions: Do Digital Different, or Perish! | Blog

For more than 100 years, not-for-profit credit unions have effectively provided their members with a wide range of financial services at comparatively affordable rates. However, they’re falling far behind in all aspects of what it takes to compete against large banks and FinTechs in today’s digital world. And, per our recently released report, Future Proofing Credit Unions from the Digital Onslaught, that’s causing credit unions to close at a staggering rate of one every two days.

To be fair, a good number of credit unions have invested in next-gen technologies like voice banking platforms and distributed ledgers, and made other moves to bridge the digital divide.

For example, Canadian credit union Meridian is launching a full-service digital-only bank named Motusbank in spring 2019. One Nevada Credit Union, Knoxville TVA Employees Credit Union, and Northrop Grumman Federal Credit Union have begun their implementation of a voice-first banking platform from Best Innovation Group (BIG). The following image shows other digital initiatives in the credit union space.

Future of Credit Unions blog image

But overall, credit unions’ digital investments pale in comparison to their competitors. For example, our research found that less than five percent of credit unions in the U.S. have a mobile banking app. And the top four banks in the U.S. spend five times more on technology than does the entire credit union industry.

Credit unions’ move to digital is hampered by multiple factors including dearth of talent and relatively small technology budgets that make it challenging to decide on run versus change investments.

But the biggest hurdle they face is lack of an overall organizational IT strategy for transformation. Their intent to invest and transform is there, but disjointed. This siloed approach fails to create a satisfying omnichannel experience for members. A glaring example is Navy Federal Credit Union, the largest credit union in the U.S. It faced multiple outages from December 2018 to February 2019, during which members couldn’t see the deposits in their accounts, the bank’s phone lines and digital channels, both mobile and online, weren’t working, and reporting delays led to inaccurate account balances.

So, how can credit unions stay relevant and afloat?

Share Costs with Other Credit Unions

We believe a solid short-term solution to delivering a better member experience is moving to a partner network wherein multiple credit unions mutualize costs. In this collaboration, the participating companies would share run-the-business costs. They might even co-invest in or co-secure funding for the latest technologies. One such example already exists: CU Ledger is a consortium of American credit unions that is exploring use cases for distributed ledger technology (DLT); and it’s already secured US$10 million in Series A funding.

A partner network with pooled resources would also create leverage for credit unions to collaborate with technology service providers. In a mutually beneficial situation, credit unions could share run-the-business costs while the providers could gain economies of scale.

Become Experience Orchestrators

In the longer-term, credit unions should embrace the role of lifestyle experience orchestrators. This means that they should orchestrate and integrate their offerings with those of third-party providers, serving as service and product aggregators to offer rich experiences to their members.

This could take on multiple shapes and forms. For example, they could integrate with a local car dealership and leverage data and analytics to recommend and finance purchase and lease options. Members would undoubtedly be more comfortable with their credit union’s recommendations than those from an unknown organization.

Future of Credit Unions

Future of Credit Unions

There’s no question that credit unions need to modernize their digital touchpoints to deliver experiences that will retain their members. The types of creative partnerships we outlined above will help them survive – perhaps even thrive – in today’s increasingly competitive and digital financial services industry.

Is your credit union undergoing some type of transformation journey too? Please write to me at [email protected] to share your experiences, questions, and concerns.

In the meantime, to learn more about the future of credit unions and the modernization journey they’re facing, please read our recently released report, Future Proofing Credit Unions from the Digital Onslaught.

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