Category: Banking, Financial Services & Insurance

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.

How COVID-19 Will Impact IT Services in the Banking and Financial Services (BFS) Industry | Blog

The BFS industry started 2020 in a cautiously optimistic mood, hoping for a rebound in global economic growth. But then the COVID-19 outbreak swept the world into a state of emergency. The current challenge is far greater for BFS firms than was the Great Recession, as they need to crack the code of how to deal swiftly with both demand- and supply-side shocks. In this scenario, banks face a dual mandate of:

  1. Playing a central role in stabilizing the economy
  2. Ensuring business continuity to maintain normal operations

Breaking down the impact of COVID-19 on the BFS IT services market

To illustrate the variation in pandemic impact across different BFS lines of business (LoBs), we analyzed the severity of impact and speed of recovery for each line. Our assessment of severity of impact involved modeling factors such as the COVID-19 revenue and profitability impact from both a near-term (3-6 months) and a medium-term (6-12 months) perspective. We gave more weight to the medium-term impact as the near-term uncertainty makes the modeling of impact very difficult.

And we mapped impact severity against the speed of recovery by gauging the time it will take for these LoBs to bounce back to the pre-crisis state; this is a function of the health of these business segments before the crisis, as well as expected changes in customer sentiment and buying behavior once the crisis is over.

Our analysis found that BFS LoBs cluster in four zones, each of which exhibits unique characteristics and will face a distinct set of technology and IT services implications. Taking it counterclockwise from the bottom right quadrant:

  1. Aggressive cost take out – Lying on the bottom right, the LoBs in this zone will face the highest degree of impact; we also expect their pace of recovery to be painfully slow. To aid in their recovery, these LoBs should rethink their operating models and get back to basic principles: focus on the core business of provisioning financial services, think of delivering more value to customers, and move away from non-core elements like engineering or IT services innovation.We expect to see heightened asset-heavy deal activity in this segment, as these LoBs will need cash to invest and rejuvenate growth in select focus segments. And they’ll be looking for financial engineering support through activities such as takeover of legacy assets, shared services carve-outs, and even signing of long-term integrated technology plus operations support engagements that are centered around specific business outcomes.
  2. Modernization –This zone at the top right comprises LoBs that we expect to rebound faster to pre-crisis growth levels. From an IT services standpoint, we expect these LoBs to focus on cost savings in the near-term by seeking price cuts on rate cards and pausing some change initiatives. However, soon enough, these segments will get back to modernization initiatives. Hybrid cloud will play a critical role, as these LoBs will place significant emphasis on digital enablement to fuel their long-term growth.
  3. Growth – Odd as this may sound, we expect these business segments to benefit from the crisis in the near term. For example, as governments across multiple geographies have announced relief packages for small businesses that are facing unprecedented economic disruption, banks are needed to facilitate these SBA loans. Financial services firms that have proactively invested in creating a scalable infrastructure and stronger business continuity plans are better positioned to take advantage of this opportunity by generating significant fee income. Enterprises with large LoBs in this zone will also be on the lookout for inorganic expansion and take advantage of the reduced evaluations. Enhancing customer experience, driving product innovation, and improving agility to quickly respond to market demands will be the key investment themes.
  4. Transformation – This zone comprises LoBs that will recover most slowly from this crisis. Hence, these business segments need to rethink their business models and diversify their revenue mix to sustain themselves in the long term. For instance, retail/consumer transaction banking will face profitability challenges due to reliance on interest-based income, and some of the fee-based commoditized businesses, like retail wealth management, have been under stress due to downward fee pressures. As a result, enterprises with large LoBs in this zone will look to transform themselves and invest from a long-term growth perspective.

 

Implications for BFS enterprises

At an industry level, we expect BFS firms to completely focus on running the business initiatives in the near term. Our research suggests that banks have put nearly 60 percent of change projects on hold. Most of these suspensions are temporary and will restart once the crisis abates; however, we believe that the prioritization and nature of these change projects will mutate due to a shift in business priorities and budgets.

As an immediate response to the current situation, designing and executing customer assistance programs should be the top priority for BFS firms. In the medium term, the firms’ focus should gradually shift to modernization of legacy systems that slowed down banks’ agility and ability to respond to this crisis. Post COVID-19, BFS firms will need to reimagine their products, pricing, and channel strategies to fulfill evolved customers’ expectations.

Our recommendation for BFS enterprises is to cautiously evaluate their exposure across each of their LoBs and carve out a holistic IT strategy that takes into account not only the near-term implications, but also their long-term business philosophy.

Please share your views on the impact of COVID-19 on the BFS industry segments with us at [email protected] and [email protected].

Anti-financial Crime Talent Imperatives in the Digital Age | Blog

For years, financial institutions have struggled to attract and retain quality anti-financial crime (AFC) talent, which remains a compliance program’s most vital asset. And the situation is only getting worse.  Why? First, both the importance and application of anti-money laundering (AML) and fraud risk management are increasing. Second, the requirements and expectations of regulators are snowballing. And third, demand for AFC talent is skyrocketing while unemployment remains low. It’s a perfect storm.

Perhaps most importantly, the AFC workforce must now be able to work with artificial intelligence and machine learning technologies. Financial institutions that can’t adapt their workforce to the demands of this new augmented human intelligence era simply won’t survive. Knowing what talent to look for – and how to attract, manage, and retain it – is key.

The changing definition of talent and the rise of “bilinguals”

In the past, whenever new compliance initiatives or regulations arose, banks tended to staff up operational teams to address them. Now banks realize that hiring operational staff isn’t enough. Instead, solving for the underlying problem – be it “Know Your Customer” remediation, reducing incidences of fraud, or ensuring better AML compliance – is the answer.

To do this, banks are breaking up their talent pyramid into tasks. Those tasks that are manual and repetitive (and therefore subject to a high degree of automation) sit at the bottom of the talent pyramid. And those requiring a high degree of judgment that can be handled only by skilled employees sit at the top. As a result, talent must now be “bilingual,” possessing not only the domain and operational expertise to drive judgments but also the technology expertise to help automate repetitive, mundane tasks.

Attracting talent

If a bank has bilingual workers, it’s not letting them go, so finding such talent at scale through hiring practices alone is unlikely. Instead, the challenge is to identify skilled workers from either a domain or technology background and train them to develop the skills they lack.

One solution is partnering with universities. For example, recognizing that ready talent is not necessarily available in the marketplace, some service providers partner with universities to identify suitable individuals for entry-level positions and then train staff in those positions on AFC fundamentals.

Developing talent

At the same time, the half-life of professional skills is decreasing at an alarming pace. Regulations and technology are constantly changing, so talent agility is key. Organizations must create an environment of innovation, training, and enabling people to do their jobs faster and better, including enabling them with access to the right tools, be they bots or data libraries.

Firms are increasingly using techniques such as micro learning, which breaks information into bite-sized pieces, and spaced learning, which identifies the right moment for intervention so that trainees retain more information. Gamification is another technique that makes learning fun and increases retention.  Through a combination of these approaches, firms can train employees and develop talent much more efficiently.

Retaining talent

Today’s banks are losing employees not only to other banks, but also to techfin firms. Amazon, Apple, Facebook, and Google are all making forays into banking, and they’re always on the lookout for people who can help their engineering teams understand the financial payments and risk disciplines. To retain talent, it’s important to drive workers’ aspirations.

Keeping employees engaged is essential to retention. Engagement can be accomplished through creative challenges and contests that instill sustainable change and help employees use their skills beyond their day-to-day work.

When it comes to AFC talent, it’s a battlefield out there. To learn more about how financial institutions can attract, manage, and motivate AFC talent to achieve the best balance between human and technical intelligence, check out the webinar I recently conducted with Genpact on this topic.

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.

Wealth Management: Market Trends You Need to Know | Blog

When you outsource your wealth management function to a third-party service provider, you’re not responsible for handling day-to-day operations and client contact. But you still have a huge responsibility in making sure your provider is fully capable of serving your clients’ needs.

Here are five major market trends that are affecting the wealth management industry. Is your provider addressing them?

Trend 1: End of bank secrecy

As the global crackdown on bank secrecy continues, wealth management advisory firms have no choice but to quickly move from secrecy-led tax services to a more holistic and comprehensive approach to investor portfolio management.

Trend 2: Evolving investor requirements

There’s a very different advisor-investor dynamic with millennials than with baby boomers. The younger investors, especially those of the entrepreneurial class, are looking for a much wider range of services from their wealth advisory partners. Beyond tax management and planning, millennial investors want:

  • Access
    • Seamless access to wealth and investment advice across platforms and channels
    • Greater access to investment ideas relating to environmental responsibilities and social impact causes
  • A networking support platform where they can exchange notes about financial management with fellow investors, colleagues, friends, and social media, instead of solely depending on regular report and data feeds from their advisors
  • Passion-based investments that are not only used as a diversification strategy but can also yield high risk-adjusted returns. Popular examples we are seeing include wine, art, watches, coins, and cars
  • DIY, wherein investors are provided with tools and advice to perform their own research
  • Highly tailored investment strategies, e.g., for female entrepreneurs
  • Real-time updates and faster turnaround times for almost all processes within the wealth management lifecycle
  • Access to the specialized set of offerings, unconventional risk management strategies, and alternative investments funds wealth managers typically offer to just Ultra High Net Worth Individuals (UHNWI.)

Trend 3: Robo-advisory platforms

Despite the robot versus human debate, robo-advisory platforms continue to gain prominence. And investors are increasingly embracing a hybrid approach where they can get low-cost advice from robo-advisors and leverage human advisor expertise when more nuanced investment decisions come into play.

Trend 4: The digital disconnect

A technology-enabled front-office certainly helps financial services firms achieve some of their efficiency and client service goals. But RPA in the back-office can make their operations even more efficient and effective, and analytics in the back-office can help them make faster, better investment decisions, and anticipate customer behavior with greater precision.
Evolving fee models

Facing diminishing returns, investors are increasingly demanding more transparency around the fees they are charged. In turn, the fee model is gradually moving from commission-based to performance-based. For example, some providers are charging their fees linked to how well they perform against a particular benchmark index or rate.

Trend 5: The compliance conundrum

Despite rising costs, enterprises continue to remain skeptical and cautious about outsourcing large chunks of the compliance function. They’re increasingly outsourcing some transactional activities, such a regulatory reporting and basic documentation vetting, to their third-party providers. But they’re still holding more critical services, such as due diligence, end-to-end KYC, and AML processes, close to their vests. And this guarded position makes very smart business sense. Because they are ultimately responsible for correct compliance, and because so much is at stake, enterprises should only consider outsourcing these types of processes if they have full confidence in their providers’ expertise and ability to effectively fulfill their compliance obligations.

What trends are you seeing in the market? Is your wealth management provider able to keep pace with your evolving requirements? How are they charging you for the services? Please share your thoughts with me at [email protected].

What Analytics Hot Spot Is Right For Your BFSI Business? | Blog

Enterprises that operate in the BFSI industry are the biggest consumers of analytics services. They realized earlier than companies in other sectors how powerful analytics can be in offering targeted and customer-centric solutions, exploiting the massive amount of available data, meeting dynamic customer demands with their expectation for real-time solutions, and helping them adapt to changing business environments.

There are four different regions around the world that provide analytics services to BFSI companies: India, Asia-Pacific (APAC,) nearshore Europe, and Latin America. Each has its own unique capabilities, characteristics, and value proposition.

To help BFSI firms select the right delivery location for their specific needs, we recently completed a “Locations Insider Report” named Global Hotspots – Analytics in BFSI.

Following is a look at the findings. To add context to them, we classify analytics solutions into four types based on their sophistication and business impact, as you see here.

What Analytics Hot Spot is Right for Your BFSI Business?

India

India is the leading delivery destination for analytics services in the BFSI industry. It has a large talent pool (more than 65 percent of the global sourcing FTEs in nearshore/offshore locations,) and offers high cost arbitrage. Because of these factors, a large number of BFSI companies have chosen to set up analytics Centers of Excellence (CoE) in key tier-1 locations such as Bangalore, Delhi NCR, and Mumbai. While both tier-1 and tier-2 locations support traditional analytics services delivery, and largely support customer, fraud, and finance risk analytics functions, advanced analytics services delivery is concentrated in tier-1 cities.

India is also seeing an uptick in start-up activity in analytics services delivery across multiple functions including customer, credit, fraud, and risk. Because these service provider start-ups can provide accelerated access to skilled resources either through partnerships or acquisitions, BFSI companies may want to factor this into their location selection strategy. In the PEAK Matrix evaluation included in our report, Bengaluru and Delhi emerged as “Leaders” because of their high cost arbitrage and significant talent availability. We identified Mumbai as a “Major Contender” due to its healthy mix of cost arbitrage and talent availability, and high maturity in traditional analytics services delivery.

APAC (excluding India)

Manila and Shanghai are the top locations in the APAC region. While services delivery is dominated by service providers offering traditional analytics services, a few locations also have a sizable shared services – or global in-house center – presence. The geography primarily supports finance and fraud risk management functions, and some companies are setting up analytics CoEs.

Nearshore Europe

In nearshore Europe, the top analytics services delivery locations are Budapest, Edinburgh, Prague, and Warsaw. While companies leverage the geography for both traditional and advanced analytics, advanced analytics services delivery for fraud and finance risk management is gaining traction, primarily due to region’s availability of high-quality talent and the ability to support work in many European languages. Certain nearshore locations, such as Belfast and Edinburgh, support high-end predictive and prescriptive analytics, not only because a highly qualified workforce is available, but also because of the need for advanced processes to be in proximity with business customers. Just like India, Poland is experiencing an uptick in start-up analytics service providers.

Latin America

Latin America is an emerging destination for analytics services. One of its key advantages is its ability to provide real-time monitoring and data analysis to the North American market due to its similar time zone. BFSI companies primarily leverage key locations in the region, such as Mexico City and Sao Paulo, for traditional analytics services across risk management functions such as credit and fraud.

Because of all that’s at stake, BFSI companies need to carefully evaluate locations for analytics services delivery against their specific business requirements. To learn more about the global analytics services landscape – availability of both entry-level and employed talent pool, market maturity, cost of operations across top locations, and implications for stakeholders including service providers, GICs, BFSI companies, country associations, and industry bodies – please read our recently released report, “Global Hotspots – Analytics in BFSI.”

Banks Increasingly Tapping the Extended Ecosystem to Reverse Their Fortune | Blog

To reverse their precipitous loss of competitive advantage and market share, traditional banks are increasingly transforming themselves from financial products/services providers into customer lifestyle experience orchestrators. One of the key levers they’re pushing to bring about this innovation turnaround is expansion of their ecosystem to include academics, regulators, FinTechs, telecom firms, and technology vendors.

Everest Group’s recently-released report, Guide to Building and Managing the Banking Innovation Ecosystem – Case Study and Examples from 40 Global Banks, revealed four distinct ways in which banks are working with the ecosystem to drive their innovation strategy.

FinTechs

This is all about exploiting the symbiotic relationship between banks and FinTechs. Serving as “enablers,” FinTechs are helping banks provide more choices to customers and expand the set of services and features in their current offering. For example, Royal Bank of Canada (RBC) collaborated with WaveApps to integrate invoicing, accounting and business financial insights into its online business banking platform. This enables RBC’s small business clients to seamlessly manage their full business financial services’ needs — from banking and bookkeeping to invoicing — in a single place with a single sign-on.

Taking on the “enabler” role, banks allow FinTechs to gain access to their customers, data, capital, experience, and platform. This collaboration helps FinTechs avoid the challenges they face in scaling their services independently.

Banks and FinTechs are also combining their unique strengths to solve specific business/customer issues in co-branded partnerships. As the banking industry moves towards lifestyle orchestration services, banks need to launch products that cut across industries such as travel & hospitality, manufacturing, and retail & CPG. This can be achieved by meaningful cross-industry collaborations like the one between Citi and Lazada Group, an e-Commerce site in Southeast Asia. The partnership allows Citi card holders to enjoy a discount of up to 15 percent on selected days when shopping on Lazada, while shoppers who sign up for a new Citi credit card receive additional discounts on Lazada. The move drives growth in Citi’s cards business via increased customer loyalty.

Internal innovation

To build their internal innovation ecosystem, banks are conducting hackathons and establishing digital R&D hubs that help them retain talent and bridge the digital skills gap. For instance, Bank of America launched its Global Technology and Operations Development Program – which is called GT&O University – to train workers for new and evolving roles related to artificial intelligence (AI) and machine learning. This has helped the bank not only upskill its workforce but also enhance its retention-oriented employee value proposition. And banks, including ING, are tapping open banking by providing external developers, industry innovators, and clients with access to their APIs. This helps them expand their offerings, provide new channels to serve customers, build new experiences for clients, and enable open collaboration.

Investments

Banks are closely tracking the innovation ecosystem through multiple programs such as investments, incubation support, and partnerships to avoid threats of disruption and competitive disadvantage. This includes investments across academic institutions, startups, and service providers. Interestingly, our research suggests that banks are likely to continue investing in startups via acquisitions or venture capital financing to accelerate their transformation efforts. This is evident from TD Bank’s recent acquisition of Layer 6, a Canada-based AI startup, which adds new capabilities to TD’s growing base of innovation talent and know-how.

Co-innovation

Through co-innovation partnerships with startups, consortiums, academic institutions, and technology giants, banks are jointly developing innovative solutions and technology. Leading banks are forming consortiums with other banks, technology firms, and other participants across industries to solve industry-wide issues such as cybersecurity, API security, and regulatory technology, building platforms and standards for the industry. For instance, TD Bank joined the Canadian Institute for Cybersecurity to co-develop new cyber risk management technologies. And HSBC is working with IBM to jointly establish a cognitive intelligence solution combining optical character recognition with robotics to make global trade safer and more efficient.

To learn more about banks’ leverage of the extended ecosystem to drive competitive advantage, and details on the “why’s” and “where’s” banks are focusing their innovation efforts, please see our report titled “Guide to Building and Managing the Banking Innovation Ecosystem – Case Study and Examples from 40 Global Banks.

Apple-Goldman Sachs Partnership Could Steal Credit Card Market Share from Consumer Banks | Blog

Apple’s March 25, 2019, announcement of a physical credit card, called Apple Card, might initially seem like a strange step away from its highly entrenched Apple Pay digital wallet. That Apple and Goldman Sachs partnered on this initiative might also seem odd, as neither operate in the consumer banking space. But when you take a closer look, you realize this is actually a very well-crafted go-to-market strategy for both Apple and Goldman Sachs.

What’s in it for Goldman Sachs?

Goldman Sachs wanted to enter the retail banking space with a credit card. But the U.S. cards market is already crowded and growing at 6-7 percent, payments is a volumes business, and it would have taken a long time to gather significant market share if it went solo. And while the wallet market is growing fast, a standalone wallet is unlikely to make a near-term impact. Goldman Sachs chose the best of both worlds; a card in partnership with a wallet service provider. This helps it enter the cards market while getting easy access to Apple’s wallet user base and future proofing the business.

What’s in it for Apple?

For Apple, this physical credit card partnership opens the path to new customer segments, particularly baby boomers who are still more comfortable with a card and have been slow to adopt digital wallets like Apple Pay. It will also help Apple expand more quickly into geographical markets beyond the U.S., where it doesn’t dominate the mobile devices market. And because Apple sells the synergy of its ecosystem and ease of use, and is promoting the card’s intuitive design, simplicity, and transparency, Apple might also boost its device sales.

Apple Card comes with an EMV chip but there is no number on the card, which means that users will have to use Apple Pay to use the card online or for NFC transactions. The physical card can only be used at point-of-sale (PoS) terminals. This may translate into a higher fee for Apple Pay and explains why Apple chose Goldman Sachs over other banks.

Further, Apple lags a bit behind some of the other BigTechs in the war for data. For example, Facebook has massive amounts of social data, and Google has enormous quantities of location and search data. Goldman Sachs can help Apple with financial analytics, an area in which it’s not particularly strong, and having access to financial data surely gives Apple an edge in its marketing efforts.

All in all, we firmly believe that Apple Card is a sound and strong market entry and growth strategy for both Goldman Sachs and Apple. Indeed, this move could prove to be a strategic masterpiece in the dynamic payments industry.

What does it mean for BigTechs and banks?

We can expect to see BigTechs like Facebook and Google make similar partnering moves to enter the cards market and tap into the larger PoS network to attract new users with their marketing power and brand name cachet.

Banks need to move faster on their journey towards digital payments or risk losing market share to other more nimble companies or partnerships like Apple/Goldman Sachs. To accelerate their move into the digital payments space, increase customer satisfaction, and avoid making huge investments on their own, banks should strongly consider partnering with FinTechs, which can be more agile and respond faster to the changing market with the right infrastructure and technology capabilities.

What’s your reaction to the Apple/Goldman Sachs partnership? Please share your thoughts with me at: [email protected].

Apple Pay Timeline

Apple Pay timeline

Digital Brings Challenge To Direct-To-Consumer Model | Blog

Historically, many companies have gone through channels to communicate about services and products with potential consumers. Insurance companies are a great example of this, as they typically go through broker-dealers, agents or wholesalers. But in today’s world where millennials and younger generations want to engage themselves in the buy, exclusively going through channels is not acceptable. Ideally, these consumers look for an e-platform, an experience on their phone or the Internet in which to engage. They like to do the research themselves and like to make their own decisions. But for companies, providing this kind of experience to consumers is far more complicated than it seems at first.

Read more in my blog on Forbes

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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