EXCLUSIVE: “Wake-up calls” – Peter-Jan Van de Venn, Mobiquity and Brett King in ‘The Fintech Magazine’
We asked Mobiquity’s VP of global digital banking Peter-Jan Van de Venn and the fintech futurist and author Brett King where banks should focus their IT investment in an uncertain year
A mildly upbeat Davos summit, a forecast 0.1 per cent economic growth in 2023 (well, at least it’s not a recession) and one of the warmest Januarys on record provided a better-than-expected start to the year in Europe. Energy prices eased back slightly, too, and China finally began to open up its economy following COVID. Relief indeed.
Across the Pond, fourth-quarter output data from the US also modestly topped forecasts with 2.9 per cent y-o-y growth. But that’s where the good news ends for banks; make no mistake, incumbents face a rough ride in 2023, despite the sector’s profitability hitting a 14-year high in 2022 when margins took off as interest rates finally climbed from historic lows in an attempt to calm rampant inflation.
However, this year consulting giant McKinsey foresees a period of belt tightening because at least half the world’s banks ‘continue to have a return on equity that is below the cost of equity. According to its annual Global Banking Annual Review, 2022’s margin rises only delivered returns above that waterline for 35 per cent of banks. Add to that a war on European soil with no end in sight, continued supply chain aftershocks from the pandemic and a cryptocurrency collapse, and it must be tempting to stop all investment until the fog clears.
Fintech futurist Brett King and Mobiquity’s digital banking VP Peter-Jan Van de Venn would caution banks not to lose digital ground now, though. The cornerstone of future resilience is no let-up in tech modernisation, says Van de Venn. And he points to three tech trends – hyper-personalisation, open banking acceleration and core banking replacement – when choosing how to spend budgets wisely.
“Due to the economic uncertainty, banks will use data to improve the financial lives of their customers. That’s still a big friction. There is so much data, but it is used to push products,” he says.“As for open banking, in the UK more than five million customers have adopted its services but there is still a lot of unlocked potential in open banking. Client-centric uses are required to significantly speed up adoption.
“Meanwhile, many chief information officers are pushing for core banking replacement because, to be truly digital, you need digital technologies on all architectural layers. We are building a complete new Cloud-based technology stack for one of our UK customers because, with their current mainframe, they can’t compete any more on the product level. So it’s inevitable that core banking replacement will continue.”
The urgency around tech stack modernisation is echoed by King, who asserts that, in 10 to 15 years, all banks will have adopted Cloud-based systems due to the demands of security, fintech partnerships and lower energy use.
He says: “You never hear a fintech talk about a core system because they don’t really have that; Cloud gives them the agility they want. That’s one driver of digital transformation, but the other is sustainable computing – you can have much better energy management. That’s why banks like ICBC [the state-owned Industrial and Commercial Bank of China] have shifted 90 per cent of their mainframe traffic to the Cloud. You can put it closer to the generation source in terms of renewables.
“There’s also the emergence of quantum computing, which can break all of the conventional encryption we have today, and will mean that if you’re not in the Cloud, your on-premises solution will be completely open.
“My other trend of 2023, taking a global view versus a Western view, is wallet integration – more people use mobile wallets for day-to-day banking than any plastic card. And where there’s been big progress, such as Paytm in India, Alipay and WeChat Pay in China, MTN and M-Pesa in Africa, there’ll be a lot of pressure on banks to develop embedded finance through the wallet ecosystem.”
Mobiquity builds digital banking value propositions and architectures, typically using components from modern third-party software-as-a-service vendors, so it’s no surprise that Van de Venn urges banks to break the chains of any remaining legacy hardware. But his main message to incumbents is that they are not as unique, nor as special as they might like to believe – which could be a good thing for their IT budget. Having worked with around 80 digital banks across the world, he says 80 per cent of the functionality provided by IT systems is common to all of them; the best strategy, therefore, is to replicate commonalities, which allows a bank to focus its budget on the 20 per cent that makes them stand out from the crowd.
Van de Venn says: “We build the commonalities in a very efficient way by leveraging out-of-the-box capabilities of existing vendors. There are many that we work with, such as Backbase and Mambu, that have already built architectures. That allows us to have more budget for the differentiation, the other 20 per cent.
“We ensure we have a deep understanding of our customer so we can provide an additional layer on top of those commonalities that are in line with their brand promise and crucial to their success.
“We also fully embrace the concept of composable architectures, setting up the architecture so components can be easily interchanged. If there is better technology for a particular area, you can replace it.”
Learning from and adopting the technical strengths of fintechs is another crucial tactic for incumbents, says King: “Buy now, pay later, salary advances, all these innovations are not coming from incumbents, they’re coming from people with more agile tech stacks.“And we know fintechs are much better at cash utilisation. They can innovate faster and more cheaply than incumbents. From an acquisition or a scaling perspective, this becomes very important.
“A lot of the benefits that we’ve seen from successful fintechs – Wise, Nubank, WeBank, etc – in terms of their utilisation of cash, have set a benchmark. Incumbents are under pressure to have the sort of cash efficiency that comes from digital transformation.
“Nubank has just crossed 70 million customers in eight years. There’s no bank in Latin America with branches that could have ever done that. So, you know, you have to assume that Nubank’s going to continue to do that, and, in that environment, if you can’t scale in the same way they can, you are going to be giving up market share to them.
“You hear banks talking about profitability, but investors really don’t care about that if they’re grabbing market share.”
Investors, though, are fickle and there are already signs that they’re paying closer attention to the bottom line: pressure on banks to spend wisely is also evident within the financial sector’s innovation programmes, which are seeking more practical outcomes, says Van de Venn.This shift from wider strategic goals to tangible shorter-term gains – what he calls ‘horizon 3 to horizon 1’ – has resulted in products such as the digital identity wallet Datakeeper by Dutch bank Rabobank, which keeps personal data on a smartphone.
“We see a shift to innovation with shorter-term value that is directly in line with, or adjacent to, the business of the bank,” he says.“A digital identity wallet is, of course, something close to the initial value that banks brought to their customers, i.e. protecting valuable assets, and identity is a valuable asset these days. The focus on shorter-term, closer-to-the-business innovation definitely needs to continue.”
Another area of concern for banks in a higher inflation environment is the prospect of worsening levels of loan defaults – and both King and Van de Venn agree data will hold the key to mitigating those increasingly likely losses. “But if you look at this as a behavioural problem, there are numerous solutions. If I know, based on current cashflow, that you won’t meet your loan commitments in three months, I can ask you if you want to extend the life of the loan to reduce monthly repayments.
Ultimately, customers will self-select services that are more flexible for them.
“As a banking sector, we’ve got sidetracked into looking at things like cashback and rewards to stimulate spending because that’s how we make a fee. But if we get wallets that are focussed on financial wellness of customers, then the likelihood of credit problems declines.”A further cultural change that both King and Van de Venn foresee is one that has already begun – environmental, social and corporate governance, or ESG.
Though Van de Venn points out that 90 per cent of banks say ESG is part of their business but only 50 per cent measure their efforts, both men agree environmental credentials will become central to a bank’s brand.
Van de Venn says: “We are running a carbon bank initiative for one of our customers and out of this we help their clients improve their awareness of their carbon footprint, based on their transactions. Some banks are still trying to buy carbon credits to offset what they should do, but it’s a start. For the reputation of banks, it will be important to keep investing in ESG, and, if you can monetise it that will have an accelerating effect.”
King adds: “I don’t think we’re going to get back to a ‘normal’ in the way we thought about it in the 1980s and 1990s. Economic uncertainty is just going to be a feature due to the impact of artificial intelligence, techno unemployment and the impact of climate change.
“By the mid-2030s I think every corporation is going to have a social mission as a side-effect of climate change and so on – they will have to be seen to be doing something helpful and productive for society, rather than just producing profitability.“This won’t be about doing press releases and buying carbon credits. Our children will be asking ‘what has capitalism brought us?’ It’s brought climate change, massive inequality, pollution – 10 million people die a year from air pollution issues and we had 65 million eco refugees last year.
“Corporations are going to have to contribute in a very different way. ESG is just the start of that cultural shift in terms of corporations’ missions to do broader good.” So, while maybe not the ideal metaphor for our climate-challenged time, the message is clear to banks and incumbents when it comes to innovation.
We’ll let Brett King sum it up: “You can’t take your foot off the gas pedal yet.”
TECHNOLOGY TRENDS BANKS CAN’T IGNORE IN 2023 – PETER-JAN VAN DE VENN’S TOP 3
Hyper-personalisation: “With the help of AI, banks will use data to truly improve the financial lives of customers. That’s still a big friction; there’s so much data but it’s used to push products.”
Open banking acceleration: “There’s still a lot of unlocked potential in open banking. Client-centric uses are required to significantly speed up adoption.”
Core banking replacement: “To be truly digital, you need digital technologies on all architectural layers.”
TECHNOLOGY TRENDS BANKS CAN’T IGNORE IN 2023 – BRETT KING’S TOP 3
Wallet integration: “It doesn’t matter if you’re looking at crypto, digital assets, the metaverse or embedded finance solutions. Mobile wallets are it.”
Tech competency at organisational level: “For execution capability in a low-latency world, you need different skillsets from the top down. So look at someone like Ant Group as a basis of how you should be thinking about organisational design. That’s a massive leap for many banks to take.”
Credit innovation: “Banks have to think about transitioning off credit cards, as a product line, to contextual ways to deliver credit in real time.”
This article was published in The Fintech Magazine Issue 27, Page 32-34
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