Few FS firms ready for open banking deadline, reveals new report

BY Fraser Tennant

Despite being viewed as a key priority, few financial services (FS) firms are prepared for major open banking enforcement deadlines in September 2021, according to new research report by Delphix.

The report – ‘The Future of Banking is Open and Regulated, but Few are Prepared’ – reveals that only 3 percent of firms believe they are ready for the Second Payments Services Directive (PSD2) and Strong Customer Authentication (SCA), both of which were initially slated to take effect in September 2019, but then delayed by two years.

The report surveyed 100 tech leaders in the finance banking and insurance industry – all of whom are from Europe, the Middle East and Africa (EMEA) and Asia-Pacific (APAC) jurisdictions and work at companies with over 10,000 employees.

“The financial services sector is undergoing a massive transformation with data at the core,” said Daniel Graves, chief technology officer at Delphix. “For many banks that rely on legacy systems, however, data privacy and compliance are proving to be major obstacles.”

Drilling down, 62 percent of poll respondents cite protecting sensitive data across multiple systems and application programming interfaces (APIs) as the biggest data privacy and compliance challenge. Others are struggling with effectively protecting sensitive information without limiting timely access to data and ensuring that compliance measures preserve the quality and usability of data.    

When it comes to opening up APIs to third parties in order to drive innovation, the biggest challenge for 60 percent of respondents is the time and effort needed to maintain and preserve the integrity of data. At the same time, 52 percent of FS firms report limited capability to accelerate the development of quality APIs and API-driven features to market.

Overcoming these hurdles will be challenging, states the report, with the majority of respondents predicting their organisational operations will be disrupted as they roll out open banking APIs.

“Data privacy challenges and legacy technology stacks are impeding the Open Banking revolution,” added Mr Graves. “FS firms need to adopt DevOps data technologies that can deliver compliant data at speed via APIs to overcome these challenges.”

Mr Graves concluded: “Open banking APIs could open up a whole new world for FS firms, enabling them to use data to drive transformational services and power superior customer experiences.”

Report: The Future of Banking is Open and Regulated, but Few are Prepared

Digital revolution: half of European customers want electronic banking, reveals new report

BY Fraser Tennant

The advent of the coronavirus (COVID-19) pandemic has shifted consumer demand for electronic banking, with over half of European customers willing to purchase products digitally, according to new analysis by Kearney.  

In its ‘European Retail Banking Radar 2021: Challenges and opportunities in a tumultuous year’, Kearney reveals that customers who were willing to purchase banking products digitally had increased to 50 percent from 33 percent in 2020. Conversely, those who said they would still visit their branch or seek advice from a contact centre dropped to 41 percent from 53 percent last year.  

Regionally, Sweden performed best in terms of highest adoption of digital channels, with 61 percent of customers saying they were willing to buy banking products online in 2021. Second was the UK, rising from 48 percent in 2020 to 58 percent this year.

“Retail banks will need to acknowledge that banking has changed – we have moved from total digitalisation and open banking being whispers about the near future to it swiftly becoming our present,” said Simon Kent, partner and global head of financial services at Kearney. “Customers are no longer loyal to high street bank branches, and retail banks will suffer if they do not evolve in line with this change in preferences.”

And while the pandemic has transformed behaviours across all markets, it particularly catalysed change in the ones that had been lagging. For example, in February 2020, only 24 percent of Germans would buy a new banking product online. By March 2021, this figure had almost doubled, with 47 percent stating a willingness to do so.

“Consumers’ demand for an online experience is not limited to simple products like current accounts – there is demand for complex products such as mortgage applications to be completed online,” continued Mr Kent. “To economise, improve profitability and remain competitive, banks must adopt even more digital and data-led practices.”

Furthermore, across all surveyed countries, disintermediation is growing. According to Kearney’s analysis, between 12 and 18 percent of customers research their next financial product through price comparison websites rather than a bank website or financial adviser. In the UK in particular, 16 percent use price comparison portals for consumer loans, a trend that is likely to grow over the next few years.

Mr Kent concluded: “Transformation is no easy feat, but the business environment of today is unrelenting.”

Report: European Retail Banking Radar 2021: Challenges and opportunities in a tumultuous year

Over three quarters of FIs unprepared for LIBOR transition, reveals new report

BY Fraser Tennant

Over three quarters (77 percent) of financial institutions (FIs) do not have a comprehensive plan in place for transitioning from the London Interbank Offered Rate (LIBOR), according to new report by Duff & Phelps.

A key part of the financial services infrastructure, LIBOR is a globally recognised base rate for pricing loans, debt and derivatives and has been called the “world’s most important number”.

According to the report, based on a survey of private equity firms, professional service providers, hedge funds, banks and others, while 54 percent had identified LIBOR exposures, they had not yet taken necessary action to resolve their liability.

Furthermore, 58 percent of these firms had not catalogued transition provision and 42 percent said they were unsure of what to do next. Almost a quarter (23 percent) of the firms surveyed have not begun any formal processes to identify exposure, with 14 percent suggesting they would not be ready until Q1 2022 at the earliest.

“The LIBOR transition is one of the greatest regulatory-driven changes ever, and inevitably it requires complex planning, thought and analysis,” said Jennifer Press, a managing director at Duff & Phelps. “It is therefore quite surprising to see that just nine months away from the hard deadline, the majority of financial institutions who were polled do not have a comprehensive plan in place.”

A failure to adequately prepare for the LIBOR transition – which is due to take place on 31 December 2021 – could lead to significant risks for firms as contracts transition to alternative reference rates.

However, a third of respondents revealed a belief that they are on track, despite limited progress across the majority of the industry. However, the report notes that firms may be underestimating the extent and complexity of the work required for a successful transition.

“The results indicate that although the majority of firms have identified their LIBOR exposures, many have yet to formally catalogue the transition provisions,” said Marcus Morton, a managing director at Duff & Phelps. “There is a real fear that many are pinning their hopes on fallback provisions written within existing contracts. The reality is that fallback language may not suit each and every party, and in some cases, contracts will fail if such provisions are inadequate.”

Rich Vestuto, a managing director at Duff & Phelps, added: “Technologies such as natural language processing and artificial intelligence could go a long way to help firms fully understand their exposure, but they must start the process now.”

Report: LIBOR transition survey

Over 1.4 billion to use facial recognition for payments by 2025, claims new report

BY Fraser Tennant

The number of users of software-based facial recognition to secure payments will exceed 1.4 billion globally by 2025, from just 671 million in 2020, according to a new study by Juniper Research.

The study, ‘Mobile Payment Authentication: Biometrics, Regulation & Market Forecasts 2021-2025’, states that this 120 percent growth demonstrates how widespread facial recognition has become – a rapid increase fuelled by its low barriers to entry, a front-facing camera and appropriate software.

Furthermore, the study identified the implementation of FaceID by Apple as accelerating the growth of the wider facial recognition market, despite the challenges to facial recognition during the coronavirus (COVID-19) pandemic with the use of face masks.

The study also recommends that facial recognition vendors implement robust and rapidly evolving artificial intelligence (AI)-based verification checks to ensure the validity of user identity, or risk losing user trust in the authentication method as spoofing attempts increase.

“Hardware-based facial recognition is growing, but the ability to carry out facial recognition via software is limiting its adoption rate,” said Susan Morrow, associate analyst at Juniper Research and co-author of the study. “As the need for a secure mobile authentication environment grows, smartphone vendors will need to increasingly turn to more robust hardware-based systems to keep pace with fraudsters’ evolving tactics.”

The Juniper study also found that the use of voice recognition for payments is increasing, from 111 million users in 2020, to over 704 million expected in 2025. The study identified that, at present, voice recognition is mostly used in banking, and will struggle to grow beyond this, due to concerns around robustness.

Juniper Research recommends that vendors adopt a multi-method biometric strategy, encompassing facial recognition, fingerprints, voice and behavioural indicators to ensure a secure payment environment.

Report: Mobile Payment Authentication: Biometrics, Regulation & Forecasts 2021-2025

Nearly half of European banks hold a negative profit outlook, reveals new report

BY Fraser Tennant

Europe’s financial institutions are facing testing conditions as a result of the coronavirus (COVID-19) pandemic, with 46 percent of banks now carrying negative outlooks – a 14 percent rise year-over-year (YOY) – according to a new report by S&P Global Ratings.

In ‘S&P Credit Conditions Europe – Curve Flattens Recovery Unlocks’, S&P also notes that having been forced to set aside higher provisions to account for the pandemic, a quarter of the top 35 European banks reported a loss for the first quarter, with the remainder seeing pre-tax profit decline by a third on average YOY.

Furthermore, states the S&P report, the outlook distribution is uneven by country, with some having most banks with negative outlooks and others having just a few. Additionally, weaker asset quality and revenue pressure will exacerbate many banks’ pre-existing profitability challenges.

“Despite this, the number of rating downgrades has been modest, with most banks benefiting from comfortable capital and liquidity buffers, and unprecedented government support for households helping contain damage,” said Paul Watters, senior director, corporates at S&P Global Ratings. “As such, the economic shock is expected to be shorter-lived than a standard recession, however the ultimate extent of credit losses will depend on the speed and magnitude of the rebound, with a softer, longer upturn expected to weigh heavily on bank ratings.”

Among the key developments highlighted in the report are: (i) banks’ lending to companies in particular picked up strongly in the eurozone and the UK in March and April, confirming that banks are playing their role as providers of the financing that companies need to cope with liquidity shortages; (ii) the low cost of credit demonstrates the at least initial effectiveness of central banks’ intervention; (iii) consumers repaid some unsecured debt during the lockdown, but this trend is likely to start reversing; and (iv) access to the European Central Bank (ECB) funding facility has surged.

That said, banks may be unwilling to make full use of the flexibility on offer  to operate temporarily with lower capital levels, according to Mr Watters. “They know that at some point they will have to rebuild these capital buffers,” he explained. “Future provisioning needs are particularly uncertain, and banks may be mindful of investors’ perceptions and ultimately their cost of capital.”

Mr Watters concluded: “The ultimate size of credit losses depends on the speed and magnitude of the rebound, becoming evident only once payment holiday schemes wind down. All in all, bank provisioning will likely peak in the second or third quarter but could persist at an elevated level well beyond this.”

Report: S&P Credit Conditions Europe – Curve Flattens Recovery Unlocks