Temenos is a software specialist whom are leading the way in terms of software for banking and finance institutions. Presently, 41 out of the world's top 50 financial institutions are running its software.
Ouida Taaffe, Editor at Financial World, the journal for The London Institute of Banking & Finance, spoke with the Chief Strategy Officer at Temenos, Ben Robinson.
- Many start-ups argue that they make better use of big data to identify customers and analyse their creditworthiness than big banks do. Is that, in your experience, true and what makes for good use of big data in financial services?
Ben Robinson (BR): I think there is a common misconception around big data. What counts much more than the quality of the algorithms and the artificial intelligence – although clearly still very important – is the amount of data on which you can train those deep learning algorithms. In that respect, banks still have a big advantage over fintech companies. And, like in many other cases, the best outcome is often for banks to work with fintech companies, banks contributing data and the fintech providing the analytical capabilities.
- Open banking will mean that banks have to provide third parties access to customer account data. Large tech companies – such as Amazon – will then be able to form a very full picture of the social and economic life of individual consumers (e.g. seeing what is in their shopping baskets; what company they keep; what they earn and how they spend it…). If such tech firms then chose to enter financial services, they will be able to target customers closely and should be able to manage risk well at low cost. What can banks do to boost the data they collect about consumers/how can they use what they already have to compete with companies that gather more, and more detailed, data from a variety of sources?
BR: I think the biggest challenge for banks to compete with the internet platforms is a cultural one. Banks don’t have a culture of sharing data, nor do they have a culture of distributing third-party products and services. To compete effectively against the internet platforms, they will have to do both. Draw insights from customer data – and this means not just transactional, but also contextual and locational data – and use these to help customers to make smarter financial and operational decisions. And help customers to get the best deals and access the most suitable services - even if these aren’t provided by the bank itself. The biggest advantages that banks have over the internet platforms are trust (we continue to trust banks more than internet companies when it comes to our financial affairs), compliance and vertical integration, the last of which should help them to deliver faster fulfilment. This is the same reason why Amazon moved from just being an aggregator to building warehouses and acquiring a logistics fleet – to deliver superior fulfilment. I have written more about this here: http://bit.ly/2sQstyj
- What difference does mobile data make in the provision of financial services? How can banks better collect mobile data from customers? Do you see any trend for the approach taken by firms like Klarna, whose customers need only enter their email address to make a payment to an online retailer?
BR: In general, I would say mobile is more of a threat than an opportunity for banks. As a technology, it enables the separation of distribution from manufacturing. It risks new players coming between the banks and its customers, gathering very valuable information, for example, about payments which can then be used to generate income without involving the bank, effectively disintermediating the bank. To stop this from happening, banks need to provide mobile interactions that are as seamless and rich as they would be using Apple Pay or Klarna and, as before, this in part involves offering up insights as well as getting the user experience right. If banks hold onto the mobile channel, there is additional data that is of use, such as the customer location, but mobile is more of a question of not losing data than gaining new data.
- Do you think there will, as has been suggested, be a “Ryanairisation” of retail banking in Europe, with a utility-like provision of basic services at the lowest price to the largest number?
BR: I think you’ll see different models emerge. Some banks will choose to become utilities, what we would call infrastructure providers, leveraging the largely fixed costs of systems and compliance over much larger volumes of business. This is a business with economies of scale so it can be profitable, but it is limited by the fact that the product is a commodity and, for regulatory reasons, it will be difficult to offer the bank-as-a-service model across national borders. Other banks will choose a different course and, for example, try to become aggregators
- Are you seeing any moves towards increased specialisation in European retail financial services? Would you expect to?
BR: We expect banking platforms to emerge, which aggregate and distribute a range of services from multiple providers. In this case, there will be room for providers who specialise in the different areas of retail banking, such as unsecured lending, since they can drive very high volumes across narrow product sets without having prohibitively high customer acquisition costs since there are platforms through which to distribute their products. At the moment, the specialist model normally fails because of high acquisition costs which can’t be amortised over a large product set (that is, up-selling and cross-selling to the customer once acquired)
- It is said that “no-one wants to buy a quarter inch drill, they want a quarter inch hole”. How can banks better support the aims of their customers – e.g. in mortgage provision? Do they have any advantages in doing that? Can you give any examples?
BR: The banking business model must change, from being a transaction provider to being a trusted virtual advisor. Banks should help their customers to understand their financial affairs better so that those customers save money and make better decisions. So, in the case of mortgage provision, the bank would help its customer, analysing his or her unique circumstances, to buy the right-sized house in the right area, get the right mortgage product (even if not from the bank), get the right insurance, introduce them to a recommended lawyer with a preferential rate and so.
- What impact do you expect on-going very low interest rates to have on the migration to fintech in European retail banking? Are you offering any services designed with ultra-low interest rates in mind? If so, where do you see most demand?
BR: everything else being equal, people are prepared to take more risk to get yield in a low interest rate environment. We may well find, when interest rates rise, that this has given a boost to several new types of products and services such as marketplace lending.
- Banking regulation is complex and compliance is expensive. Do they represent a barrier to entry to fintechs and, if so, do you see any technological solutions that make regulation less burdensome? Can you give examples?
BR: I think regulation used to be a barrier to entry. Today, regulation in many cases such as PSD 2 is actually opening up the industry to new and more competition. In addition, many solutions are emerging which enable firms to comply with regulation more cheaply and also to obtain some advantage from compliance. As examples, I would cite MarketPlace providers such as Qumram, which records all client communications in line with MiFID II regulations but which then uses all of the data captured to drive sales and marketing insights, or Neuroprofiler which offers a risk profiling game to comply with MiFID II which in addition to establishing a customer’s risk profile gives the bank insights into that customer’s behaviour and cognitive biases which can be used to serve them better.
- What difference has SEPA made to the provision of retail payments services in Europe and the way in which banks approach them?
BR: I think the general move to instant payments is interesting. Obviously, it has implications on the money banks can make from spreads and floats, but it has broader implications. For example, do we still need credit cards in a world of instant payments?
- You mention that Blue Code, a payment solution that does not require a bank card (and also avoids merchant fees) is popular in Germany and Austria where only a minority of people use credit cards. Do you see any demand for such solutions in the UK? Could they be used to enable small traders to cut the amount of cash they have to handle/to help enable banks to cut the number of branches they run without damaging local economies?
BR: Blue Code has benefits for all stakeholders. For consumers, it’s free and easy to use, secure, anonymous and can be linked with loyalty cards. For merchants, it’s an inexpensive and convenient way of getting paid. And for banks, it helps to digitize cash payments, opening up a larger revenue stream, and since Blue Code doesn’t hold any payment information, it does not risk the bank being disintermediated.
- What do you see as the single biggest challenge for UK retail banking over the next two years, and why?
BR: with a two year window, I would still see compliance as the biggest challenge facing UK banks. MiFID II, PSD 2, GDPR and ringfencing are complex and have tight implementation deadlines, falling within the next two years.