Financial services trends for 2018

Against the backdrop of transformative technologies and the latest regulations, Graham Lloyd, Director and Industry Principal of Financial Services at Pegasystems, identifies the obstacles and opportunities financial services will have to navigate in their journey through 2018.

Evolving customer engagement

Social media is just one element of customer engagement and there are other big issues on the horizon – digestibility, cost and effectiveness. Data mining is now so huge and its outputs so great that we should perhaps be referring to ‘big insights’, as there are so many of them. For most players, the problem is how to work out which insights to leverage within whatever time and budget constraints prevail.

Running customer engagement by mining all available data and seeing what pops up already requires compromises. These can include cached decisions, some kind of formulaic, but subjective selection process, or the use of advanced tools for the wrong purpose.

If we take it up a level of abstraction, we can see that this is a “ready, fire, aim” approach. To get things in the right order, banks need to begin by defining the outcomes they seek, then to go and search data to find them, then take an action. This would not just be a far quicker and more logical process, it would focus the thinking into what these outcomes should be, i.e. what matters most to the customer on the receiving end of all this engagement. Moreover, the combination of forethought and speed would help ensure that what was placed in front of the CSO and customer would be far more likely to be relevant and real-time.

Time to tackle trade finance

With trade finance risk-weighting kicking in properly in March 2019, we are entering the home straight for finalising the necessary business changes. Most players will presumably look to offset some of the costs of introducing capital requirements in this hitherto largely unweighted portfolio by seeking greater productivity/process efficiencies. Indeed, there are improvements to be made, but only a small percentage of these will derive from doing what we do now, a little better.

Trade finance structures and practices are largely as they were in the past few centuries and the deadline in March may be a perfect opportunity to drag them into the present. For example, it is easy to imagine a good case management and decisioning system driving and checking documentation and payments in nano-seconds and handling open account and documentary credits with equal aplomb. This activity could be outsourced if required, perhaps to an automated clearing house, or it may be a perfect opportunity to embrace distributed ledger technology (blockchain).

The truth is out about challengers!

Thus far, challengers and Fintechs have been portrayed as somewhere between a benediction and a panacea. The great generic USP – “we’re not a traditional bank” – has helped them weather all sorts of issues from low take-up to sub-optimal IT to almost-but-not-quite products, with scarcely a hard question asked. But the honeymoon period may be drawing to a close, and even in combination, they have still to take any serious market share away from big/traditional banks.

Of course, some have done better than others, but few are showing any sign of sustainable growth. Some will argue that their prime purpose was closing a gap in the market, or providing an alternative. However, in such cases, they will still need to show profitability or good take-up instead. Furthermore, it’s only a matter of time before an economic event or milestone means they have to take some hard decisions – foreclosures on small businesses in a depressed part of the Midlands, anyone?

Rebalancing beliefs to a more mature and realistic view of what these firms can do may make sense for all. Financial realities may lead to a shared, single operating model, with efficiencies for all as well as more freedom to concentrate on customers and products. A sharper definition of what value Fintechs can actually add would help ground their brand and product set – leaner and hopefully more effective. Few Fintechs have an actual track record of serial success but most have one great idea. These businesses may find greater acceptance and success as excellent components in the financial ecosystem rather than potential unicorns.

Successful social media

The growing discrediting of social media content and its practices comes at an awkward time for banks. The last thing they need is association with anything that could contribute more mistrust to their profile, but they cannot afford to ignore a powerful channel with such reach and strong links to here-and-now impact

The conundrum is further complicated by the seismic changes already underway here – cookies are being denied, adverts blocked and customer identification rates plummeting. Ideally, first-party data would be entered directly into these channels to ensure veracity and accurate customer identification, with real-time updates. However, this would require a different approach to social media, with the bank taking more of a driving seat. Properly done, it could enable the bank to stand out as a beacon of integrity. 

Possibilities of PSD2

In the final run up to PSD2, there are sizeable revenue opportunities for a bank positioning itself as the ‘destination of choice’ for PISPs (Payment Initiation Service Providers). These new players will gravitate towards the banks offering a higher service standard and the least hassle, as the effects will flow through to the PISPs’ own customers and their expectations of security, certainty and convenience. Banks stand to recapture not only some of their own lost transactions, but also some which have flowed out of their competitors.

Overall, successful financial services firms are those that embrace the ability to be flexible, and use the technology available to their advantage so that they can keep up with the ever-evolving market. Rather than greeting new legislation and technology with trepidation, banks should use these opportunities as a means of setting themselves apart from their peers and ensuring longevity in the financial sector.

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