Times of change

The pace of change in the financial services sector seems unprecedented. Traditional business models are being dismantled at a rate that, for inflexible incumbents, must be alarming. It is not solely that enabling technology is hurtling forwards, it is also to do with the bigger picture of low margins, heightened customer expectations and increased competition.

Almost from nowhere, along comes Alipay to threaten traditional credit card players, not least UnionPay in China. The online payments part of e-commerce colossus, Alibaba, has grabbed around half of China's online third party payments market in less than three years, tapping the hundreds of millions of Chinese still without a credit card, and it is now spreading to the international market.
More sweepingly, blockchain is looking like a major disruptive technology, with nearly all large banks and infrastructure providers rushing to understand how it might be harnessed. Whatever form it takes, the days of banks being able to reap the rewards of their payment inefficiencies are clearly numbered, thereby further eroding previously comfortable margins.

On the retail banking side, there are calls for banks to become ‘lifestyle concierges’, i.e. to be able to seamlessly provide their clients with value-added services across the board, for instance, suggesting a law firm if a customer is buying property and needs legal services, offering real-time discounts and rewards in shops and restaurants and so on. The latest annual gathering of Temenos, Temenos Community Forum (TCF), for example, was held under the banner of 'experience-driven banking’. In his keynote speech, the vendor’s CEO, David Arnott, stated that this is a fundamental shift that requires cultural change. ‘Banks will have to open up their existing platforms, start selling third party products and share customer data,’ he said. John Schlesinger, Temenos’ chief enterprise architect, told the bankers attending the event that ‘for user experience and interface, you have to be at least as good as Amazon’.

Banks and others, including Visa, are clamouring to harness new innovations, by nurturing the efforts of third parties and/or allocating internal resources to this pursuit. After all of the talk in the last few years about ‘big data’, there is a real intent in some organisations to try to work out how to capture and make sense of this for much smarter marketing, better credit ratings, and value-added services and products for customers.

There is a similar move to go beyond lip-service when it comes to partnering, with banks looking to build meaningful, mutually beneficial relationships with non-banks as well as working in greater cooperation with each other to devise new joint propositions (as is happening in Poland within the BLIK initiative for mobile payments).

Where does that leave the core banking systems market? Ultimately, many banks will still need to grasp this challenge, whether by rip and replace or a phased migration to truly gain cost efficiencies and improve their channel delivery, data management, time-to-market etc. Temenos’ Arnott was clear in his message at TCF: ‘You always start with the core. No digitalisation is any good without it. You need a single reference point that is modern, efficient and real-time.’

Whether the long-standing suppliers are the ones to continue to reap the business is debatable, with signs that, here too, disruptors are on the way with real-time solutions that look rather different from what has traditionally constituted a core banking system.

This makes things interesting for industry watchers such as us, of course, with the luxury of being able to observe, pry and report. Much of the interest is coming from suppliers and non-bank institutions that weren’t around even a few years ago.