Digital disruption

Scott Thompson looks back over what has been an extremely eventful 12 months for the FS technology sector, and ahead to 2015

June saw the return of the FStech Omnichannel Banking Conference. A key message to come from the event: banks with omnichannel aspirations must shake off old ways of working and start acting more like startups. It looked at how they are faring when it comes to fusing channels to create a unified customer experience across various touchpoints (mobile, online, the branch, social etc). This is tricky territory to navigate, it was concluded. Regulatory compliance requirements, for instance, continue to place enormous strains on banks' budgets and resources. Throw in the potential invasion of their markets by new non-traditional, digitally savvy entrants, such as Amazon, Apple and Google, and some organisations could be pushed to breaking point. At the same time, however, a successful omnichannel strategy could potentially strengthen their relationships with existing customers, capture new ones and gain better customer intelligence.

These challenges and opportunities dominated 2014. There have been many examples of FIs making omnichannel progress. But for every Nationwide Building Society blazing a trail on the High Street and online, there have been FIs aplenty falling down on customer service and generally failing to join up the cross channel dots as they continue to be weighed down by pesky legacy IT systems.

Let us, however, start with the good, before moving onto the bad and the ugly. As mentioned, Nationwide has forged ahead this year. In an industry first, it announced that its mobile banking members could now access real-time account balances on their Android Wear smartwatches. The building society’s Android app has such other features as the ability to make payments, transfer money, manage overdrafts and open savings accounts.

Kudos also to Barclays Bank for its Digital Eagles effort. It has trained thousands of members of staff to help customers who come into branches and express an interest in online and mobile products. The initiative forms part of its bid to close the digital divide and have the most digitally savvy workforce in the world.

Barclaycard's bPay wristband hit the capital during September, allowing Londoners to make contactless payments at 300,000-plus terminals and across the TfL network. Any UK Visa or MasterCard debit or credit card can be linked to the wearable device, bringing onboard the 50 per cent of Londoners currently without a contactless-enabled payment card.

Barclaycard said that bPay would help the capital’s commuters avoid ‘card clash’, which can arise where the card readers on buses, stations or at tram stops in London detect more than one contactless card and either take payment from a card that was not intended to be used or present an error message. The product itself is free and there will be no usage fees for consumers. At the heart of the offering is a pre-paid account to which funds are either added automatically when the balance runs low or can be done so online. It was trialled at the Pride in London LGBT celebration in June and the Barclaycard British Summer Time music festival in Hyde Park in July and is expected to be made publicly available this year.

Outside of the UK, Poland's mBank won plaudits for mDeals, the first European implementation of merchant-funded transactional marketing. It has also developed a way to perform online, loan underwriting and credit scoring in 30 seconds. Money transfers instantly into the customer’s account and the customer can repay with debit card or at any ATM.

And it doesn't stop at mBank. Efma's 2014 Yearbook, published in November and looking at the state of global retail banking markets, notes that there are various interesting developments taking place in that part of the world. "Poland has some very innovative banks and has been one of the growth markets in the European Union in the last several years," commented Patrick Desmarès, secretary general at the not-for-profit retail FS organisation. He also flagged up Thailand and Colombia as having some similar characteristics as rapidly developing but still low income countries. In contrast, the East African countries have very low income and generally weak infrastructure but have been global leaders in mobile money developments, he noted.

In Spain, meanwhile, CaixaBank inked a deal with Fujitsu to manufacture 8,500 ATMs as well as an agreement under which both organisations will foster innovation in ATM technology and related network services. The 10-year project is part of a €500 million investment by the Spanish bank. The new terminals will incorporate technologies to enable new network services currently being developed by CaixaBank. For example, its new ATM model Punt Groc incorporates a contactless card reader that allows transactions via compatible mobile and wearable devices. Automatic banknote recognition, meanwhile, facilitates the availability of cash in ATMs and simplifies the manual loading process. They will also incorporate the latest advances in accessibility, including the European Commission-funded APSIS4all initiative that offers resources and support to older people, disabled users, or those who are unfamiliar with electronic devices.

CaixaBank also launched Europe’s first Visa contactless wristband, enabling payments at terminals in more than 300,000 businesses across Spain. It initially issued 15,000 of the contactless wristbands this summer, to selected customers who have made the most use of their contactless cards. The device was then made available to all customers via the bank’s branch network and other channels in the second half of the year. Inside the band is a microtag with the customer’s encrypted card details, protected with the same security guarantees as normal contactless cards, CaixaBank said. As with a normal card transaction, for purchases worth over €20, customers will have to enter their card PIN to validate the transaction. There will also be an option to download a new mobile app, which will alert customers when any transactions are made using the device.

This was not the first foray into wearable technology for CaixaBank; in early 2013 it launched the world's first application for smartwatch devices and a function for Google Glass users to locate branches and convert currencies.

A bad year for...

The Central Bank of Ireland announced in November that it had fined Ulster Bank €3.5 million for IT and governance failings that resulted in approximately 600,000 customers being unable to use their accounts over a 28 day period during June and July 2012. The penalty is the largest imposed by the Central Bank and comes on top of €59 million paid out in compensation to affected customers. The RBS-owned bank is also facing a further hefty fine from the FCA in relation to the Northern Ireland part of its operations.

The Central Bank’s director of enforcement, Derville Rowland, commented: “The summer of 2012 saw an unprecedented disruption to banking services as a result of a failure that occurred on the IT systems that Ulster Bank Ireland used to process daily banking transactions. The IT failure caused significant and unacceptable inconvenience to affected customers trying to carry out their everyday financial transactions. Over a prolonged period of time customers were unable to access cash through ATMs/cash and pay for goods and services and there was a delay in the processing of payments in and out of accounts. As the provision of financial services to customers represents the core business function of the firm, the major breakdown in the firm’s provision of these services as a result of IT failings is completely unacceptable."

Ulster Bank entered into an outsourcing services agreement with Royal Bank of Scotland Group (RBSG) for the provision of IT services in 2005. During June 2012, software that RBSG used to process banking transactions across all of its businesses failed. The immediate cause of the failure arose from difficulties with a software upgrade supplied by a third party that had been installed by the organisation a few days prior to the IT incident. As a result, the process of updating transactions and customer payments did not run for an extended period of time.

Rowland said: "While the Central Bank recognises that IT outsourcing is a feature of modern banking business, outsourcing is no defence for regulatory failings. Ultimate accountability for compliance remains with firms and they must ensure that they maintain oversight of outsourced activities. Senior management must ensure that risks associated with outsourced activities are appropriately managed and must be aware that outsourcing arrangements can never result in the delegation of their responsibility to manage the risks associated with such activities. The obligations imposed upon firms and management applies equally to situations where activity is outsourced on an intra-group basis or to a third party. Where firms and their management fail to ensure that robust governance arrangements are in place for in-house and outsourced IT systems, they should expect vigorous investigation and follow up by the Central Bank, and for the Central Bank to exercise its powers, including sanctioning powers where appropriate."

The jury's out on...

The Payments Council welcomed the new Payment Systems Regulator's proposals to regulate the payments sector when it becomes fully operational next year, while stressing that, "we are already committed as an industry to maintaining our world class payments systems for customers whilst ensuring new providers enjoy a level playing field."

Maurice Cleaves, interim chief executive of the Payments Council, commented: “The UK is globally renowned for delivering payments innovations. UK customers already enjoy contactless technology and chip and PIN on their cards, internet and phone payments at the touch of a button, Paym on their mobile phones; and they can move account more quickly and easily than ever before thanks to the Current Account Switch Service. These services match or beat what customers enjoy elsewhere in the world. We will press on with all this work whilst continuing to engage with the PSR to ensure that all those that access and use payment services on a daily basis are the winners.”

Open for consultation until 12 January 2015, the PSR's proposals focus on driving industry strategy and encouraging innovation; opening up the ownership, control and governance of payment systems; and providing fairer and more open direct access to payment systems as well as increasing transparency.

Hannah Nixon, managing director at the PSR, said: “It’s vital for the UK to have world class payment systems. The systems we have today have been developed incrementally over time by the major banks. So while they are relatively resilient, they are often treated as back office functions. Competition is limited, decision making opaque, and this is stifling innovation. This has to change. I want to see an industry that is responsive to, and focused on, the needs of those using payment services. This will be an industry that encourages and enables competition and innovation, provides value for money, while maintaining reliability and security. In short: a UK payments industry that is world class. I am confident that our proposed package of measures will make this possible.”

We at FStech are following this one with a healthy dose of scepticism. Whilst startups have undoubtedly found it hard to access payments systems due to various vested interests at work, we're not sure that wading in with yet more regulation is the right approach. To quote a delegate at our Payments Conference in November: “We’ve got civil servants trying to decide how payments systems should work. They haven’t got a clue. The new payments regulator will need its own regulator.”

The TfL roll-out was an undeniable shot in the arm, but contactless still flatters to deceive in many respects. Contactless payments have been growing at a phenomenal pace over the past two years, gushed Worldpay during November, adding that we will see a potential tipping point for the technology in 2015 when the current £20 limit rises to £30.Erm, define phenomenal, guys...Although the banks and card schemes see it as a done deal, the fact remains that it has yet to gain traction outside Japan and South Korea.

Our ones to watch in 2015

Zapp...a bit obvious, we know, as they’ve rarely been out of the spotlight this year and have been the go to guys for lazy journalists (not us, obviously, ahem) looking to knock off an m-commerce article in double quick time. Nonetheless, the mobile payments venture set up by VocaLink and due to launch in 2015, makes our list for announcing tie ups with a number of retailers. Asda, Sainsbury’s, House of Fraser, Thomas Cook and Shop Direct (including the, Littlewoods, Isme, and K&Co brands) have given it their backing. Other retail and biller partners include: Clarks, Dune, Spar, Best Western Hotels (GB), Starstock, QD Stores, Anglian Water, Bristol & Wessex Water, Sutton and East Surrey Water. Support from the charity sector through Oxfam and Charities Aid Foundation has been previously announced.

Zapp also has in its corner such payment providers as Verifone, Klarna, Touch Go, Siemens, Apogee International, Vix Technologies, Global Charge, Just Desire and RSL. And banks including HSBC, first direct, Nationwide, Santander and Metro Bank, who combined provide current accounts to over 18 million people in the UK. Additionally, almost all major UK acquirers and PSPs are supporting it, including Worldpay, Elavon, Optimal Payments, SagePay, Realex, TrustPay Global and

If there's a downside, it's that, while many of the banks not mentioned just now have made positive noises, they've yet to commit publicly to a deadline. Zapp, which bypasses the card networks and offers real-time payments on consumers' mobile phones through their existing mobile banking application via the Faster Payments service, is competing for attention with the likes of and Apple Pay. The mobile payments road is long, with many a winding turn, as somebody sort of once sang.

2014 was the year that London solidified its position as a leading hub for FinTech startups looking to disrupt the way the FS sector operates. Startupbootcamp FinTech has been key here. Launched this year and pitched as "the first true London-based global accelerator specialised in FinTech", it recently hosted its first London Demo Day for 10 selected startups. Over three months, the companies collaborated with more than 250 mentors, partners and investors, to build products. Startupbootcamp FinTech invites angel investors, venture capitalists and financial institutions looking for investments and partnerships, to watch the startups pitch and meet the teams.

436 startups applied from across 59 countries, for the opportunity to receive mentoring and exposure and also three months free office space; €15k in cash and €450k in partner services. The 10 finalists were: Creditable, enables employers to lend money to their employees, easily, transparently and fairly; Dutch, integrates with existing bank systems to enable real-time social payment networking; Epiphyte, deploying enterprise software that allows the pre-installed systems of financial institutions to “talk” to crypto-financial networks; Friendlyscore, creates credit scorecards based on big data from Facebook; Insly, a cloud-based tool for insurance salespeople, enabling them to manage sales from start to finish; investUP, enables people to find, track and grow all of their debt and equity crowdfunding investments; Invoicesharing, is a financial services marketplace which enables free electronic invoicing; Liquity, an online marketplace matching buyers and sellers of private company shares; m-changa, enables anyone to quickly and inexpensively manage a remote fundraiser; milliPay, a Swiss micropayment startup that makes online payments as simple as browsing.

At the time of writing, TransferWise, a London-based money transfer startup backed by Sir Richard Branson, was on track to raise $50 million from US venture capital firm Sequoia Capital, in a deal valuing the business at around $1 billion (it has already raised $33 million in the three years since its launch). Estonian friends Taavet Hinrikus and Kristo Käärmann came up with the idea for building the platform when they first became expats in London and were confronted by the high fees banks charge to transfer money abroad. Hinrikus had worked for Skype in Estonia, so was paid in euros. Käärmann worked in London, but had a mortgage in euros back in Estonia. They realised they each needed the currency the other had, so they devised a plan: every month Käärmann put pounds in his friend's British bank account and Hinrikus put euros in Käärmann's euro account. They used the official mid-market rate exchange rate, both received the right amount of money and neither paid any bank fees. Within a few months they’d saved thousands of pounds and realised there were probably millions of others that needed a system just like theirs. So they set to work and the result is a business that has so far transferred over £1 billion worth of customers' money.

The startup also makes our list for an inventive marketing campaign that has seen it mock the traditional banking industry and its penchant for hidden charges. In October, calling for greater transparency in foreign exchange, over a hundred rum coves dressed up as skeletons and marched from Bank to the Silicon Roundabout tech cluster in Old Street, flying a giant, inflatable tombstone inscribed with the words, “RIP Hidden Fees”, which was left to float above the London skyline. Customers were also urged to participate via the hashtag, #RIPHiddenfees. You gotta laugh...

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