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Friday, 15 January 2021

The business of banking and payments

 What does a bank do? From the perspective of a consumer of business here are the core functions:

-Offers consumers banking services around their day to day needs of payroll, paying bills, cash requirements, mortgages, deposits and managing wealth.

-Offers businesses a way to receive money from customers and pay their suppliers, loans to fund their business, handle domestic and international  payments 

Between themselves, they offer loan syndication, securitization, investments , stocks and bonds.

A common theme is the use of information technology to support their transactions and service their constituents with information about their money.

Since thousands of years this has been the function of banks. A trusted repository of your money and a facilitators of transactions for business benefit from financing wars to paying for your coffee. 

What has changed in the last two decades? The rise of internet as a set of technologies to enable banking. The unintended consequence is that Internet has enabled banks to take advantage of scale and hide bad behavior such as creating complex derivate trades without responsibility  for the underlying asset. 

But what about payments? The Internet has been of net benefit to the payments segment by enabling tracking of the legal beneficiaries and cost transparency for the end user of banking services. Trends like modernization of payment rails, APIs, Open Banking, ISO20022 messaging are facilitating deep integration across the payments value chain. This is a clean , fee based business with few places to hide for bad actors.

Wednesday, 13 January 2021

Barriers to Open Banking

 As the banking industry is wrestles with  the twin challenges of  new customer acquisition and operational costs they are aligning some of their spend on digital transformation to Open Banking driven by the requirement of giving TPP or third party providers access to customer payments data.

This has created some additional barriers around competition and innovation. Lets consider these in more detail:

Competition:

-All jurisdictions with PSD2 have rules around which accounts should be accessible by TPPs. Many banks have even published APIs of their own, however there lack of standardization of these APIs. If banks build "premium" APIs the TPPs will be charged for this access.

-In market driven jurisdictions like USA and Canada they are talking of consumer rights but legislation is absent . In this case bank have partnered with TPPs like Plaid under a screen scraping contract to display account information . But these carry contractual risks as the recent litigation by TD bank has shown.

Innovation:

-A bank may hope to provide access to data residing in legacy mainframe systems, but will face manual work arounds when encountering the new authentication and authorization requirements for services offered by third parties.

-When a TPP wants access to data in absence of detailed rules around ownership of customer data banks may comply by providing the bare bones payment information. In such cases the 360 degree view of the customer is unavailable for TPPs to offer personalized service.

The solution is to think of Open Banking as market infrastructure and enable each other. The regulators also need to play an enabling role to ensure fair rules and partnership. This will take time to evolve.


Tuesday, 12 January 2021

Why should banks care about ISO20022?

 Consider some of this data:

-Total transition costs for migration to ISO 20022 payment message standard cost the SEPA $9 billion as per a 2017 study.

-Payments Canada expects a migration from checks will save the Canadian economy $4.5 billion.

This is good for the economy and society as a whole but I am a bank running for profit so why should I care? I have a system that works fine, the inefficiencies and delays in my current system is to my benefit as I can enjoy the float and charge more plus its been working fine for decades.

Well too bad, bank. Customers and regulators are insisting on this change and if you don't change you risk rising operational costs. falling behind the curve leading to loss of customers and regulatory burdens.

Lets peel this onion, shall we?

Rising operational costs: Drop in STP rates means less and less of your transactions will be completed without manual intervention. As it is, only about 60-80 % of your transactions go through STP and this is already  impacting the cost vectors of your payment business. ISO20022 rich data messaging allows you to do better reconciliation leading to improved STP rates.

Regulatory burdens: Sanctions screening, AML, KYC, purpose of making the transaction, legal entity, ultimate beneficiary  all these are checks you are doing today. With tools like LEI in ISO20022 this information travels with the message reducing your regulatory obligations.

Loss of customer: If I am a customer expecting a wire transfer and its going to take a week to get the money in my bank account and cost me $40 for this  , I will certainly look for options to get the funds faster and for lesser cost. No brainer here.

So the cost of not moving to ISO20022 is not the factor .Rather, it is the when and what deadlines I am facing that drive this decision. See this chart and note that many market players in North America are yet to go live but be assured all regulators are working in this directions.




Monday, 11 January 2021

What is a Data Fabric?

 We are all aware that banks today are dealing with multiple data sources. Each of these data sources or end points  have to be brought into a central warehouse to run analytics on.  All this data movement requires integration capabilities and further the need to manage for security , the information about the data or metadata.

Data fabric is a middle layer that sits on top these end points and the connections architecture . You can think of this as a logical or virtual layer. You then build services to connect to the data fabric.  It has the contextual capability which describes the lineage of the data and the business logic.


This infrastructure allows the consumer of this data a convenient data set for analysis regardless if the user is from a bank or the customer. This data set is always current and fast  because we are not copying the stored data and its rich because it comes from any number of data sources.

The benefit is for the bank that you don't have to make copies of the data , the fabric abstracts the data into a dataset  for analysis and for the end customer they can interact with their own data . Due to zero replication, it is easier to administer and manage the data thus providing them control over the data they shared with the bank.

The overall benefit for the bank is this type of infrastructure allows them to think of new ways to create products and provide insights to their customers. 

Sunday, 10 January 2021

How will payments be regulated?

 With the success of Chinese and UK based fintech and the changes in the USA allowing the likes of Amazon to offer lending to small business, fintechs are a well established member of the market infrastructure. As the volumes they handle rises the questions is what will regulators do?

On the one hand they want to encourage competition, enable the underserved and have worked to ensure data collections and sharing is regulated. Now that these goals have been met, the challenge is what to do with the new monopolies being created in fintech.

Witness the ANT group IPO shut down. Regulators will now want to ensure that no body is too big to regulate. The sheer scale of data about customer behaviour an Alibaba or Amazon can gather gives them an unbeatable advantage versus banks. These companies will also lock out new fintech competition by buying  them out or restricting access to data, the same problem that banks have.

One way is to ensure as in US that the parent company has liquid assets corralled off to cover the activities of their payments and microlending activities. The capital needed will satisfy regulators but want about innovation?

Would blockchain DLTs be the answer? By providing access to payment processors via DLT  they allow more entrants to what is essentially an old boys club and protect innovation perhaps.

It will be interesting to note the developments in regulations.



Saturday, 9 January 2021

What is a Data Repository

 In order to provide true value to the customer, banks need to understand them first. To understand customer behaviour with the goal of offering products/services relevant to them, the bank collects all details of the customer transactions. Then they study the data to see if any deeper understanding can be gleaned.

To facilitate the process of getting insights banks use a collection of data bases called Data Repository   (aka data lake, data mart, data library, data archive). This repository stores the data sets on which analytics are run to gain insights and predictions around customer behaviour. The business then takes a call on what insights to offer the customer . 

To get to the data sets however is a major task. The different sources from which data will be gathered need to identified. The data from each of these databases will be placed in a data warehouse . To get data into the warehouse requires ETL tools that will extract data from each of the databases, transform the data format of this data  into a format the data warehouse will understand and load the data to create the data set for analytics.

In fast moving real time businesses like banks, the data needs to be current, accurate and changes need to be captured . The processes and technical architecture of the data repository needs to accommodate these requests. Many ways to create these technical infrastructures exist and new ones such as cloud based ,open source, hybrid and connections with social and data feeds add more complexity.

Start small or repurpose an existing data set and scale up as you build consensus and maturity to deliver these data sets.

Friday, 8 January 2021

The need for data integration

 In modern banking technology environment , the quest to get hold of data is a very complex exercise. First the data about the transaction has to be collected and there are rules on what to collect , how to collect and from where you are receiving this data. Then the need to transform the data into a form that can be ingested ,indexed and visualized by the product developers. After this, the data has to be moved to analytical platforms to slice and dice the data in a way that will make sense to the business teams. Finally the data has to be stored for a period of time . While doing all this the data has to be secure and protected  from hacking or loss.

Data Integration is the discipline of IT that comprises of the practices. architecture and tools that allows the bank to manage their disparate data sets in a coherent manner. This discipline covers all flavors and  types- data ingestion, data transformations, data processing, data pipelines, data synchronization, data virtualization, data fabrics, data engineering, data staging, streams data and data services to name a few.

In absence or lack of process around your data it can quickly overwhelm banking operations and lead to deterioration of services and impact the bottom-line.

Luckily this is a well known problem for which many approaches  and technical solutions are available. The challenge is all these solutions cover some parts of the puzzle and the bank has to figure out what works best for them. Understanding your data lifecycle, who needs access to what data are the key aspects to figure--how to do once a path has been decided is the easier part.