Banking in the connecting world

PRIVATE

Banks in the new world

The next-generation platforms need to be built on a cloud-first foundation Key to a smooth transition is an effective change management program

BY ERI (Abbiamo lasciato il testo in inglese per cogliere le sfumature del contenuto, n.d.r.)

REPORT

NEW ECONOMY

Over the last decade, competition in the banking industry has intensified with a rise in the number of neo and challenger banks serving customers at one-third the cost of traditional banks. Large banks are increasingly concerned about the limitations of their core architectures and the slow pace of change in terms of time to market and siloed data storage. To regain their ability to compete in this hyper-paced world, banks need to aggressively implement advancements in technology. This will enable them to reach a high

level of flexibility and automation

with a fully digital core capable of delivering customised offerings. This triggers the modernisation of Core Banking Systems and the move from legacy systems towards cloudbased and SaaS-enabled models.

Transactions in real time

With the advent of digital banking, cloud and APIs, banks have witnessed a significant shift in how banking products and partnerships are developed. Banks are now expected to process transactions in real time, release new products/ services frequently, and scale (up and down) their infrastructure needs. Legacy Core Banking Systems designed for reliability rather than open architecture are trying to embrace the shift to this new requirement, but dated technologies often cannot support interfacing with new tools.

A new way

Since its inception in 2018 in Europe through regulatory initiatives such as the revised Payment Services Directive (PSD2) and the Open Banking Standard,

Open Banking has spread to over

50 countries globally. Some countries are opting for a regulatory-driven approach modelled after Europe and the UK. These include Australia, Canada, Hong Kong and more recently, Brazil, Mexico, Bahrain and Saudi Arabia, with mandated API standards and data access. In contrast, others are following a more market-driven approach. The US is driven by the rise of fintech challengers, whereas the transformation in Asia, in particular China and India, is

driven by payment disrupters and

e-commerce giants. API Banking is evolving across Europe. For instance, LUXHUB,

Open APIs have become a standard of collaboration enabling to strive for dominance in different parts of the value chain

PRIVATE

CANADA

Canadian Banker’s Association focusing on Digital Identity as first step towards Open Banking. SNAPSHOT OF OPEN BANKING ACROSS THE GLOBE

UK

Open Banking Working Group UK comprising 9 major banks set up by Competition & Markets Authority; became the Open Banking Implementation Entity (OBIE) in 2018.

EU/EEA

Revised Payments Services Directive for account aggregation and payment initiation in 2018.

HONG KONG

Open API framework paper issued by HK Monetary Authority for banking in Jan 2018; APIX API platform launched.

INDIA

Driven by payment disrupters but also, by regulation (United Payments Interface) in 2016.

SINGAPORE

Early adopter - launched the “Finance as a service” API playbook with 270 open APIs published by Nov 2017; Forward regulation by Monetary Authority of Singapore (MAR) but nonbinding.

MEXICO

Fintech law passed requiring banks to publish Open APIs with oversight by Central Bank (BANXICO) for digital certificates.

USA

Limited regulations e.g., OCC financial charter and 2018 Treasury report affirming third party access to consumer data.

BRAZIL

Central Bank leading Open Banking Project being implemented in parallel with instant payments PIX.

SOUTH AFRICA

Reserve Bank to establish regulatory sandbox.

SAUDI ARABIA

Open Banking initiative launched by Saudi Central Bank (SAMA) for early 2022.

AUSTRALIA

Prudential Regulatory Authority (PRA) mandate for phased implementation of Open Banking by the Big Four banks in parallel to Consumer Data Right.

an open API standard built by a consortium of four major Luxembourg-based banks (BCEE, BGL BNP Paribas, Banque Raiffeisen and POST Luxembourg), has become a leading European Open Banking API platform. As well as ensuring PSD2 compliance, LUXHUB connects fintechs and financial institutions through powerful, secure, and robust API connectivity. In 2020, LUXHUB and SIX Group, a leading financial infrastructure provider headquartered in Switzerland, entered a strategic partnership to facilitate and accelerate the adoption of Open Banking in Switzerland. By leveraging this partnership, SIX was able to evolve and improve its Open Banking Hub. By combining established banking fundamentals with sector-leading technical expertise and innovation, LUXHUB has emerged as a key driver of

Europe’s evolution towards open

finance.

The Consumer Data Right

As one of the most regulated markets, Australia stands out for having an innovative approach to Open Banking. The Australian Prudential Regulatory Authority mandated the implementation of

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Capitale a rischio. Il valore degli investimenti e il reddito che ne deriva possono crescere così come diminuire, e non sono garantiti. Gli investitori potrebbero non rientrare in possesso dell’importo inizialmente investito. Capitale a rischio. Il valore degli investimenti e il reddito che ne deriva possono crescere così come diminuire, e non sono Messaggio Promozionale: Prima dell’adesione leggere il Prospetto e il KIID disponibili su www.ishares.com/it, che contengono una sintesi dei diritti degli investitori. garantiti. Gli investitori potrebbero non rientrare in possesso dell’importo inizialmente investito. Informazioni importanti. Predisposto da BlackRock (Netherlands) B.V.. BlackRock (Netherlands) B.V. è autorizzata e regolamentata dall’Autorità olandese per i mercati finanziari. Sede legale Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20-549-5200. Numero di registro commerciale 17068311. A tutela dell’utente le telefonate Messaggio Promozionale: Prima dell’adesione leggere il Prospetto e il KIID disponibili su www.ishares.com/it, che contengono potranno essere registrate. La politica di gestione dei reclami di BlackRock è disponibile in italiano e consultabile al sito una sintesi dei diritti degli investitori. www.blackrock.com/it/investitori-privati/literature/investor-education/politica-gestione-reclami-sito-retail-italiaInformazioni importanti. Predisposto da BlackRock (Netherlands) B.V.. BlackRock (Netherlands) B.V. è autorizzata maggio2022.pdf. © 2022 BlackRock, Inc. Tutti I diritti riservati. 2184767 e regolamentata dall’Autorità olandese per i mercati finanziari. Sede legale Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20-549-5200. Numero di registro commerciale 17068311. A tutela dell’utente le telefonate potranno essere registrate. La politica di gestione dei reclami di BlackRock è disponibile in italiano e consultabile al sito www.blackrock.com/it/investitori-privati/literature/investor-education/politica-gestione-reclami-sito-retail-italia-

PRIVATE

Open Banking for its “big four” banks, similar to the UK’s approach. However, it moved beyond Open Banking by implementing in parallel the Consumer Data Right, an open data economy whereby citizens can ask financial institutions to share their data with third-party providers of financial services and companies in other sectors like energy or telecoms. Another example is Canada, where the Banker’s Association focuses on digital identity as a precursor to an Open Banking framework. It has now started the second phase of its “consumer-directed finance” consultation on Open Banking. However, Open Banking has been slow to take off, even in developed markets such as the UK and Europe. Customer inhibitions in sharing banking data and a lack of interoperable API standards across countries have been the major hindering factors. The biggest impediment to adopting Open Banking has been legacy IT architectures at incumbent banks. Open APIs have become a standard of collaboration enabling banks, neobanks, fintechs, and payment disruptors, among others, to strive for dominance in different parts of the banking value chain. It has been observed that approximately 65-70% of financial executives in the UK in 2020 had a positive attitude to Open Banking, compared to around 45-50% in 2019 (source: IBSI Research). In the UK, growth in API deployment has been noticed amongst banks with an increased focus on efficiency in terms of cost and speed. API call volume by banks increased to approximately 6 billion in 2020 (source: IBSi Research).

A modern digital architecture

Banks require a modern digital architecture to succeed in Open Banking. Those running functionally rich Core Banking Systems built on distributed cloud-native IT architectures leveraging containers, microservices and open APIs can provide differentiating digital experiences for their customers and establish marketplaces to exploit opportunities from Open Banking.

Conclusion

A number of banks across the globe are focused on switching to modern Core Banking Systems. These nextgeneration platforms need to be built on a cloud-first foundation, and must leverage an open APIbased architecture to integrate seamlessly with both internal and external systems. Beyond the benefits of cost reduction, scalability and faster deployment, a cloudnative architecture offers banks a level of agility that is impossible to achieve with a monolithic core. Banks also need to ensure a collaborative framework. Instead of being confined to a specific technology or process, they can partner with various fintechs to identify best-of-breed solutions. In turn, using this approach, banks can become innovators, build new products and scale businesses. Finally, core banking transformation is indeed a complex journey; different approaches, such as the “big bang” approach or an incremental approach, can be adopted. In addition to technology migration, banks must consider how core banking modernisation will impact their workforce, moving from vendorbased servicing models and relying on scarce skillsets to support legacy, custom-built applications towards more configuration and API-driven, cloud-based solutions. Key to a smooth transition is an effective change management program that not only covers the technology aspects of the transformation but also the people aspects. All in all, modern Core Banking Systems are critical to future-proof banks’ competitive relevance and achieve operational excellence.

The transformation is indeed a complex journey; different approaches can be adopted In addition to technology migration, it’s necessary consider how modernisation will impact on the workforce

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OPINION

Growing popularity

In the last years the family offices have become major players in the world of investments In 2018 they held 3-4 trillion of dollars and the actual number could be many times larger

DI LAURA MESSCHENDORP* (Abbiamo lasciato il testo in inglese per cogliere le sfumature del contenuto, n.d.r.)

Family offices have quietly become major players in the investor space. The Economist estimated that $3-4tn was held in family offices in 2018, and that actual number could be many times larger, given the low profile of many offices. Preqin’s own data shows that North America, where the likes of John D Rockefeller and JP Morgan originated the concept, is home to 35% of family offices, slightly fewer than Europe (38%).

Europe on top

The top ten family offices by (known) AUM globally are split evenly between the two regions, according to Preqin data. By number of office headquarters, the US alone accounts for 32% of family offices worldwide, with 708 offices. After the US, 13% of family offices globally are based in the DACH region (Austria, Germany, and Switzerland). Europe’s largest economy, Germany, has 163 family offices, accounting for 7.3% of the global total, making it the secondmost popular country. It is followed by Switzerland, which hosts 148 family offices (6.6%), including the largest multi-family office, Zurichbased UBS Global Family Office, with AUM of $226bn. One reason for Germany’s prominence may be that family wealth is often accumulated over generations and concentrated in the country’s backbone of SMEs and family businesses, known as the Mittelstand. Though described as SMEs, many Mittelstand companies are global leaders in specialized fields, with McKinsey estimating that almost half of the global ‘hidden champions’ are Mittelstand enterprises.

Transparency increases

Family offices are known for being relatively opaque, not having to adhere to the same transparency requirements as, for example, public pension funds. The collapse of family office Archegos Capital Management last year left brokers, including Credit Suisse and Nomura, with a combined $10bn in losses and led to a number of banks reviewing their relationships with family offices to gain more insight into their risk levels. With many families choosing to keep a low profile, data on family offices in incomplete. This is compounded by the proliferation of family offices since the 1980s, as the growth in the number of billionaires globally has accelerated. Part of this is driven by the increase of tech entrepreneurs, which, particularly in the US, have supported the doubling of private wealth between 2009 and 2019, according to Dealroom.co.

An alternative strategy

Despite their differences, family offices face the same issues as other investors, including those around ESG, asset allocation, and balancing risk and return. One of these questions is how to compensate for low yields in fixed income – and many family offices are coming up with the same answer as other investors: allocating more capital to alternative assets. Multi-family offices are increasingly catering to smaller family offices – those that measure their wealth in the millions rather than the billions. As the name suggests, these manage the investments of a number of families, providing a

OPINION

TOP TEN COUNTIES NO. OF FAMILIY OFFICES ESTABILISHED

COUNTRY

NO. OF FAMILIY OFFICES ESTABLISHED

US GERMANY SWITZERLAND SINGAPORE UK UNITED ARAB EMIRATES HONG KONG SAR  CHINA AUSTRALIA CANADA SAUDI ARABIA

SOURCE: PREQIN PRO 708 163 148 125 120 104 96 79 62 61

route to alternatives that they may not otherwise be able to access if investing alone. The average age of ultra-high net worth individuals has dropped and the share of billionaires’ wealth from tech doubled between 2008 and 2018, according to Dealroom. co. The new rich are much more likely to invest in start-ups through venture capital, and to invest directly, than family offices traditionally were. In Preqin’s 2022 investor survey, 56% of family offices said they would be making direct investments in private equity in the future, compared with 51% that were targeting venture capital, and 63% for real estate, with pooled single manager funds the preferred structure. The majority of family offices saw the US and western Europe (excluding the UK) as presenting the best opportunities over the next 12 months, across asset classes. The US was particularly attractive for venture capital (selected by 88% of respondents) and western Europe for private equity (59%). The majority of family offices that responded to Preqin’s survey are based in North America and Europe, which may have skewed the preferences in favor of these markets. The Global Financial Crisis preceded a rise in the number of family offices, as those that already have money tend to do better in financial uncertainty than those that do not. As such, and given the additional access they provide to alternatives, the number of family offices may increase further in the next few years.

*Financial writer, tratto dal sito internet di Preqin