interoperability

Tech Talk

Words:

David Burrows

While the rapid rise of technology in financial services has delivered plenty of advantages – from real-time payments to more rapid customer service – is there a risk that too many fragmented systems could create barriers rather than benefits?

PLENTY HAS BEEN written in the past two years about how the pandemic accelerated digital banking and changed our relationship with technology – both as individuals and as businesses.

In the world of banking and finance, emerging technologies are changing the way we work and changing customer experiences – and largely for the better.

Near real-time payments and seamless banking are good examples of where traditional financial institutions and fintechs are coming together to create a better experience. But, as more and more technology emerges, how can we ensure the various new technologies, APIs and platforms work together to enhance opportunities rather than creating barriers?

Ankit Shah, Head of Digital Banking at Apex Group, argues that technological disruption and the increasing trend towards becoming more digital is both an opportunity and a threat for the operations of asset managers.

“The investment of time and resources into technology is no longer a ‘nice to have’. It is essential and must be fully integrated in to the day-to-day structure and functioning of organisations and customer experiences,” he says.

“The financial services businesses that are effectively leveraging technology are achieving greater efficiency, improved client experience and delivering competitive advantage.

“The use of new technologies and improving of user experiences is being driven by customer demand and maintaining the balance between use of technology, associated barriers and managing customer expectation and demand is a balancing act for businesses – especially in banking.”

It is fair to say that Covid-19 drove the banking sector to rapidly accelerate its digitalisation plans, joining forces with third parties to deliver services to customers as quickly as possible. The pandemic was a catalyst for the consumer trend towards digital banking, forcing branches to close amid lockdown and social distancing measures.

COVID THE CATALYST

However, as Shah points out, the lines between professional and personal lives blurred, too, as millions of people were forced to work from home – and flexible working is likely to remain the norm for many.

“Consumers are not just expecting digital access to their personal bank accounts, but are asking why the same can’t be true for their business banking.” In collaboration with fintechs and specialist providers, banks have found themselves able to deliver new digitally accessible solutions to meet the needs of their business customers.

Ben Sykes, Director, Global Liquidity and Cash Management at HSBC, agrees that the pandemic accelerated digital banking – and he sees this developing even further in the coming years.

“The pivot towards e-commerce was clearly evident during the pandemic. The e-commerce journey now needs to be a slick one for all businesses, not just retail ones. We will increasingly see the payment embedded in the process. As an example, think of Uber. At the end of the journey, you don’t have to say: ‘I need to pay now’; you just trust that the payment has been made.” The landscape has also changed with regards to how tech is placed at the forefront ▼

of the business. As Sykes explains, IT is increasingly influencing business decisions. “Historically, it has been the CFO who has called the shots; but the CTO is really influencing the decisions now.”

He adds that a key trend currently is the use of APIs (application programming interfaces), which allow computer programs to communicate with each other.

“APIs are now available at much lower cost to clients,” he says. “There is an increased understanding of how APIs can benefit a business in terms of speed in accessing data – whether that be payment or account information. This can really help decision-making.”

POTENTIAL BARRIERS

Of course, one of the problems with improved connection is standardisation – specifically lack of it.

As Oswald Lopes, Vice President (Digital Engineering Services) at Kiya.ai, emphasises: “Metaverse banking – or virtual banking – offers huge flexibility, but there are potential obstacles.

“What if one Metaverse cannot talk to another Metaverse? Metaverse is a relatively recent thing and there were no standards when it came on the scene. Institutions have since come together to form a standards forum, which is a positive thing. And there is clearly an incentive for everyone to be on a common exchange pathway.”

Shah believes that joined-up thinking in the sector is important. “With appropriate integration, technology will improve the client experience and bring efficiencies in cost/processes within banks. It is the role of business leaders to carefully identify technology gaps and opportunities, and to choose the right technology partnerships in order to deliver this.”

He concludes that, to maintain profitability as well as competitive advantage, banks will need to make critical decisions about how they source, develop and deploy technology solutions.

FINTECHS TAKING OVER?

We have talked about players jostling for position in a digital landscape. So, in the new climate, is there a chance that the fintechs will take over – or do they need the traditional financial services organisations’ scale and capabilities? Shah insists that fintechs and traditional financial organisations have their own niche in the market and their co-existence is key for success – it is not a question of one triumphing over the other.

“Characteristics such as the agility and innovation drive of fintechs, combined with scale and broader capabilities of established financial organisations can deliver great results for customers,” he says.

Lopes takes a similar line: “Fintechs need to collaborate – anyone who thinks they can build all these things themselves will fail.” n

Historically, it’s been the chief financial officer who has called the shots, but the chief technology officer is really influencing the decisions now

With 5G, everyone will be more connected. People are far more confident around tech now and understand its speed and reliability

The future of global payments and digital finance

While the rapid shift among financial services firms to digital channels has the potential to erode trust as human interactions decrease, research by Accenture suggests that the opportunity it provides for a more personal approach, in addition to value for money, is appealing to consumers.

Shah explains that the successful banks of today have moved away from pushing products through traditional sales methods and marketplaces. Customer expectations have changed – people are focused on costs and convenience, but they also want products designed around their needs and they want a better level of service.

Technology is the key enabler. Lopes accepts the fact that a cost-of-living crisis might in some quarters advocate a preference for face-to-face banking, but he also believes most people will be reassured sufficiently via digital channels.

“We will have faster broadband soon, and with 5G, everyone will be more connected. People are far more confident around tech now and understand its speed and reliability.”

The pace of technological innovation in blockchain, AI and distributed ledger technology (DLT) means that banking is likely to get even more sophisticated in the years ahead. Shah suggests that new developments will have a profound effect in particular on how businesses bank in the future.

He points out that blockchain and DLT will offer limitless opportunities, from financial transactions to automated contractual agreements, particularly as it removes the need for authentication.

Blockchain technology is already revolutionising the speed and volume at which transactions can be processed by banks – and will only continue to enhance these capabilities. Advances in AI will particularly aid risk mitigation and management, helping to spot and defend against fraud and cyber-attacks.

And what of the crypto space? Lopes believes there will be something of a shakeout in the crypto universe, with those currencies backed by governments having by far the best chances of surviving.

He does not see Bitcoin becoming a replacement reserve currency for the US dollar, but he does envisage more countries adopting central bank digital currencies (CBDCs). The benefits of a blockchain-based CBDC include improved payment efficiency, lower transaction costs and enhanced security.

“The Bahamas has launched a CBDC and India plans to do so, too”, Lopes adds. “The developed world may be slower in backing CBDCs, but they will likely follow.” n

have you got the power?

Charles Carpenter, Investment Advisor at Ravenscroft, explores how the response to the mounting energy crisis could offer opportunities for investors

AS EUROPE FALLS deeper into an energy crisis, governments and central banks are facing a dangerous combination of slowing economic growth and runaway inflation.

The UK and the EU recorded the highest level of headline inflation in 40 years, with year-on-year UK inflation at 10.1% and 8.9% in Europe during July. Inflation is expected to continue to increase, primarily driven by higher energy prices – UK energy prices are expected to rise by 80% and an average of 40% across Europe.

Since the invasion of Ukraine, the Kremlin has responded to sanctions by utilising gas exports. Russia supplies Europe with 40% of its natural gas and 4% to the UK.

Gazprom, the Russian state-owned energy corporation, began reducing the flow of gas through the Nord Stream 1 pipeline before announcing an indefinite shutdown. As traders and utilities struggle to secure gas supplies ahead of winter, the European gas benchmark is 30 times higher than two years ago, peaking at around €340 per megawatt.

Natural gas is an important part of daily life. It is used for cooking and heating and is the main fossil fuel used to run power stations that provide electricity to homes and businesses.

Governments are exploring various methods of reducing the burden of rising energy prices on the consumer through energy caps but undoubtedly, living standards will decrease and household savings will be depleted.

The surge in energy prices is likely to keep inflation higher for longer and have countries seeking alternatives to gas.

ENERGY SECURITY BECOMES A PRIORITY

The disruption of energy markets has demonstrated that countries need to focus on becoming self-sustainable. The UK electricity network is connected to France, the Netherlands and Ireland through undersea interconnectors, and electricity can be imported and exported when it is most economical.

Energy security is a priority for governments and with the progression seen in renewable infrastructure, the transition to self-sustainability is only possible with continued investment and government spending.

In addition to this, we must consider our transition to a low-carbon economy. The UK has ambitions to be net zero by 2050 and the government has set energy providers a target to generate 100% zero-carbon electricity by 2035.

The burning of fossil fuels remains one of the largest generators of electricity in the UK and the EU, providing approximately 40% of power generated, so we recognise that more investment is required in areas that will help us meet these clean energy goals.

Many are looking to generating power through fission as a solution. Nuclear power generates around 16% of the UK electrical supply and 25% in Europe. Nuclear power remains one of the most reliable, low-carbon energy sources available but as older nuclear plants are retired, it is necessary for new nuclear stations to be built. EDF Energy is constructing a new European Pressurised Reactor at Hinkley Point C in the UK, with plans for another two new power stations. Germany is also turning back to nuclear power to shore up its energy security by temporarily halting the phasing out of two nuclear power plants.

With the increased demand for energy, companies providing energy storage solutions have been defensive against market volatility.

Energy storage addresses supply-demand imbalances on the electrical grid and allows companies to generate multiple revenue sources through the storage and brokering of electricity. As well as being relatively stable, they can also generate predictable cash flow, which is paid back to investors via dividends.

INFRASTRUCTURE FUNDS

Infrastructure funds have also proved to be a haven, investing in diversified infrastructure assets and benefiting from long-term contracts, which often have government backing.

The increased investment in renewable infrastructure generates stable and sustainable returns that contribute toward a net-zero carbon future.

Rolls Royce’s Small Modular Reactors (SMR) has developed the reactor that is designed to deliver low-cost clean energy, using proven and commercially available technology.

The fully integrated, factory-built nuclear power plant will be approximately one-tenth of the size of a conventional nuclear generation site and able to generate up to 440MW, capable of powering approximately one million homes.

As Rolls Royce has shown, these challenges and global shifts create exciting investment opportunities.

There are innovative companies trying to solve some of the world’s greatest challenges, including our transition to clean energy. We believe that there are incredible investment opportunities along the energy value chain from the energy producers, distributors and those providing storage solutions. n

FIND OUT MORE

Ravenscroft is an independently owned investment services group that has £8.76bn of assets under administration for private and institutional clients from around the world. We have offices in Jersey, Guernsey, Bishop’s Stortford, Peterborough and the Isle of Man. If you have any questions about investing, our team in Jersey can be contacted on 01534 722051 or email info@ravenscroftgroup.com.

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