Volume 6 (2021-22)

Each volume of Journal of Digital Banking consists of four 100-page issues.

Volume 6 Number 4

Editorial
Simon Beckett, Publisher
Papers:
What could a central bank digital currency look like in the euro area? The outcome of a hackathon exercise
Aleksi Grym, Head of FinTech and Principal Adviser, Bank of Finland

Central bank digital currency (CBDC) has become a widely discussed subject in central banking. Most of the literature, however, has been theoretical, and there exists no precise description of what a CBDC could look like in a major economy. The Bank of Finland conducted an internal hackathon exercise to shed more light on the practical questions of a CBDC. This paper presents the findings of that exercise. It is a model of a CBDC for the eurozone, and it attempts to approach the question from an operational point of view. The model is not a suggestion, and it probably omits many important considerations. However, by presenting one possible description of a CBDC, it contributes to the policy discussion and provides a practical reference that exemplifies the degree of complexity that central banks will be facing when considering the issuance of a CBDC.
Keywords: central bank digital currency, FinTech, payments
From open banking to embedded finance: The essential factors for a successful digital transformation
Joris Hensen, Founder and Co-Lead, API Program and Brigitte Kötting, Communications Manager, API Program, Deutsche Bank

Consumers’ needs have changed significantly in recent years, and so have their expectations of financial services. Not only does a large part of their life take place online, but digital apps and products are also integrated into everyday situations. Instead of offering isolated products on a website, companies therefore began to address consumers right at their ‘point of need’ — on e-commerce platforms, in apps from mobility service providers or on comparison portals. Banks can adopt this approach by embedding financial services into the products of non-bank companies, thus offering seamless processes and an increased level of convenience to their clients. Open banking is what provides the foundation for this concept of ‘embedded finance’, by allowing third parties to access banking data via technical interfaces — so-called application programming interfaces (APIs). In 2015, Deutsche Bank decided to take advantage of the opportunities offered by open banking. Through an API programme, the bank enables its partners and customers to integrate banking data as well as financial products and services into their own applications and products. Thus, partners can offer financial services to their customers directly at the point of need. The work of Deutsche Bank’s API Program has provided valuable insights into how banks can successfully open up and even take the next steps towards embedded finance. This paper looks at Deutsche Bank’s experience with open banking and the possibilities and opportunities for embedded finance and presents best practice examples for the necessary internal transformation of financial institutions.
Keywords: APIs, open banking, embedded finance, banking-as-a-service, digital transformation
Central bank digital currency: Applications for domestic and cross-border transactions in Thailand
Vachira Arromdee, Deputy Governor for Corporate Development and Tunyathon Koonprasert, Senior Specialist, Digital Currency Team, Bank of Thailand

With the belief that Distributed Ledger Technology (DLT) holds the promise of bringing greater efficiency, inclusion and innovation to the financial system, the Bank of Thailand (BOT) began research and development of a proof-of-concept central bank digital currency (CBDC) utilising DLT for wholesale domestic and cross-border funds transfers, beginning with Project Inthanon in 2018. A proof-of-concept corporate CBDC was also subsequently developed, and the exploration of a retail CBDC for the general public is currently under way. In this paper, we discuss the important findings and considerations of each CBDC project. We found that DLT can increase efficiency in both domestic payment systems as well as cross-border transactions by enabling direct transfers between parties and providing enhanced programmability through the use of smart contracts. Several technical shortcomings still exist and will need to be reevaluated. Furthermore, studies on governance structure, regulatory issues and implications of CBDC for monetary policy, financial stability and the future financial landscape must be carried out before proceeding to develop production-ready systems and networks.
Keywords: central bank digital currency, Distributed Ledger Technology, wholesale CBDC, retail CBDC, cross-border payments
Smart data fabrics: The emerging architectural approach that is revolutionising data and analytics initiatives
Joe Lichtenberg, Product and Industry Marketing, InterSystems

Within financial institutions, digital transformation agendas are currently widening their focus from solving specific or individual business problems to looking at enterprise-wide initiatives. The aim is to gain a competitive edge, deliver more value to customers, reduce risk and respond more quickly to business needs. With this, finding ways to leverage data to gain insights and inform decision-making is now the top priority. This is, however, challenging because overly complex data infrastructures that rely on a disjointed set of technologies for data management, semantic layers, data pipeline, data integration and analytics are leaving financial institutions unable to obtain data fast enough and in a way that is easy to interpret and share to drive their organisation forward. Many are also struggling to deploy and gain value from much-needed advanced technologies. This paper, supported by research conducted by WBR Insights and sponsored by InterSystems, examines the current data challenges being experienced within the sector and the reasons behind them. It also gives insight into the emergence of next-generation approaches to data management, namely smart data fabrics, which are being considered as a long-term solution to these wide-ranging challenges.
Keywords: data, data fabric, data management, analytics
Bank of Lithuania’s digital currency experimentation: Lessons learned
Austèja Šostakaitè, Project Manager, Market Infrastructure Department, Bank of Lithuania

As part of a broader Eurosystem effort, the Bank of Lithuania carried out an experiment on the European central bank digital currency (CBDC) — digital euro, building a central bank-provided, two-tier settlement infrastructure. A number of important product development and functional features emerged from the experiment. For example, it was found that the digital euro could offer a novel two-tier infrastructure, which interoperates centralised and decentralised ledgers with new roles for financial intermediaries. Such new roles stem from new technologies underlying CBDC settlement and PSD2-like interfaces that could open up new possibilities to develop additional services. The central bank is able to provide a real-time, privacy-preserving and risk-free payment instrument for citizens to benefit from both legacy account-based and innovative DLT-based systems. Control features of the digital euro tested include safeguarding against double spending, limiting CBDC holdings and applying adjustable interest rates — features vital to the central bank’s mandate to foster financial stability. The infrastructure was analysed for its privacy modalities, which proved to be configurable per user profile or transaction type, opening up more possibilities for the future use of decentralised identity (DID). Overall, the experiment demonstrated that technology is not a limiting factor for the digital euro. The main challenge is to find the strategic placement of the digital euro in the retail payment ecosystem, with a substantial value proposition for citizens and business opportunities for financial institutions. This paper presents views on the CBDC and lessons learned from the Bank of Lithuania experimentation.
Keywords: CBDC, digital euro, digital payments, payments infrastructure, DLT, Blockchain
The state of digital wallets today and tomorrow: What does this mean for payments in the future?
Monika Liikamaa, CEO and Co-Founder, Linda Buss, Product Manager for Payments and Ville Vaajanen, Content Producer, Enfuce Financial Services

This paper analyses the current state of digital wallets among consumers, financial institutions and merchants globally and looks at what the future holds in this regard. The findings of this paper are based on the expertise from Enfuce, a Nordic payment service provider, which is looking at digital wallets from a global perspective, as well as case studies from Northern Europe and secondary research. Although the case studies are examples from the Nordics, the lessons learned can be considered to be global. It was found that the use of digital wallets will increase in the future as consumers increasingly prefer digital wallets as a means of payment. Reflective of this is the vast and ever-increasing number of digital wallets available on the market today, which is due to differing demands and behaviours of consumers, financial institutions and merchants in different regions and markets. This means that there is no single solution catering for all market participants. With an increased number of digital wallets available, the competition will get even more brutal — only the most popular and visible apps will thrive, and end-user experience and appealing features are crucial to success.
Keywords: digital wallets, payments, banking, mobile wallets
Central bank digital currency: The new kid on the block?
Thomas Moser, Alternate Member of the Governing Board, Swiss National Bank

The emergence of cryptocurrencies and stablecoins has prompted many central banks to study the issuance of digital central bank money. This raises the question of whether central banks should also use Blockchain technology. A notable challenge here is the scalability of Blockchain technology. Another challenge arises from the need to strike the right balance between know-your-customer requirements and privacy protection. Both problems are easier to solve without Blockchain. Blockchain, however, needs a means of payment. This paper therefore argues that central bank digital currency (CBDC) does not need Blockchain, but that Blockchain needs CBDC.
Keywords: Central bank digital currency, CBDC, Blockchain, stablecoins, privacy
Strategic business models under open banking: A guideline for incumbent banks
Hung Huynh Long Nguyen, Postgraduate student and Alan Megargel, Assistant Professor of Information Systems (Practice), Singapore Management University

Since their emergence, FinTechs have been rapidly propagating and capturing market share from incumbent banks. These newcomers are responsible for most of the industry’s recent innovations, besides being more agile and customer-centric in their delivery of innovative banking products to the market. With the advent of the open banking era, FinTechs now have the support and encouragement from regulators to compete for business on a level playing field alongside traditional banks. A partnership between banks and FinTechs can leverage each side’s strengths, thus maximising returns for both. This paper discusses, from an incumbent bank’s perspective, what role in a FinTech partnership it should take or, in other words, what kinds of strategic business models it should follow within an open banking framework. Towards this end, we have performed an evaluation considering both academic and practical resources in this discipline. Industry case studies of incumbent banks fulfilling various bank-FinTech partnership roles are presented in this paper. Our findings suggest that banks should consider open banking strategic business models based on their total internal resources and product offerings, as well as their appetite and readiness for participating in the application programming interface (API) economy.
Keywords: FinTech, open banking, API, ecosystem, platform, strategy

Volume 6 Number 3

Editorial
Simon Beckett, Publisher
Papers:
A transformational journey: Artificial intelligence in financial services
Theodora Lau, Founder, Unconventional Ventures

New technologies hold promise for both improving the relationship between financial services institutions and their customers and strengthening the financial outcomes for larger swathes of our society if this is done responsibly. Despite the heightened interests of artificial intelligence (AI) in financial services, however, there still exists a significant gap between expectation and reality. Through examples from customer service, personal finance and wealth management to credit decisioning and risk management, this paper highlights recent developments where AI has been employed to drive business outcomes. The paper also challenges the reader to dig deeper into ethics and trust — the very values that are uniquely human — and to reflect on the safeguards that need to be in place to ensure accountability, transparency, fairness and auditability, as more use cases move from pure research and development into real-world applications in our daily lives. The paper concludes that the industry must move beyond efficiency and cost savings to an era where AI-driven applications are more intentional and purposeful in transforming human lives.
Keywords: artificial intelligence, financial services, FinTech, ethics, AI
Banks and FinTechs: Friends or foes? What it takes for banks and FinTechs to successfully cooperate
Katharina Lüth, VP, Europe, Raisin DS GmbH, and Chair, Raisin

This paper examines the dichotomy of banks versus FinTechs with the aim of providing the reader with a better understanding in three areas: what banks and FinTechs each have to offer one another, what typical obstacles stand in the way of successful cooperation and how the COVID-19 pandemic lockdowns have changed the landscape for bank-FinTech partnerships. The paper explores the increasing difficulty of making clear categorisation within the financial sector, between banks and financial tech, pointing to tendencies that blur the lines between these categories and raising questions about how new business models will redefine FinTech and banking going forward. Readers will, moreover, learn what both banks and FinTechs need to understand and prepare for as they approach potential partnerships with the goal of building win-win-win solutions for banks, FinTechs and consumers.
Keywords: Banks, FinTechs, partnership, innovation, digitalisation, trust, banking, cooperation, digitisation, pandemic
The emergence of the Chief Digital Information Officer role and its influence on the future of digital transformation
Kari-Anne Clayton, Head of Transformation and Strategy, Retail Banking and Wendy Redshaw, Chief Digital Information Officer, Retail Banking, NatWest Group

As digital transformation, innovation and technology advance at a staggering pace, organisations need to rapidly adapt and ‘look beyond’ the horizon to remain relevant, competitive and proactive. Organisations are challenged by the complexities of competing digitally — keeping pace with agile delivery while remediating legacy infrastructure and addressing the need to transform technologies, processes, people, culture and organisational structures in a sustainable and holistic way. This paper aims to explore the leadership requirements and behaviours that organisations may wish to consider in the future and introduces an emergent role in the C-Suite ecosystem, namely the chief digital information officer (CDIO), which blends the triumvirate of digital business, technology and people/culture and shifts towards a sustainable business model rooted in value proposition, value creation and delivery and value capture. The discussion also builds on the five dimensions of logic and perspective, on the basis of which existing CIO, CTOs and CDOs define and differentiate their roles, suggesting how a CDIO may be differentiated from its peers with respect to value orientation and goal achievement as an example, while reflecting on the successes and challenges observed to date having practical experience in introducing chief digital information officers into the organisation.
Keywords: digital transformation, modality, transformation fluidity, CDIO, Chief Digital Information Officer, triumvirate
Incorporating microdata into macro policy decision-making
Jean-Marc Israël, Former Head of Division, European Central Bank and Bruno Tissot, Head of Statistics and Research Support, Bank for International Settlements

The ongoing expansion of granular data sets calls for broadening official statistical frameworks to benefit from this information in order to assist the assembling of macroeconomic aggregates and/or facilitate the linkage between micro- and macrolevel statistics. It can also provide important analytical benefits and effectively support central bank policies, with a greater ability to ‘zoom in’ on particular areas of interest and assess the distribution of macroeconomic aggregates within reporting populations. There are, however, important challenges associated with dealing with these data sets, for instance with regard to their quality, confidentiality and the manner of accessing them. Indeed, the task of integrating (granular and) microfinancial information in macro frameworks has proved more complex than initially thought, and many challenges have yet to be addressed. This paper discusses an important issue: how to make use of granular information from private sources which are not part of the official statistics framework.
Keywords: official statistics, granular data, policymaking, central banking, data integration
Blockchain, DeFI, NFTs: From use cases to business plan
Laurent Marochini, Head of Innovation, Société Générale Luxembourg

The financial sector and banks have existed since ancient times. Their history has been marked by crises and moments of prosperity. Innovation has often been the driver of the sector, allowing it to evolve and rebuild each time. New technologies are more than ever at the heart of current events in the sector, particularly with the development of Blockchain and Distributed Ledger Technology (DLT). Blockchain can be described as one of the greatest inventions of the 21st century, a ‘business game changer’ and has been compared to the Internet of value. These technologies require a different way of thinking and will make banks question their strategic positioning. This paper aims to, first, describe the impacts of Blockchain in the financial sector and to decipher innovations such as decentralised finance (DeFI) or non-fungible tokens (NFTs). Second, it analyses the innovation strategies of banks in the face of a technology with disruptive potential.
Keywords: Blockchain, DLT, tokenisation, business model, disruption, strategy
Unregulated digital exchanges as bottleneck
Mattia L. Rattaggi, Managing Partner, METI Advisory and Luca Schenk, CEO, Xwiss

Since the creation of Bitcoin in 2009, digital exchanges have demonstrated that global, 24/7 and disintermediated trading is possible. By trading digital currencies, they have grown to a size impossible to ignore. To allow digital exchanges to enter the multitrillion market of securities trading and business, technology and regulators need to work hand in hand. Together, they are in a position to solve the challenges of a steep learning curve and build an efficient, convenient and, most importantly, trustable environment that can protect investors. Regulators face the challenge of channelling the path but are potentially also among the biggest beneficiaries of the inevitable transition from traditional stock exchanges to digital asset exchanges, since compliance may be ensured by design. While ensuring personal data protection and jurisdiction particularities, global standardisation and distributed ledger technology (DLT) can effectively forestall trading errors and market abuse instead of leaving them to be discovered. To generate the necessary trust for market participants to adopt, digital exchanges will have to be regulated, licensed and supervised in the same way that traditional stock exchanges are today, while safeguarding and leveraging the technological benefits that DLT carry.
Keywords: finance, exchanges, cryptocurrencies, cryptofinance, Blockchain, DLT
Transforming the future of digital banking with APIs and DataSecOps
Peter Lancos, CEO and Co-Founder, eXate

Digital banking involves high levels of process automation and web-based services and may include application programming interfaces (APIs) enabling cross-institutional service composition to deliver banking products and provide transactions. It enables users to have access to their financial data via their digital devices. APIs represent as great a threat and an opportunity to banks today as the advent of the digital era once did, opening the market to greater competition around customer loyalty and engagement. Banks should not consider these APIs as simply technical interfaces that expose data to third parties but rather as radical enablers of new and attractive customer experiences. APIs are already commonplace across many industry sectors, where they are, in fact, viewed as customer products. Banks will have to follow suit in order to remain competitive. In brief, APIs are the nucleus of digital transformation. Around 84.5 per cent of those working on digital transformation initiatives state that APIs are playing a significant role in those initiatives. Given the risk of API-first architecture, these numbers are expected to continue to grow. There are risks, however, that companies face as a result of the increased reliance on APIs as the main driver of digital banking. Seventy one per cent of software engineers surveyed considered ‘security’ the most important factor to consider before integration with an API, which was tied for the top concern. While software engineers are aware of this risk, there is a need to address it not only at a technology level, but at a risk and business level as well. In order to address these risks, the concept of Data Security Operations, or ‘DataSecOps’, has arisen. DataSecOps is a discipline that empowers software engineers, data scientists, governance risk and control, cybersecurity & operations teams to work together in a single application for safer and easier access, analysis, delivery and governance of data. DataSecOps principles will become a critical component in addressing the security issues related to digital banking.
Keywords: API, digital era, security, DataSecOps, financial services, privacy, identity and access management
The ascent of digital banks in the Gulf region: Prospects and challenges
Ala’ Azmi Abumughli, Chief Wholesale Banking Officer, Doha Bank and Ahmet Faruk Aysan, Professor & Programme Coordinator, Hamad Bin Khalifa University

This paper provides a practitioner’s and academic’s perspective on the impending challenges faced by the Gulf banks from the growth of FinTech and technology disruptors in the region. The authors provide a comprehensive view of the approaches taken by the banking industry in the Gulf to face these new challenges, including the support provided by their governments. The paper describes three dominant approaches taken by the banks in the region on the digital banking front. As practitioners and academics, the authors provide their recommendation through their four-corner strategy of action points that the Gulf banks should adopt in order to successfully overcome ongoing challenges posed by FinTech’s and technology disruptors and to stay relevant during this period of changing consumer behavioural patterns led by technology disruption and growth.
Keywords: digital, FinTech, Gulf Banks, collaboration
How automation is driving partnerships and innovation in financial services
James Wooster, COO, Glue42

This paper outlines how financial services firms are automating business processes and indirectly driving the creation of new partnerships between different types of software vendors. It discusses how desktop automation, itself a relatively recent innovation in financial services, encourages relationships between vendors to optimise front-office processes and improve business outcomes.
Keywords: desktop integration, desktop automation, interoperability, SaaS, application platforms, partnerships, systems integration, integration platform, desktop integration platform, financial services, FinTech

Volume 6 Number 2

Editorial
Simon Beckett, Publisher
Papers:
Financial services in a post-pandemic world: How cloud-based intelligent enterprises will forge the path ahead
Jennifer Geary, General Manager, EMEA nCino

COVID-19 has shown financial institutions (FIs) globally that the ability to respond quickly to unexpected challenges and continuously innovate to meet changing customer expectations and an ever-evolving industry is vital. Those institutions utilising cloud-based and cognitive technologies will have a competitive advantage over those that avoid or resist meaningful digital transformation. This paper will explore the benefits of cloud adoption and artificial intelligence (AI) and discuss how FIs can employ these technologies to help future-proof their organisations.
Keywords: SaaS, BaaS, artificial intelligence, machine learning, cognitive technologies, cloud, digital transformation, intelligent enterprise
How a focus on ecosystem play is important for financial institutions to stay relevant
Nam Soon Liew, Asean Regional Managing Partner and Vinay Pamnani, Associate Partner of Financial Services Consulting, EY

The territory traditionally occupied by financial institutions is seeing new competition not only from financial technology (FinTech) players but also from non-financial services players. These non-financial services players offer payments, insurance lending and wealth management in addition to other services such as e-commerce, ride hailing or food delivery. To stay relevant, financial institutions need to venture beyond their immediate fields and explore partnerships and ecosystem play. The rise of FinTechs and consumer platforms in South-East Asia comes at a point where customer pain points and unmet needs have long existed and yet not been addressed. Hence, FinTechs and consumer platforms had the opportunity to leverage this gap to entrench themselves in the value chain, and grow in prominence, riding on the region’s strong fundamentals and widespread digital adoption as well as supportive regulatory developments. This paper discusses the growth of FinTech and consumer platforms and explores how participation in digital ecosystems may be the answer to the existential question that financial institutions face. It also lists the different roles that financial institutions can consider in an ecosystem and the five fundamentals of effective participation. As FinTech providers become more popular with customers through lower fees, greater convenience and higher returns, financial institutions need to transform to maintain their market share and competitive advantage. This means streamlining business and operating models, leveraging data analytics, adopting new technologies and transforming talent.
Keywords: ecosystem, APIs, business model, FinTech, digital transformation, collaboration
Future strategies for remote working in an era of accelerated transformation
Peter Sjöberg, Chief Operating Officer and Joshua Hall, Strategy and Responsible Banking Leader, Santander – Nordic

The pace at which organisations have changed has been materially slower than advances in technology. The breakdown of antiquated mindsets, in respect of remote working arrangements driven by the COVID-19, has unleashed an ability for organisations to catch up. Within the banking sector, new digital native players have forced incumbents to up their game despite the latter continuing to operate models conducive to, among other things, bureaucracy, high cost bases and reduced agility. This paper assesses the backdrop behind the transformational shift to remote working, attempts to underline the significance of robust leadership and clear corporate strategy, and ponders several potential future actions that banks might consider when assessing the ‘new normal’. The authors propose that it is those organisations that embrace the opportunity landscape that presents itself that will secure stakeholder value creation in the long term.
Keywords: strategy, leadership, remote working, collaboration, health and well-being, productivity
Customer understanding is the new digital
Joerg Bartussek, Head of Digital, Raiffeisen Bank International AG

One hundred and fifty years ago, credit union pioneer F. W. Raiffeisen implemented a concept that still holds its own in today’s digital economy: perfect your customer understanding! Its long history of customer relationships has enabled banks to assemble a vast and valuable treasure of customer intelligence and insights, which serves as a solid foundation for customer-centricity and customer experience optimisation. Banks that have an intimate customer understanding have an important strategic advantage over FinTech and neo-banks. On the path to transforming customer understanding into concrete value-adding solutions, however, several obstacles must be overcome. It is imperative to understand who each of your customers really is and to provide them with the appropriate customised experiences and solutions. Value-adding digitalisation supports this goal, if digitalisation is not limited to process automation or implementation of high-tech gadgets. Digitalisation and technology are only tools that are merely as good as the bank’s understanding of when and how to use them. As risk adverse organisations, banks must be aware of the perils of the Perception Gap. This can help them to stay focused on customer understanding. While there are many ways of embedding customer understanding in a bank, case studies like the reorganisation around industries and Industry Leads or the Digital Basket, as a smart way to include your customers in your learning journey, can serve as guiding examples.
Keywords: customer understanding, customer experience, key success element, digitalisation, Perception Gap, Digital Basket
Real-time payments are transforming economies and lives: Initial evidences from select countries
Andrew Buckley, New Payment Platform Products, Mastercard and Mahadevan Balakrishnan, Payment System Development Group, World Bank

Retail real–time payments — also known as fast payments or real-time payments — are becoming mainstream, with over 56 countries already having them and many others at various stages of implementation. Real-time payments are transforming economies by providing additional payment options for a variety of use cases, and its usage is gaining momentum. This paper analyses the reason for such wide acceptance of real-time payments using the Technology Acceptance Model (TAM), the economic impact of real-time payments in select countries, its impact on financial inclusion and concludes by providing some insights on how real-time payments are changing lives on the basis of ethnographic studies carried out in select countries.
Keywords: retail real-time payments, fast payments or real-time payments, implementation, additional payment options, technology acceptance model (TAM), ethnographic studies
With digital advances, bancassurance leaps forward
Sean Ringsted, Chief Digital Officer, Chubb

Bancassurance is enjoying a renaissance in the financial services industry largely because of the upheaval of consumer expectations and the growing trend of digital banking ecosystem integrations with other industries. Shifts in customer-centric design thinking and the blurring of boundaries between industry sectors are bringing bancassurance back into fashion but with new digital capabilities and experiences. This paper illustrates the context and environment in which industry players operate, where banks can capitalise on digital advances in bancassurance, how banks are facing and responding to the challenges of digital services and, finally, how these changes are creating a win-win-win opportunity for banks, insurers and their shared consumers.
Keywords: FinTech, API, Insurance, Bancassurance, Digital Banking, Partnership
Simple banking: It is not that complicated
Haukur Skúlason, co-founder and CEO, indó

In an ever-changing, and ever more cumbersome, regulatory environment banks face increased risk management costs, and in the wake of the banking failures of 2008 and more recent banking scandals related to money laundering, the question that looms ahead is whether the need for a different approach to risk management, mitigation and transformation is warranted and whether such an approach can reduce risk, improve profitability and offer true value to customers. Safety and security are the staple of banks, without which they will run into trouble. This paper proposes a different approach to retail banking, built on an 80-year-old economic theory. The idea of narrow banking, or full reserve banking, centres on keeping deposits 100 per cent secure by offsetting them with risk-free assets on the bank’s balance sheet. This paper will discuss the feasibility of this approach and how it can be implemented to tackle some of the most critical issues and concerns from a regulatory perspective in banking.
Keywords: narrow banking, risk transformation, profitability, trust, bank failures
Research paper
Securing DLT-based KYC via randomised audits
Matus Drgon, Tech Analyst, Barclays, Lamprini Georgiou, PhD candidate, University of Edinburgh School of Law and Aggelos Kiayias, Chair in Cyber Security and Privacy and Director, Blockchain Technology Laboratory, School of Informatics, University of Edinburgh

Know Your Customer (KYC) is a costly and heavily regulated process that financial institutions are legally required to undertake to conduct business with their customers. Distributed Ledger Technology (DLT) can be used as a coordination mechanism for financial institutions to share KYC costs in a common jurisdiction. Previous techniques that use DLT to support the KYC process, perhaps unexpectedly, introduce a single point of failure in the system. Indeed, financial institutions are vulnerable to repercussions if a single institution makes an operational mistake during the onboarding stage. We tackle this problem by introducing a probabilistic mechanism, where some of the financial institutions involved need to independently repeat the KYC process in the form of a randomised audit. This novel approach mitigates the single point of failure of the previous DLT-based KYC designs and introduces a natural trade-off between the security of the KYC process and its cost efficiency. In our approach the audit probability can be either set as a global DLT parameter or be dependent on attributes associated with the particular client.
Keywords: KYC, DLT, Blockchain, RegTech, robustness, single point of failure, brittleness, machine learning

Volume 6 Number 1

Editorial
Simon Beckett, Publisher
Papers:
Building a new ecosystem: A bank’s journey through sustaining digital transformation, understanding AI and managing the galaxy of continuous change
Nidhi Nikum, Principal Consultant, NextWave Consulting

In October 2019, I delivered the keynote address to a room full of banking and financial services professionals on what to expect on a journey towards digital transformation (DT). At the outset I asked my audience if their business was in any of the following three categories — advanced stage of DT, somewhere in between or warming up to it. There was only one show of hand for ‘somewhere in between’, while the majority identified themselves as being at the starting stage. It did surprise me. Since then, however, the evolution towards DT has been rapid. Digital disruption has created a level-playing field for various ecosystems, with its own subsidiaries offering services and generating real business value. If your business is an early adopter of digital disruption, then you already know the value, but if you are among the early majority, the conservative or even the sceptic willing to cross the chasm, I really hope that you can find at least one useful takeaway from this conversation. I am bringing the spotlight back to ‘where to start’, ‘why digital principles are required’ and ‘understanding and building your own strategy for data, platforms and machine learning’ to rebuild your organisation by facilitating the use of agile methods by important players across your organisation. Find your ‘why’ to connect customers, business and technology seamlessly through an opportunity well guided by data and machine learning.
Keywords: digital principles for banks, digital transformation, agile, machine learning, data strategy, platforms
Credit intelligence: A more robust alternative to current commercial loan modelling approaches
Neil Kahrim, Director of Growth & Operations and Sean Hunter, Chief Information Officer, OakNorth

Most commercial lending is based on a decision-making process and modelling approach largely unchanged by technology. By adopting a data-driven alternative that takes into account the fundamental differences between businesses, lenders are able to make data-driven decisions that will ultimately lead to better credit outcomes. This paper aims to briefly outline some of the limitations of the current approach to commercial lending and suggest improvements (collectively, ‘credit intelligence’), taking specific note of lessons of the current COVID-19 crisis and how this has transformed the economic landscape. It also provides a case study (OakNorth in the UK) where these principles have been implemented and notes the promising results so far.
Keywords: credit intelligence, credit risk, portfolio monitoring, commercial lending, commercial banking
Is your IT strategy ready to support growth in your bank’s ESG investments and market offers? Can AI help solve what traditional IT cannot? AI-based strategy for ESG industrialisation
Kovid Bhardwaj, Assistant Vice President, Société Générale

This paper analyses the demands on integration and scalability that the Environmental, Social and Governance (ESG) theme has placed on financial institutions and how modern digital technologies can help banks quickly scale and solve this business need. It starts with evaluating both internal and external factors that are not only driving ESG but also radically altering banking business models. It then discusses at length the integration issues faced by banks in this sector. While keeping the nature of these integration issues at the centre, the paper goes on to evaluate why modern digital stack complemented with artificial intelligence offers a good architecture to industrialise ESG in a bank. Factors like a tenfold increase in ESG data, new ways of greenwashing and falsification of ESG efforts coupled with terabytes of unstructured data are some of the themes the paper discusses at length. It also looks at how artificial intelligence helps solve these issues. The idea is to enable and complement human intelligence by reducing the time and effort taken for investigation and thus bringing operational efficiencies to help analysts and management focus on more valuable services like advisory, structuring and executing ESG offerings. It also looks at the maturity and scalability of artificial intelligence (AI) in this area. The paper concludes by suggesting a practical and implementable blueprint for AI-based ESG workflow that can be industrialised at scale.
Keywords: ESG, sustainability, responsible banking, strategy, artificial intelligence (AI), digital transformation
Innovation in the face of disruption
Katharina Herrmann, Global Head of Platforms & Beyond Banking, ING

The coronavirus crisis has accelerated various trends across industries, predominantly in favour of digitalisation and the need for innovation. Consumer behaviour is changing rapidly in response to the crisis, as customers expect their banks to mirror the personalised, quick delivery experiences offered by the BigTechs and the companies outside of the financial world. With regard to innovation in times of crisis, financial services companies are faced with a choice between a defensive approach, where they safeguard their current operations — already hugely under pressure — and an offensive approach, which is crucial to avoid losing relevance, market share and profits. The dilemma banks face concerns how saving costs and safeguarding their current operations while addressing immediate customer needs and investing in the future. This paper describes shifts in customer behaviour and explores opportunities for banks to disrupt themselves and invest in new business models with a focus on platforms.
Keywords: platforms, disruption, digitalisation, customer experience
Business risk, collaboration and invisible banking
Elliott Limb, Chief Customer Officer, Mambu

This paper discusses how, faced with accelerating rates of change, banks must be able to adapt quickly, easily and at low cost. Agility has joined liquidity as a fundamental element in a bank’s risk score. Without it, the threat of systemic failure will never be far away. Many banks think technology will make them agile, and they are partly right. True agility, however, can be achieved only when the right technology is combined with the right mind set and the right business model. Without the last two, a bank cannot hope to get the most out of its investment in the first. Put them together, on the other hand, and a bank will be able to deliver what its more important customers want, when and how they want it, all the time. It will be able to work with best-of-breed third parties, swapping partners in and out. But it is not all down to the banks. Regulators, vendors and consultants must also rethink how they help banks become agile to minimise risk. Regulators must reassess their risk metrics to put agility alongside liquidity. Management and implementation consultants must find alternative revenue streams to five-year plans. Vendors must build truly cloud-native core platforms — available as software as a service (SaaS) and easily combined with offerings from third-party software specialists — rather than their current monolithic IT infrastructures that cover the whole banking process. When all this happens, the banking ecosystem will be truly agile, making them significantly less risky and therefore more sustainable. Technology can help banks adapt to rapid change, but it is not a silver bullet. Banks also need the right mind set and right business model to put the customer at the centre of everything they do.
Keywords: banks, banking, digital banks, core platforms, core banking
OK Google, what is the future of voice in banking?
Yvon Moysan, Academic Director, Master’s degree in Digital Marketing and Innovation; Chair, IESEG School of Management; Member Crédit Agricole Nord de France Digital Banking & Big Data; CEO, Saint Germain Consulting

The adoption of voice and the multiplication of use cases in the banking sector are encouraged by the emergence of new technologies that have reached maturity (artificial intelligence (AI), voice synthesis, voice biometrics, etc) and by the expansion of the market for connected devices (smartphone, watch, speakerphone, etc). USA, India and China are among the leading markets. In the USA, roughly 1 in 4 adults now owns a smart speaker. In India and China, nearly 80 per cent of their populations have adopted voice technology. The banking and insurance sectors have several players in the field of digital voice technology, including American Express, Capital One, JP Morgan and Bank of America. This paper discusses two strategies which are used by these actors: the first is to offer its services on a new device, whereas the second is to create a virtual assistant with a real identity.
Keywords: Google Home, Amazon Echo, Alexa, voice banking
RegTech: An untapped opportunity
Mukund Umalkar, Fintech Partnerships, ING Neo

This paper discusses a practitioner’s viewpoint on RegTech (Regulatory Technology) solutions for managing risk and compliance in an organisation. RegTech solutions, which represent an ever-growing category of start-ups and scale-ups, can create value by enabling organisations, both large and small, to efficiently and effectively navigate the complex regulatory landscape. Given significant spend due to regulatory enforcement actions, and investment to comply with regulatory requirements, RegTech firms present an untapped opportunity, especially in large organisations, where non-compliance can be costly. Given the unique constraints of the risk management and compliance activities, however, collaboration between large organisations and RegTech firms can be challenging and requires a unique approach. This paper discusses how to frame the concept of RegTech, important challenges of adoption and potential solutions and presents a perspective of how the future of RegTechs should evolve.
Keywords: RegTech, FinTech, regulation, innovation, platforms, interoperability, data, AI, partnerships
The cyber arms race: How can CISOs win?
Mark Weston, Co-founder, Regulativ.ai and Rajan Kashyap, Head Digital Solutions, Birlasoft Ltd.

This paper discusses the trends in cybersecurity, especially in banking and financial services. Senior executives are concerned about the increasing attack vector with an exponential increase in the number of devices and its impact on their organisations’ security. A structured approach is needed to be only just security compliant but ahead of the curve. The paper presents a new approach and framework within which to govern cyber in three main areas: foundational, proactive and futuristic. It also lays out what it is to be a cyber leader, how to free up time to take the proactive measures that are necessary right now and to remain alert to futuristic threats.
Keywords: cybersecurity, regulatory compliance, Blockchain, CISO, AI/ML, cyberattacks, IoT, security, banking, cyber maturity