Volume 8 (2023-24)

Each volume of Journal of Digital Banking consists of four 100-page issues. Articles scheduled for Volume 8 are available to view on the 'Forthcoming content' page. 

Volume 8 Number 2

  • Editorial
    Simon Beckett, Publisher
  • The next digital inflection point for US banks
    Michael Carter, Finalytics.ai

    This paper explores the effect of technology on the American banking landscape in the 21st century. The number of US banks and bank branches has been consistently decreasing in this century, partly owing to technological advances. Existing legacy delivery channels, however, have slowed the rate at which banks in the United States have adopted and deployed the technology available to them. This slower rate of innovation by US banks has resulted in a level of consumer dissatisfaction that has created opportunities in the banking sector for FinTechs and Big Techs, especially since 2009.
    Keywords: engaged banking; hyper-personalisation; AI; journey orchestration; datadriven digital; banks

  • Generative artificial intelligence and large language models for digital banking: First outlook and perspectives
    Jean-Pierre Sleiman, N26 Operations

    After several years of steady progress, the Generative artificial intelligence (AI) and large language models (LLMs, their applications to text) fields have accelerated tremendously since the end of 2022 and the public launch of ChatGPT. This is due to record-breaking model sizes and performances in the last couple of months, triggering unprecedented adoption curves from end users across the world. Even though regulators reacted fast, sharing their first recommendations, auditing emerging players, amending their AI regulation drafts or launching dedicated working groups, these efforts will require several months or years to come to fruition. There are multiple reasons for this. LLMs are complex technological objects made of gigantic foundational models trained on enormous quantities of texts, coupled with dedicated interfaces and action agents. They present a huge potential to perform high varieties of tasks with very high quality but also important risks in terms of costs, content accuracy, transparency, data privacy, security and ethics. Finally, the current ecosystem of stakeholders is very dynamic but also immature. In this uncertain context, the digital banking industry has been reacting ambivalently, with major players banning employee access to ChatGPT and publicly communicating on new LLM initiatives at the same time. This can be explained by the huge potential offered by these technologies to transform their business, coupled with many open questions in terms of technological set-up, usage, compliance and profitability. As these technologies seem to be too transformative for the industry incumbents to just wait and see, they should start creating the right conditions to learn how to use them, by identifying relevant use cases, choosing adapted and simple solutions, designing relevant user experiences, building the right teams, environment, data sets and operating model, and actively engaging in regulatory conversations.
    Keywords: artificial intelligence; AI; Generative AI; large language models; LLMs; machine learning; digital banking; innovation

  • Effective risk management for financial institutions’ partnerships with FinTechs
    Meredith F. Piotti, Wolf & Company

    The aim of this paper is to provide insights into the regulatory concerns and challenges faced by financial institutions when partnering with FinTech companies. The paper highlights the recent consent orders issued against well-known financial institutions for their FinTech relationships and risk management programme shortcomings, as well as how financial institution and FinTech collaboration can overcome these shortcomings. It acknowledges the frustration caused by the limited guidance provided by regulators on incorporating FinTech into financial institution operations. However, it encourages financial institutions to learn from the published consent orders and improve their risk management programmes. The paper also discusses the factors that need to be considered in FinTech partnerships, such as overborrowing, bias and discrimination in algorithms, and data privacy and reliability. It emphasises the importance of compliance professionals in analysing regulatory considerations early and creatively to meet future demands. Furthermore, the paper explores the changing landscape and increasing reliance on technology, highlighting areas that need to be considered in financial institution risk management programmes. It addresses concerns related to alternative credit models, bias and discrimination in algorithms, and data privacy and reliability. Overall, readers can expect to gain knowledge and insights into the regulatory concerns and challenges associated with FinTech partnerships, as well as practical actions and considerations to mitigate risks and ensure compliance.
    Keywords: FinTech partnership; digital transformation; regulatory compliance; third-party risk management

  • What is the hype about hyper-personalisation? A three-dimensional view to implementation
    Mirella Reznic, Valley Strong Credit Union

    The banking landscape has been transformed by rapid advancement of digital technology, enabling financial institutions to reach their customers through multiple channels seamlessly. Omnichannel banking has become the new norm, allowing customers to access banking services across mobile devices, websites, ATMs and branches. As customer expectations continue to evolve, however, banks and credit unions must go beyond offering multiple channels and focus on delivering hyper-personalised experiences seamlessly between these channels. In this paper, we will explore three dimensions of this journey: (1) the customer experience, (2) data readiness and (3) humanistic artificial intelligence (AI).
    Keywords: hyper-personalisation; artificial intelligence; customer experience; customer journey; predictive analytics; machine learning; humanistic AI

  • Where are the customers’ bots? The AI paradigm shift in retail banking
    David G.W. Birch, 15Mb and Kirsty Rutter, Lloyds Banking Group

    Financial institutions are already using artificial intelligence (AI) to cut costs and deliver new services. Robo-advisers, chatbots and ‘copbots’ auto-detecting fraudulent transactions are increasingly common. These uses are undoubtedly valuable, but the business model is still the consumers being sold a financial product by a bank, whether by a call centre agent or a robot that impersonates a mortgage vendor. The big change in financial services will come when customers use AI to assess offers from financial institutions for themselves. They will have access to AI as powerful as the banks have, because Google, Facebook, Apple and Amazon (and companies like them) will be giving it to them. And this will mean individuals will not be the customers: their bots will be. Since most retail financial services offer products that just service a need at a point in time (eg paying for parking) rather than create an extraordinary user experience or are too complicated for normal people to make informed decisions about (eg pensions), we might expect most consumers to abdicate in favour of intelligent agents operating under the new duty of care umbrella. This has been a subject of futurist speculation for some time, but the rapid growth of ChatGPT and its ilk means that banks now have an urgent need to develop strategies to take advantage of this significant change in the nature of the financial services in the mass market. This paper looks at the imminent confluence of open finance and AI to consider the consequences of giving bots access to consumers’ cash (through open banking, for example). This will mean a world of smart wallets, capable of making decisions on behalf of consumers. They will be capable of deciding what services to use, who to get them from and how to maximise their financial well-being, leaving their users to spend more time on human activities.
    Keywords: AI; LLM; smart wallet; open banking; open finance

  • Banks offer crypto: Why does not yours?
    Sai Agnikhotram, Fritz Jost and Simon Kühne, Sygnum Bank

    This paper shares the perspective of market practitioners who are enabling regulated digital assets services within an institutional context. The authors represent one of the world’s first banks that has a full, Swiss banking licence and that enables clients to buy, hold and sell cryptocurrencies within a fully regulated set-up. The paper first argues why recent market events indicate a strong demand for regulated digital asset services. More so, these events prove that banks are best positioned to offer them in the close future. This work further explains the unique challenges and opportunities in enabling such an offering within a bank. Finally, the authors highlight a set of product criteria and value drivers that allow for a winning digital asset product offering.
    Keywords: digital assets; banking; crypto; crypto banking; digital asset banking

  • Case study: How RegTech tools enable regulatory compliance for cryptoassets: A case study for cryptoasset transaction monitoring
    Magdalena Boškic´, Sygnum Bank

    BBVA, BNP Paribas, Citigroup, DBS, JPMorgan, Société Générale — these are the names of just a few well-known traditional banks that have already established or are in the process of establishing a cryptoasset offering to their clients. While various challenges need to be overcome in introducing a cryptoasset offering, some might see the true challenge starting once customers can not only ‘buy and hold’ cryptoassets but also transfer these assets to a wallet outside the banking environment or bring their already existing cryptoassets into the banking environment. Compliant yet efficient cryptoasset transaction monitoring as part of an effective cryptoasset compliance framework is an important component of a successful cryptoasset offering by a traditional bank. This paper discusses some of the challenges related to cryptoasset transaction monitoring, provides insights on regulatory technology (RegTech) tools that address those challenges and illustrates in a case study the approach of Sygnum Bank, the world’s first digital asset bank, to overcome these challenges.
    Keywords: Blockchain; cryptoassets; banks; compliance; RegTech; transaction monitoring; Travel Rule

Volume 8 Number 1

  • Editorial
    Simon Beckett, Publisher
  • How can banks continue digital transformation in a downturn?
    Rishi Khosla

    Digital technologies have come to play an increasingly important role in our lives. Their availability to customers has set expectations for personalised experiences with the banking services they use, making it imperative for banks to innovate and continuously evolve their product offerings to keep up. The banks that are able to do this most successfully are new entrants with advanced technological capabilities that can adapt to changes in the economic environment and consumers’ shifting expectations more quickly. It is this adaptability and technological knowledge that ensures that these new entrants are best positioned to capitalise on periods of downturn. This paper will examine digital transformations that have reshaped the world of banking to date, including the shift to digital banking in the wake of the COVID-19 pandemic, the uses of data and analytics, as well as data-driven tools like AI in present-day retail banking. Furthermore, the paper will detail areas where digital transformation is yet to exert a profound effect on banking, particularly lending to small and medium-sized enterprises (SMEs), an essential area given the contribution that small-to-medium businesses make to economic growth. Finally, the paper will explore ways that new entrants can use digitalisation to support these crucial businesses, as well as detail other examples of digital innovations that are shaping the future of banking; for example, AI automation in know your customer (KYC) and the rise of ‘open banking’.
    Keywords: banking; digitalisation; SMEs; downturn; data; innovation

  • Optimising the customer experience: Lessons for banks from tech giants
    Silke Finken and Katharina Rusp

    Customer experience has received growing attention as an essential element of the overall customer relationship for banks. The omnipresence of tech giants, their customer centricity and their highly intuitive and user-friendly customer experiences are changing users’ expectations regarding banks’ digital and digitally provided services and points of customer contact. This raises the question of which aspects customers value in their interactions with tech giants and which insights banks can derive for optimising their customer interfaces, experiences and journeys. The present paper is among the first to analyse these various aspects and to derive relevant insights and lessons learned for banks. The study is based on a quantitative online survey with 573 participants. Participants were asked about their degree of satisfaction and loyalty regarding their current bank, the aspects they value most in their interaction with tech giants, in general as well as with their favourite tech giant, and which of these aspects they would like their bank to adopt. Convenience and ease of usability of services, products and interfaces; the constant availability of services regardless of time and place; the seamless integration across different channels and access devices; and the high aesthetics of interfaces and services were considered valuable by more than 70 per cent of the respondents. In particular, the degree of convenience, extensive availability, speed and easily understandable interfaces were also rated highest in terms of characteristics that users would like their banks to adopt. For banks, this means that the design and optimisation of their digital customer experiences should be customer-centric and should focus on intuitive usability, timely delivery of services and information, comprehensive availability of functionalities and relevant data as well as an appealing design of their customer interfaces.
    Keywords: Big Tech; tech giants; customer experience; customer journey; open banking

  • Best practices and important considerations for AI and digital transformation in an economic downturn
    Brendan Deakin

    Banks surged ahead with digital transformation during the pandemic — largely out of necessity — when faced with lockdowns and the shift to digital-first transactions. Now, as the banking industry moves into the post-pandemic era, and given the current state of economic uncertainty, the adoption of digital transformation is even more crucial. A large proportion of investment will involve AI to improve automation and personalisation while improving the speed and accuracy of decision making. This is essential for banks to address today’s ever-changing risk landscape, especially as consumers and businesses navigate economic uncertainty, rising inflation and energy prices. In the midst of the current economic downturn, organisations must be purposeful in their digital transformation efforts. This paper provides an overview of best practices for digital transformation in the banking sector when every dollar is coming under increased scrutiny.
    Keywords: AI; digitisation; fraud prevention; alternative data; machine learning

  • Evolving consumer expectations and the future of digital banking
    Srini Kasturi

    The financial services industry has a long history of deploying new technology to respond to evolving customer expectations. The rise of digital banking in recent years represents a significant acceleration of technological change, fuelled by factors like the COVID-19 pandemic and shifting demographics. In the vanguard of sweeping industry changes are the FinTech providers. Advances such as cloud computing APIs and machine learning are being deployed to deliver seamless, 24/7 finance and banking services to consumers who now expect immediate, accessible digital solutions that provide both safety and convenience. Banks need to keep up with the incredible pace of change but face challenges in the form of entrenched legacy systems, siloed operations, a vast beachfront of propositional enhancements and compliance with regulations — issues that typical single-minded FinTechs are less burdened with. Many banks, however, are seeking to overcome these challenges, knowing that otherwise they face diminished market relevance. For many, the answer lies in partnering with existing FinTechs in mutually beneficial engagements that can deliver for increasingly digitally savvy users, such as a partnership between Barclays and TransferMate to deliver advanced cross-border payment services. Regulatory developments like Open Banking have set the scene for increased market competition as well as integrated disparate systems between multiple providers for the benefit of the end user. Onto this stage have entered traditional big-tech firms like Apple, Amazon Google and Meta, seeking opportunities to reshape the digital payments space. In parallel with these developments has emerged decentralised finance (DeFi) offerings that leverage concepts like Blockchain technology, smart contracts and distributed ledgers to provide solutions outside of the centralised processes of traditional finance. This paper explores the changing shape of digital banking; the potential for both competition and collaboration between banks, FinTechs and traditional tech companies; and examines how consumer demands are driving innovation.
    Keywords: digital transformation; FinTech; decentralised finance; Open Banking; banking as a service

  • Case study: Moving towards the scalable service-oriented data management organisation at OTP Bank
    Gergely Babos

    This paper discusses data and data asset management, topics that are growing in importance in organisations, specifically in regard to managing data consciously as a strategic resource to create business value and building the real self-service data consumption capability. You can read a relevant use case in connection with establishing and transforming the data management organisation — which is basically the back-end function — into a service-based operation model from a component-focused one. By the end of the paper, you will have understood the importance of data strategy and the whole data galaxy focusing on the data modernisation programme in a Hungarian banking group. We were able to reduce data expenses (eg maintenance and license costs of data warehouses, implementation costs of new data elements) by modernising the IT architecture, despite the constantly growing amount of data and the multitude of different data storage solutions. As the hunger for data emerges in the organisation, there is a huge demand for data services. The paper introduces the solution of OTP Bank to flexibly scale the organisation in a way that meets the demand.
    Keywords: data management; data asset; data services; data strategy; data-driven company

  • Practice articles: Modernising intra-day liquidity optimisation for commercial banks
    Jeremie Feuillette, Will Towning and Kimmo Soramäki

    Commercial banks are facing a period of exceptionally difficult funding conditions amidst a challenging economic environment. To address this, banks need to optimise their liquidity flows and usage. But existing liquidity optimisation and management methods fall short of materially reducing liquidity costs and can generate large operational risks. This paper describes how advanced analytics and algorithms can be used to optimise liquidity flows and usage in a real-time environment through payment resequencing. This approach can enable banks to significantly and consistently reduce liquidity usage and costs, potentially turning more effective treasuries into profit centres. This paper also describes the fundamental requirements for embarking on a modern liquidity optimisation project and also presents some recommendations for best practices in operational and technological infrastructure.
    Keywords: liquidity; optimisation; resequencing; networks; algorithms; simulation

  • The future of cryptocurrency and Blockchain technology in finance
    Wong Wanyi and Alan Megargel

    Cryptocurrencies have been all the rage in recent years, drawing many to hold them as speculative investment assets. Its proponents also champion the secure and decentralised nature of the technology it is based on, called the Blockchain. Given the secure nature of Blockchain technology, the idea of adopting cryptocurrencies as legal tender currency has also been mooted and experimented with — the most famous example being the Central American nation of El Salvador’s bold move to adopt the cryptocurrency Bitcoin as legal tender in September 2021. In theory, this would provide a solution to the high transaction costs faced by overseas El Salvadoreans when transferring money home and to the lack of bank accounts in the case of 70 per cent of its population — Bitcoin does not require a bank account and can be transferred across borders easily. However, even though individual consumers seem to evince interest in adopting cryptocurrencies as legal tender, most countries have little appetite to do so or to integrate their use into their citizens’ lives. Does cryptocurrency have a future as a legal tender currency or as an investment asset? If not, what are the potential future developments? This paper examines and attempts to answer these questions by (i) analysing the pros and cons of adopting cryptocurrencies as legal tender; (ii) discussing alternative uses for the Blockchain technology behind cryptocurrency; and (iii) reviewing regulatory challenges to cryptocurrency as an investible asset.
    Keywords: cryptocurrency; Blockchain; stablecoin; decentralised finance; central bank digital currency

  • Account aggregator ecosystem: A step towards revolutionising digital lending in India
    Venkat Yellapantula and Venu Madhav Miriyala

    An essential contributor to a nation’s economic success is providing individuals with access to established financial systems. India, through innovative use of digital finance infrastructure, aka India Stack, provided as a public good, removes obstacles in offering financial products to the unbanked and underbanked. The three pillars of the India Stack are: the identity rail (Aadhaar), the payment rail (universal payment interface) and the data-sharing rail of account aggregators (AAs). The next phase in the India Stack is the Open Credit Enablement Network (OCEN), which promises to transform the digital lending industry by shifting the business model from asset-based to cash-flow-based lending. OCEN is a standard set of application programming interfaces (APIs) that pull data based on customer consent from financial information providers and offers it to financial information users to decide on credit requests. AA manages consent on behalf of the customer using data empowerment and protection architecture (DEPA). The rest of the paper explains the interoperability and portability features of the AA ecosystem, the pricing model that the AA can adopt for a sustainable business model, describes the current state of the AA ecosystem in terms of consents provided and fulfilled and concludes with the use cases of OCEN in credit extension and continuous loan monitoring.
    Keywords: account aggregator (AA); India Stack; Open Credit Enablement Network (OCEN); open banking; digital lending; data empowerment and protection architecture (DEPA)