ISG Provider Lens™ Banking Industry Ecosystem - U.S. 2020 - Core Banking Implementation Services: Retail
Core Banking Implementation Services
ISG sees U.S. banks approaching their core banking modernization based on their capitalization. Tier 1 and Tier 2 banks are growing in size via mergers and acquisitions, and given their complexity, are focused on next-generation systems via parallel running and progressive renovation, so implementation efforts tend to be more focused on a longer-term modernization effort. Smaller capitalized retail banks are consolidating, which
is driving the need for a single core banking system of record. Smaller tier banks are increasing using a “big bang” approach and are modernizing within the context of a single program. And as the number of de novo banks in the U.S. finally begins to increase from post-recession lows, ISG believes these banks will rapidly embrace the cloud-first, API-first banking-as-a-service model.
This intense focus on modernization is primarily aimed at transforming the customer experience. For retail banks, as switching costs plummet, millennial buying power soars, and non-traditional banking alternatives proliferate, the ability to obtain and retain customers is more critical today than ever before. For corporate banks, the same challenge exists: how to attract and retain corporate customers with innovative, and easy-to-use treasury management, supply chain and credit solutions given the rapid rise of FinTechs, often “frenemies” of traditional banks, and marketplace lending alternatives.
In the past, banks focused on improving the front-end of the experience by creating customer-friendly apps and websites. But this is no longer enough. Banks need to rethink their internal systems – and their operating model – to respond to rapidly changing customer needs, tap into emerging FinTech ecosystems and exploit new technologies. In order to do this, banks are increasingly realizing that they need to modernize their legacy core banking system to access data for real-time decisioning.
Payments Ecosystem Services
Growing demand for alternative payment systems: The digitalization of the payment ecosystem is not expected to replace either cash or cards services from financial institutions, but to co-exist as a complementing feature of the existing payment system. Alternative payment systems are no longer considered a value-add but a must-have value proposition across major banks and financial institutions. This has been further exacerbated with the current COVID-19 pandemic, where digital technology-led contactless payment alternatives are becoming increasingly relevant. Banks and payment system implementors are capitalizing on the situation as an opportunity to usher the era of a completely digital payment ecosystem.
In the U.S. market, characterized by a dominant proportion of card-based payment, alternative payment systems including e-wallet, instant or real-time payment (RTP) and Blockchain solutions are being driven by competitive forces rather than consumer or merchant-led trends. Challenger banks and new age Fintechs are aggressively pushing the boundaries of the payment ecosystem with API-led service portfolio of offerings that encompass virtual cards, instant payment options, loyalty-based credit, blockchain-based and many more.
Streamlining and optimizing payment systems: Although, payments are considered a significant business line for banks, much of the operating costs have been tied with transaction and processing fees. For most banks, current investments and spend on payment systems have been focused on streamlining and optimizing the existing infrastructure, to reduce these costs as well as to seamlessly offer alternative payment modes to their customers. While leveraging a modular approach to implement payment solutions, the APIs are being tightly integrated with other service lines (insurance, investment) and banking rails (clearing houses, wire transfers) to ensure faster transactions as well as better security and efficiency. Banks have been engaging with system integrators capable of providing accelerators and payment modules that would enable them with next-gen payment features enhancing customer experience as well as improved business opportunities for other service lines. Accenture, Capgemini, Cognizant, DXC Technology, FIS, Fiserv, Infosys, TCS are identified as Leaders, with Atos being
recognized as Rising Star.
KYC / AML Implementation Services
The U.S. financial regulatory system can be described as fragmented, with multiple overlapping regulators and a dual state-federal regulatory system. The system developed in fragments, involving areal changes triggered by responses to various historical financial crises. Also, the U.S. will maintain its regulatory financial footing by introducing new Fintech regulation.
Many clients still have rather old KYC/AML implementation, ranking from their install date. It seems many banks have long been looking at KYC and AML as simply a compliance issue, a cost, and something that is not worth investing much in. This has changed, with the fast development of AI KCY and AML are considered a driving force behind digital banking. The COVID-19 pandemic certainly serves as an additional driver because it gives
digital banking another spin, but this development will probably not turn into visible additional provider revenues before 2021.
A large number of clients are moving towards automated AML checks to improve scaling and speed and to reduce false positives. To meet these requirements, service providers are collaborating with smaller FinTech companies to develop integrated solutions. Artificial intelligence (AI) is a strong driver for AML automation, and all large AML implementation service providers offer their own solutions for machine learning (ML) and AI.
AI also plays a strong role in the development of KYC technologies and solutions. It allows real-time transaction monitoring for KYC anomaly detection, reduces customer’s profile update time, and can be integrated into customer communication to allow better services and an adaption of services as per the customers responses. Being able to find patterns within large amounts of data, AI also allows new technologies like social biometrics (analyzing the customer’s social media footprint) and raise the level of KYC effectiveness significantly.
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