AutoRek's Consulting head on how tech can help overcome SFTR

17 January 2019 Consultancy.uk

In the first quarter of 2020, Europe’s Securities Financing Transaction Regulation (SFTR) will come into effect. Marc McCarthy, Associate Director of Business Consulting at regulatory technology provider AutoRek, encourages financial services firms to look towards technology to help them smoothen SFTR implementation and monitoring.

“We have got a lot of clients who do transactional reporting across the whole G20, and yet following EMIR and MiFID II they’re seeing yet another piece of regulation coming out that they need to adhere to," commented McCarthy. "It’s quite time-intensive to get these regulations in place, and 2019 will therefore very much be about trying to find a better way to overcoming SFTR without too much hindrance to their businesses.” 

McCarthy added that there is a degree of fatigue at this point, with technology earmarked as the key to facilitating an effective transition. “In the coming period, companies will really look towards technology to fix regulatory challenges without them having to do too much.” 

The Securities Financing Transaction Regulation (SFTR) was introduced by the European Union to increase the transparency in the securities financing markets. SFTR will result in all EU firms being obligated to report their securities finance transactions (SFTs) to an approved trade repository. This will include securities lending activities, margin financing activities and repurchase agreements (repos). The new legislation is currently scheduled to go live in Q1 of 2020.

“In 2019, companies will really look towards technology as a better way to overcoming SFTR without too much hindrance to their businesses.”
– McCarthy, Associate Director of Business Consulting

Marc McCarthy went on to say that though there has been an increase in regulation over the past few years, he believes it to be a good thing that is “very much putting the customer at the forefront of corporate thinking today”, however he expects audits to be put in place surrounding the technology that he encourages firms to use. “I think 2019 will see audits of the technology that’s been put in place, of the procedures that have been put in place. I think that’s been a bit lacking in 2018. We expected it to happen; it didn’t come about, particularly not in the MiFID II space. And I think that’s largely due to Brexit and all the work that’s gone into that by the various staff of the FCA.” 

The role of technology has become a game changer for regulation and compliance. With the introduction of so many new regulations in the past few years, McCarthy believes each of them has spawned a new industry for Fintech and Regtech, with firms being pushed to consider these regulations whilst still relying on outdated practises and technologies to complete complex tasks. “Automation and proper regulatory technology offer accuracy, governance and control around important data.”

“Look at challenger banks for example, or the new fund platforms that are out there. They start on the premise of technology. They start very much with that in mind, with that being their end goal already from day one. And I think some of the older firms just need to catch up.” 

The Director of Business Consulting at AutoRek further pointed at the opportunities that will arise from emerging technologies such as artificial intelligence. “AI will help firms identify key customers, tailor solutions to them and ensure that alignment and personalisation is optimised. Robotics will play a huge part in ensuring that data is correct and is not misaligned. We see an awful lot of that…. These sort of technologies will definitely assist companies to be more accurate and better going forward.” 

Related: RegTech as a driver for regulatory and compliance cost reduction.

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The business and operating models of digital-only banks

04 April 2019 Consultancy.uk

In recent years, several digital-only banks have successfully managed to nestle themselves in the banking landscape, with their popularity continuing to increase. Looking at it from the customer’s point-of-view, there is little difference between these FinTech unicorns; looking at the bigger picture, however, reveals significant variation in their business models. Matyas Fekete, a consultant at KAE, explores some of the main similarities and differences in digi-bank business and operating models. 

What about the profit?

Unlike in the UK, in most of continental Europe, bank accounts and corresponding banking services are historically paid-for services. The fact that digital banks offer most of their services free of charge has undoubtedly helped them build a large customer base. On the other hand, despite comparatively low set-up and minimised operational costs compared to that of traditional banks, and given the lack of revenue stemming from the typically no-fee model, profitability has proved difficult to achieve. Monzo, for instance, recorded a net loss of £30+ per customer in its most recent financial year. 

In the start-up world, it is customary to focus on expansion rather than profit – see the case of Uber, for instance. Still, while profitability might not be their number one priority in their early stages of development, it must be a long-term goal of any business. With their ever-growing customer base, digital banks are increasingly under pressure to turn their business from loss- to profit-making. 

Credit where credit is due

Digital banks pride themselves on their fair (often meaning “free”) proposition and have so far stayed clear of offering loans (including credit cards & overdrafts), traditionally amongst the most lucrative products for traditional providers. Though somewhat reluctantly, newcomers are also realising that offering lending products is one of the most straightforward ways to offset losses made on their free, often high-cost services (e.g. overseas ATM withdrawals). Monzo, N26 and Starling have recently started offering credit products to their customers, with their loan offering expected to be extended to a wide range of services, from mortgages to overdrafts. Correspondingly, creating a lending portfolio can also pave the way for launching an interest-paying savings offering – a proposition seen as a basic banking product that is yet to feature in most digital banks’ portfolios. 

The business and operating models of digital-only banks

The premium customer

While most digital banks offer most of their products for free, some have extended their offering by paid-for premium services in order to create a revenue stream. As these premium features – including different types of insurance, unlimited free transfers/withdrawals, faster payment settlement or concierge services – are often offered in a subscription format, customers are typically prompted to pay for the full package rather than just the desired service(s), providing a significant revenue stream for the bank. Revolut, for instance, was amongst the first digital banks in Europe to break even earlier this year, a feat largely due to revenue from its premium subscription.

SMEs like digital too

Traditional banks typically service small and medium sized businesses under their retail rather than corporate banking arm. Having their product offering tested with consumers, and consequently gaining a reasonable customer base, digital banks have also identified SMEs as an ideal segment to extend their target audience to. The five FinTechs profiled have already gone, or plan to go, down this path by following up their consumer solution with a business account. While both propositions are typically built on similar features, some providers charge businesses a monthly subscription (e.g. Revolut), while others apply additional fees to specific services (e.g. TransferWise), banking on the expectation that businesses are more likely to be willing to pay for banking – something they are already used to doing. 

The marketplace model

While most digital banks offer a wide range of banking services, some of these tend to come from partnering with third-party providers. For instance, Starling Bank’s only proprietary product is its current account, which serves as a basis for the provision of ancillary services, ranging from loans to insurance, to investment opportunities. Instead of developing these services in-house, Starling enables a select group of partnering financial service providers access to its platform in exchange for a fee. In effect, Starling is using its customer base to create a market for its partners, charging a commission for each acquired customer. 

In such cases of digital banks applying this marketplace model, the majority of their income often comes from partners rather than customers. Naturally, only banks with a large enough customer base can be successful in this set-up, underlining the current intensity of competition amongst digital banks.

Banking as a Service

While customer-centricity is heralded amongst the main USPs of digital banks, some are looking beyond offering consumer-facing services to diversify their revenue streams. Starling, which is among the few digital banks built on its own proprietary platform, has recently leapt into the Banking as a Service (BaaS) industry, making its technology available to other start-ups looking to launch a digital bank. Naturally, this raises the question whether the two offerings could threaten each other’s success. Generally, as long as such partners operate in different markets, the two business lines should be able to thrive alongside each other. Further along the line, however, such partners could easily end up expanding their banking solution into the same market(s) as they aim for global success, and by doing so, becoming direct competitors. 

Different approach, same result?

It is fair to say that consumers in Europe looking to bank with a digital-only provider would have a difficult time finding relative advantages/disadvantages amongst the leading players in the industry. Still, despite the limited surface-level variety, exploring the business models of leading digital banks reveals different approaches to the challenge of making money. Alongside the more straightforward method of offering paid-for premium features/subscriptions, some are banking on the value that access to their customer base offers to third-parties, while others outsource their technology to neobanks wanting to focus on the Fin rather than the Tech. With competition amongst digital banks heating up, it will be interesting to see which business model(s) prove to be the winning formula in the long term.