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In this update from the Financial Institutions Group, our industry experts looked at the changing market, and how new technology and regulation have been impacting the market at pace.
Welcome to our first newsletter of 2019 – we hope you’ll enjoy our new format, which provides regular updates and insights from our FIG sector heads.
So far in 2019 we have continued to make great progress on building out our European corporate banking platform and capabilities. Key milestones have been successful migration of our Euro Clearing to Frankfurt and reconfiguring our businesses in France, Spain, Portugal, Italy and Germany as branches of our European subsidiary Barclays Bank Ireland. This investment is critical in delivering on our strategy of becoming a leading provider and partner for Euro Clearing and transactional banking and ensures we are positioned to support our FIG clients in UK and Western Europe however Brexit progresses. Plans continue on our expansion plans for Luxembourg, Netherlands, Belgium and Switzerland.
As ever, if you’d like to speak to us about how we can support your business, please contact your Banking team.
Global Head of Financial Institutions Group.
Financial institutions facing a changing payments landscape
Wherever they’re based, financial institutions are facing a sea-change in the UK and international payments systems this year and beyond.
The financial services landscape is set to look very different over a relatively short space of time, particularly from a payments perspective, with major advances in real-time payments, payee confirmation services and international messaging standards starting to take shape.
The digital transformation of the sector continues to give rise to a steady flow of innovative FinTechs and challenger banks disrupting the market, creating new competition but also opportunities for collaboration.
The evolving payments landscape
The UK and international payments landscape is at a pivot point, with a raft of changes expected to drive innovation, standardisation and open access within the next few years.
Firstly, with customers expecting to be able to pay anyone, anywhere, anytime, the adoption of instant or real-time payment systems has gathered momentum in recent years. There are currently 50 schemes, either live or in build phase, and demand is growing. As this conversation evolves, we will likely see more cross-border real-time payment activity, such as the proof of concept trialed using the New Payments Platform in Australia.
The International Organisation for Standardisation (ISO) harmonisation will make it easier to link clearing systems directly and we will be watching this space closely.
Secondly, the way that UK payments are governed is also changing. Faster payments and Bacs have been consolidated under Pay.uk, and the Bank of England (BoE) is now overseeing and redesigning the UK’s high-value payment system. We will be keeping a close eye on the impacts of this evolving strategy.
Thirdly, Pay.uk’s new Confirmation of Payee service is expected to go live within the next few months. This will allow banks to match account details to beneficiary names prior to initiating a payment for the first time, which should significantly reduce the level of misdirected payments and fraud, and help validate the legitimacy of direct debits. SWIFT GPI’s pre-validation service aims to do something similar through an API-based mechanism which will check beneficiary account information with the ultimate beneficiary bank.
Looking further ahead to 2022, the adoption of the single ISO20022 payment format by 120 countries could have a bigger impact on the global payment arena than anything we’ve seen before and should allow greater connectivity between banks as well as more efficient communication. EBA CLEARING and SWIFT have announced the start of a work programme to migrate the large-value payment system EURO1 to the ISO20022 standard. The migration is scheduled to be completed by November 2021, in line with the deadline set for the migration of the Eurosystem’s TARGET2 platform.
All institutions should be thinking about how they can benefit from these comprehensive and information-rich transaction messages. The infrastructure changes required will have a major impact on all businesses’ internal systems, driving operational efficiency and reductions in risk. However, smaller banks will likely find it a more challenging and costly adjustment.
The post-Brexit payments landscape
The eventual impact of Brexit on UK financial institutions, and the payments landscape in particular, is of course on everyone’s mind. While the outcome is still unclear, we and the industry as a whole are working hard to ensure the transition is as smooth as possible.
In an encouraging development, the European Payments Council has recently ruled that the UK can remain in the Single Euro Payments Area (SEPA) even in the event of a no-deal Brexit, ensuring that UK payment service providers will still be able to make and receive euro payments efficiently and cost-effectively, however this is not a permanent status.
Irrespective of how Brexit plays out, we will continue to support you, including by expanding our European presence and building our euro clearing capabilities in Frankfurt, and will continue to keep you up to date on these important developments.
Alongside the myriad changes to the payment systems, we’re seeing an increased industry and regulatory focus on developments such as Open Banking and APIs. Read more about these topics in our FinTech and UK Bank articles.
Head of Overseas Banks, Broker Dealers and Affiliates
Credit in UK banks
2019 will be a year of continued change and opportunity for the UK bank and alternative finance market as new business models continue to compete for SME and consumer business.
Innovation and change in the UK financial services market is affecting businesses across the sector, from established UK banks and building societies, challenger banks, mortgage and consumer finance firms and the fast-growing P2P lending sector.
The challenger bank market is becoming increasingly mature, with significantly scaled-up banks providing services right across the economy.
The macro environment
The supply of credit to the real economy through banks and alternative finance providers remains critical. These businesses are continuing to see activity in secured lending and the securitisation market, and continue to lend - although sentiment may be challenging across the sector.
Debt investor appetite soured towards the end of last year. As the twists and turns of Brexit have continued, spreads have closed in from the wide levels seen in November and investors continue to keep a close watch on market developments. It remains to be seen if debt and securitisation markets will become fully open in the near term.
Institutional investors have concerns that the global economy is late cycle, but generally appear to favour UK and US financial services risk. In the UK, there remains a close focus on consumer credit, particularly unsecured consumer credit and its interplay with Brexit risk, and the changing face of retail affecting the UK consumer.
At the same time, regulatory change continues to impact the market. The FCA’s focus over recent years on different aspects of the consumer credit market - from High Cost Short Term to overdrafts and the recent FCA announcement on the UK auto sector - are all driving changes to business models and disrupting the sector. This change in regulatory approach is, in the long term, good for consumers and the underlying credit quality of the sector.
We’re seeing strong and sustainable businesses emerging from this cycle of change, with consumers paying lower fees and borrowing more affordably. By encouraging competition from newer banks entering the market, this is also driving changes to existing business models, particularly with the rise of platform models among challenger banks.
Drivers of growth
With the embedding of open banking and the PSD2 regulations, we think that use of transaction data by challenger banks and other lenders will provide additional precision in underwriting in the years ahead.
It will also provide a new distribution channel for consumer facing products through ‘platform’ banks, who can build complete consumer propositions by bringing together the best lending, savings, investment, insurance and current account products together in a unified channel.
Matching your ambitions
In response to these changes we are bringing our UK Banks and Alternative Finance teams together to work more closely across our Investment Banking Advisory and Debt Capital Markets business, our structured product and securitisation teams, and our colleagues in Barclaycard, to deliver the range of services our clients need to support their growth.
We are also rethinking how we provide services to challenger banks, drawing on our capabilities to support their payments ambitions with cloud-hosted systems directly connected to the UK payments systems. Read our FinTech update for more info.
We are upgrading our own architecture at pace to deal with the changing nature of domestic and international payments, to help our clients connect simply to payments systems in the UK and Europe. Read our Banks and Broker Dealers update for more info. For more information, please contact your relationship director.
Head of UK Banks and Alternative Finance
FinTechs building a strong platform for the future
FinTechs continue to play a major role in the transformation of the financial services industry with the mood shifting from disruption to collaboration, as the industry responds to increased regulation.
The ever-increasing impact of FinTech businesses on the financial services sector can’t be underestimated. With new regulations coming into force and the increased focus on digitisation and collaboration in order to meet customers’ needs, there are a number of developments that all businesses in the FinTech and payment service provider (PSP) space should be preparing for.
With PSD2’s Regulatory Technical Standard (RTS) deadline in September 2019 fast approaching – offering customers more control over their financial information through APIs – it’s essential that FinTechs and other payment service providers (PSPs) consider how they can best harness these changes.
The requirement for all banks to develop APIs is expected to massively disrupt the banking sector by allowing banking-as-a-platform to really take off. This is potentially advantageous for FinTechs – provided they offer a good platform – as they plug into the myriad of possible APIs made available. Customers will be able to see all their services in one place, and use information from a range of sources such as social media or ‘Internet of Things’ devices to inform credit decisions.
We expect to see increased collaboration between FinTechs and established institutions to provide mutually beneficial products and services to clients.
Growing your business
With the industry maturing, growing FinTechs are looking for ways to keep up with their own success stories. Key to this will be frictionless connectivity to payments systems and partnerships allowing transactions to be supported in bulk, striking the balance between speed, expense and security. The FinTechs that succeed in the long run are keeping their focus firmly on creating the ultimate user experience that they originally set out to achieve.
Whilst the number of organically growing unicorns in the industry is increasing, early 2019 has not been short of M&A activity creating several new supersized FinTechs. Several major deals have dominated our newsfeeds, such as Ant Financial acquiring WorldFirst for c.$700 million, and VISA standing to acquire Earthport after a bidding battle with Mastercard.
We expect mergers and acquisitions to continue to be major trend within the payments space in 2019.
Financial crime and compliance
Amid a backdrop of rapid growth and development, fraud and financial crime continue to be key threats. This concerns every company in the payments industry and requires a co-ordinated response.
A recent white paper^ from the Emerging Payments Association discusses the importance of collaboration across the sector to promote risk management best practice among PSPs to combat fraud and financial crime. In particular, it highlights the need for a world-leading digital identity solution for the UK and the importance of effective transaction monitoring analytics across a range of payment types and data sources.
It’s essential that businesses across the sector work together to make sure we all have a common understanding of these issues and how to deal with them, and we encourage you to share your views on this with us.
The eventual outcome of the Brexit negotiations, wherever they leave us, will, of course, have a tremendous impact across the financial sector.
The European Payments Council has now approved a request for UK PSPs to retain continued access to the SEPA scheme in the event of no-deal. The decision will be reviewed in light of other possible Brexit outcomes as negotiations continue.
At the time of writing, the situation regarding potential loss of passporting rights into the EEA remains uncertain. Many firms have been planning for the worst case scenario and going through the sometimes long-winded and costly process of setting up new regulated businesses in EEA countries so they can continue to serve their European customers.
Make sure to read the Banks and Broker Dealers article for further information on the post-Brexit payments landscape.
For more information, please contact your relationship director or email us at FinTechNewClient@barclays.com
Head of FinTech and PSPs Coverage
Embracing technological change in insurance
What lies ahead for insurers looking to embrace new technology to enhance the customer experience in a rapidly changing commercial landscape?
Against a backdrop of soft pricing, continued market consolidation and changing consumer preferences, insurance companies increasingly recognise the need to modernise to meet the expectations of today’s tech-savvy customers. However, many face the challenges of decades-old systems, often with legacy payment infrastructure.
There is clearly considerable room for improvement in the customer experience. We all recognise that, from the customer’s perspective, insurance is largely seen as a ‘grudge’ purchase, sometimes involving a baffling assortment of call centres and online aggregators. The claims process can be time-consuming and frustrating, often without the swift payment resolution people have come to expect, instead culminating in old-fashioned cheque payments.
Transformation on the way
Similar to the banking industry, which has begun its own journey and learning curve to adopt new, customer-facing technology, the insurance industry is acutely aware of the need to change at pace in the face of tech-driven disruption.
The industry clearly has an appetite for modernisation to deliver the type of personalised insurance that customers are looking for and is already putting a lot of time, money and resources into achieving that transformation.
At the same time, with pricing under pressure, insurers need to drive efficiencies and reduce operational costs to maintain profitability.
There’s no doubt that the sector will look very different even in the near future. From a banking perspective, we see three main areas of focus – or pain points – that can help insurers improve the customer experience while making them more efficient and driving down operating costs.
Addressing customer pain points
Firstly, insurance companies need to offer customers faster ways to make premium payments. While payment by cheque is now largely a thing of the past, this can still be a relatively convoluted process, a long way from the one-click purchasing that consumers are now familiar with. As we see an increasing shift away from traditional annual premium renewals, particularly for property and casualty cover, newer instant payment methods such as mobile apps and payment wallets can help customers avoid the telephone helplines they often face when doing something as simple as setting up a direct debit.
Secondly, while the industry has made great strides in its approach to underwriting appropriate cover and improving claims management processes, the claims payment systems that underpin them often lag behind. Emerging payment solutions have the potential to make claims settlements instantaneous, rather than reverting to a ‘cheque in the post’ or 3 day BACS transfers.
Thirdly, the way that insurance companies interface with their banks and other service providers is also set for rapid change as the use of AI and machine learning enables a move away from labour-intensive manual working methods towards straight-through processes that talk directly to each other.
This technology is set to transform the way companies access and share their own financial information using the likes of online dashboards or host-to-host data pipelines that can link directly to their Enterprise Resource Planning and back office systems. There are also a range of new tools emerging that can help insurers to manage their treasury functions more effectively and reduce costs.
Overcoming the challenges
We are very focused on getting ‘under the skin’ of policy holders’ pain points to develop workable solutions that help our insurance clients overcome these challenges. Not only can we help with our own banking solutions but we can also connect you to specialist insurtech companies that may be able to help modernise legacy infrastructure.
One of the ways we’re doing this is through Rise, Barclays’ accelerator for tech start-ups, which promotes collaboration to drive innovation and develop technology solutions that you could benefit from.
With significant change undoubtedly coming to the sector, we’re here to share the lessons we’ve learned from the digital transformation of our own industry and to support our clients in embracing the exciting opportunities these changes will create.
Barclays Head of Insurance UK
Addressing the hot topics facing the asset management sector
Asset managers are having to get to grips with a range of financial issues in a rapidly changing industry.
Asset managers have plenty to contend with in the current financial climate, from continued pressure on fees to ever-greater regulation.
With ongoing market consolidation and a plethora of new, low-cost market entrants, many established firms are re-examining their business models and exploring the use of automation, artificial intelligence and machine learning technologies to drive operational efficiencies.
A key area of focus for firms has been finding the most effective safe house for corporate cash balances and, particularly in the wealth management and platforms space, for client money.
In January 2018, the FCA’s CASS client money rules extended the term for which client money could be deposited out to 95 days.
This provides firms with a strong counterparty for these funds, while allowing them to benefit from greater yields to pass on to their underlying clients.
The change was warmly welcomed by the industry and in the past couple of months we have started to see more firms taking advantage of this rule change and using 32, 65 and 95-day notice products.
Responding to Brexit
Asset managers have, of course, also had to commit considerable time and resources to plan for a range of possible Brexit outcomes, with many establishing bases in EU countries, particularly the Republic of Ireland and Luxembourg, to avoid losing their passporting rights.
Needless to say, preparations for Brexit have been a huge area of focus for Barclays too, and we have been working closely with clients to share our plans and help you understand the potential impacts on your underlying businesses and corporate treasury models.
This includes using our growing presence in Europe to help preserve market access for asset managers, in particular by expanding Barclays Bank Ireland to help serve clients in the European Economic Area.
Further information on preparing for potential Brexit outcomes is available here.
As always, we made every effort this year to support asset managers in the busy run-up to the 5 April ISA deadline by ensuring that they had access to the right credit limits and people on standby to handle sales and queries.
Given the higher risk of fraud at this time of year, our clients were also given individual cyber security advice, and reminded of our fraud protection hub which provides content on how to stay ahead of such threats.
Looking ahead, we will continue to work closely with you to address the issues you face. In particular, as Brexit continues to unfold, we are committed to providing continued access to EU-27 financial markets and to developing specific propositions to meet your funding, cash management and risk management needs.
Head of Funds and Non-Bank Financial Institutions for Europe
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To discuss your business requirements and how Barclays can support you, contact us today.