Digital Banking III - How to get there?

Traditional banks are organized around money in branches.

• Their thinking,
• Their technology,
• Their incentive systems,
• Their knowledge about customers

are all structured around branches and product lines.

To become digital,

- Banks have to focus on electronic platforms and data as their core and branches as secondary.
- To get to an integrated electronic platform,  banks need to replace their old core systems.

Banks are shutting down branches
           - Europe closed 20,000 in the last four years.
           - Thousands have been closed in the U.S.
           - It has been predicted that banks will go from 1 branch per 20,000 customers now to 1 branch per 250,000 customers.
          - Banks will move to electronic channels where a transaction is much cheaper than one   performed by a teller.


Digital banking is more than getting consumers to use online or mobile banking or building a new app – it is a way to run an entire organization.

This new model touches product development, distribution, front and back office operations, marketing communication and the entire customer experience.



When engaging with a digital bank, consumers should benefit from the following:

• Shop for a financial institution online or with a mobile device
• Open a new account by using a computer, tablet or mobile device using image capture to save steps
• Communication with their bank through the channel of choice, potentially with live video tools
• Financial insights pre-login, such as balances, recent transactions and product recommendations
• Real-time and secure transactions online or at the point of sale with a mobile device
• Personalized and predictive offers that leverage geographic as well as contextualized insight
• Real-time digital money management including alerts and notifications
• Integration of financial services with daily activities.

Digital Maturity Model

Dell has developed a comprehensive Digital Maturity Model (DMM) to map a financial institution’s current digital state allowing an organization to develop a comprehensive action plan that is completely aligned to overall strategic goals.





 

Today's Complex - Payment System

TRADITIONAL PAYMENT SYSTEM

TODAY'S COMPLEX PAYMENT SYSTEM FOR END USER

 

 

 

Digital Banking - II

According to McKinsey Report,

Digital transformation will put upward of 30 percent of the revenues of a typical European bank in play, particularly in high-turnover products such as personal loans and payments.
• Banks can remove 20 to 25 percent of their cost base by leveraging this digital shift to transform how they process and service.
• Put together, the economics of a digital bank will give it a vast competitive edge over a traditional incumbent. It’s fair to say that getting digital banking right is a do-or-die challenge.

How to go digital without going crazy?

• Maximize the use of existing technology
• Apply lightweight technology interventions
• Place a few selective big bets

Address the people dynamics

• Set the right structure and incentives
• Increase the focus on business outcomes, not digital activity
• Formulate and implement a people vision

What exactly in the value of DIGITAL BANKING?

While the cost-saving opportunity for banks comes in many forms and touches every area of the bank, there are two areas that are especially significant and represent the bulk of the value:

• Automation of servicing and fulfillment processes and migration of front-end activity to digital channels. On automation, European banks can realize 40 to 90 percent cost reductions in a range of internal processes through careful deployment of work-flow tools and self-servicing capabilities for customers and staff.
• On front-end transformation, beyond diverting existing branch activity into digital channels, digital tools can also be used to augment frontline servicing (for example, with iPad forms rather than paper forms, or videoconference access to specialists to maximize their utilization)—easily doubling staff productivity and enhancing the customer experience.

In the near term, we expect shorter-tenure, high-turnover products like credit cards, loans, and payments to see the most digital transformation. In fact, these are the areas most under attack from new digital entrants.

Looking further ahead, bank accounts and mortgages, which together drive more than 50 percent of many banks’ revenues and usually provide “sticky” annuity streams, will be brought into the fray.

Digital Banking

“Digital” is the new buzz word in the banking sector, with banks all around the globe hopping onto the digital bandwagon.

Just like how the introduction of mobile technology massively disrupted innovation in the banking sector, digital is now doing the same.

Banks of all sizes are making sizeable investments in digital initiatives in order to maintain a competitive edge. So, what does “digital” actually mean?

That was the time, I was able to relatively to to distinguish between the sorts of

•    Internet banking
•    Online banking
•    Electronic banking

1. Internet banking would mean browser-based banking.
2. Online Banking means, It includes software or even telephone banking.
3. Electronic Banking, would mean the entire range of electronic payment and transaction processes including card terminal transactions.

And now, there is new contender, “digital banking” made a recent appearance and it looks like it is here to stay.

According to PWC, Digital Banking means,

"The full extent of what digital can offer customers goes beyond the basic mobile and internet banking services that are now widely provided, although there is still value to be obtained for many banks from simply delivering these basic services well.”

 “Digital banking will evolve into a richer set of offerings, providing new value for banks and their customers through a new ‘digital feature set’, based on innovations in:
         - User experience;
         - Mobile devices and
         - Networks;
         - Social media and
         - Collaboration;
        -  Customer analytics;
        -  Channel Ïntegration.”


“Digital Banking – a new concept in the area of electronic banking,
 which aims to enrich standard online and mobile banking services by integrating digital technologies,  for example strategic analytics tools, social media interactions, innovative payment solutions, mobile technology and a focus on user experience.“

According to ACCENTURE,

"Banks must reconnect with customers, rebuild trust and rethink the banking experience.
Digital technologies and solutions provide an excellent opportunity for forward-thinking financial institutions to move past this challenging market environment. If banks do not step up to digital, non-banking organizations will seize the opportunity to own the customer experience layer and provide alternate means of distribution. By having a truly digital business, banks can move away from reactive, transaction-based customer relationships, toward a more intimate, proactive and personalized experience across multiple channels, products and services"

 

TARGET2

TARGET (Trans-European Automated Real-time Gross settlement Express Transfer) was launched in 1999 and comprised the national real-time gross settlement (RTGS) systems of EU Member States participating in the Economic and Monetary Union (EMU), the ECB payment mechanism and an interlinking mechanism.

TARGET2 is the new trans-European payment system which replaced TARGET. 

 The new system was developed to cater for the needs generated both by the enlargement of the European Union (EU) and by technological advances, as well as to meet market participants’ demands for safe and efficient payment systems across Europe.

TARGET2 is based on a technically centralized platform (Single Shared Platform – SSP), which is provided by the central banks of Germany, France and Italy and replaces the decentralized structure of the original TARGET system. With TARGET2, the Eurosystem provides participant Member states with payment services based on a single price structure for both domestic and cross-border payments. 

TARGET2-NL The Dutch component of the ESCB’s TARGET2 RTGS system.

TARGET2 was introduced in the Netherlands on 18 Feb 2008. The difference vis-à-vis the previous version of TARGET is that it uses one central technical platform for payments, eliminating the need to maintain national large-value payment systems. Financial institutions send their large-value payments directly to the platform. Most Dutch credit institutions participate in TARGET2-NL.

 

 

 

 

 

DEBT BOMB

 

Debt Bomb occurs when a major financial institution,

such as a multinational bank, 

 

defaults on its obligations that causes disruption not only in the financial system 

of the institution's home country,

 

but also in the global financial system as a whole.

 

A debt bomb can occur also if consumer spending is based heavily on debt. For example, if a nation incurred huge credit card debt, individual debt holders could default in mass and create trouble for creditors.

 

 

 

Central counterparty clearing house (CCP)

Central counterparty clearing house (CCP) is an organization that exists in various countries that helps facilitate trading done in derivatives and equities markets.   These clearing houses are often operated by the major banks in the country.   CCPs benefit both parties in a transaction because they bear most of the credit risk.   If two individuals deal with one another, the buyer bears the credit risk of the seller, and vice versa.   There are two main processes that are carried out by CCPs: clearing and settlement of market transactions.   -       Clearing relates to identifying the obligations of both parties on either side of a transaction.   -       Settlement occurs when the final transfer of securities and funds occur.
In Europe:
		European Association of CCP Clearing Houses (EACH) represents the interests of CCPs in Europe since 1992. EACH currently has 18 members from 14 different European countries. EACH works with public authorities and industry stakeholders in order to:  ·         Offer the consolidated opinion of our membership in regulatory discussions and consultations ·         Help member CCPs to agree appropriate standards and guidelines for the industry

In Netherlands:
Holland Clearing House (HCH) is a central counterparty for derivatives. They deliver CCP Services for the derivatives Multilateral Trading Facility (MTF), TOM MTF.   HCH is regulated and supervised in the Netherlands by Netherlands Authority for the Financial Markets (AFM) and De Nederlandsche Bank (the Dutch Central Bank; DNB).
As of December 2014, Intercontinental Exchange (ICE Clear Europe), a leading global network of exchanges and clearinghouses, has completed the previously announced acquisition of a majority stake in Holland Clearing House (HCH).

Netting

Netting is consolidating the value of two or more transactions, payments or positions  in order to create a single value. Netting entails offsetting the value of multiple positions, and can be used to determine which party is owed remuneration in a multiparty agreement.   In the context of credit risk, there are at least three specific types of netting   Close-out netting – A special form of netting which follows certain contractually agreed events (such as the opening of insolvency proceedings), whereby all existing obligations are accelerated such that they become due immediately.   Netting by novation – The legal obligations of the parties to make required payments under one or more series of related transactions are canceled and a new obligation to make only the net payments is created. The parties to the new obligation may be  the same as the parties to the existing obligation. Alternatively, in the context of some clearing house arrangements, there may be some substitution of parties.   Position netting - Also called as Payment/Advisory/Settlement netting, is netting of orders in respect of obligations between one or more parties which neither satisfies nor discharges those original individual obligations. This can be applied either bilaterally or multilaterally and on related or unrelated transactions.   -     Bilateral Netting, the process of consolidating swap agreements       between two parties into a single agreement.       As a result, instead of each swap agreement leading to a stream       of individual payments by either party,       all of the swaps are netted together        so that only one net payment is being made to one party based on the flows of the combined swaps.   -     Multilateral Netting, an arrangement among multiple parties that transactions be summed,       rather than settled individually.       Multilateral netting not only streamlines       the settlement process, it also reduces risk by       specifying that, in the event of a default or some other termination event,        all outstanding contracts are likewise terminated.              Generally speaking, multilateral netting is enabled via a membership organization like an exchange.
Financial Facts:
·         Starbucks has operations in more countries than both Goldman Sachs & JP Morgan Chase. ·         If you invested $100 in Microsoft in 1986, instead of buying a version of Windows 1.0, it would be worth $46,400 today.

Tokenization Tussle

What do tokens, or digital replacements for sensitive payment account information,
particularly the primary payment card number (PAN), have in common with interchange and other fees linked to credit and debit cards?

Easy: Tokens, like transaction pricing, have become a battleground between competing interests in the payments industry.

For example, models under development include those from EMVCo, which is controlled by the major payment card networks, and The Clearing House, which is controlled by banks. Other proposals have come from the PCI Security Standards Council and the Accredited Standards Committee X9.

While there are plenty of technical matters to be settled, one of the hottest issues under debate is the use of static and dynamic tokens. Static tokens are easier to implement, but dynamic, or one-time-use tokens, offer even more security because they change with each transaction.

Meanwhile, some payments executives fear Visa and MasterCard are using closed token standards to extend the domination they enjoy in the magnetic-stripe card world into the emerging realms of Europay-MasterCard-Visa (EMV) chip cards and mobile payments. Others worry that separate groups are developing standards without enough back-and-forth among prospective token users and token originators.

In late July, several major merchant trade groups called for an open approach to tokenization, as did the Secure Remote Payments Council (SRPc), which represents debit networks.

The Mobile Payments Industry Workgroup (MPIW), a group formed under the auspices of the Federal Reserve banks of Boston and Atlanta and which includes payments executives, also urged the industry to find common ground on tokenization.

The 10 biggest issues in e-payments

The 10 biggest issues in e-payments

 

1. The Tokenization Tussle
2. Can Apple Revive Mobile Wallets’ Sagging Prospects?
3. Choking on Operation Choke Point
4. Will Anything Stop Data Breaches?
5. EMV’s Race Against the Clock
6. Meet the Value-Added Reseller
7. Look Who’s Coming to the Point of Sale
8. If at First You Don’t Succeed…
9. The Real Issues Surrounding Virtual Currencies
10. The Painful Sales Adjustment

How to have successful Banking Transformation Project?

Some thoughts on how to succeed in Core Banking Transformation Project?




Vendor – Once implemented a core typically stays in place for a long time. It provides a primary support function to any financial institution, so select a vendor like you would select a wife or partner….for the long term :). Good relationship, understanding of each others business, can work through issues (as they will arise), trust and a clear well defined agreement. It must be win-win to be a partnership.

System – Select a system that has a good fit for your current and future needs – the core is a moving, growing system – over time new channels, products, and customers will emerge and the system has to be scalable and flexible enough to change, adapt and accommodate new requirements. No point selecting a system that matches today’s need spot on, that is impossible/expensive to adapt later. There will be change…

Scope - Keep the scope well defined. Having an agreed and proven approach to project change management will ensure the impact of change requests are understood and dealt with appropriately.

Leadership – The Executive team of the bank must understand that this is not a side-project. Don’t underestimate the effort required – it is surprising how many tenders come out with ‘explain how it will be a seamless transition’ – organisational change management is key – recognise that this is the opportunity to change outdated work practices, embrace new work methods, and tighten control – it will need drive from the top. The change of core is a test of leadership – it’s why many try to avoid this …

Processes – Use an industry-standard process reference model – and try and work out why you are not doing your process that way. Many BIAN members (http://www.bian.org ) process millions of actions using a standard process – and there probably is a good reason – work it out, don’t surrender to “the way we do it”

Look – Try and make sure the new system looks ‘better’ than the old one – chances are the green screen or winapp looked ‘old’ or ‘clunky’ to users – spend a little on the look to make people feel it is modern and nice. They are used to the Web 2.0 – at least make it look like it was designed this century…

Training – Ensure that all users receive sufficient training – get buy-in from staff – pick at least 5 things that really grate in current system and solve with the new (regardless of if they have to be developed). Be wary of the parallel run – if not well managed it just delays the moment they realize they have to use the new system – test the users in the dry run leading up to conversion.

Project- There must be a project sponsor who is willing and capable of driving the project through internal roadblocks – and it helps if they represent a key profit center. Have a project team with representation from the whole business. They need to be supported by HR/Training, change/comms, finance/contract and process engineers – not just capable technical and business staff. If need be support this with skilled external consultants with direct relevant experience – but recognize that the those paid by the day have a conflict of priorities…


Commercial terms – Plan well with your vendor/partner and expect the unexpected. Ensure you have sufficient budget and appropriate commercial terms to see the project through to completion


Actually, above facts are applicable to all the projects. But, few things are more specific to Banking Transformation project.

Difference between Tokenization and Encryption

What is the difference between tokenization and encryption?

A lot of the time, encryption and tokenization are being used interchangeably to describe the process of protecting data stored in the cloud. Although they both essentially have the same function, they are different processes and have different effects on the data they are protecting.

Tokenization

Tokenization substitutes a value with a random 'Token" value. Each individual value has its own token assigned, so no matter when that value is inserted, the same token will appear. The token values are then stored in the cloud.

To retrieve the original value, the token value is pulled from the cloud through the company's firewall where de-tokenization takes place. A dictionary of tokens is stored behind the firewall to replace the token value with the original value.

Encryption

Encrypted data obscures the value using an approved encryption algorithm. To reveal the original value, the user needs a secret key. This makes it impossible to reveal the true value to any unauthorized user.

There are many different ways to encrypt data, including private keys, public keys, SSL, and TLS. The encrypted data is then stored in the cloud. As the data is pulled from the cloud, the user can access the true data if they can access the secret key to decipher the data

What is Payment Tokenisation?

Tokenisation, when applied to data security, is the process of substituting a sensitive data element with a non-sensitive equivalent, referred to as a token, that has no extrinsic or exploitable meaning or value.

The token is a reference (i.e. identifier) that maps back to the sensitive data through a tokenisation system. The mapping from original data to a token uses methods which render tokens infeasible to reverse in the absence of the Tokenisation system, for example using tokens created from random numbers.

The Tokenisation system must be secured and validated using security best practices applicable to

- Sensitive data protection,
- Secure storage,
- Audit,
- Authentication &
- Authorization.

The Tokenisation system provides data processing applications with the authority and interfaces to request tokens, or detokenize back to sensitive data.

Tokenisation in Payments

Tokenisation is the process of replacing sensitive data with surrogate values that remove risk but preserve value to the business. In other words, a traditional primary account number (PAN) is replaced by unique identification symbols to create a ‘token’.

To tokenise a payment transaction, the PAN is sent to a centralised and highly secure server called a ‘vault’ where it is stored in a PCI-compliant environment provided by a payment service provider (such as a payment system). Immediately after authorisation from the card issuer, a unique, token number (with its expiration date) is generated and returned to the merchant’s systems for use instead of the PAN.


While payment tokens are reversible and can be ‘mapped’ back to the traditional PAN by authorised parties, this is a highly complex process. The token is therefore meaningless if someone gained malicious and unauthorised access to the data.


How are tokens used?

A token is generated for one time use within a given and pre-defined environment, such as to purchase goods from an online retailer. In most circumstances, it will perform just like the original PAN for business functions such as returns, sales reports, marketing analysis, recurring payments etc. It cannot, however, be used to conduct a transaction outside of that merchant’s environment.
The data only has meaning within the pre-defined environment for which it was created.

What is the aim of tokenisation?

The process removes traditional PAN information from environments where data can be vulnerable and, if stolen, used for illegal purposes. Tokenisation completely and quickly disconnects the real PAN and replaces with a token, while maintaining backwards compatibility with existing business processes.
For this reason, tokenisation offers a real alternative payment solution that could significantly reduce fraudulent activities.  In this way, tokenisation can retain all the essential customer data without compromising its security.

So, what is new?

The standardisation of payment tokenisation systems will promote credibility of this payment solution and encourage market interoperability. The framework provides different models and potential flows for several identified tokenisation scenarios, enabling suppliers to map existing solutions against these and develop new ones ready to meet new token service provider needs.

PCI Standards

PCI standards do not allow credit card numbers to be stored on a retailer’s point-of-sale (POS) terminal or in its databases after a transaction. To be PCI compliant, merchants must install expensive end-to-end encryption systems or outsource their payment processing to a service provider who supplies a tokenisation facility. The service provider then handles the issuance of the token value and bears the responsibility for keeping the cardholder data locked down, for which they require industry proven secure solutions.

With Softwares which is available in the payments market, Banks and merchants can also become their own in-house service provider to manage their own mobile and e-commerce EMV payments solutions including tokenisation

Parties Involved in the Dutch(Netherlands) Payments System

The payment system plays a pivotal role in the Dutch economy.

Millions of payments are processed each day, by debit card and giro, both nationally and internationally. 

Different payment methods and rules exist in the Dutch and international payment systems. The payment market features many parties, each making stringent demands with regard to the quality of daily payments. It is a market that benefits from continuous innovation of products and services.

http://www.betaalvereniging.nl/en/organisation/parties-involved-in-the-payment-system/ à The Dutch Payments Association site

The Payments Association organizes the collective tasks in the national payment system for its members. Within its role, the Payments Association consults with numerous parties on behalf of its members. These parties include enterprise and consumer umbrella organizations, social interest groups, parties involved in infrastructure, brand owners and regulators.

Supply side

The members of the Payments Association are providers in the payment system. They are payment services providers that offer end products on the market (to both businesses and private individuals) independently. In other words: banks, electronic money institutions and payment institutions. The Payments Association works closely with its members and consults with them regularly on developments and activities.

Demand side

The demand side includes the end users of payment services, both business owners and consumers. The Payments Association is committed to actively involving representatives of end users in its activities. In this way, the Payments Association fulfils its social role in the payment system.

Legislation and supervision

The payment system must comply with various laws and rules, both nationally and internationally. The Payments Association consequently deals with government authorities such as the Ministry of Finance, regulatory bodies such as the Dutch Central Bank (Nederlandsche Bank, DNB) and the Netherlands Competition Authority (Nederlandse Mededingingsautoriteit, NMa), the European Commission and other organisations that monitor legislation and regulations.

Regulations and standards

Regulations concerning payment products are necessary in order to clarify which roles and activities parties in the payment market may carry out for a particular payment product. An example of such a regulation is the stipulation that transaction processors and banks must ensure that a merchant will receive the amount of a PIN transaction in his bank account within 24 hours on business days.

Standards help to enable the different parties and links in the payment chain to work together properly. For example, there is a standard that prescribes how cash register systems and POS terminals are to be linked together to ensure that devices made by different manufacturers can be connected properly. There are also standards for giro-based transactions.

The Payments Association keeps track of national and international rules and standards that are relevant to its members and stakeholders, provides detailed information on how those rules and standards can be applied and helps its members to develop their own rules and standards.

Infrastructure

The processing of electronic and giro-based payments requires hardware, software, communication links and communication networks. Parties involved in this include: document processors, debit card suppliers, transaction processors, data communication providers, POS terminal suppliers, cash register suppliers and software suppliers. The Payments Association administers rules and requirements for these parties in the payment system and certifies hardware such as POS terminals and data communication lines. It also monitors compliance with rules and agreements in order to ensure and further improve the security and reliability of the payment system.