BoE stress tests: all you need to know

The Bank of England has released the results of its latest round of its annual banking stress tests and its semi-annual financial stability report this morning. Used to measure the resilience of a bank’s balance sheet in adverse scenarios, the stress tests measured the impact of a severe slowdown in Chinese growth, a global recession […]

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Draghi: Eurozone will decline without vital productivity growth

It’s productivity, stupid. European Central Bank president Mario Draghi has become the latest major policymaker to warn of the long-term economic damage posed by chronically low productivity growth, as he urged eurozone governments to take action to lift growth and stoke innovation. Speaking in Madrid on Wednesday, Mr Draghi noted that productivity rises in the […]

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Asia markets tentative ahead of Opec meeting

Wednesday 2.30am GMT Overview Markets across Asia were treading cautiously on Wednesday, following mild overnight gains for Wall Street, a weakening of the US dollar and as investors turned their attention to a meeting between Opec members later today. What to watch Oil prices are in focus ahead of Wednesday’s Opec meeting in Vienna. The […]

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Banks, Financial

RBS emerges as biggest failure in tough UK bank stress tests

Royal Bank of Scotland has emerged as the biggest failure in the UK’s annual stress tests, forcing the state-controlled lender to present regulators with a new plan to bolster its capital position by at least £2bn. Barclays and Standard Chartered also failed to meet some of their minimum hurdles in the toughest stress scenario ever […]

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Barclays: life in the old dog yet

Barclays, a former basket case of British banking, is beginning to look inspiringly mediocre. The bank has failed Bank of England stress tests less resoundingly than Royal Bank of Scotland. Investors believe its assets are worth only 10 per cent less than their book value, judging from the share price. Although Barclays’s legal team have […]

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Categorized | Banks, Financial

Financial industry faces disruption

Posted on September 26, 2016

Driven by Uber: the rise of the “sharing economy” based on peer-to-peer services is helping growth of small mobile payments©Dreamstime

Driven by Uber: the rise of the “sharing economy” based on peer-to-peer services is helping growth of small mobile payments

A few weeks before the Olympic Games started in Brazil this summer, a world record of a different kind was claimed by two small banks in Canada and Germany, when they completed a transaction that could change the world of finance.

ATB Financial, based in Edmonton, Alberta, sent C$1,000 to Germany’s Reise Bank over a platform developed by Ripple, the San Francisco-based specialist in blockchain, the shared database technology that underpins the digital currency bitcoin.

Payments have long been a backwater of finance, pleasantly profitable yet placid. Now all that is changing

    The banks claimed this was the first real international money transfer using blockchain technology. It took only 20 seconds to complete, compared to the several days that most international bank transfers take to clear, underlining the technology’s potential.

    Payments have long been a backwater of finance, pleasantly profitable yet placid. Now all that is changing. The trend for people to pay for more things on mobile devices, and combined with the growth of online shopping, has produced a spurt of growth in this once staid sector. The consultancy McKinsey predicts that global payments revenues will rise from $1.8tn in 2014 to $2.3tn in 2019.

    However, the industry is entering a period of extreme disruption. The dominant players — the banks and credit card companies — face an uncertain future. A fast-growing group of upstart financial technology, or “fintech”, companies are lining up to challenge the incumbent payment providers by offering to meet customer demand for faster, cheaper and easier-to-use services — many of them using the blockchain.

    Allied to this, regulators are ratcheting up pressure on banks to cut the juicy fees they earn from processing payments while forcing them to be more co-operative with the fintech challengers. At the same time, traditional providers of payment services are facing an onslaught of cyber attacks from an army of increasingly sophisticated hackers and digital criminals.

    The rise of the “sharing economy” based on peer-to-peer services, such as Uber and Airbnb, is expected to fuel rapid growth of small mobile payments. These are already on the rise, driven by the adoption of digital wallets, such as Apple Pay, which allow consumers to pay for products by waving their smartphone over a terminal.

    Juniper Research predicts that global payments using mobile devices or wearable technology will be worth $95bn annually in 2018, up from $35bn last year.

    Bo Nilsson, chief executive of Nets Holding, the Nordic payment processor, which recently announced plans for a public listing, says: “We continue to see cash being converted into digital payments, such as with new contactless payments. We expect 70 per cent of commerce in dollar terms to be in digital payments in a few years.”

    As consumers carry out more financial transactions on their mobile devices, banks are responding by making it easier for them to transfer money quickly. In the UK, for example, the main lenders have launched Paym, a service allowing people to pay someone using only their mobile number. More than 3m users have signed up so far.

    Glut of “fiddly” pay apps leaves consumers cold

    Power dressing: an MJ Bale suit with contactless payment technology in the sleeve

    Retailers and shoppers waiting to see winners and losers

    Cross-border payments are still a costly and time-consuming exercise for the most part, both for individuals and companies. Marcus Treacher, head of strategic accounts at Ripple, says: “The payments industry is revving up, but it is stuck in second gear because it is being held back by the antiquated banking system.”

    This has prompted scores of fintech groups to spring up, offering cheaper and faster ways to transfer money overseas via online services. Perhaps the best known in Europe is TransferWise, which has been doubling in size each year and is now handling more than $1bn of payments each month.

    Some banks are responding to the rapid growth of these fintech companies. Barclays recently struck a deal with the Commonwealth Bank of Australia that will allow customers to send payments between the two countries using only a mobile phone number.

    Rachel Nash, the UK head of financial services at NCR, which operates thousands of ATMs and provides payment software to banks, says: “It is all about a seamless customer experience. Transferring money across accounts really easily, that is what customers are starting to expect now.”

    Payments networks tighten security after cyber attacks

    Anti-Money Laundering Council (AMLC) executive director Julia Abad (R) and Bangladesh ambassador to the Philippines John Gomes (L) speak to the press at the headquarters of the Central Bank of the Philippines in Manila on March 31, 2016. More than 4.5 million USD of tens of millions recently stolen from Bangladesh and funnelled into Philippine casinos was recovered on March 31, as a lawmaker in Manila said almost half the haul could still be salvaged. On February 5, unidentified hackers shifted $81 million from the Bangladesh central bank's account with the US Federal Reserve to a nondescript bank in Manila, and then to the casinos where the trail went cold. / AFP / NOEL CELIS (Photo credit should read NOEL CELIS/AFP/Getty Images)

    Plugging weak links in authentication is crucial

    While innovation is flourishing in the payments sector, it is increasingly under attack from cybercriminals. In the UK, the latest official figures showed that more than half the 3m cases of bank fraud came through the internet. Similarly, a group of hackers stole up to $1bn from about 100 financial institutions over a two-year period, according to researchers at internet security group Kaspersky Lab.

    One of the most high profile incidents resulted in cyber criminals making off with $81m from the Bangladeshi central bank in February, exposing a weakness in the security around the Swift international payments network. Several similar cases, some of which were successful, have since emerged at banks in Vietnam, the Philippines and Ecuador.

    The industry is also under fire from regulators, which are stepping up their efforts to inject more competition into a payments industry that has long been dominated by the big banks.

    Earlier this year, the largest British banks sold Vocalink, which processed more than half the country’s payments last year, to MasterCard in a £700m deal. The UK’s payments watchdog had called for the business to be sold to increase competition in the sector.

    In Europe, the banks are braced for the arrival of the Payments Services Directive 2, which is due to require lenders to open up access to the data of their clients to third party service providers in a bid to boost competition and stimulate innovation in the sector.

    New EU laws legitimise fintech challengers

    Fintech entrepreneurs are set for a boost from an overhaul of EU legislation on the payment services market AFP PHOTO GEORGES GOBETGEORGES GOBET/AFP/Getty Images

    Rule changes open up ways for consumers to bypass banking sector

    Once these third parties gain customers’ permission to access their accounts they could handle payments and offer tailored financial advice.

    For the banks, this could prove critical. It would enable companies such as Google, Amazon or Facebook to aggregate all of a person’s financial information from different accounts into a single site and then provide payment services directly from this portal. If banks do not respond quickly, they risk becoming the “dumb pipes” that handle the plumbing of the financial system, while all their customer interaction is stolen away by more technologically adept rivals.

    As Accenture put it in a recent report: “This scenario would present a significant threat to incumbent banks by acting as a virtual consolidation of the fintech industry . . . With less customer data, the banks would enter a negative feedback loop in which their ability to compete would steadily decline, eroding a key competitive advantage that banks currently enjoy through their wealth of customer data and insight.”