Category: Banks

European banks have shown strength during Covid-19

On By mehranmuslimiblogIn BanksLeave a comment

It could have been another 2008 banking crisis, but as it turns out, European banks have weathered the challenges of Covid-19 with great resilience. Despite this, they still face other challenges that could upset their future outlook, especially consumer debt and interest rates.

This time around, banks have ended up in a much stronger capital position than back in 2008, due to the regulations introduced in the wake of the financial crisis. Some are in such a buoyant position that they are ready to resume dividend payouts this year, Silvia Amaro writes at CNBC. 

Arnaud Journois, vice president at DBRS Morningstar told Amaro, “The most important takeaway is that we have not seen a deterioration in asset quality yet since the onset of the crisis.” This view of ‘strength’ is backed up by Fahed Kunwar, head of European banks equity research at Redburn, who said its latest quarterly results have been ‘Strong”.

The big lenders have benefited from government stimulus measures introduced across EU countries, and business failures have been contained due to steps taken by the European Central Bank and the Bank of England. However, there are fears that this situation may not continue into 2022 as “fiscal and monetary interventions are potentially scaled back.”

Nick Andrews, Europe analyst at investment research firm Gavekal told CNBC, “Bad loans will start to appear over the next year or so. That’s when we will get a clearer picture of how bad the situation is in the corporate sector.” A view that is echoed by Elisabeth Rudman, head of European financial institutions at DBRS Morningstar, who also said, “the full level of non-performing loans is still to materialize.”

While governments haven’t made concrete announcements about their withdrawal of financial support, this is bound to happen as the health crisis slows down and economies reopen. When it happens, some businesses will be too stretched to meet their loan repayments and may have to file for insolvency.

The interest rate challenge

Jes Staley, CEO of Barclays, commented on interest rates, saying, “One risk given the level of government spending is if interest rates do start to move up markedly, that will increase the cost of trying to respond to the pandemic.”

As we know, interest rates are at a record low level after being cut as part of the economists’ response to the pandemic. However, central banks could raise the rates if prices rise significantly. There may be less risk attached to this in the Eurozone, where recent increases in inflation were associated with one-off events, such as Germany’s new consumer tax rules.

But in the UK, economists are predicting that prices “could overshoot the Bank of England’s inflation target later this year,” and that would likely result in an interest rate rise. If this happens, it will be bad news for the UK economy in general.

The big hope for the banks is consumer spending once restrictions are eased and restaurants and shops re-open. Andrews from Gavekal said, “We could see a stronger rebound on the back of pent-up demand,” which would ultimately support the banks’ balance sheets and draw in more business investment.

Can XAI in banking help small businesses?

On By mehranmuslimiblogIn AI, BanksLeave a comment

Small businesses (SMEs) are no longer as well served by traditional banks, yet this is one niche sector where they have an opportunity to shine.

To date, banks have provided SMEs with a mix of retail and corporate services, however, as a Finextra blog explains, “this no longer fits the evolving needs of small businesses.”

Services for this business sector need to think about more holistic solutions. These may include more collaboration with a range of digital service providers if they are to retain the confidence of SME clients by addressing their pressing needs.

Temenos, a firm specialising in enterprise software for banks and financial services has been reimagining how banks could better serve SMEs using the available technology. For example, “banks can implement innovative design-centric and data-driven products, as well as services that can transform the SME customer experience.”

The customer’s digital experience is now critical, as is the use of data, because these will be the driving force in future SME banking services. And this is where artificial intelligence (AI) can be of enormous help. It can enable banks to leverage data from multiple sources “to make faster, and more accurate decisions and provide individualised, frictionless customer experiences.”

Utilising AI, or XAI (explainable AI) would be another major step, primarily because “one of the key issues for banks using AI applications that there is little if any discernible insight into how they reach their decisions.” Transparency is required for customer confidence, especially concerning lending.

If banks looked at more than an SME’s credit score, and took a more holistic approach by viewing a range of attributes, they would be able to make more “nuanced and fully explainable decisions that lead to 20% more positive credit decisions and fewer false positives.” Furthermore,  this can be done in real-time using APIs to connect to third-party data sources.

Banks using XAI can show how the decision was made and then suggest alternative products or provide advice about how to improve the chances of getting a loan. In this particular period of time, with the Covid-19 pandemic having negatively affected so many small businesses, there has been an increased need for SME loans. As a result, banks need to support this with more digitisation and smarter decision-making. Using XAI seems like a good place to start.

Neobanks need to own their niche

On By mehranmuslimiblogIn Banks, Mobile payments, neobanksLeave a comment

Currently there are somewhere around 256 neobanks in existence, according to Exton Consulting. These brands offer a digital-only experience that are perceived as customer-centric and easy to use, as in opening an account only takes a few minutes. They are also lower cost to use than their physical banking counterparts.

However, only a small handful of these banks have achieved substantial profitatbility. Their names will be familiar: Revolut, N26, Monzo, Nubank and Chime amongst them. The others, which are significant in number, are unlikely to be profitable for the foreseeable future, according to Accenture research, which revealed “the average UK neobank loses $11 per user yearly.”

Part of the problem is the rising cost of providing a service, whilst the margins generated per customer remain low. Finextra correctly reminds us that disrupting the traditional banking market was always going to be a long-haul business, and that it really needs large amounts of venture capital investing to keep the LTV/CAC ratio in good shape.

CAC is ‘customer acquisition cost’, and LTV is Life-Time Value in this case. The LTV is a measurement of the average revenue generated by a customer in a 1, 3 or 5 year period. Clearly, neobanks want this to be as high as possible, but it is one area where they are being challenged, as the average is around 15€ per customer per annum. Banks like N26 and Monzo obtain revenue mainly from “the low debit card interchange fees,” but this results in very low LTVs. Less travel and smaller purchases during the 2020 pandemic has had a big effect on this.

The CAC is calculated by taking the total money spent on customer acquisition and dividing it by the number of new customers. Neobanks do much better than traditional banks in this regard, “with an average CAC of neobanks around 30 euros versus 200 euros for incumbent banks,” Joris Lochy reports at Finextra.

Lochy says that what we are going to see this year is a switch from chasing growth to increasing profitability. Neobanks are being strongly encouraged by VC investors to provide more profitable products, such as investments and credit: products such as credit cards, overdrafts, salary advances and purchase financing. They are also likely to chase small business customers, and provide Banking-as-a-service services to other Fintechs or even banks.

It also follows that some neobanks will stop offering free services. They used these effectively to grow their customer base, but now they may need to charge more fees.

Threats are also coming from the incumbent banks, but perhaps the biggest threat is from Big Tech stepping into this space. As Lochy suggests, what the neobanks need to do is “find a niche where they can excel and not fight head to head with the large banks.”

Finding a niche

This is likely to come by restructuring and rethinking the product offering to provide an even more personalised service, probably in the credit sector. Some would also be better off by targeting a specific consumer group and tailoring their product offering to them. For example, the Longevity Bank is for Seniors, and there are ones focusing on women, freelancers and SMEs. Ultimately, what neobanks need to do to survive, is offer something that no other bank, credit union etc offers – that’s what ill really bring home the customers.

How hackers steal millions from bank accounts

On By mehranmuslimiblogIn Banks, CyberSecurityLeave a comment

The latest information from IBM Security Trusteer’s mobile security research team indicatesthat hackers have been using ‘mobile emulators’ to steal millions from financial institutions in Europe and the USA.

How they did it?

They set up a network of mobile device emulators that were behind thousands of spoof devices able to access thousands of compromised accounts. A set of set of mobile device identifiers was used to spoof an actual account holder’s device, and in each case it is likely that these accounts had been infected by malware, or collected via phishing.

The hackers have the victim’s username and password, and using an automatic process are able to “script the assessment of account balances.” They can then automate large numbers of fraudulent transfers. These are never large enough to trigger bank scrutiny at the time.

How does an emulator work?

It mimics the characteristics of several mobile devices. They are often used by developers to test applications, but in the wrong hands they are a crime tool.

According to Finextra: “IBM Trusteer says that the scale of the operation is one that has never been seen before, in some cases, over 20 emulators were used in the spoofing of well over 16,000 compromised devices.”

IBM added, “”The attackers use these emulators to repeatedly access thousands of customer accounts and end up stealing millions of dollars in a matter of just a few days in each case. After one spree, the attackers shut down the operation, wipe traces, and prepare for the next attack.”

IBM Trusteer’s intelligence team has also observed a trending fraud-as-a-service offer in underground venues, promising access to this type of operation to anyone willing to pay for it, with or without the required skill.

“This lowers the entry bar for would-be criminals or those who plan to transition into the mobile fraud realm,” says IBM, and is likely to become a growing trend amongst cybercriminals.