Petr Koutný (BSC): Banks have to simplifyFebruary 2020
BSC is a software company that builds turnkey banking systems. We talked with BSC’s boss, Petr Koutný, about how classic industries, such as banking, have managed the transition to new digital processes. “From the client's point of view, digitization is going great, we can pay with watches, telephones, we have great mobile and internet banking, we’ve got it all. But everything is just a little too complicated. The client ends up using only a fraction of what the app is capable of, and it’s not always user-friendly. Banks have to simplify”, he says in an exclusive interview for Peak.cz.
Banks around the world and in the Czech Republic, as in other fields, are undergoing a digital transformation. While this has been rather straightforward for their clients, it hasn’t always run smoothly for banks.
“Banks know that the world is changing, and that old conservative institutions that don’t keep up with the times won’t be signing very many new clients” says Petr Koutny. Koutny, as head of BSC, a banking system development company, knows this transformation process very well both in this and in other countries.
According to Koutny, it is important how banks choose to enter the digitization process. It is up to them which path they choose, and which one will be most effective for them.
“Today, clients are technologically dependent on their digital devices. This is one of the reasons why banks have found that they need to transform from financial to technology companies, but today’s banks must be far more than only a technology company” adds Koutný.
Where has the banking industry shifted in recent years?
In the last few years, the term “digitization” has been a hot topic, but the shift started as early as the 1990s, when the first electronic banking services began to appear. What accelerated and altered the industry was the arrival of devices that clients use every day, specifically computers and mobiles. These Internet-connected devices have accelerated not only the banking industry, but all of our daily lives. Banks were spurred into action by the “digitization” of their clients.
Have banks managed a similar transformation?
Given that customers are already mostly digital, banks have naturally followed them to this area. Banks know that the world is changing, and that old conservative institutions that don’t keep up with the modern age will not sign new clients and will not keep growing.
Some of them realized the need for change and began to re-design their internal organization and structure and the way their workers cooperated. When clients switch to digital communication channels, banks risk losing control and the ability to contact digital clients. There is simply no choice but to change.
Client deposits and investments are strictly regulated.
Banking is a very regulated field. Are regulations time-consuming?
Regulation has two aspects. In the banking sector, the most regulated area is receiving and managing money from clients. Banks who hold clients’ money cannot do more than regulation allows them, but that’s not all there is to banking.
This is the reason why a wide range of banking and financial services, which are not so tightly regulated, have seen a lot of outside players enter the market. I’m thinking, for example, about payment services. There has been a large influx of players who are not banks and have the ability and resources to move very fast. In addition to this, some of them, such as Apple and Google have the benefit of already having 300 million clients worldwide.
Apple has introduced Apple Express Transit in London, which allows you to pay public transit fares quite simply, even if your phone has a dead battery. Those companies which already have a large customer base are offering more and more services. They’ve even entered the lending market, but they enter these markets with a partner and are therefore not directly subject to financial regulation.
This puts banks at a disadvantage, although regulation only affects parts of their business. But the regulations are not there just to slow banks down. For example, PSD2 (EU payment services directive) forced banks to significantly change how they do business.
So, what has the new directive changed?
The architecture of their systems. The regulations reminded them that they were not the owners of the client’s information, that the real owner was still the client. The new directive, however, has made it clear that this information can be provided, with the client’s consent, to third parties to use. Some banks say PSD2 has given them the opportunity to change their understanding, helping them to create and use new applications, or existing third-party applications.
It turns out that whoever has the client wins, because services have been commoditized. So, if you already have a client, they are much more likely to buy the services you offer. There are banks that take PSD2 as an opportunity, and others that consider it a burden – just another regulation that they have to comply with that costs them money.
Banks have never been technology firms
How have banks in the Czech Republic reacted to this?
The bank that handled PSD2 best in our country is probably Česká spořitelna. The other Big Four banks were much more passive. Banks are now facing competition from a new front, from technology companies such as Google and Apple, which have the ability and resources to perfectly handle and master new technologies that they never stop developing.
Banks, on the other hand, have never been technology firms, they are the “managers” of their clients’ money. But clients are technologically dependent on a variety of smart devices, and banks have come to realize that they need to transform from a financial company into a technology company. And today they have to be even more than just technology companies.
Česká spořitelna was the first to recognize this and started creating its own software house a few years ago. It has teams that both invent and code applications and are able to innovate quickly. At the same time, they are open to cooperation with startups and external developers. I think that this is the right way to do it.
You have talked about technology companies, big ones like Apple or Google, but there are also much smaller players like Revolut and others. Will regulations catch up with these players? Are regulatory limits in place, or are regulators trying to catch up?
It depends on the strategies of these service providers. You mentioned Revolut, it has chosen a specific niche to occupy and is scaling it across markets. It is a global service, but with a narrow range of product offerings, although it is gradually expanding. However, the key will be to see if it can continue to compete with established players after stepping out of its niche and whether it can monetize its customer base.
We did a survey and only a few clients completely trust Revolut, and even fewer are willing to pay for its services. Not one of these smaller, narrow-profile players are in the black, so they have to start cross-selling – for example, by offering investment services. In the end, they are going to be entering into areas that are much more regulated.
Unlike the big tech players?
Yes, that’s why Revolut or Transferwise or Monese offer different services than Apple and Google. The big players are slower not because they are less capable, but because they don’t want to go into heavily regulated areas which would complicate and disrupt their business.
Moreover, regulation costs a pile of money. But Apple has a customer base it is able to monetize. Take Apple Pay, for example. When you think about how long banks have been dealing with and solving problems with card intermediaries and transaction fees. And now, after the fees have finally been reduced (interchange fees), Apple walks in and demands a high fee similar to what credit card companies used to charge. And yet, banks are happy to pay it, because if you don’t have Apple Pay, you’re an inferior bank. So, Apple is able to capitalize on basic, simple services such as payments and what’s more, they are able to do it without any kind of revolution.
Digitization has made life easier for us, not for banks
How do Czech banks compare to global competition?
As I said, from the Big Four, Česká spořitelna is the leader in our market. ČSOB is playing a waiting game and Komerční banka is, I would say, trying to catch up. In general, banks have managed to digitize almost all of their products, offer digital products and services to their clients and create applications that work. But everything is a bit too complicated and it hasn’t really simplified the client’s life.
At the same time, from the client’s point of view, the digitization process is excellent. We have everything, we can pay with watches, phones, we have nice mobile and internet banking, nothing’s missing. But it’s all just a little too complicated. Applications offer many features, but the client only uses a small part of them and working with the application is often annoying and unintuitive. It should be simplified, and more consideration should be given to client’s real needs. Digitization has helped more technologically sophisticated clients, but for most people it’s difficult. For banks, it has caused a lot of problems.
And in comparison with the world?
Czech banks are not among the leaders, I would say the leaders are the Scandinavian countries or the Baltic countries, perhaps also Poland or Turkey. But we fall into the category of smart followers, but that’s not such a bad thing. For example, large economies such as France, Germany, Switzerland or Italy are behind us, transformation has been much slower there.
Paradoxically, digitization has been the fastest in underdeveloped markets. There was often very little infrastructure in the East, so they were able to start from scratch with the best available technology. But Czech banks are doing relatively well with regard to digital services.
Banks are changing strategy
Are technology companies turning into banks? And will banks, in turn, also raise their game in terms of the services they provide?
Banks are faced with a decision on which path to take. They will either become a financial product provider, which, these days often through an API, they can then offer to third parties, keeping the product in house and continuing to develop it. This path is chosen by banks that have some unique product. For example, in investment banking, if you have a special ETF (exchange traded fund), you have a competitive advantage and you can sell it through different channels.
The second strategy is having a large number of clients and focusing on the “customer journey”. These are banks that not only want to help you get a mortgage but want to guide you through the whole complex process of securing housing. They will start by advising, finding opportunities, financing a mortgage and overall implementation, or supplying other services. Honestly, however, I think this is a very difficult path, because even the clients themselves have never thought of banks like this.
Can clients learn to?
The perception that banks are their “life partners” is a long-term process; A classical bank can thus change in two ways, either it has a product or a client.
And possibly there is a third direction – that it has operational efficiency. This means that it will offer its operations and systems to someone else as a digital service. This is how, for example, N26 in Germany or Monzo in Britain work – those are banks that function like digital projects because the systems they use are the best available and they are able to supply them to other financial institutions.
Which of these paths will come out on top?
I can only talk about the markets I have experienced in Europe, the USA and South Asia. For example, the United States is a completely different world compared to Europe. In the USA, we are focused on a specific segment, the so-called credit unions, which are smaller credit institutions with assets of up to $10 billion. Their only priority is gaining clients and they simply buy everything else.
Nearly virtual, brand-oriented financial institutions are being created there. These entities then completely outsource the operation of the bank, including the technology. Often this works perfectly unless there is a problem with the provider. And often there is not a single provider but a whole chain of linked companies.
What about Europe and Asia?
In Europe we don’t have any of this, and European regulation simply does not allow it; banks are more versatile here. Asia is far from America and Europe, banks in that region have already become software companies.
In Russia, for example, this was due to international sanctions being imposed on the country. They couldn’t buy anything, so they did everything by themselves, a good example of which is Sberbank, which has tens of thousands of people in IT. At the same time, the Russian market has created a leader of innovation – Tinkoff, a bank founded by the businessman Oleg Tinkov. It has created the Tinkoff Market Place ecosystem through which other banks and e-commerce players can sell services to clients. He was the first, then Sberbank and others jumped in, but they have not been as successful.
Banks Must Invest
How much has the arrival of these new players influenced the industry?
It has varied. For example, Revolut or Chinese Tencent, which are both viewed as startups, though both are big companies, can attract clients from more traditional banks but only for specific services. Revolut is great for holidays and payments abroad, but the SIPO payments are very complicated. Startup banks will not destroy traditional banking, just change it.
Banks have to continue to invest but have a big asset by virtue of having profitable clients. Startups are growing their number of clients, but they have not been profitable because they are not offering profitable services. On the other hand, they have forced banks to think differently.
So, clients and banks are becoming digital entities, but are we ready for a possible system failure? Are we ready for blackout?
We are not, we are a fragile industry. But let’s not forget that if there is a blackout, there are more important things than payments. Frankly, there are fewer and fewer people who understand what’s going on around us. An increasingly small group really understands technology, but an increasing number of people use and depend on it.
Do you expect anything like the matrix?
I think maybe I do, to some extent, but it won’t be right away. For example, Austria wants to guarantee the right to hard currency in the constitution. Their reasoning is that once anonymous cash disappears, privacy disappears. If I can track your transactions, I know everything about your lives. Some people are afraid of the big players and they should be. In the case of new technologies, their long-term impact is underestimated in many ways and their short-term effect is overestimated.
Clients bear the risks
Should we be afraid of artificial intelligence?
Everyone is talking about artificial intelligence, but in banking, for example, there are still not many examples of using advanced artificial intelligence. Although it is trendy term that is thrown around a lot, in practice these are all still very simple applications. Advanced artificial intelligence in banking is not something you need at the moment. At present, automatic data processing, so-called machine learning, has proven to be very useful. Artificial intelligence is not yet on the agenda, as banks often do not have enough data from client communication. They have financial information, but not information from immediate communication with the client. While it’s true that artificial intelligence in banks is already being used in the field of fraud detection, these are still just statistical models.
How much are the number of system attacks and disruptions growing?
It is increasing, given the ease with which you can do it. In the past, if you wanted to rob a bank, you had to physically travel there and rob it. Today you don’t have to go anywhere, you can do everything remotely from your desk.
The sources from which the attack can come are increasing and the frequency and types of attacks are increasing. But the biggest risks are still on the part of the client who still believes in fraudulent e-mail and social engineering. Humans are still the weakest link in security.
How do you think banking will change moving forward?
Banks must become technological players, no doubt about that. To do this, they need a huge amount of know-how they have never needed before. But it must be focused on areas where it brings added value. They don’t, for example, need to develop an application infrastructure. I compare it to the fact that when you buy a computer, you don’t have to write the operating system from scratch. You simply buy it and focus on your own software.
Banks shouldn’t start building everything themselves, they should build in layers. Let them build on systems that exist and are tested and focus on applications. This has been our strategy when delivering digital operating systems to banks, often with pre-installed end-client applications.