A world of threats and opportunities

Roadmap24

The world is changing, and financial institutions are feeling the heat. Shrinking margins, growing regulation, fierce competition from new entrants and the constant demand for simpler, more intuitive digital solutions are combining to stretch banks’ capabilities close to breaking point. Infrastructures are under pressure, and traditional business models are threatened, with some experts predicting that as much as one- third of today’s asset management industry could disappear over the next five years through consolidation and closures.

But change brings opportunities, too. The number of potential clients at the affluent and mass affluent levels is growing fast. New markets are opening up, but existing business models that focus on high net worth and ultra-high net worth individuals can’t be extended to these segments without sending costs through the roof and margins through the floor.

Established banks and wealth managers face disruptive challenges from aggressive, fast-moving competitors, armed with new technologies and bent on cherry-picking the most profitable services and the most lucrative clients. These new entrants – both energetic start-ups and the financial services arms of global tech giants like Google and Apple, Alibaba and Tencent – have seen the opportunities offered by AI, machine learning, blockchain and platform business models. They are targeting the relatively high margins available in wealth management, and they have the funding, the reach and the technologies to compete head-on with even the largest banks.

Technology is certain to be a key battleground. But even the banks that are most flexible and innovative in their use of technology can’t always be sure that they are going in the right direction at the right speed. Not all new technologies are winners, and those that are going to be successful don’t always move at the pace that’s expected. We saw this with the rush to implement robo-advisory services, where forecasts about take-up and profitability proved to be over-optimistic and way ahead of market realities. Banks and wealth managers must innovate and experiment to survive, but they must also get used to the idea that there will be failures or slow burners alongside the immediate successes.

The other problem is that new technologies generally demand new skills and infrastructure resources. The specialist skills involved are usually scarce and expensive, and acquiring the new infrastructure resources that are needed can be costly and time-consuming.

No bank is an island

The fact that compliance is not a matter of choice makes regulation a powerful force for change in financial institutions. But most new regulations only require changes to processes and technologies. Few really force changes in institutions‘ core business models.

PSD2 is different. The introduction of PSD2 and open banking has drastically reshaped the landscape, as it was designed to do. The aim was to create transparency and encourage competition, providing new entrants with a level playing field and removing many of the historical advantages wealth managers and banks had enjoyed for hundreds of years because of their exclusive access to client data.

PSD2 is a European Union directive, but the ideas it embodies are being picked up around the world. Markets and regulators as far afield as Australia and Nigeria are already looking at open banking as a key concept for the future of financial services. While many banks have initially focused on guaranteeing compliance by providing API access to the necessary data, the shift to open banking represents a much more fundamental challenge that goes right to the core of every wealth management and banking business.

New entrants are understandably focusing their efforts on the high-margin parts of the business, where they can see there is money to be made. The new solutions that are being proposed are targeting specific client needs in ways few incumbent banks can offer, with the aim of picking off the most profitable parts of the wealth management business. To fend off these assaults and protect existing revenue streams, established banks must find a way to deliver similar capabilities quickly and offer clients an equally attractive and user-friendly experience.

This is going to require new and radical ways of thinking. Banks are losing the advantages they have traditionally enjoyed through end-to-end ownership of the client and every part of the service. They must become facilitators, operating within an open ecosystem, focusing on those aspects of their services that are vital for the bank’s financial health and collaborating with third parties to offer the broader set of capabilities needed to keep restless and demanding clients engaged and happy.

It’s a revolutionary realignment that will inevitably transform the business of wealth management. But this approach has the potential to benefit both the banks and their clients and other participants within the ecosystem.

  1. Co-innovation with fintechs and technology partners will allow needs to be addressed far more quickly than ever before.
  2. Rapid introduction of new services and competitive functionality will keep clients interested and help to ensure they remain loyal.
  3. Ecosystem partners will provide the infrastructure and tools needed for their own solutions, speeding up time-to-market and making it easier to provide pay-per-use rather than fixed-cost services.
  4. Working with ecosystem partners removes the need to recruit and retain in-house staff with many different highly specialized skill sets.
  5. New functional integrations can allow banks to develop fresh revenue streams, exploiting opportunities such as the monetization of data and the ability to offer banking-as-a-service modules for other institutions and market players.
  6. Providing fully integrated services and applications via appropriate third parties will enable banks to focus directly on their clients and concentrate on ensuring that what is offered is genuinely useful and appealing.

avaloq.one – at the heart of the ecosystem

Avaloq’s open banking infrastructure forms a rock-solid foundation for avaloq.one, the platform that sits at the hub of our rich ecosystem of banks, partners, fintechs, developers, investors, prospects and clients.

avaloq.one brings together a number of complementary features – including technical, financial and community elements – to create a flexible and effective system for addressing challenges with practical and innovative solutions.

A marketplace where wealth managers and banks can discover and access innovative and effective third-party solutions that have been validated by Avaloq.

A developer portal where fintechs, partners and banks can access the tools and materials needed to develop complementary solutions.

A cloud sandbox for integration testing that provides access to an instance of the Avaloq Banking Suite, configured as a model bank, complete with synthetic data.

Standardized contracting, using the Avaloq procurement process for easy onboarding of third-party products and purchasing solutions.

Regular events that bring together clients, prospects, banks and partners. These include our Fintech Tuesdays, where partners can present and demonstrate their solutions to the entire Avaloq community.

Global fintech connectivity and collaboration across major fintech hubs in Switzerland, London, Edinburgh, Berlin, Copenhagen, Malta, Singapore and Hong Kong.

The Innovation Hub at our Community Conferences, where banks and wealth managers can get a first glimpse of new and specialized solutions.

Access to fintech investors – including our own specialist investment arm, Avaloq Ventures – with the funding to back promising innovations and help them develop from concepts to fully-fledged banking applications.

We’re taking the initiative as the leading integration partner for banks and wealth managers, helping them develop, test and validate new products, services and even business models. As part of this, avaloq.one plays a key role as the orchestrator and facilitator for all types of interaction between the players involved in various parts of our ecosystem.

Our use of standardized REST APIs is designed to eliminate all the traditional hassles and complexities involved in integrating products from different fintech partners. The approach is to make integrating an application or solution a one-off process for the fintech via standardized Open APIs. Once this is done, the new offering becomes easily accessible to every bank, allowing the fintech to rapidly expand its collaboration with a wide range of banking partners.

From the bank’s point of view, Open APIs simplify the integration of new services, often slashing implementation times from several months to just a few days. This approach helps our banking clients be more agile, flexible and collaborative in building customized user experiences and helps them test new market offerings, progress rapidly through multiple iterations and quickly evolve new services to surprise and delight their users. Off-the-shelf plug-and-play integration cuts the cost and time involved in testing new ideas, allowing far greater freedom to experiment without damaging margins.

Roadmap

The next six months

Development of the concept that became avaloq.one started about three years ago with the launch of the company’s first marketplace, the Avaloq Software Exchange, a platform that now offers our clients and partners more than a hundred validated solutions.

In the last six months, 20 new partner solutions have been added to avaloq.one’s marketplace, offering valuable new services in key areas such as sentiment analysis, network messaging and mobile analytics.

Using the developer portal and cloud sandbox for testing, we’re working with our partners to rapidly expand the range of solutions available on the new platform. We’re accelerating our Open API development programme to help bring new and innovative partners on board and we’re extending our own scouting missions, together with Avaloq Ventures, to identify and support solutions we believe could add value for our clients.

In every case, Avaloq applies a structured process to check and validate both the product and the supplier company before a listing is promoted on avaloq.one.

Starting in Q4 2019, Avaloq has opened up the avaloq.one marketplace for wealth managers and banks to begin investigating available solutions, arrange demos and, where appropriate, test these services using the cloud sandbox facility. We’re also making our developer tools and the cloud sandbox facility available to banks to help them develop their own new products and services.

Clients wanting to use solutions listed on avaloq.one will need to have deployed the OpenShift Kubernetes platform as part of their core infrastructure, as these solutions are based on microservices and require the same infrastructure as future versions of the Avaloq Banking Suite (starting with version 4.9). Details of the OpenShift requirements can be found in the architecture section of Roadmap24.

The next 12 to 24 months

In the next two years, we’ll be pushing ahead with the programme to increase our Open API coverage and widen the range of capabilities available from our fintech partners.

Functionality will be expanded to facilitate interactions between all stakeholders and participants in the ecosystem. The sandbox will be further enhanced to include the ability to test functions against new Avaloq digital products, broadening the integration possibilities from the full Avaloq Banking Suite to include our new platforms, Avaloq Wealth and Avaloq Engage.

Looking further ahead, avaloq.one will be extended beyond software to include information about, and direct access to, value-adding services delivered by ecosystem partners, such as in-depth certification of fintechs and customized implementation services.

The eventual goal is to develop avaloq.one from its current B2B role into an ecosystem orchestrator that allows banks to access fintech products and services and to enable it to be used by banks to create their own platforms offering self-service options for their clients.

In this B2B2C model, wealth management clients would be able to go to the bank’s store – with a clean, simple interface like the Apple App Store – and select extra functions they could use to enhance and personalize the online banking experience.