Financial Technology has arguably transformed financial services in ways previously unseen. While we’re still in a period of transition and plenty of change is yet to come, six areas have crystallised as the key technologies that drive this movement.
Digital and Mobile
As simple as it may sound, first the Internet and then smartphones have changed how we and future generations bank entirely. The continuing trend of branch closures demonstrates that many customers prefer the mobile experience over brick and mortar. Recent trends in digital banking include payments through NFC technology like Apple Pay, QR codes or payments through social media. Virtual and augmented reality are only one aspect that is employed to create an integrated digital experience, for example the seamless action across various channels. According to BI Intelligence in 2015 more 38% of millennials in the US had not set foot in a branch at all. With that number likely to increase over time with more people getting used to digital banking, financial institutions have to make sure that while they need to provide the right IT, they also ensure that people are at the centre of a great digital experience.
The increased access to the APIs of financial institutions brings many advantages. Application programming interface, as what API stands for, is a set of programming instructions and standards for accessing a software application or tool that can be access over the Internet. When one company releases its API to the public, it does this so other software developers can design products that are powered by its service including it in its ecosystem. In banking, opening up APIs and entering into partnerships with technology providers like FinTechs, it can increase to operational efficiency through use of cloud services or shared resources. It can also lead to better data protection and potentially better management of regulatory obligations. For instance, giving a regulator direct access to financial institutions could result in better regulatory oversight as authorities have better insights and understanding of an organisation’s activities. It works the other way around, too, though, as financial institutions receive automated notifications of regulatory change, which could then be used to amend internal procedures and controls. FinTech influencer Jim Marous went as far as saying that the future of banking depends on open banking APIs in his excellent article on the subject earlier this year.
Professor Patrick Wolfe of the University College of London’s Big Data Institute stated that “the rate at which we’re generating data is rapidly outpacing our ability to analyze it”. That is not the only problem with Big Data though. If not interpreted correctly you can use it to demonstrate to proof the most absurd theories like storks delivering babies. As Professor Achtner of the University of Giessen pointed out, while most of us wouldn’t easily believe, data can actually indicate differently: comparing the numbers of both storks and new-borns between urban and rural areas, the latter shows significantly higher numbers in both numbers in both categories. One conclusion would be to indeed establish a connection between storks and babies based on data, but that only shows the importance to make good use of all this information that is gathered. Done properly, however, Big Data is a fantastic tool to grow the businesses and enhance the services banks provide to their customers. From saving costs to more efficient marketing to improving the customer experience to better risk management and employee involvement the list seems endless, but many financial institutions still struggle with the might of this tool. Only those who harness the value of Big Data and create actionable insights from it will survive the digitalisation of financial services though.
Adaptive Security and Biometrics
Cybersecurity is one of the biggest issues of the digital age. According to the Hiscox Cyber Readiness Report 2017 “cybercrime cost the global economy over $450 billion” in 2016. With growing number of news of security breaches and stolen data we seem to read about every day the need and value of innovative solutions is apparent. Biometric software uses scans of fingerprints, iris and the face or voice recognition aims to make identification simpler and more secure. Adaptive security systems are real-time network security models, which employ tools to counter cyber attacks by recognizing threat-related behaviours. In most cases it uses heuristics to proactively predict, recognize and deal with threats such as malware and hackers. Adaptive security software can track application and system behaviour. It also recognizes events that are out of the ordinary, like logging on from an unknown IP. It tracks the user behaviour back to its source and thereby protects against advanced threats far better than traditional security systems.
Artificial Intelligence and Deep Learning
Chatbots in customer services and Robo-Advisors in investment management are just two of the most prominent cases of AI and Deep Learning in banking. Computers will continue to deepen the impact and involvement they have in previously manual processes. Going through vast amounts of transactions to detect fraudulent behaviour and provide better compliance. Model scenarios for capital planning. Algorithmic trading based on cognitive computing. The list goes on. While the investment in innovative technology initially provides a burden for financial institutions, the advantages of automation by using AI outstrip the costs in the long run. As a report from Infosys highlights: “The benefits of engaging with customers in a more automated and intelligent way offers significant cost savings, with the risk being spread over millions of customer interactions.”
Blockchain and Distributed Ledger Technology
Blockchain and DLT is argued to be the biggest game changer not only in financial services but several other industries as it changes the Internet as we know it. Its not only the foundation cryptocurrencies like Bitcoin are built on but also the basis of solutions that allow for cheaper and faster transfers of any kind of asset. It also provides for more transparency and security through cryptography, rendering processes more efficient and increase trust by being trustless. Through the use of smart contracts processes are automated and intermediaries and human interaction are removed from the equation. For instance, in payments cross-border transactions are much faster process than through traditional centralised ledgers and since the middlemen that had to receive his cut is removed, the cost of each transaction can be significantly lower.
The way ahead
FinTech is here to stay as, for example, the success of The 10 biggest FinTechs in Europe shows. While the question may remain what the financial sector will look like in ten or twenty years, the technological game changers described above will certainly be part of it.