What the heck is BankingTech

In our popular “What the heck…”-series we have been looking at the various buzzwords of the FinTech universe that represent the different areas with the objective to explain to our audience the key aspects. In our final installment, we look at #BankingTech and how its innovative solutions are transforming the sector.

Banking has been heavily dependent on technology for many years, but the latest wave of innovation has transformed the industry entirely. So when you aim to describe the different aspects of the FinTech revolution you can’t avoid areas that overlap or that fall in one category as well as into another.

BankingTech is the category that sits at the centre of many facets of this revolution and the solutions it has created. Thus, when we look at what BankingTech is and how it has transformed the industry we will sometimes touch upon technology or services that we have already covered elsewhere but in a different form.

Before we delve into the details, we need to point out though that we have to distinguish between the two ways to use the term BankingTech: the first one entails all forms of technology within banking organisations and which includes other areas like PayTech, LendTech or even RegTech; the second one is a more narrow one and focuses on the change of banks itself and the technologies deployed. This is the one we will be concentrating on here.

The challengers

Let’s start with the most visible aspect of BankingTech: the challenger banks. A term coined by the new banks (hence sometimes also called neobanks) that have popped up in the UK that often specialise in areas that either underserved by the incumbents and/or are ripe to be transformed through new technologies creating online-only experiences or drive down costs through automation. It has long moved on from a UK only-phenomenon as the following non-conclusive list of examples of challenger banks from different jurisdictions shows:

Atom Bank, UK
Banco Original, Brazil
Chime, USA
Jibun Bank, Japan
Kakao Bank, South Korea
Metro Bank, UK
MYBank, China
N26, Germany
Nubank, Brazil
SolarisBank, Germany
Starling Bank, UK
WeBank, China

Nonetheless, the success of challenger banks is very dependent on regional circumstances and markets. While Europe has seen several FinTechs trying to break into the traditional banking market, other jurisdictions like the US struggle with the adoption due to high rate of existing financial institution per person in the US, but in addition to the small number of American examples, some European firms like Monzo or N26 want to expand into the US. At the same time, the existence or absence of a dense grid of branches with regard to the adaption of digital banks can be an advantage for newcomers and an important contribution in terms of financial inclusion in less developed countries were physical presences of banks in the form of branches are rarer.

Pros and Cons

While the exact services and products of Challenger banks differ, there are some characteristics most of them share and that are the foundation of their business model:

  1. No brick-and-mortar building but online only: since they don’t have an expensive network of branches but rely on online only, they are able to operate at significantly lower costs.
  2. Legacy systems: Starting from scratch means they don’t have to maintain and patch up old systems, but can use state-of-the-art software that makes them also more agile.
  3. Automation: Where they can their software replaces many of the functions humans used to do in traditional banks driving down headcount.
  4. Regulatory burden: While they do not exactly benefit from light touch supervision, some newcomers have a limited scope of services and as such are not affected by regulation as much as a full-scale traditional bank. It some jurisdictions like Switzerlandthe authorities also try to promote innovation by lowering the threshold for entering a market by issuing specific FinTech licences that come with organisational relaxations for such institutions

Despite these advantages, the game is far from over for traditional banks. Many customers still prefer physical branches and some people see digital banks as risky in a sense that they could easily disappear over night – together with a customer’s savings. Furthermore, the incumbents have established brands and large customer bases that the FinTechs usually don’t have. The traditional financial institutions also have picked up some of the tricks of the challenger banks and seek to integrate them into their structures. Moreover, though big banks may have to deal with more regulation, they are at the same time better prepared in terms of resources and experience in dealing with regulators. And talking about resources, the incumbents usually have much deeper pockets and are less depending on raising funds to keep the boat afloat.

The bank branch – A thing of the past?

However, beyond this pretty front are other services that are covered under the term #BankingTech, those that create the foundations on which these new services are built. Those that provide the APIs like XigniteFigo or mFinoor connectivity like TrueMotion or Judo. Firms that make the platforms on which banks trade. The software that make financial controlling, accounting, customer or data management more efficient. The opportunities seem endless and touch on every aspect of banking. But that’s probably more a case when we analyse what’s under the hood…

What’s under the hood

What are the key technological innovations though that enable this breed of FinTechs to challenge the traditional institutions? We already touched upon some of them above when we discussed the different services, but let’s try to explain in a few simple words what we are talking about:

1. Open API

We just mentioned APIs, i.e. application programming interfaces, which are a set of programming instructions and standards for accessing a software application or tool that can be access over the Internet. ´We talk about ”open APIs” because 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.

2. Digital and Mobile

Digital hasn’t transformed the banking industry but it certainly is one of the sectors, where change is the most visible. 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, 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.

3. Artificial Intelligence, Machine Learning and Deep Learning

Chatbots in customer services and Robo-Advisors in investment management are just two of the most prominent cases of AI, Machine Learning 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.

4. Big Data

Digitalisation has led to the collection of incredible amounts of data, but we have long passed the point where our ability to analyse all this information can keep up. That is not the only problem with Big Data though. A wonderful example of how things can go horribly wrong when trying to interpret data correctly, is the one to demonstrate to validity of an absurd theory like “storks deliver 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 newborns 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.

5. Internet of Things

The Internet of Things aims to connect anything and everything. It isn’t only fridges that order milk whenever we run out of it or systems that manage the heating in our apartment when our car tells them that we’re not at home. In Banking, wearables are already used for mobile payments on the Apple Watch, but there are plenty of other projects under way to benefit from IoT: using connected cars as mobile cash machines or for deposits; the use of bluetooth beacons in retail banks to revive underused high street branches; American bank Capital One  lets customers to pay their bills via Amazon’s Alexa and other banks like Starling also try to implement virtual assistants like Google Home or Siri into their services.

6. Adaptive Security and Biometrics

This wave of innovation is not all rainbows and butterflies though. Cybersecurity is one of the biggest issues of the digital age. The Hiscox Cyber Readiness Report 2017  “cybercrime estimated the cost the global economy at over $450 billion” in 2016. The need and value of innovative solutions  to protect us against hackers is apparent if we only consider the growing number of news of security breaches and stolen data. 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. Biometric software uses scans of fingerprints, iris and the face or voice recognition aims to make identification simpler and more secure.

7. Blockchain and Distributed Ledger Technology

And then there is Blockchain and Distributed Ledger Technology(“DLT”). It 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. It isn’t limited to the use of virtual currencies (or cryptocurrencies) like Bitcoin and Ripple though, which are built on it. It is also the basis of solutions that allow for cheaper and faster transfers of any kind of asset. Furthermore it provides for more transparency and security through cryptography, renders processes more efficient and increases trust by being trustless. Using smart contracts, these activities are automated and intermediaries and human interaction are removed from the equation. For example, in payments cross-border transactions are much faster process than through traditional centralised ledgers and since the middleman that had to receive his cut is removed the cost of each transaction can be significantly lower.

This concludes our “What the heck…”-series but if you are new to PlanetCompliance or have missed any of the previous instalments, why not check out #WealthTech#PayTech#LendTech,#LegalTech, #InsurTechand #PropTech or simply head over to our dedicated FinTech Insights area.

Lavanya Rathnam

Lavanya Rathnam is an experienced technology, finance, and compliance writer. She combines her keen understanding of regulatory frameworks and industry best practices with exemplary writing skills to communicate complex concepts of Governance, Risk, and Compliance (GRC) in clear and accessible language. Lavanya specializes in creating informative and engaging content that educates and empowers readers to make informed decisions. She also works with different companies in the Web 3.0, blockchain, fintech, and EV industries to assess their products’ compliance with evolving regulations and standards.

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