Collaboration Between Banks & FinTechs is the New Way Forward
Banks are increasingly behaving like FinTechs, and some have even started partnering with them. The digital transformation, in which FinTechs have played a prominent role, has brought with it new cognitive technologies and macro forces such as blockchain and the digital experience, which are continuously shaping all areas of banking.
“Banks have responded to this new paradigm, digitising their processes by leveraging and making decisions based on data and analytics, and shifting their focus on consumer experiences that go beyond mobile and online”, says Rosanna Woods, UK Managing Director at Drooms. “They have realised that to remain competitive and maintain market share they need to be more strategic and technologically adept, recognising the need to invest in automation, core modernisation and digitisation.” Below, Rosanna tells us why a collaborative approach is the way forward.
The changing landscape of investment banking
2019 is proving to be a momentous year for the global investment banking industry as it returns to normalcy in terms of profitability and capital adequacy. Global M&A activities, mainly by large US banks, are creating opportunities to expand overseas and acquire FinTech startups.
Today, most investment banks are enthusiastic about digital transformation initiatives to reduce costs and improve customer experience. Although investments banks adhere to their conservative business model, digitisation has shifted power to investors, who favour partnering with banks that are digitally more advanced.
Opportunities amid regulatory challenges
In Europe, the introduction of wide-ranging regulations has also impacted the working environment for banks. For example, the Second Payment Services Directive (PSD2) has encouraged innovation and competition between incumbents and FinTechs, while implementation of the revised General Data Protection Regulation (GDPR) framework has given EU citizens comprehensive data protection, forcing banks to ensure the privacy of customers’ data.
While addressing the myriad requirements of these new and contradicting regulations makes data management more daunting for banks, the major challenge for most of them is that data is being managed in siloed and disparate systems, making it all the more difficult to understand clients’ needs and demands.
Today, most investment banks are enthusiastic about digital transformation initiatives to reduce costs and improve customer experience.
However, the good news is that more banks are recognising the capabilities of cognitive technologies in gathering intelligent insights on customers, compliance and operations making collaboration with FinTechs more attractive. Also, robotic process automation (RPA) is rapidly gaining popularity as it brings productivity benefits to the table.
Helpful technology
The advent of Artificial Intelligence (AI) has been particularly helpful for banks in processes including client servicing, trading, post-trade operations such as reconciliations, transactions reporting, tax operations and enterprise risk management.
While much of the media attention towards AI has focused on its potential capacity to replace humans, at present it is seeing much more practical use in terms of complementing human intelligence. ‘Augmented’ intelligence involves machines assisting humans in their decision-making processes.
A sub-field of AI – Natural Language Processing (NLP) is a good example of augmented intelligence in practice. NLP systems are designed to read and interpret human languages. A key application of this in relation to banking is the analysis of substantial amounts of ‘unstructured data’, which is data that as yet cannot be ‘read’ by machines, such as PDF files, images and audio materials.
Banking is a data-intensive sector and many key tasks demand correct interpretation of partly structured data. Therefore, NLP has the potential to make processes much more efficient with less effort required from humans. As such, FinTechs have been quick to apply this technology because of its value in improving customer interactions, making collaboration with them attractive for most banks.
The advent of Artificial Intelligence (AI) has been particularly helpful for banks in processes including client servicing, trading, post-trade operations such as reconciliations, transactions reporting, tax operations and enterprise risk management.
Role in M&A
Technologies such as virtual data rooms (VDRs) come into their own for banks when used in M&A deals, helping to address many of the challenges such pursuits face even at the best of times. There are several key causes of failure, including politics around the deal, culture clashes among the personnel involved and, in particular, parties being unprepared for the due diligence phase. In this latter regard, M&A deals rarely fail because of a lack of knowledge. Rather, it is about how that knowledge is handled. Over half of deals fail because those parties involved are reluctant to confront issues head-on.
Buyers often proceed with deals despite the challenges because they feel obligated by the amounts of time and money involved. They should, however, be prepared to cut their losses if the risks outweigh the benefits. For example, allocating inadequate resources during the review stage cost Bank of America $50 billion in legal fees post its acquisition of Countrywide Financial in 2008, let alone the reputational damage it suffered for inheriting the past mistakes of the mortgage lender.
A VDR enhances the M&A process by increasing the power to collect, process and distribute information to the right parties with much greater security and accuracy. It digitises relevant documents, automates tasks and streamlines workflows.
Authorised users, including those inside a company and their external stakeholders, are connected digitally and in a secure environment with real-time access to all relevant documentation, depending on users’ individual permission levels.
A VDR enhances the M&A process by increasing the power to collect, process and distribute information to the right parties with much greater security and accuracy. It digitises relevant documents, automates tasks and streamlines workflows.
Creating a database in which documents can be updated consistently gives asset owners full control and the ability to react to the latest market conditions, bringing assets to market quickly when the conditions are right, sometimes at short notice.
One of the strengths of the Drooms NXG VDR is its Findings Manager function. This improves the vendor due diligence both prior and during the sales process. It allows for the automatic pre-selection of documents and helps in the assessment of potential risks and opportunities within a transaction. This yields greater control, instils confidence in potential buyers and cuts disruption to existing business.
Blockchain first
Macro forces such as blockchain are also slowly revolutionising many areas of banking. For example, blockchain made it possible to automate approvals of contracts as well as protect the transfer of confidential data from hackers and fraudster whenever transactions are made. In 2018, Drooms became the first provider to move its VDR offering into the blockchain age, using this modern technology to enhance the security of transaction data archives. Up to that point, all data had been stored on physical data carriers following completion of a transaction. But now it can be stored on Drooms’ own servers with blockchain protection. As a result, the secured data cannot be lost, is non-manipulable and is accessible to all parties involved in a transaction at any time.
A new threat
As more financial institutions start to adopt technologies created by FinTechs, a likely threat is emerging. Tech giants such as the likes of Amazon, Alibaba, Apple and Google are attracting customers in the payments domain by offering alternative ways of managing finances. In the US, Amazon is already offering its customers the option to turn spare change into gift cards, and parents can also give children their allowances via a reloadable debit card for example. In India, customers pay delivery fees through a Cashload feature and store excess cash from previous purchases in their account, as well as deposit money for future orders.
With platform companies’ potential to exploit customer data and come up with innovative solutions to address customer pain points, there is a lingering risk of disintermediation for banks. Customers who feel that tech companies alone meet their banking needs may decide to switch to non-banking channels. And there is also the possibility that tech giants may provide banking services in the future, making services provided by banks non-exclusive. Although big techs pre-dominantly target the origination and payments domain of banking, a stronger foothold by platform companies could threaten the survival of many banks in the industry.
Towards modernisation
The various areas of the banking industry will undoubtedly continue to evolve at varying speeds. And as time progresses more banks will likely partner with innovative FinTechs to remain competitive and market relevant. Potential for creative and ground-breaking collaborations and advanced modernisation will also likely increase.
That said, as technology transforms the future of banking, so ought banks’ mindset towards cognitive technologies and collaboration with FinTechs. After all, technology is not a panacea and it is accompanied by many challenges as well as opportunities.