The coronavirus pandemic has left many businesses scrambling to adapt. The lockdown and social distancing measures now in place – likely to remain in place, in one form or another, for many months to come – are forcing organisations of all sizes and sectors to reconsider how they operate. Ammar Akhtar, co-founder and CEO of Yobota, shares his thoughts on what the newly adapted financial sector might look like.
As we so often hear, we must prepare for a “new normal”; a world where office working, unrestricted travel and regular visits to bricks-and-mortar premises for essential services is going to become increasingly rare. In short, the transition from physical to digital is being greatly accelerated.
In the finance industry, there is a huge amount at stake. Firms that are unable to deliver their services while the physical world is largely closed off from us are at risk of being left behind by their competitors.
Rising to this challenge invariably means turning to technology. Indeed, fintech has been championed as the future of the finance sector for a decade now, but it has taken COVID-19 to bring about a “fintech revolution” in any meaningful sense.
What will this ‘revolution’ look like?
The increasing prevalence of financial technologies has been a common subject in both consumer and business contexts for many years. The so-called fintech revolution promised open access to data, hassle-free banking experiences and fairer deals for customers.
Yet only relatively small steps have been taken towards this vision. Until now we have only really witnessed a cautious adoption of this technology as consumers, regulators and established banks became familiar with what it can enable – and this has still come at considerable investment.
The so-called fintech revolution promised open access to data, hassle-free banking experiences and fairer deals for customers.
Now, though, things are finally changing. Technology is now not just a competitive advantage for financial services firms; it is essential to their very existence.
Today, people must be able to access critical financial services digitally. From taking out a new product (a loan or a credit card, for example) through to managing their finances and receiving advice, this must all be possible from within one’s own home. But more than that, the process of doing so must be fast, painless and personalised as possible.
There are credit marketplaces in the UK which already offer pre-approved loans that can be opened in just a few minutes with minimal clicks. This is possible because the lenders have made progressive choices in the way they develop or utilise technology.
Conversely, many finance companies still have data, systems and processes that are completely reliant on legacy technologies and on-premise servers. Simply put, these firms are under threat of becoming the Blockbuster or Kodak of the financial services sector (that is to say, businesses that were far too slow to respond to technological change).
Interoperability and the cloud
For financial technologies to be successful, two things are essential: interoperability and cloud computing.
Over the past decade firms have too often taken a piecemeal approach to adopting fintech; they have deployed specific technologies to solve isolated problems. That is because fintechs – financial technology startups – are typically created with that very focused mindset.
For financial services companies, particularly banking providers, a much broader perspective is required. Not only must each element of a business’ operations be built around best in class technology, but the technology must also be interoperable – it must fit together to form entire systems and processes that work seamlessly together.
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Take the example of someone applying for a credit card – something that is increasingly common as a result of the economic hardship brought about by COVID-19. There are various different stages that an applicant will need to pass through – identity verification; credit scoring; advice or product recommendation; application and assessment; and, if successful, creating the account.
Using interoperable fintechs on a cloud-based platform removes time, complexity and human interference in all of those processes. Data can be rapidly shared and analysed, allowing for the appropriate products – better yet, personalised products – to be shown to the user. There is no reason that an applicant cannot go from the start of the process to the end by themselves in minimal time; so long as the credit card provider invests in the technology that enable them to do so.
Embracing fintech to its fullest
We are in the midst of what, in ‘business speak’, they would call a paradigm shift. We are moving past the stage of thinking about financial technology as simply being a means of checking one’s account or transferring someone money. The fintech revolution is gathering speed, and it will lead us to a more open, connected form of banking where one can see and manage all their finances digitally, as well as accessing personalised advice and products all from the comfort of their sofa.
In this primarily digital landscape, financial services firms who cannot deliver an exceptional level of service to customers – be it consumers or business – risk losing them to those who can. Now is the time for the sector to embrace fintech to its fullest and build systems that are not just adapted to the new normal, but actually help to shape it.
The financial sector has been especially keen to reap the benefits that Artificial Intelligence (AI) technology can provide, but there are still some fears that these innovations will cause huge job losses and remove the human role from businesses. Here Frank Abbenhuis, VP of Strategic Alliances at Axyon.AI, discusses the current AI landscape, touching on some the key steps ahead.
What is AI now?
Over the past 20 years, AI adoption has increased dramatically, due to some key shifts in the market. Firstly, technology has advanced hugely – not only in its ability to process large quantities of information in a fast, accurate manner but also in how inexpensive computing has become. The data that AI utilises has also become hugely prolific, with both individuals and businesses producing huge amounts of data on a daily basis. The result is not only cost effective and fast, but also incredibly accurate.
However, even with this foundation, AI would not be witnessing increased adoption if it were not practical for financial services. Through AI, financial institutions are now able to offer an improved customer experience, identify new sources of business growth, determine more effective models to follow, and develop broader aspects of the organisation: from enhanced productivity to better risk management.[1]
AI as a tool
This increased adoption of AI has inevitably caused concerns over job security, with fears that jobs will become automated as a result.[2] However, the reality is that AI has come at an ideal time to address the demands that banks are facing.
For example, the customer experience is now a key focus in building a business’ reputation. To remain competitive, companies need to move away from the ‘back office’ process-driven tasks and increase their client engagement strategies. As such, the more that AI can support these internal functions, the more that the business invests in building those vital client relationships.
Naturally, there are also concerns around how AI can be implemented. Fortunately, banks and other businesses in the financial sector often have enough historical data available to train an algorithm and run the task automatically. If this automated function is then combined with human oversight, the business can improve the quality of advice given to clients. In this way, AI no longer takes over a person’s role, but enhances their functionality in the business.
Making the most of data
Even with this progress, there are still certain areas in financial services where AI can be enhanced. For example, syndicated loans desks have a wealth of historical market data that is not leveraged to its full potential.
If AI were implemented here, algorithms could be used to analyse all previous deals and produce the likelihood of specific actions being taken. In this scenario, AI would not only be able to access which investors participated in every syndicated loan, but also the high-level structure of these loans – something that would be impossible for a single human mind to achieve.
This is just one example of how AI can enhance those in capital markets and asset management. The sheer amount of data that these sectors produce make them ideal for the predictive capabilities of AI. The only impact this level of automation will have on those working in these industries is smoother processes and improved output.
With all the fear that can surround new technologies in financial services, AI is set to only improve how people work in the sector. Through taking advantage of huge amounts of data, AI has the potential to streamline internal process and increase overall output – with the added benefit of improved accuracy and reliability.
[1] https://www.mckinsey.com/industries/financial-services/our-insights/analytics-in-banking-time-to-realize-the-value
[2] https://www.theguardian.com/money/2019/mar/25/automation-threatens-15-million-workers-britain-says-ons
As we herald a new era of banking, will PSD2 result in FinTechs challenging the dominance of traditional banking services?
13th January 2018 marked the beginning of the Open Banking era. The EU’s Second Payment Services Directive (PSD2) which took effect earlier this month forces banks to allow third parties, including digital start-ups and challenger banks, access to their customers’ financial data through secure application programming interfaces (APIs), and create a new way for customers to bank and manage their money online. If all goes to plan, PSD2’s main objective is to ensure maximum transparency and security, whilst encouraging competition in the financial industry. The Open Banking revolution aims to create a form of cooperation between banks and FinTechs – however, this doesn’t seem to be the case 18 days after the triggering of PSD2, with a number of banks that still haven’t published their APIs and incorporated the necessary changes. Naturally, the directive is good news for the FinTech sector. FinTech companies and digital payment service providers will gain greater access to high-street banks’ customers’ financial data – something that they’ve never had access to in the past. This will then undoubtedly inspire FinTechs to develop new innovative payment products and services and provide users with opportunities to improve their financial lives, whilst allowing them to compete on a more-or-less level playing field with the giants of the financial services industry, the traditional banks. Does this mean that traditional banks will need to up their game when competing with the burgeoning FinTech industry? Are they scared of it, and if not – should they be?
Traditionally, and up until now, banking has always been a closed industry, monopolising the majority of other financial services. The recent advancement of digitisation has shaken the industry, with FinTech start-ups offering alternative solutions to more and more clients across the globe. From a bank’s point of view, PSD2 will forever change banking as we know it, mainly because their monopoly on their customers’ account information and payment services is about to disappear. Banks will no longer be competing against banks. They will be competing against anyone that offers financial services, including FinTechs. And even though the directive’s goal is to ensure fair access to data for all, for banks, PSD2 poses substantial challenges, such as an increase in IT costs due to new security requirements and the opening of APIs. However, the main concern is that banks will start to lose access to their customers’ data. Alex Bray, Assistant VP of Consumer Banking at Genpact believes that a possible outcome of Open Banking is that banks could end up surrendering their direct customer relationships. If they don’t acknowledge the need for rapid change or move too slowly to adapt to the landscape, they risk becoming “commoditised payment back-ends as new aggregators or payment initiators swoop in”.
However, Alex Bray also argues that for banks to take advantage of PSD2, “they will need to find a balance between openness, privacy and data protection.” There is also a case to suggest that traditional banks who embrace and utilise the new directive to its potential could transform a potential threat into a huge opportunity. He also suggests that: “they [banks] will need to improve their analytics so they and their customers can make the most of the huge amounts of new data that will become available”. Only a well-thought-out strategy will help banks to survive the disruption to the long-established financial industry – and cooperating with FinTechs can be part of it. Alex Kreger, CEO of UX Design Agency suggests that “Gradually, they [banks] could turn into platform providers of banking service infrastructure… As a result, successful banks may lose in service fees, but they will gain in volume. Many FinTech start-ups will not only offer services on their platform, they will actively introduce innovative products designing new user experiences, thereby enriching the financial user’s journey and transforming the banking industry. This will attract new users and provide them with new ways of using financial instruments.”
Only time will answer all the outstanding questions related to the open-banking revolution. FinTech firms are expected to ultimately benefit from all these changes – however, whether the traditional banks will cohere to the new regulations quickly enough, whilst finding ways to adapt to them, remains to be seen.
More than three quarters (77%) of commercial banks are preparing to increase fintech investment over the next three years as the rapidly growing sector shows no sign of slowing, with 86% of senior managers expecting an imminent rise in investment.
The in-depth research commissioned by Fraedom, polled 100 decision-makers in commercial banks including shareholders, middle managers and senior managers.
The survey also discovered that more than seven out of 10 (71%) respondents believe the rise of technology within commercial banks threatens traditional one-to-one banking and customer relationships. This was felt strongest among 95% of shareholders, as opposed to 67% of middle managers.
Kyle Ferguson, CEO, Fraedom, said: “The research reflects what is an upward curve for fintech organisations and to continue this trend it’s important for commercial banks to make the right choice when working with a fintech provider. By working with a trusted partner that understands the challenges of local markets, and equally how digitisation of commercial banks can support financial service offerings, this choice can often lead to further investment in the fintech industry.”
The research also revealed that despite an overall feeling that the future of the fintech sector is exceptionally bright, nearly two thirds (63%) of respondents believe commercial banks are more cautious than retail banks when it comes to adopting new technologies.
In addition, it was discovered that the most common reason for commercial banks lagging behind its retail counterpart was that ‘the market was settled and there was no strong competition from newcomers until now’. This was supported by 37% of respondents that felt retail banks surpassed commercial banking in the uptake of technologies.
“The commercial banking sector must become less cautious in embracing new technologies, especially when fintech firms can support areas of their service by outsourcing operations such as commercial cards,” adds Ferguson. “When technology is embraced at a faster pace, the gap between commercial and retail banks will become smaller and the collaboration between banks and fintech providers will help drive the future of finance, benefitting consumers, businesses and of course the industry as a whole.”
(Source: Fraedom)
With the introduction of blockchain technology and the implementation of the token economy, Gary McKay, CEO and founder of APPII, believes the 4th industrial revolution is about to take place, potentially in the coming year.
The industrial advances being brought about by artificial intelligence (AI), robotics, the Internet of Things (IoT) and blockchain technology will outstrip the industrial transformation of the last two centuries. It’s not an exaggeration to say that we are on the edge of the next great industrial revolution – Industry 4.0.
While the third and most recent industrial revolution reshaped our lives through digital transformation and social media, this next logical step will address the issues of complexity that still exist. Today, there are a myriad of processes that are still done manually – wasting time and money through inefficiencies and fraud. Industry 4.0 will see these processes automated and undertaken by digital systems, ultimately moving towards a decentralised worldview, where value is shared across systems rather than being accumulated at the centre by large organisations.
One of the main technological drivers behind this coming revolution will be blockchain, cryptocurrency, and tokens. In fact, they are already beginning to disrupt a number of industries, paving the way for Industry 4.0 today.
Paving the way for Industry 4.0 today
In the finance sector, blockchain technology, cryptocurrency and AI have been instrumental in dragging the archaic industry into the 21st century. Processes that historically involved long, time-consuming human administration and processing are now streamlined, freeing up much needed time to focus on more complex cognitive tasks. For example, financial companies are now harnessing blockchain technology to process loan applications. Rather than relying on a third-party broker service to verify an individual’s identity and credit history, loan advisors can now refer to blockchains to access verified data on credit and debit histories – reducing the time and cost it takes to approve loans.
While there has understandably been a significant amount of investment from financial companies in blockchain technology which has dominated the headlines, blockchain has the potential to disrupt virtually every other third-party broker industry; from real estate, the legal profession and insurance to recruitment, art and antiquities. As such, blockchain and the cryptocurrencies and tokens that it supports, are beginning to pave the way for disruption across every single industry – ultimately becoming the keystone for Industry 4.0.
Turning investment on its head with ICOs
In the last year alone, more than $2billion has been raised towards blockchain projects via Initial Coin Offerings (ICOs) or Token Sales. Unsurprisingly, initial investment rounds and ICO funding were directed towards blockchain platforms that offered services to the finance industry. However, as the potential disruptive power of blockchain, cryptocurrency and tokens have become more apparent, capital has started to move towards platforms harnessing the technology outside the world of finance. In particular, the big players in highly competitive markets are looking to blockchain start-up platforms to give them an edge over competitors. For example, Technojobs, one of the UK’s leading recruitment jobsites, has invested in our platform, which offers blockchain-verified CVs for the first time.
Blockchain technology is fundamentally changing the way investment is made, paving the way for how we will raise and invest in companies following the fourth industrial revolution. As a means of transferring value in a decentralised way, blockchain platforms have introduced cryptocurrency and tokens, as a substitute for traditional currency like British pounds or American dollars. Since Bitcoin’s creation in 2009, over 900 different cryptocurrencies and tokens have been created.
These cryptocurrencies and tokens can be used as an exchange for value within the platform that provides them. As such, new blockchain start-ups are choosing to raise capital for developing their platforms through ICOs and Token Sales instead of following the more traditional routes of fundraising through VCs and seed funding. The ultimate aim of ICOs is to create a token model economy on the blockchain platforms that fundamentally changes the industry the start-up is trying to disrupt. Underpinned by blockchain, ICOs are predicted to have a genuinely profound impact on every sector worldwide.
This intrinsically new way of raising capital will not only become the foundation for Industry 4.0 - as a novel concept it will drive capital towards the start-ups developing platforms in these new technologies much more quickly than through traditional methods. For example, in the recruitment sector tokens could be used as a reward for organisations who verify data on CVs, or alternatively as a reward from organisations to candidates for allowing them to view their verified profiles. Ultimately this will create a mutually beneficial environment where organisations can use tokens collected from verifying CV data to view individuals’ verified CVs.
A token-based economy will fundamentally turn the existing model in recruitment on its head. The traditional means of exchanging value, heavily weighted in companies’ favour, will be democratised, shifting the distribution of benefit in business models to the edge (i.e. to candidates and employers) instead of accumulating in the middle.
It would be remiss to not acknowledge that cryptocurrency and ICOs have come under fire in recent times, with crypto-sceptics highlighting the risks associated with a young and, at times, volatile market. While the global crypto market has been subject to short spikes, sophisticated investors should be looking at this new technology with long-term value in mind.
We are already staring at the upcoming horizon of Industry 4.0, and investment and development in blockchain technology and cryptocurrencies will bring this new revolution about in record time. Moving towards decentralised autonomous networks will streamline all aspects of life, freeing up precious time and capital to focus on the more complex, cognitive tasks that we have little time to dedicate towards when caught up in lengthy manual processes. Harnessing blockchain to create a token economy will fundamentally underpin the new world post Industry 4.0, and we are only beginning to see the tip of the ice berg when it comes to benefits.
Blockchain will disrupt everything from Silicon Valley to the New York Stock Exchange.
Craig James, CEO of Neopay, tells Finance Monthly PSD2 will prove to be the most beneficial piece of legislation for fintech companies in years, and could completely change the face of the UK banking sector.
While technology has grown increasingly important in the financial sector, the “traditional” industry has been slow to adapt as consumers grow more frustrated by the lack of progress.
Innovative start-ups, looking to fill the gap left by the traditional establishment’s hesitation to change, have been growing in prominence as some banks, regulators and the government try to encourage new ways for businesses to engage with customers in a market suffering a long-standing loss of reputation.
Coming into force in January next year, the EU Payment Service Directive (PSD2) is the latest change facing one of the country’s oldest institutions, and could prove the catalyst for a technology revolution in the sector driven by innovation in personal banking.
Putting consumers at the heart of the fintech revolution
The most substantial change in PSD2 is enabling customers to allow third party businesses – like technology companies – to have access to all their bank data.
For fintech companies focussed on bringing new products to the market, this presents a new opportunity to create these offerings, without the infrastructure costs facing traditional banks.
Personalisation has been a buzzword in banking for some time, and there is no shortage of products from savings accounts to credit cards that are promoted as tailored to a customer’s needs.
However, while banks can provide a card with an interest rate suitable to the customer, the current offerings are incapable of working across multiple accounts, and cannot adapt to real time changes to a consumer’s individual circumstances.
PSD2 opens the possibility for fintech businesses to create “one stop shop” apps for bank services, allowing a customer to access and manage every aspect of their financial footprint from a single point.
These technology based products will put the consumer back at the heart of banking as businesses will be forced to adapt their products, or face getting left behind by smaller technology businesses which can suddenly offer better services.
It will also open entirely new ways for consumers to manage all aspects of their financial needs.
Better budgeting
There is already a plethora of products which can help customers with their finances, but they are severely limited in essentially being a replacement for paper based tracking. The onus is still on the customer to stay on top of the information.
However, by getting access to a person’s account information and financial history, a fintech company could create a genuinely personalised budgeting tool which could remove the management aspect from the customer.
By being able to monitor balances and outgoings in real time, these apps could be programmed to learn when particular bills are due and, if one account is lacking funds to pay, the app could notify a customer and then automatically transfer money from another account – or combination of accounts.
Considering that most people have more than one active bank account, this type of capability could prove invaluable for customers, helping them avoid unnecessarily falling into debt because they failed to move money around in time.
Real time debt solutions
For those customers who have already fallen into debt, new technology based bank apps could be created to offer real time solutions to help consumers pay down the money they owe, and get out of difficulties.
One of the major frustrations with current banking services, according to our research, is that balance updates are not always immediate and in some situations a user is not being shown an accurate account of their financial situation – which makes it hard to make decisions.
New banking apps could greatly benefit these customers by assessing their income and spending habits – while updating account balances in real time – and instantly suggest ways that customer could reduce their out-goings.
There is also the potential for banks to adopt these kinds of apps, which could be used to find or suggest savings plans.
The biggest benefit of this wave of products over existing services, is that they could monitor activity across multiple accounts in real time. The real-time aspect of these tools could help customers by instantly alerting them to unusual activity or if an account is in danger of becoming overdrawn.
While the “traditional” banking sector is at risk of being left behind by the speed of technological change there remains great potential for banks and fintech companies to introduce a wave of new products and tools for consumers that can help them manage their personal finances better.
PSD2 could kickstart the biggest chance the banking sector has experienced and, in the long run, will prove extremely beneficial for those institutions most able to implement technology at the heart of the customer offering.
As technology changes, and thereby so does the customer, a banking revolution is at hand. Here Peter Veash, CEO at The BIO Agency discusses with Finance Monthly the sector’s adaption to the internet of things and the constant need to be ready for change.
High street bank brands have remained largely set up to cater to that customer who joins as a teen or young adult, who pops into the branch to pay in a cheque or withdraw some cash and once every few years might nervously make an appointment to plead for a mortgage. That customer doesn’t exist anymore.
That customer has diverse needs. They are used to transacting online and can’t understand why you wouldn’t do it all via smartphone. They also have some very pressing questions about why you won’t give them a credit card if you’ve been trying to sell them the very same credit card all over their social media. That customer knows you have their data and is baffled as to why you’re not using it.
Digital transformation is happening, the customer expects it and they’re not about to wait for you to catch up.
Customers don’t have to wait because there’s too much fun choice among new entrants. So, perhaps the newcomers don’t have bricks and mortar branches or they only offer a limited range of products. That’s not a problem for the consumer. They can just pick and mix their products and their providers and run it all off their phone.
It’s going to be challenging times for traditional banks but quitting isn’t an option.
For a start, legacy brands do have a lot going for them. They remain large, national and even international institutions. They are able to deliver a wide range of products and services that are trusted and competitive. Certainly fewer customers are using branches but the branch network is still vital and most legacy brands already have a physical footprint - it’s just about rationalising its size and purpose. For most legacy brands the building blocks of their response to digital transformation are there, they just have to use them.
Lloyds Bank plans to overhaul hundreds of branches as it attempts to cope with the rise of internet banking, which has seen fewer customers visiting high street sites. The bank is radically shifting its operating model and following the customer – which, in this case, is off the streets and towards the increased convenience, efficiency and improved user experience that online banking brings. The company plans to rollout high-tech micro-branches (these smaller branches will be run by just two employees equipped with tablets).
But this is just one approach which alone isn’t enough to stem the tide of competitive threat from fintech and startups. Online-only banking startup Atom has begun to popularise the ultra-low interest rate flash sale. It’s not necessarily intentionally marketed as a flash sale. The simple fact is that its operating model is lean enough to offer a limited number of very low cost deals. Customers flock to them, ergo, they’re sold out in a flash.
To reengineer decades of legacy process would take too long. Traditional banks need to find ways of bolting on innovations while working on the much longer term process of internal transformation. Whether this is through creating disruption task forces internally to brainstorm and boostrap solutions; buy in consulting, data and tech power or just buy up these entrepreneurial startups to become the fast-response arm of the existing business, each legacy business will have to decide for themselves.
Even if banks choose to retain their core brand behaviour while trying to respond quickly to changes in customer behaviour, they will eventually have to evolve. Creative thinking has to become part of the banker DNA. Too much is said about the agile organisation without taking into account the agile mindset.
It is often asked of agencies, consultants or experts - ‘what will the next big change be?’ No-one can predict the future beyond saying that those companies who fail to adapt to today’s changes will surely become obsolete. And we can say with relative certainty that companies who react to today’s challenges without keeping one eye on tomorrow’s are only putting off their fate.
By maintaining an agile mindset, companies - even traditional retail banks - can become agile and responsive to change. Being an innovator is good but being a fast follower is just as relevant to consumers. Organisations can only follow fast if they are primed and ready for change.
Disruption has always been an inevitability for the banking sector. The financial revolution is happening before our eyes. But what these large heritage institutions do next, however, will determine whether they survive this next wave of innovation by fintech players such as Atom and Monzo, or whether they become relics of an antiquated past.
