Fintech has brought unprecedented disruption in the financial services ecosystem. While traditionally, fintech was used for back office functions by leveraging software to help banks manage customer databases, execute transactions and handle accounts, today it has DIY modes where customers rely less on a brick and mortar bank for their banking needs, and instead have a multitude of digital channels at their disposal. With 24/7 device-agnostic access, virtually every transaction is now digitally possible.
Digitization has fundamentally transformed banking as we know it today. Mobile payment revenue worldwide in 2015 was $ 450 billion and is expected to cross $1 trillion in 2019. Smartphones with intuitive apps have given customers the advantage of real-time transactions. Close to 40% of the world’s population will own a smartphone by 2021, up from a third of the global population in 2017.
Payment apps integrated with bank accounts allow seamless mobile to mobile payments, online payments, investments and transfers. Reports indicate that 39% of shoppers today prefer electronic payments. Meanwhile, growth in Real-time Retail Payment Systems has been encouraging, with 18 countries now having a ‘live’ RT-RPS systems in place.
The Power Of Digital: Some Key Fintech Trends
- Omnichannel banking challenging branch banking: With omnichannel banking enabling customers to use social, online, mobile channels there has been a steep decline in customers visiting the friendly neighborhood branch. In the EU, 9100 bank branches closed down in 2016, owing to widespread adoption of electronic payments and mobile banking.
- Automation with Machine Learning and Artificial Intelligence: For most banks, this means technology and people working in tandem. Banks like UBS Group AG and Goldman Sachs have already put an AI/ML based solution in place. They have not only replaced tiresome back office work with efficient machines but also used the intelligence gathered from the process to fine tune financial services. For example – The system allows their wealth management customers to find answers to financial questions asked in plain English, as well as create individual client profiles matching them to relevant wealth management products.
- Biometrics for instant authentication: With incredibly faster authentication, biometrics does away with the frustration that comes with multiple passwords besides providing advanced validation techniques. Several banks have begun investing in biometrics-based authentication that use the smartphone cameras to scan the iris and the phone’s inbuilt fingerprint scanners. They are also considering solutions like vocal patterns and facial recognition to add an extra layer of authentication. According to an HSBC survey, 46% of the 12000 people surveyed across 11 countries trusted biometrics, with UK at the forefront of adopting the technology.
- Growth of blockchain: Blockchain provides transparency, minimizes risk, human errors and transactional fees. The distributed ledger system of blockchain leverages stringent controls enabling smart contracts and auditable data. Trust being core to it, blockchain provides the perfect trading platform for securities exchanges. An Accenture Survey reports that 90% of European and North American banks are exploring possibilities in creating new services and improving existing services; to make blockchain ubiquitous.
The Fintech Explosion: How Banks Are Responding
- Open innovation: For large financial institutions, open innovation means engaging with knowledge capital and assets, opening the organizations’ IP, cultural transformation to digital and tapping new areas for growth. For example – Barclays Bank is creating a global community for fintech innovation and has initiated an accelerator program aimed at fintech startups. ANZ Bank has appointed a global panel of tech experts to advise its Board on the strategic application of new and emerging technologies and technological trends that could affect the bank’s strategy.
- Collaboration: Traditionally, financial services institutions partnered only within the industry for innovation and process improvements. This will go a step further in the future, to build ties with those in different industries and with different outlooks, and to identify new ways to generate value.
E.g. – the Minimum Viable Product concept (MVP is the most trimmed down version of a product that can still be released) allows fintechs to quickly test-market-test prototypes. Risks can be mitigated at the design phase by the partnering bank that provides a wealth of consumer insights. But fintech firms need to be wary of product functionality, flexibility, scalability and compliance keeping in mind the partnering financial institution’s threshold for errors. This is a tricky balance, but good partnerships are able to manage it well.
- Accelerators: Established financial services firms make venture capital investments in fintech startups to innovate for their business. While fintech companies have the advantage of innovation, financial institutions provide a sandbox for proof of concept and scale. But implementing transformation takes time and by the time a new innovation is implemented, there is a high chance that it may have become obsolete.
Digital Disruption: What next?
Legacy financial institutions looking to become digital-enabled face two main challenges. First, the business models and personal skills that have served the industry well for decades has been disrupted by digital innovation and no longer works in the new banking ecosystem.
Second, attempts to create new, viable models for the digital age will flounder unless people and organizations are willing to disrupt themselves. This paradox has been termed ‘the innovator’s dilemma’ and was first outlined almost 20 years ago by Clayton Christensen.
Because of the existence of current profitable business sectors and personal successes from the past, there is a normal lack of incentive to identify radically new ways to conduct business. This leads to insufficient decisiveness to commit human or financial resources to experiment with new models.
Also, digital disruption has not been without a flip side. Cyber-attacks (malware, ransomware, phishing, etc.) have been growing steadily along with digitization, so conventional authentication mechanisms are no longer enough to thwart fraudulent attempts. Smarter security protocols and extreme real-time, cross-channel fraud management systems are now available to protect institutions and customers.
Success will depend on how banks quickly respond to opportunities for innovation. The strategy should be to stay focused on growth with digital innovation at the core. Even as the digital disruptions continue, the ecosystem will see deeper collaboration between financial institutions and fintech firms.