How digital is disrupting the financial services industry — Top 4 trends
The financial services industry is facing stiff digital disruption and the status quo is changing rapidly. What is new and innovative in 2018 will be soon outdated. The increasing popularity of fintech, blockchain, data analytics, and AI are disrupting the way financial institutions have been operating. Those financial institutions that fail to upgrade their work environments and keep pace with cutting edge technology will be left behind.
Trend 1: Customer is the new king
An essential feature of digital transformation is the drive to improve the customer experience using innovative technology solutions. Customer expectations are changing rapidly around the world, but banks are not delivering the level of service that consumers are demanding, especially with respect to technology. Banks are feeling enormous pressure because of mounting competition from financial technology startups. The reason is that such fintech startups often cater to the evolving needs of customers using new digital technologies. In fact, it’s usually in their DNA.
Retail banking is shifting more towards online/mobile banking. Consumers (especially the younger generation) want to do their banking without having to go to the physical branch. A PwC study shows that 46% of customers prefer using smartphones, tablets, and other online applications instead of going to a brick-and-mortar bank. In context, the profits of the banking industry are around $1 trillion, and if banks don’t adapt to changing customer expectations and innovate, they could lose up to 60% of their retail banking profits to fintechs over the next 10 years, predicts McKinsey.
Consumers are searching for new features and products for payments, fund transfers, personal finances, personal loans, and saving accounts. Since traditional financial institutions have been slow in offering these features, consumers are looking towards fintech startups to fill this gap. Owing to the increasing popularity and impact of fintech startups, global investment in these companies was around $100 billion between 2010 and 2017. If global financial institutions will not catch up with fintech by providing innovative solutions to consumers, they will continue losing market share to them.
Trend 2: Will the blockchain live up to its hype?
Blockchain is a technology that is transforming the financial services industry (commercial banks, rating agencies, venture capital, central banks, stock exchanges, etc.). Blockchain technology is likely to revolutionize financial services institutions similar to how the internet revolutionized media and advertising companies. The existing financial system is needlessly complex, expensive, and inefficient. Therefore, a new decentralized financial system (brought about by blockchain technology) could simplify it by removing layers of intermediation through a decentralized peer-to-peer (P2P) network. Lately, its most prominent use has been in cryptocurrencies such as Bitcoin, Ethereum, and Ripple. However, the technology holds more promise than digital payments.
According to a conservative estimate, blockchain technology could help investment banks reduce approximately 30% of its infrastructure costs, and save the 8 world’s largest investment banks up-to $12 billion annually. Furthermore, the lack of information about customers (credit score, salary, and loans) limits the potential of financial institutions to create new business models and revenue streams. The following chart below is a good example of the benefits of blockchain technology compared to the traditional banking and the online finance businesses.
Given the above mentioned benefits of blockchain technology, it is no wonder that in 2017 over $5.6 billion was raised through so-called initial coin offerings (ICOs).
Trend 3: Data analytics is here to stay
Big data technology is another trend that is disrupting the financial services industry. This type of technology can be leveraged by global financial institutions to improve their product offering, provide customized consumer solutions, and enhance security. Unlike traditional financial services institutions, fintech startups have been quick to integrate big data and advanced analytics into their decision-making processes in order to improve the customer experience and to provide customized financial solutions to their customers.
Through big data, established fintech companies, such as PayPal and Upstart, have been able to predict customer habits and demands and to thereby provide their customers with the solutions they desire. However, traditional financial services institutions have still been relying on outdated surveying methods to gauge consumer demands. Furthermore, their current offering and structures also do not cater to the changing financial habits and expectations of customers by failing to offer services such as peer-to-peer (P2P) lending and easy online payment. Unless traditional banks adopt a customer-centric, flexible, and scalable data strategy, they risk losing their business to innovative fintech startups.
Trend 4: AI is the future of financial services
One invention that is transforming the entire value chain in the financial services industry is artificial intelligence (AI). AI is changing the way banks interact with their end customers, weigh important decisions, and prevent fraud. According to UBS, AI tools can increase banks’ revenues by 3.4% and cut costs by 3.9% over the next three years. AI applications such as “robot advisors”, chatbots, and compliance tools are already a reality and are being implemented by financial institutions, including UBS, who are investing billions of dollars in them.
A study conducted by Tata Consultancy Services suggests that 86% of business leaders in the financial industry are already using AI in their operations. Investment and retail banks are looking at the application of AI to improve customer service, portfolio management, recommendations of financial products, sales and marketing, algorithmic trading, fraud detection, and loans. Financial institutions that are quick to adopt AI are set to improve their market positioning and get a larger share of the market. Those financial institutions that resist change are set to lose and thus risk their very existence.
Summary: What to do
Despite their enthusiasm for digital technologies and innovations, banks have been slow to innovate and adapt. Owing to their huge size and complex structures, they often lack the agility to integrate new innovations into their operations. If banks are to benefit from this wave of digital disruption, they have to make fundamental changes in their business model and organizational structures. Only then can they respond quickly to changes.
The new era of digital transformation demands continuous innovation, change, and improvement.
Originally published at bell.ventures on April 5, 2018.