Exponential Tech Innovations That Are Disrupting the Financial Services Industry
You no longer need to go to the bank. Thanks to technology, the bank can come to you. If slower moving banking institutions fail to adapt to these fast-moving changes and implement technology that provide updated conveniences to customers, they are at risk of losing their competitive advantage.
Technology used in banking is always evolving, especially within delivery channels. In the 1960s, the ATM revolutionized how customers interacted with banks. Online banking was the next and probably the last big innovation that came out of brick and mortar banks. When the term “online banking” initially gained popularity in the late 1980s, the phrase referred to the use of a terminal, keyboard and television or computer monitor to access bank accounts using a landline telephone. Nowadays online banking includes any electronic payment system that allows customers to conduct financial transactions through a bank’s website or mobile app. These days innovation comes out of smaller tech startups here in Silicon Valley and around the World.
Banks now more than ever need to keep a close eye on changing consumer habits and technological trends if they want to claim a place in future of finance and economy. Banking services will be a very different customer experience in less than a decade from now.
Only banks who continuously develop faster, more secure and more convenient services will survive. Customers are experiencing many service innovations coming from these smaller, more agile FinTech startups, Challenger Banks and Telco Companies and these innovations make their lives easier at a much lower cost. Some larger banks are catching up with similar services because of the threat of losing market share to these innovative startups.
If these banks want to survive the upcoming wave of disruption, they need to invest heavily in the future and replace old legacy technology with a more agile, future-oriented technology infrastructure to serve their customers better.
Mobile banking
Based on World Bank data, in 2015 there were 98.3 mobile phones per 100 adults. A recent report by the United Nations revealed that more people in the world have mobile phones than have toilets.
Mobile phones have improved the flow of information and has brought people closer than in any other time in human history. Now the mobile phone is becoming a financial tool that begins to cover the last mile of global financial inclusion.
Financial institutions are leveraging the capabilities of the mobile phone to build relationships with customers by shifting the bulk of retail bank services to mobile. It is now common for customers to receive account alerts, check balances, pay bills and friends through their phones and watches, apply for a loan and even make withdrawls on an ATM machine.
In the US and in Europe, mobile banking supplements the traditional retail bank branch. In third-world countries, the mobile phone is the primary retail banking device. The mobile phone is allowing customers access to banks they otherwise would not have. For example, in Kenya close to 60 percent of the population first accessed financial services through simple feature phones. After signing up for mobile money services like M-pesa, Kenyans could easily save money, transfer funds and even access credit lines.
Here in the US mobile phones are reducing the costs of managing retail bank branches. Based on a PricewaterhouseCoopers (PwC) report, banks will be forced to close some branches to remain competitive. The bulk of their services will be offered through mobile and online banking.
However, banks have many new business opportunities using mobile. For example, Autogravity is a mobile platform to source financing for car purchases. The customer selects the desired car brand and model, and gets access to their local dealerships inventory. They can then apply for financing from their phone and immediately receive up to four financing offers.
This is an interesting business model for banks to consider because it puts them at the beginning of the car purchasing process for their existing and new customers and provides new opportunities to open new revenue streams. These new customer-centric business models are what is required to attract and retain customers in a mobile-driven world.
Artificial Intelligence and Big Data
Banks have always collected data, but it has been difficult and expensive to turn data into profit. The use of Artificial Intelligence and Deep Learning models make it possible for banks to access and use their big data silos and turn them into profit-generating assets.
For instance, banks can use personal data collected elsewhere to calculate the credit scores of potential customers.
Tala, a fintech startup based in Santa Monica, California, has given out loans worth close to $1 million to low- income earners in the Philippines, Kenya and Tanzania. The company uses social media accounts, call logs, messaging and mobile money history data acquired from smartphones to determine the creditworthiness of borrowers.
This means that banks equipped with the right strategy and supporting technology will be able to reach out to customers in different countries. This creates new business opportunities for banks with a relatively low risk.
The other big opportunity in AI lies in the deployment of chatbots for customer service and other simple tasks. Developments in natural language processing has enabled systems to be able to process many conversational prompts. The widespread use of virtual assistants such as Google Now, Alexa, Siri or Cortana for routine tasks is just a glimpse of what chatbots can do.
Virtual agents in the form of chat bots could answer customer queries and even serve as robo-advisers to offer customized advice on finance and investment.
Some banks are already deploying chatbots. Since May of 2016, Wells Fargo has used a bot on Facebook Messenger that uses AI and big data to provide customers personalized answers to their finance questions. The advantages are substantial cost savings in customer service with only a fraction of development and deployment cost.
AI could also create additional layers of security through biometrics such as iris, fingerprint and voice recognition. The New York Times reported in January 2017 that major banks such as Wells Fargo, Bank of America and JPMorgan Chase are implementing these security features. Banks could also use AI to create behavioral risk models that could identify fraud. According to Forbes does “AI have the potential to fundamentally transform banks’ finance function within the next decade — if not sooner.”
Blockchain
The blockchain is the underlying technology that powers cryptocurrencies such as Bitcoin. In essence, a blockchain is a ledger on a decentralized peer-to-peer network that is updated in real time through a consensus process outlined in a protocol and secured by cryptography.
This technology will revolutionize how banks receive, store and share data with both clients and their partners. It will improve the security of their platforms as well as service delivery channels.
Blockchain also makes new services in banking possible. One of these is smart contracts, which are agreements that are created and executed through code.With a smart contract service, a customer can find a house to buy online, negotiate the price and enter into and sign a smart contract with the owner and a financier using their mobile phone. This would eliminate the need to visit a local bank branch and escrow or attorney’s office to sign mortgage papers.
Three blockchain consortiums have been formed by several major banks, insurance and technology companies: R3Cev, Hyperledger and B3i. Blockchain enables a new way of maintaining records and allows banks and customers to transact business without the need for an intermediary.
Internet of Things
It is hard to separate the Internet of Things (IoT) from mobile devices, big data, artificial intelligence and blockchain technology. In essence, IoT is all these things put together.
But IoT has a life of its own as a whole unit. In particular, it presents the scenario of machines carrying and owning transactions that retail banks facilitate. In that setting, your thermostat could pay your electricity bill, and your electric vehicle could negotiate rates with the charging station without your input and your bank settles the transaction.
Even in a future full of smart devices, banking will maintain relevance but it will require proactive measures.
Conclusion
Banks need new customer experience and product innovation strategies if they want not only to defend their business against the wave of new competitors that are moving into their space — banks need to out-innovate them. Not having customer-centric product and service offerings will increasingly becoming a barrier to attract new customers and retain existing ones.
However, these technologies themselves will not help you build a customer-centric business. There needs to be strategy behind their implementation.
Jeff Bezos once said, “Being customer centric means knowing that customers will demand more customized, personalized, and convenient retail experiences and they want them in spaces and places designed to immerse them in the customer experience.” This statement applies to any industry and business that has a customer.
For most of the young and successful FinTech startups and challenger banks, offering customized, personalized and convenient banking experiences is the core of their success. Banks that don’t put the customer at the heart of their business strategy are doomed to become a footnote in banking history.
