In case you missed the fintech forecasts for this year, this post will help you to quickly catch up! I would like to kick off this post with a quote from Claudia Bate, Head of Financial Services and Fintech at Fleishmanhillard Fishburn:
“…there is a fine line between being excited about the future of finance, and over-hyping its potential. […] As such, authenticity in communications will be more important as ever for the sector in 2018 and beyond.”
In the recent years, fintech VC funding has steadily increased, and so does the hype around anything that carries the slightest opportunity to reform the outdated operations in the sector. To filter the essentials, I sat down and read all the 2018 predictions and created an ultimate prediction guide based on my experience, believes and everything others forecasted, with a strong focus on the digital retail banking customer’s viewpoint. Then I added a dose of skepticism to it!
I see 2018 as a dual year. It is an opportunity for many: a test year for technologies (open APIs, distributed ledger technology, compliance to new regulations, AI solutions), as well as an opportunity for fintechs, neobanks and challengers to jump forward. Huge tech giants will noticeably tap on banking services and products, while the first bank-operated marketplaces will appear.
On the other hand, same trends and regulations will make the arms race between incumbents more fiercer: it will boost their lagging digitalization and cultural change but won’t result in shockingly new customer-facing solutions in this year. I expect to see the following in 2018:
Innovation as a mindset — culture to change, talents to attract
“The innovation function grows up and moves from the Lab to the Factory. Bank IT teams will meld with business and deliver new solutions […] This is the end of innovation islands and will be the only way to deliver true financial services innovation.” said by Dion Lisle, VP and Head of Fintech at CapGemini
It was a natural evolution that banks acquired complimentary service providers, appointed Chief Digital Officers and set up innovation teams. Most of them learned along the way, that innovation in an existing organization is really about cultural transformation, a change in the mindset, that can’t be solved by isolated teams or managers. It has become clear by now that innovation is everyone’s job. But why is it important for 2018?
Open banking initiatives will fuel the collaborative attributes of the industry: these new challenges require more alignment and smart solutions from each player. Any reasonable reaction from the banks’ side (more details in Open Banking chapter) requires cross-department cooperation on a digital basis, creative, customer-value centric propositions with the lack of laser sharp ROIs. These digital functions affect the banking operation front-to-back, thus banks have to finally break down their silos in 2018, along with their processes and workflows revolving around stop-gap solutions. They have to create new operation paradigms to reduce their reaction time, otherwise there is no chance to change the digital customer experience.
These kinds of cultural changes rely heavily on education and practice. The problem in this case is that most of the innovation-related topics (AI, ML, blockchain, big data, etc.) can neither be learned in traditional ways (e.g. universities) nor by doing at workplace. Any expert on board will be busy doing actual work instead of mentoring. As the demand for these skills increases significantly in 2018, first movers race for talent will heat up. I predict that smart banks will place their fresh talents directly in the production lines of each department to nurture transformation by actual participation.
My wilder bet is that bigger players will start to sponsor / run online education programs around fuzzy logic, machine learning or pattern recognition in 2018.
Cryptocurrency, blockchain, distributed ledger technology
There can be no 2018 technology prediction list without cryptos. This Wild West, gold rush scene had a big run in the recent years and made a lot of waves in the news. There is no doubt that regulations will be soon applied in countries with high trading-volume (China, South Korea, Japan, USA etc.) resulting in a significant decrease of price volatility and presumably attracting institutional investors. It is also possible that upcoming (tax) regulations will create ‘coin-paradises’, as well as new banks solely focusing on crypto assets and trading.
All in all, I expect to see the cryptocurrency scene to go through a similar evolution as forex trading did (at least on the short run). As companies like Coinbase Custody — whose mission is to make digital currency investment accessible to every financial institution and hedge fund — start to take off along with proper regulations in practice, a lot of institutional money will flow into cryptos. In addition to direct investments, banks will start to offer crypto related digital functions and new financial products, not just to attract traders, but to buy into the ongoing global tokenization of the economy which will open completely new ways for individual capital to be invested.
Large banks already started to invest in blockchain start-ups, but this year will also bring smaller players closer to the technology. I expect to see numerous implementations (30% of all POCs) this year in various fintech areas: trade financing, capital markets, KYC, instant payments, treasury, cyber security, custodial services, and loan fulfilments. Current workflows are highly manual, inefficient and often duplicated. Automation will bring efficiency, transparency and make significant cost savings starting at the back-end, driving the interest for distributed ledger and smart contract technologies high in 2018, although widespread implementation will take years.
ICO (Initial Coin Offering) is the most debated element of the crypto world. Currently operating outside of the regulated security scene, we can expect the toughest regulations to be applied to them in 2018. I think that their current form — as a fintech (crowd) investment — is not efficient due to the lack of awareness and domain knowledge of investors. I’m much more attracted to the way how EOS is building its network, where the company acts as a VC and decides which early stage team gets funding, then distributes the team’s newly issued tokens to the original EOS token holders. It is hard to predict whether ICOs will be totally banned or restructured this way, but it seems that everyone is motivated to avoid turning ICOs into another unproductive crowdsourcing platform.
One big impact of the crypto trading craze was that millennials — quite uninterested in trading — began to learn and try. This trend was driven by the ‘quick-money’ phenomena but exploded thanks to the user-friendly exchanges (e.g. Coinbase, eToro) with features like social trading and various deposit options. I believe it will affect traditional trading services in 2018 as well.
Open banking — as a general trend of opening data and services for 3rd parties — arrives to its biggest milestone as PSD2 goes on-live early this year. Being an active part of the strategic questions for many banks in the recent years, the following 4 role options — and their mixes — have emerged: Incumbent as a full-service provider/a utility/a supplier/or an interface. Although the bottom two are the most interesting, I fear that their majority will choose either to become a utility or a supplier.
Proactive players praise the effects of being the first mover, to exploit the opportunities in the marketplace model and the platformification (hype alert!) trend of the industry in general. There are numerous players in the EU who already prepared to act fast in Q1 (e.g. RBS, HSBC), mostly operating in the UK, where similar initiatives have a brief history.
Open banking not only gives advantage for banks but 3rd parties as well. Until now fintechs desperately needed traditional banking’s financial and distribution power to survive. Now that is changing. There will be a fierce race between institutions to become the one stop shop for their customers. This will result in increasing personalization for customers: they will not only see their data aggregated, but gain the option to choose between different products and services in a simplified way. As I state in Cybersecurity chapter, it is going to be a race for customer trust that will shape the future of the players.
“The rise of open banking will force banks to decide whether they want to be the interface (in control of the relationship), or the pipe (providing third party ecosystems) with digitally savvy product and systems. Big internet players will test the water and offer unbundled financial services to support their core business (e.g. payment services, lending).” — Paolo Barbesino, SVP and Head of Digital at Unicredit
At the same time, I see a lot of myths associated with the directive and open banking in general. Without debating the long-term effects, I only highlight the irrational short-term expectations: similarly to digitalization in the early 2000s, open banking is not something that will tear down the traditional banking system in a few years. As branches had a moderate decline over the last decade, new BaaS and marketplace models will slowly emerge. I think the main factors are not the technical and business difficulties, but rather the pace of customer adoption. Open banking is a huge challenge where governments have to put money on the table to support it. Digital savvy customers will move fast, but the real deal is to convince the masses.
As a result of these complex questions, many banks started to act as observers: their goal for the moment is to comply with the regulations and learn from their competitors’ results.
There are even more passive players: 5 big banks already stated that they will miss regulatory deadlines and many more reported late 2018 launch dates.
That suggests that there will be no widespread transformation in 2018, rather we will possibly see how smaller challengers, non-industrial players and neobanks take on the situation this year, which will give us a sense where the industry will move in the following years.
Neobanks, challengers and fintechs
Non-banking challengers are not newcomers in the fintech world. Neobanks, specified start-ups and finance-related tech giants (Apple or Google pay) have been operating for years now, but so far very few of them were able to attract significant user base on the West. At the same time innovative banks like DBS, Timo or Kakao, and non-banking players like WhatsApp or Alibaba created a so-called SEAsian fintech model.
There are several reasons behind the fast improvements of the fintech sector in SEA: huge, (financially) underserved internal markets, fast adoption of e-commerce, high penetration and usage ratio of smartphones, remote location. The most interesting aspect of the region is the strong e-commercialization of the industry, where non-banking players — using their vast user base — connects a series of relevant financial products and services to their offering.
For Tencent and Alibaba, p2p and merchant payments was a logical step to start with. In 2018, Asian tech giants will continue to build their standalone, alternative financial ventures to battle existing players and become the primary (often only) financial provider for their customers. I expect to see similar uptakes in South America and Africa. Not only in terms of pace and volume, but the methods will be alike: e-commerce combined with basic financial services already spread in these regions (e.g. Go Jek, Rappi).
Although Eastern trends shift towards the West, due to the customer habits and regulations these regions move in smaller steps: Amazon added logical, complementary financial products to its offering (see above) but didn’t apply for a banking license. It rather incorporates the beneficial parts of finance and focuses on the emerging markets, like Mexico or India, with fintech products. The customer acceptance is there, 78% surveyed (globally) consider to switch from banks to tech giants. With their enormous, trustful customer base and huge amounts of their personal data, these companies are in a perfect situation to do significantly better financial product personalization than incumbents. I expect a rapid growth of non-banking served retail (and probably SME) customer ratio in 2018.
To counter this trend, banks are likely to start negotiations with bigger players (Amazon, Facebook, Alibaba, etc.), after the series of successful collaborations with smaller, specified fintech start-ups. This kind of customer (data) sharing will be a significant change this year, showing that banks are starting to take this bad-case scenario — to lose their customers to non-banking challengers — seriously. I’m thrilled to see how players will balance their powers in these relationships and how banks avoid becoming too reliant on ecosystem providers?
At the same time banks are under pressure by challenger (neo) banks, who will get a strong tail wind from open banking initiatives. Many will go global starting this year (mostly Europe➞US, e.g. Monzo, Revolut, N26, Transferwise) after successful test years. This is an opportunity and a challenge at the same time: they need to start bringing revenue to satisfy their investors in 2018, stated Anne Boden, CEO and Founder, Starling Bank. This revenue pressure is already noticeable: after the 10 years old mantra — fintechs unbundle banking, targeting single underserved financial products with better UX, marketing and branding — the tide seems to turn. More and more fintechs moved from single to multi product offering (Revolut: crypto accounts/trading, Transferwise: business accounts, Wealthfront: portfolio lines of credit) and I expect to see more of these expansions in 2018.
There are four more areas worth mentioning:
- Investments. Private assets held by individuals thrive in SEA. Retail has a big appetite to invest compared to Western skepticism of money markets. Therefore, fintechs are opening the possibility for individuals in the East to invest in Western companies and vice versa. While in previous years Western financial start-ups rushed to open offices in the UK or USA, their strategy has now started to change in favor of Singapore, Taiwan or Kuala Lumpur. Governments will further accelerate this change with fast regulations and initiatives in 2018, while MEA and SA are catching up.
- Lending has continued to dominate fintech investments in 2017 (6/10 biggest deals are in this category, CBinsight p.111). As lending services in developing markets emerge, the West has to find effective ways for consumer and SME loans, especially that traditional lending processes seem to continue to fall in 2018 due to slow processing and ineffective risk analysis.
- Instant processing. I expect to see an emerging number of banks joining instant payment scheme(s), plus few examples of instant credit approval and funding. Tencent’s WeBank already grew it’s retail loan amount significantly, mainly because of their stunning 0,3 sec loan approval time. This attractive feature made WeChat one of the biggest distributor of traditional consumer loans in China. This type of vertical integration is an opportunity for both banking and non-banking players. I bet that we will see a lot of similar cooperation and standalone instant processing offers from banks, both in Eastern and Western regions.
- Trade financing. Challengers as well as open banking play a big role in trade finance improvements by cutting the time and cost of cross-border, overseas payments. As global flow of goods & services increase (currently 45% of the world’s GDP) the need for competent PSPs is demanding. I expect to see new and scaled service providers in this area in 2018. Open banking and blockchain technology are the main drivers, and some established players have already jumped on this topic (e.g. Transferwise).
My bonus prediction for 2018 is to see the acquisition of at least one neo bank.
Cybersecurity, identity-security, regtech
Although this topic has been generally important in the last 10 years, ageing IT ecosystems, open banking initiatives and the increasing value of digitally ‘exposed’ customer assets have made it one of bank’s the top concerns by 2018, especially as SaaS model gets adapted. Consumer attitudes to data protection, controls and data sharing are rapidly changing in many markets, especially in Europe. Surveys show that the long praised ‘customer trust’ is no longer an exclusivity of banks, fintechs have already caught up:
U.S. consumers ranked PayPal and Amazon nearly as high as banks for trust with their money. […] 55% of US consumers are open to buying financial products from established tech firms. Bain & Company’s
That means that banks should work extensively in 2018 to (at least) maintain this status quo, as cyberattacks traditionally target bigger financial institutions. We are yet to see whether attacks start to shift from incumbents to fintechs as their controlled customer asset value increases. My bet is that breaches targeting financial players will simultaneously increase for all players in 2018, but the actual competition will in fact take place on PR channels: customers will turn away from those providers (type of providers) who have the worst security reputation in the media.
Ageing (legacy) systems are not a big help for banks in this race. They are not only obstacles to digital innovation, but also pose a lot of security risks. Most of these factors could be controlled earlier by building security loops, basically placing sensitive system elements in a quarantine. Now as those digital strategies aim to integrate with various 3rd parties or even turn the bank’s platform into an open financial marketplace/app store, these techniques become unsustainable.
Financial marketplace and aggregator roles are getting popular due to open banking initiatives (see Open Banking chapter). Several parts of PSD2 and GDPR aim to secure newly forming processes from the identity and access management perspective, which is a good sign. However, cyber security solutions go head to head with cyber-attack methods, in an endless race. It is the stake and motivation factor of this race that will change this year, as both the assets and the identity of customers get ‘digitally’ exposed. Customer attitude to data protection, controls, and data sharing are undergoing important changes all around the world, especially in Europe.
It is no longer a question of individual loss only, but the increasing cyber attacks and fake news corrupting the general, AI-handled data carry a chance for wider financial and political destabilization. I expect to see an increasing number of security breaches in 2018 that will pose a higher risk than before: as more and more financial systems switch to 24-hour availability, outage avoidance becomes harder and result in a higher loss on the bank’s side. The good news is that I see global financial regulation collaboration as an emerging trend that will continue in 2018. (Good examples in 2017: France & Canada, Indonesia & Australia, AFINA). As payments and retail capital continues to go beyond borders, such cooperations is inevitable.
As a result, cybersecurity and regtech industry will get a bigger focus in 2018. We will definitely see numerous blockchain based pilots, especially through new confidential solutions based on zero-knowledge proofs and ring signatures, since smart contracts and distributed ledgers solve neurological pain-points in this field.
Aside from cybersecurity, regtech has an increasingly important role for banks in terms of compliance. Europe as a test market will be in the focus in 2018 with GDPR, MIFID2 and PSD2. A conservative analysis (by Consult Hyperion) forecasts that European banks can expect fines in the region of €4,662 million in the first three years after the introduction of GDPR. My hypothesis is that these regulations will drive significant investment by banks in regtech, as they seek options to decrease their regulatory risk and cost. Despite the positive outlook, regtech investments are still relatively low (1,8bn USD for 176 deals since 2013 vs 56,5bn for 4484 deals in global fintech ecosystem — CB Insight).
AI, voice and chatbots
According to the traditional hype cycle, 2017 was the year of the ‘peak of inflated expectations’, however hardware (Echo, Homepod, Home, Alexa, Raven) and software (Watson, Dialogueflow, Recast, Wit) vendors worked hard to mature the market. We at Labs personally experienced the tremendous work — both technically and business wise — that needs to be poured into AI projects for the smallest output. I already saw promising POCs and believe that the new generation of home devices will boost the industry.
30% of large financial institutions are investing in AI, so the expectations are high. AI capabilities (especially machine learning) are already widely adapted mostly in back and operation layers of banking (risk management, fraud detection, pattern analysis, trading and back office automation). I strongly agree with Anne Boden, CEO & Founder of Starling Bank:
“…the majority of existing implementations are driven by banks’ needing to improve their own processes and efficiency. We believe that 2018 will be the year that AI can be used to help customers make better decisions with their money.”
I’m looking forward to seeing these B2C solutions in 2018, however it is probable that most of the early birds with holistic assistant approach will fail, due to the high expectations from customers who were socialized on general assistants like Siri or Alexa. My bet is that the best performing assistant will emerge in niche, standalone fintech segments (e.g. insurance, bill payment, p2p payments) and in repetitive customer support cases, where the domain knowledge — business case matrix result is viable.
AI will also boost personalization in general: better targeted content on banking sites, flexible — auto adjusting fees for products, timely notifications (see more in the Marketing chapter). The threat in this case is that open banking will let the technology owners, vendors and advanced e-commerce players to analyze the banking data, putting them in a perfect position to become the main ‘offer interface’ for the users. Among traditional banking operations, dynamic pricing is an especially interesting area, since it can affect the customers habits: a clear visualization of their decision’s consequences entails the opportunity to educate them about financially healthy habits. As an example, ANZ Australia is planning to introduce dynamic, risk — based pricing method for mortgages, to offer a unique rate for each applicant.
Rise of wallets and lifestyle apps
‘Mobile-first’ is already a 10-year-old saying in banking. The importance of the channel is indisputable, although common mobile functionality has become a must not a plus in the eyes of customers. That means that digitally savvy institutions must raise the bar to attract and retain customers.
I see two major (but interconnected) directions to react:
- To provide a lightweight payment solution (call it wallet) that can be used as simply as a bank card. That may sound odd, but making an NFC payment or a P2P transaction in today’s complex mobile banking apps feels odd, compared to the simplicity of sharing a photo. Although I’m not a fan of the multi-app approach, I saw a lot of good examples recently and expect to see more in 2018. I personally see it as a nice way to get away from the current robust mobile banking technology (used by many segments) and building a cutting edge, fresh thing to acquire digitally savvy customers.
- The other major direction is the lifestyle app way: banks love to talk about long time engagement and customer loyalty, but frankly for most of their clients, these terms are barely compatible with banking. Logging in, checking balance, making transactions - that’s all mobile banking is about.
Lifestyle approach means that banks reinterpret themselves as a general service provider, a hub to various, non-banking functions. In this scenario financial functions are indeed on the underlaying level, a ring in the keychain where keys represent the different services: ordering food or taxi, paying fees and taxes, buying lottery, paying off subscriptions, browsing products. Currently digital wallets offer similar functionality. If we look at WePay, we see that it’s far more than a simple p2p payment app:
Although it may seem unrealistic for customers to use their bank as a primary gate to other services, if we look at the recent app usage statistics it becomes obvious that a very few apps have the chance to nail long-term engagement. I believe some banks have the chance to make it to that league. This outside-in approach won’t work for everyone as it requires complex business and IT planning and operation to act as an aggregator, but it’s definitely worth it on the long run.
With it’s convenient, everyday use cases, lifestyle apps give an easy way for financially excluded people to join. In 2018, millions of yet un- or underbanked people will join the digital financial economy, especially in SEA (440 million unbanked) and MEA (462 million). This will initiate a series of bank digitalization processes to help banks modernize current (mostly paper based) operations: new form of payments, identity management, consumer loans. In order to enable the creation of compelling B2C functions, banks can no longer postpone renewing their legacy systems. As the race for digital customers intensifies, banks who apply ‘innovation as a mindset’ (see Innovation Chapter), and are able to transform whole lines of operations behind a service will win in 2018.
Better and smarter marketing mix?
Even if institutions do everything I listed above well this year, there is still a major obstacle to overcome: making customers aware without chasing them away. Best-in-class players will apply advanced analytics and artificial intelligence to increase automation, improve personalization, reduce costs, enhance the customer experience and even assist with compliance.
True personalization at scale requires advanced analytics, which is why banks and credit unions of all sizes are using AI and machine learning to customize all components of the marketing mix. Marketing teams can no longer postpone using AI-powered solutions in content development, offer selection, segmentation and targeting, website integration, customer service/support, product pricing and churn management. There is a fine list of customer expectations in each segment by Accenture.
Similarly to how Amazon and other retail organizations fine-tune messages and offers in real-time, based on purchases and digital shopping behaviour, financial institutions can test forms of communication, channels and offers to find the ‘perfect mix’. One key element to be successful in 2018 is to move from reactive to proactive with the help of AI and advanced data analytics. It is not enough to be customer centric and relevant! According to Ambrogio Terrizzano, European Financial Services Lead at Accenture, the key is:
“…to activate structured top-down initiatives to detail the brand promise across every touchpoint and front-line behavior, with the final goal to create a deep and durable alignment with the human side of their customers — moving from ‘customer experience’ to ‘human experience’.”
The truth is that most banks that started big data projects in the recent years have piled up tremendous amount of data which is fragmented, unstructured and hard to use. They are in a state where AI and machine learning struggle to help. As Chris Skinner says:
“…customer data across multiple platforms, and banks recognize that they cannot use AI effectively on data spread across the business. As a result, organizations will develop strategies for building an Enterprise Data Architecture in 2018…”
I highlighted this topic not just because its interconnected to all topics listed above but because marketing comes before any other form of experience or engagement: if a bank fails to send the right message in the right time, customers won’t bother to look at any of the cool stuff laying behind. I expect to see innovative solutions, cooperation and partnerships aimed to put not just the brand, but the precise offering of the bank in front of the eyes of the customers in untraditional digital places.
About Finastra Labs
Finastra Labs is a disruptive innovation group at Finastra, working on the future of retail digital fintech. We constantly look 3–4 years ahead and create concepts we believe will define the next generation of banking experience. As a European team we are in the middle of the PSD2 flow, work on our assistant, help our customers to transform themselves into lifestyle service providers while we try to exporting our innovative mindset into the organizations around us.
If you have reached this far: thanks for reading! I hope my guide will help you succeed in 2018.
Source list (not linked in the article):
The Financial Brand
Forrester report (summary) by Jim Marous
Let’s talk payments
The Banking Circle
Global banking and Finance Review