How Do We Reinvent Trust in Banking?
This was the question posed to a hushed room of bankers and payment executives, as alarming financial crime statistics flashed across the screen. Financial fraud is at an all-time high, and large security breaches at financial institutions are becoming commonplace.
Upward trends of fraud and uncertainty are shaking customer faith in the traditional banking sector. Forty percent of businesses would switch banks following a severe data breach. For financial institutions and their clients, a gap between the known and trusted and the unknown and untrusted is widening.
“With data becoming analogous to the new oil, trust is becoming the new currency”, explained Saba Shariff, Head of New Product Development and Innovation at Symcor. She highlighted three key elements that must be used in the fight against financial crime: Data, Artificial Intelligence, and Collaboration.
However, before one can examine how change can be implemented at the highest levels of banking payments infrastructure, it is important to examine the disruption occurring at the foundation of the banking industry.
Reinventing Banking: Technology as a Disruptor
Brett King has spent a lot of time thinking about financial disruption. As an international bestselling author on the subject of financial disruption and past advisor to President Obama on financial technology, he has studied the changes in the banking industry over not just decades, but centuries.
Banking 1.0, as he calls it, stretched from the medieval ages up to the development of the mainframe computer and the first replacements of hand-recorded ledgers with automated bookkeeping.
Banking 2.0 saw the development of the ATM, and a gradual shift to other methods of banking such as telephone and internet banking.
Banking 3.0 brought forth mobile-first banking and a decline in the physical branch-based model.
However, in other emerging markets around the world, a shift in design thinking has culminated in the latest disruptive generation of banking —
First principles thinking is the key towards any industry upheaval.
What do Steve Jobs and Elon Musk have in common?
They are First Principles Designers. Instead of iterating on previous designs and relying on design-by-analogy approaches, they deconstructed existing processes to examine the root of the problem, coming up with radically unique takes on the space rocket and the mobile phone. Banking 4.0 is a total reconstruction of how customers interact with their financial services.
Apple Pay has failed to gain significant traction, Brett King explains, because “they stuck a plastic card onto a phone screen”. It represents a familiar and iterative development on the tap payment system that does not change much.
“The hallmarks of the world’s fastest-growing banks today are a focus on digital acquisition, digital identity management and digital fraud prevention.”
To examine some examples of Banking 4.0, King moved the focus to China, where Tencent WeChat’s banking division, WeBank, acquired over 80 million retail clients, as many as JP Morgan, in the span of four years. Ant Financial’s Yu’e Bao money market fund became the largest in the world in merely five years, while its Alipay e-payment service has captured a majority in China’s $12T annual mobile payment transaction volume.
One way these companies achieved significant market shares so quickly was by providing a way of digitally sharing red packets, monetary gifts during Chinese New Year.
“Alipay and WeChat established themselves as trusted financial services providers by proving their utility in large-scale scenarios. Trust is based on utility to the consumer— not a bank charter.”
Chinese consumer surveys show a higher degree of trust in the financial services of WeChat and Alipay compared to the incumbent Chinese banks.
“This is the result of utility, flawlessly executed on a technology layer”, explains King. “Alipay and WeChat have both leveraged data analytics in a nation with fewer data privacy laws to enforce strong data identity and anti-fraud practices.”
Looking ahead, King believes that AI will empower banks to replace document-based ID with biometric and behavioural-based ID, in addition to enabling real-time suggestions and savings tools. He asserts —
“By 2025, a majority of the world’s population, especially the currently underbanked, will have a value-store that isn’t from a bank.”
How will the world’s Banking 3.0 infrastructure update itself? It largely depends on how quickly incumbent financial institutions can adapt these cutting edge technologies.
What have we learned from the past?
In a quest to establish a secure and trusted payments ecosystem, Canadian financial institutions can look across the pond at the UK’s Faster Payments Service (FPS), an initiative to modernize the UK’s payments and money transfer infrastructure which debuted a decade ago.
“Faster Payments was initially a play to boost the economy and speed up money flows,” explains Neira Jones, a payments and regulation-tech expert.
Focused on the end-user, Faster Payments launched with poor communication between the banks and their clients, as well as issues with several different approaches by each bank.
The launch of FPS coincided with a spike in fraud, driven by an increase in online banking usage vulnerable to phishing, as well as the 2008 recession. A fraud prevention policy that largely relied on transaction limits, as well as outdated AML regulations further exacerbated the problem.
Today, the FPS is still dealing with authorized push payment fraud and slow regulatory progress. For Canada, Jones suggests five critical cornerstones for Canada’s stakeholders to focus on in developing new real-time payment rails:
• Fraud Prevention and Cybersecurity
• Industry Collaboration
• Digital Identification
• Customer Education and Care
• Supportive Regulatory Frameworks
By supporting Canada’s future core payments systems with these five pillars, Canada can avoid some of the pains that the FPS experienced, ushering in a robust and trusted real-time payments network.
Key Takeaways in Different Perspectives
A Lawyer on Privacy and Data Management:
“Collaborative data networks provide many benefits to their members, such as enhanced situational awareness, cost efficiencies, and added credibility to participating parties. Recent changes to PIPEDA may provide unique drivers in Canada to adapt data-sharing frameworks. It’s also important to recognize Canada’s commitment to user privacy and anonymity, as well as the ethical use of data.”
A Quantum Physicist on the Potential of Quantum Computing in Banking:
“Quantum computing leverages the fact that quantum bits, or qubits, can exist in multiple states at once. Quantum computers may eventually be able to crack today’s encryption methods, however they also bring more secure methods to the table. We may also see applications in random number generation for cryptographic encrypting, as well as trustless quantum cloud computing.”
A Deception-Recognition Expert on How to Spot a Liar:
“Liars frequently leak verbal, physical and behavioural cues that reveal the truth. With institutional trust reaching all-time-lows, it is important to know how to recognize what’s real or fake, and to watch for potential insider threats. This becomes important in high-stakes decision making.”
Building Trust Requires Collaboration
The 2018 COR.SPARK Innovation Summit brought banking and payments executives together to discuss unique perspectives and issues facing Canada’s payments ecosystem. This conference has demonstrated the multidimensional and sensitive nature of trust.
Whether data-driven, earned through utility, or certified by technology, it remains in the collective interest of all stakeholders that Canada’s payment infrastructure stays modern, competitive, and above all, trusted. Through data-sharing initiatives that enrich the AML and KYC potential of all members of the payment network, Canada can continue to sustain its reputation as a world leader in stable and secure banking.