6. Executing on Innovation
Increasing consumer expectations, the influx of fintech competitors and the reduction in margins are forcing banks to rethink their current business models and sources of revenue. Although innovation is a proven path to differentiation and competitiveness, the banking industry’s short-term focus, siloed approach to operations and risk-averse culture work against the potential for meaningful advancements.
Start-ups embody the core principles of innovation to drive commercial success. They embrace risk-taking and failure, while rewarding success. They are agile and can pivot immediately to meet market demand. Because they are usually small, they can think big. But because they are small, scalability can be a challenge.
The question is whether banking can replicate the best of fintech start-ups, while leveraging their customer base scale advantage to respond to a changing marketplace? Or, will the majority of the industry need to be a fast-follower or laggard … with the inherent risks?
According to James Haycock, managing director of Adaptive Lab and co-author of the book, Bye, Bye Banks, “There’s been a lot of hype about innovation and the banks are investing heavily, but the consumer has yet to see much of the outcomes. The struggle is access to customer data through bank’s legacy technology, the comfort with being more experimental due to the risk of brand damage, escalating research and development costs, and the underlying conservative culture of banking.”
Maria Jose Jorda Garcia, from BBVA believes the tide is turning, “I believe that after this tactical and in some cases uncontrolled year of investments trying to be part of the innovation game (fintech investments, open competitions for banking challenges, creation of innovation boards, structures and tools to generate ideas, and in some cases, partnerships or acquisitions), 2016 will be the year we see banks trying to get value out of those investments.”
“2016 will see the construction of larger sandboxes by the banks. The current legacy infrastructure doesn’t allow for enough play with fintech partners. No play, and no room for real experimentation, results in no real change.”
– Sam Maule, Emerging Payments Practice Lead at Carlisle & Gallagher
“Decentralized IT and blockchain fintech startups will be a focus area for VCs, and in general, VC focus will change from B2C to B2B. Security, analytics and artificial intelligence are areas of special interest.”
– Frank Schwab
“We’ll see more large financial firms investing in internal business incubators and innovation labs and pursuing research and development between their own walls. This will include bringing more design capabilities in-house. These trends will require a culture shift and more courageous enterprise risk management policies”
“More banks will open up their APIs, and there will be more innovation labs operating within financial organizations, which will enable experimentation with startups and new innovation technologies.”
– Elizabeth Lumley from London MD Startupbootcamp Fintech
“Innovation programs and incubators at large banking organizations will increasingly start paying off, with a number of banks launching homegrown offerings that get serious traction.”
– Nick Bilodeau, Head of Insurance for Canada at American Express
7. Exploring Advanced Technologies
There is no question that technology is changing banking. From online, to mobile to wearables, the advancements in digital technology are moving faster than most banking organizations can handle. This wasn’t lost on our panel of experts, as they looked into their crystal balls to make educated guesses as to what we could expect in 2016.
While there will be a great deal of debate as to the likelihood of any of these trends gaining traction in the next 12 months, most panelists believe the debate can only be around timing.
— Blockchain —
According to an excellent overview done by Simon Taylor from Barclays, blockchain technology presents both opportunities and obstacles. “While it’s clear that the security and controls associated with blockchain technology will need development before many of these applications can become mainstream, the opportunities are so significant that it’s a question of when, not if, these applications will emerge,” said Taylor. “The technologies around bitcoin have the potential to transform many different processes, and companies should be discussing these developments at the board level and asking how this technology could help them and whether they should be investing in it.”
“Blockchain for shared ledger structures will be a hot topic for 2016, as it enables any financial counterparties to exchange value with trust in real-time for almost free, stated Chris Skinner, best-selling author and President of the Financial Services Club. “This has been discussed in 2015, but will make an even more dramatic impact in 2016.”
Chris Fleischer, Market Research Manager for D+H, has a more pragmatic perspective, “While the industry is exploring the innovative potential of blockchain technology, the great majority of banking firms are focused on ‘blocking and tackling’ trends that might not be as sexy, but impact the operations daily and for the foreseeable future.”
“Blockchain technology will move into the correspondent banking business, with a community-lead approach.
- financial inclusion in developed markets, focusing on under banked and millennials. Financial Inclusion for underbanked will have an unprecedented focus.
- crowd funded micro insurance in emerging markets”
“The distributed ledger architecture will see the first real world applications with instant settlements between financial providers along some high-volume cross-border routes. Another application will be notarization of physical or digital assets. Finally, I predict the availability of digital lockers accessible through biometric authentication, and again they may come first in Asia or Africa.”
“The race to establish open standards tech stacks in the blockchain space will accelerate and leave casualties in its wake. The casualties will be those that want to own the entire stack and intend on having banks and markets captive to their solutions.”
– Pascal Bouvier CFA, Venture Partner at Santander InnoVentures
— Robots and AI —
The primary opportunity for robots and AI tools in the banking industry at this time is that they can extend the creative problem-solving capabilities and productivity of human beings and deliver superior business results, states Cognizant in a report on the use of this new digital technology. Their research shows that through these technologies, humans have the potential of attaining new levels of process efficiency, such as improved operational cost, speed, accuracy and throughput volume.
The opportunity for cost savings is the first place where AI and process automation will impact banking. In the Cognizant study, 26% of banking respondents stated they have enjoyed 15%-plus cost savings from automation in their front office and customer-facing functions compared with one year ago, and 55% expect those same levels of savings (15% or more savings) within the next three to five years.
According to Cognizant, the top drivers for automation beyond cost savings include:
- Reduced error rates (21%)
- Better management of repeatable tasks (21%)
- Improved standardization of process workflow (19%)
- Reduce reliance on multiple systems/screens to complete a process (14%)
- Reducing friction (11%)
“Less than a month after Google introduced public APIs for its AI engine, Facebook followed suit and Elon Musk led the the $1B founding of OpenAI. Together, they accelerated and democratized the development of AI by a decade, with finance most likely going early.”
– Neff Hudson, Emerging Channels Executive at USAA
Advances in machine learning and AI’s will start infiltration of financial processes. They will asses risk and reward. AI’s will not only provide solutions for customers, they will also integrate with processes such as compliance, information security and more.”
– Mike D. King, Owner of Bankwide
“While AI won’t get quite to the levels of hype that blockchain is receiving, AI has the potential to really move the dial on operating costs and bring the power of digital servicing to the masses through natural language processing and interactions.”
David Brear, Chief Thinker at Think Different Group
“Robotics will be used more in banking services – physical robots in the branch environment and software robots in customer advice and back office processing will become more the norm.”
– Makoto Shibata, Head of Global Innovation at Bank of Tokyo-Mitsubishi UFJ
— Internet of Things —
The Internet of Things is defined as a way for devices that are connected to the Internet to communicate and share information with other ‘smart’ devices in real time. In context, these sensors would leverage the capabilities of big data, analytics and even artificial intelligence to anticipate needs, solve problems and improve efficiency.
“By enabling the collection and exchange of information from objects, the IoT has the potential to be as broadly transformational to the financial services industry as the Internet itself,” states Jim Eckenrode, executive director of the Deloitte Center for Financial Services and the author of the Deloitte report, How Financial Services Can Make IoT Technology Pay Off.
With the deployment of as many as 25 billion new endpoints, there will be opportunities for all industries, including banking. The Deloitte analysis suggests that as many as one-quarter of sensors deployed in 2013 could be of use to FSIs, rising to one-third in 2015 and then to about 50% by 2020.
“It seems to me that there are probably three main ways that banking will intersect with the Internet of Things in the foreseeable future, says Dave Birch, from Consult Hyperion. “The first, and to me most interesting, is the issue of identification and authentication. This is an area where banks ought to be able to deliver interesting new services to customers, building them around the idea of safekeeping and privacy. The second is in terms of instrumentation for risk management. The third may be in the area of payments.”
“The impact a connected world will have on our daily habits is as large as the Internet itself. As mobile connectivity brought the world of information and context to our daily life, autonomous devices will start driving new value into our life to save the most precious commodity of all – time.”
“The Internet of Things” (Iot) will slowly come of age and offer opportunity to innovators in fintech and financial services. Much of this will be driven by mobile and our on-demand economy, which will result in the ‘uberfication’ of everything.”
– Bryan Clagett, CMO of Geezeo
— Authentication —
As knowing your customer (KYC), privacy and identity protection becomes more important, we are constantly seeing new approaches to how consumers’ identifications are managed and delivered as parts of key economic activities – account opening, check-out, payments, critical services, immigration/border control etc. As various countries from the UK, New Zealand to Italy and Nigeria work to create their own national identification schemes, consumers are challenged by questions such as, “Which document do I carry?”, “Which document will be most broadly accepted?”, and “Which authentication process is the most secure?”
The greatest challenge facing all of these proposed solutions is uniform acceptability. In any counterparty relationship, there are two parties who must work with each other to agree a common standard or protocol. For identification, one party (usually the customer) must possess a current and valid form of the required information, and then must provide it to the other counterparty (the vendor) who must equally accept and recognize it as a sufficient form and type of verification.
“The trend that stands out for me in 2016 is the renewed focus and interest around authentication and digital identity. Apple led the way in showing how device-based biometric authentication can be used in payments. We will see increasingly more banks exploring how similar approaches can be used to authenticate customers for a broad range of activities.”
Andra Sonea, Lead Solutions Architect at Lloyds Banking Group agrees, “A true banking ‘customer view’/identity does not exist in a way that it should in a digital business – authenticated, rich, accessible in real-time for making real-time decisions. I can just hope that we will see some focused work in this respect as the current technology allows us to do things we didn’t even dream of in banking.”
“Both the complexity and tediousness of such a task for the service provider implies that we will see a ‘Stripe for KYC’ very soon, who will wrap ‘Know Your Customer’ (KYC) processes to perform the function in the most clean, and scalable manner,” added Cherian Abraham from Experian Decision Analytics.