Innovation in financial services

August 2021  |  FEATURE | BANKING & FINANCE

Financier Worldwide Magazine

August 2021 Issue

New technologies have enabled banks, insurers and other financial services firms to overhaul their operations and identify different ways of serving their clients. Over recent decades, innovative products have transformed the financial services industry – from payment types including credit and debit cards, to transaction processing such as telephone and online banking, to saving options such as investment funds and structured products, to e-commerce for financial assets, to risk management techniques, and beyond.

Financial services firms must embrace the opportunities offered by innovation and further integrate disruptive technologies, such as artificial intelligence (AI), advanced analytics, robotics, the cloud and blockchain, to enable new services and capabilities.

Customer preferences

While there is still a place for traditional banking and financial services, customer expectations and preferences are evolving. According to VMware, almost half of UK consumers prefer to engage with banks via apps rather than in person, while two-fifths believe their smartphone is more important than their wallet in powering financial transactions.

The availability of mobile applications and online experiences is increasingly important to customers. They want to access their accounts through mobile and connected devices and to pay for goods with a tap on their wearables.

Furthermore, over half of consumers would switch to a competitor if their digital experience does not live up to expectations – only 10 percent of those surveyed would remain loyal to their existing FIs, according to VMware.

Given the direction of travel in the industry, financial institutions (FIs) need to have a clear roadmap for technology and innovation. It is not enough to simply devise a digital strategy; instead, financial services firms need to have a business strategy focused on thriving in a fully digital world.

Automation

One area of innovation helping FIs to become more efficient and effective is robotic process automation (RPA). Technological advances in conversational AI, for example, are allowing FIs to deliver high-quality digital experiences to customers at scale, empowering users to control their finances without human support. Chatbots offer instant responses and quick complaint resolution, boosting the personal banking experience. Conversational interfaces also provide an easy and economical way for FIs to receive customer feedback.

RPA can streamline key banking functions, including customer onboarding, verification, risk assessment, security checks, data analysis and reporting, compliance processes and other administrative activities. Automating these processes not only benefits consumers, it also frees up FI employees to perform more complex, value-adding activities.

Going cashless

Since the COVID-19 pandemic took hold, the transition to contactless payments has intensified. The shift toward a cashless society was evident prior to the crisis, but contactless payment technology has grown exponentially due to its hygiene benefits, and the ability of mobile wallets to facilitate faster transactions.

According to a Payments Journal survey, in the early months of the pandemic contactless payments rose by 30 percent. In the UK, over the past 12 months, people have adapted their buying habits significantly, with 54 percent of consumers trying a new payment method, such as via a wearable device.

Before the pandemic, contactless card payments already accounted for more than 40 percent of all card transactions in the UK, while in 2020, according to Barclaycard, contactless payments accounted for almost 90 percent of all card transactions. Accenture research found that cash usage in the UK is declining faster than any other major European economy, falling almost 40 percent in 2020, against a European average of around 30 percent.

Though security concerns caused some initial apprehension, technological innovations, such as biometric security, have proven fast and reliable at authenticating the identity of a card bearer. In June 2020, French bank BNP Paribas brought forward a project to add biometric authentication to contactless payments. Under the project, while customers will still be able to make contactless payments up to the spending limit without a fingerprint, they will also be able to make higher-value contactless payments using the new card.

As an alternative to physical cards, mobile devices which require a fingerprint scanner or facial recognition are one of the fastest growing payment methods at point of sale, and the popularity of these digital wallets is only likely to grow.

Transformation

But there is data to suggest that the financial services industry is lagging behind in digital innovation, failing to match the levels seen in many other industries over the last 18 months, since the outbreak of COVID-19. Indeed, less than one-third of consumers (30 percent) believe the financial services firms they interact with now deliver an improved digital experience compared to before the pandemic, according to VMware. In light of changing loyalties and expectations, FIs need to rethink and retool their business and operating models.

For FIs, digital transformation to improve existing IT infrastructure will be a primary area of focus. Legacy systems present myriad challenges, including high maintenance costs, isolated datastores, lack of visibility across networks, outdated applications that restrict innovation, and limited interoperability. Obsolete proprietary systems make FIs slow to react to dynamic changes within the industry.

Many of these challenges can be overcome with new hardware and software solutions, such as open source technologies, hybrid cloud computing and standardised IT infrastructure. A successful digital transformation process puts FIs in a better position to respond to customer demands, address security concerns and meet regulatory requirements.

To benefit fully from digital transformation, companies need a bespoke strategy. Senior management must fully commit and dedicate the resources and investment required to make the process successful.

On the cultural front, companies need to foster an environment conducive to collaboration and learning. Cultural change can be painful, and traditional organisations may suffer from siloed departmental goals which can be tough to break. A tendency toward conservative risk aversion can also hinder digital transformation. Ongoing employee education and training sessions should be conducted to ensure people are fully versed in the new procedures.

The industry is still in the early throes of digital transformation. Demand for digital will intensify – particularly in the post-pandemic era where customers expect more options and creative solutions, a more personalised service, as well as increased flexibility from FIs. Disruptive start-ups will become genuine challengers to traditional financial services firms, which must confront the competition.

The FinTech factor

A big push for innovation within the financial services industry has been driven by the emergence of FinTech companies, which use leading technology to get ahead of the game and force incumbent FIs to play catch-up. The digital-first, customer-focused approach adopted by many FinTechs and challenger banks has dramatically impacted the customer battleground.

The uptake of FinTech services grew to 64 percent in 2019 compared to 16 percent in 2015, according to an EY report. In 2020, investment apps experienced an 88 percent rise from January to November, according to Adjust, while payment app sessions increased 49 percent globally.

FinTechs are encroaching on established markets and offering customer-friendly solutions developed from the ground up, unencumbered by legacy systems. They have manged to disrupt four major areas – market share, margins, information security and privacy, and customer churn. They offer new business models to address dynamic market changes and reduce costs. They also operate on platforms, such as social media channels, that traditional FIs have been slow to adopt.

As the COVID-19 crisis unfolded, the FinTech sector thrived – particularly in emerging markets, which have seen strong growth in all types of digital financial services except lending, according to a joint study by the World Bank, the Cambridge Centre for Alternative Finance at the University of Cambridge’s Judge Business School and the World Economic Forum.

Throughout the pandemic, FinTechs have helped lower the cost of providing services, making it possible to reach more people, while reducing the need for face-to-face interactions, which has been key to maintaining economic activity amid social distancing measures.

It is no surprise, then, that FinTechs continue to attract significant investment, even during the pandemic. According to Innovate Finance, in 2020 global FinTech investment reached $44bn across 3052 deals, up 14 percent on 2019. The US attracted $22bn, up 29 percent, while the UK saw $4.1bn, Indonesia $3.3bn and India $2.6bn.

Post-pandemic, FinTechs may look for partnership opportunities with FIs, to combine the benefits of capital, distribution access and compliance infrastructure, with highly sought-after digital solutions.

Looking ahead, FinTechs can lead the charge for advancing financial inclusion programmes for many of the unbanked people in developing and developed economies. According to the World Bank, there are around 1.7 billion unbanked people globally. FinTechs, by partnering with FIs, retailers and governments, are poised to advance democratisation of financial services in an unprecedented manner.

Investing in a digital future

Considering the broad structural changes brought about by the pandemic, now is an ideal time for many within the financial services industry to invest in technology and innovation. In the past, digital adoption has been hindered by generational divides, but the pandemic has been a great equaliser. By leveraging RPA, blockchain, chatbots and biometrics, FIs will be ideally placed to compete with emerging challengers.

The future of financial services demands greater technological innovation and integration. FIs will be looking for ways to keep costs low by scaling back expensive branches and call centres and building up their online offerings, including apps, conversational AI and other virtual resources.

Next generation developments encompassing the internet of things, 5G connectivity and wearables with digital wallets all represent key opportunities. The industry must be ready to prosper in the coming age of hyper-connectivity and innovation.

Digital transformation within the financial services industry is both an exciting prospect and an necessary undertaking. To retain the loyalty of customers and prevent reputational damage to their brand, FIs will need to harness technology and keep innovating.

The path to recovery from the pandemic may be long and arduous, and FIs should be open to new ideas, technologies and capabilities to help them build back better. The future of the financial services market will be created by firms able to anticipate the needs of tomorrow while delivering on the priorities of today. Embracing innovation is their best way forward.

© Financier Worldwide

BY

Richard Summerfield