Disruption on its way, are banks ready?
The technological revolution is now shaking up the banking industry like all other industries. Today, millennials are no longer interested to use the banking system that was actually designed for their granddads.
Due to the rise of technological innovations, the traditional banking system is now challenged by financial technology (fintech). Many tech giants are now acting like big banks and disrupting the legacy banking system, these companies are now offering banking services to the consumers in a smarter way than the incumbent retail banks, examples of such service being Apple Pay or Google Pay besides PayPal.
Millennials are embracing these technological developments for their day to day payments as this generation is more gadget dependent than their older generations. Banks have the opportunity to cater this new generation embracing fintech innovation for smarter banking solutions.
The people behind fintech start-ups are usually the smart young people who can predict the future, they solve existing problems offering better technological solutions. These innovative people are changing the banking world for better without facing many barriers due to the size of their start-ups. These start-ups are bringing “new market disruption” in the financial services industry offering a better way to pay, send money, borrow and invest.
Banks, on the other hand, usually struggle to come out of their legacy system and bureaucratic trap, although banks have the power to attract the tech talent, they can hardly come out of their old shells. Just offering internet banking or a mobile app for the current account is not sufficient to face the emerging challenges, although it may be a case of “sustaining innovation” for the incumbents.
Banks should not consider their existing strategy as the permanent strategy, if their current strategy is successful, they should think they have a temporarily successful strategy and should look for innovations even while their core business is strong.
Incumbent banks should focus on the following technologies to respond to the future challenges:
- Distributed ledger technology (DLT)
DLT is a decentralised electronic ledger system that allows to keep record, share and synchronise transactions among the independent computing devices commonly known as nodes, each participant node of the network updates itself independently.
“Blockchain” is now a buzzword in the financial industry which is one type of DLT, the popular cryptocurrencies like Bitcoin, Ether, Ripple, Litecoin and so on use the blockchain platform. Blockchain allows users to transfer value cutting the middleman efficiently, reliably and promptly. According to a recent industry, 67% of central banks experimented with blockchain in 2017.
Banks can use blockchain for clearing and settlements, payments, trade finance and syndicated loan to significantly reduce the cost and to increase efficiency.
- Artificial intelligence (AI)
Although AI has been around for over 60 years, it has got mass attention recently. AI, in some cases, can perform smarter and better than human, financial service sector is now using AI for compliance, quick transaction processing, mitigating human error, automation etc.
The two revolutionary developments in AI for financial service industry are: a) robo-advisor, an algorithm-based AI tool for automated financial advice that can analyse market data to automatically manage trading portfolio; and b) chatbot, this tool can interact with customers almost like human customer service agent answering customers’ queries, suggesting better products or services etc.
HSBC has developed an AI-based chatbot for customer service, for example. A UK based fintech start-up, Revolut, also uses chatbot for customer service. Other example include OCBC Bank in Singapore, Eastern Bank Limited (EBL) in Bangladesh, Bank of Montreal (BMO) in Canada, and Banpro in Nicaragua, among many others.
- e-KYC and identity
Through the digitalisation of identity checking process banks can make their know your customer (KYC) process easier and better. Blockchain can play a vital role in storing and keeping records of identity. Many well-established financial institutions rely solely on the e-KYC process, collecting and verifying customer identity through their mobile app. Voice and facial recognition to verify customers are becoming a new norm in digital banking.
- Great app with great UX and UI
Mobile app-based payments are on the rise, banks need to make their mobile banking app smarter as the smartphones are getting smarter. Merely having a mobile app to view transactions and to make payments is not sufficient to satisfy the customers these days, banks need to check how smart and intelligent their mobile app is, whether the app can give a great user experience (UX), whether the app can fulfil the needs of the customers, whether the app is customer oriented rather than service oriented.
The UX should be as seamless as possible, banks should think why people can use Facebook or Snapchat apps easily but struggle to use their mobile banking app. Meanwhile, all the fintech start-ups usually spend a good amount of time on design thinking for a great UX and user interface (UI).
The not very good news is that digital platforms are more exposed to cyber threats, mobile, wearable technologies and the internet of things (IoT) devices are highly vulnerable. Just a two-factor authentication (2FA) is not enough to tackle the increasing level of threats, it is possible to intercept the SMS sent by banks for 2FA purpose due to the vulnerabilities in the set of telephony signalling protocols known as SS7.
Banks and fintechs need to have a proper system in place to tackle the cyber threats. The very good news is The World Economic Forum (WEF) has created a consortium of financial services and technology companies to help protect the growing fintech industry and its customers from cybersecurity threats.
A disruption is typically an opportunity long before it becomes a threat. The incumbent banks have the opportunity, infrastructures, people, sufficient funds, data, and clientele to easily embrace fintech, if they can come out of their legacy system and bureaucratic zone the banks have the opportunity to thrive.
If the banks cannot think beyond their legacy system, the best move will be to collaborate, not to compete with fintech start-ups, if banks cannot beat them, they should simply join them.
By Nazmul H Azad, CEO of Southeast Financial Service UK Ltd (a subsidiary of Southeast Bank Limited)