5 technologies disrupting banking by 2023

Over the next five years banking is going to change dramatically and will be nothing like we know it today. The changes will come due to technology and will provide financial institutions with both opportunities and challenges.

The global recession put a spotlight on banks; these institutions were largely responsible for the near-collapse of economies and although they have weathered the storm, people’s trust in them has not been restored.

Out of the failure of financial institutions came the bitcoin protocol and blockchain technology. This was followed by the arrival of fintech startups and neobanks, both of which threaten the consumer account monopoly enjoyed by retail banks, which is referred to as ‘legacy’ in the financial media. According to various consultancies, new players could capture up to a third of incumbent banks’ revenues in the next 2–3 years. If banks don’t respond to this, they are in danger of disappearing.

However, there is good news for the traditional banks: the new technologies that are threatening the banking industry also present significant opportunities. They can leverage big data and advanced analytics to improve customer experience, as well as build trust, loyalty and revenues. Dan Cohen, SVP at Atos, said: “Banks are at a crossroads. Continuous fintech innovation and new technologies such as blockchain are disrupting the market. While it creates threats, it also opens multiple opportunities for financial services to reinvent themselves and thrive.”

Here are five of the technologies that will advance fintechs and potentially cause more disruption in the banking sector, unless the banks are agile enough to incorporate them.

1. A hybrid cloud

Cloud computing tech has gone mainstream in banks pretty fast. It was found that at least 75% of bankers said their most successful cloud initiatives had already achieved expansion into new industries, creation of new revenue streams, and expansion of their product/services portfolio.

2. APIs

The combination of open platform banking and open APIs will change the entire banking ecosystem in its current state. In this scenario, the bank will serve as a platform, on top of which third-party companies can build their own applications using the bank’s data.

3. Robotic process automation

Robotic process automation (RPA) has helped banks and credit unions accelerate growth by executing pre-programmed rules across a range of structured and unstructured data.

4. Instant payments

Consumer demand for instant payments is on the increase. With instant payments, more transactions will be made digitally instead of in cash, which means that payments will become less expensive and more user friendly.

5. Artificial Intelligence (AI)

The benefits of AI in banks and credit unions are widespread, reaching back office operations, compliance, customer experience, product delivery, risk management and marketing to name a few

How big banks could decentralise money

One effect of the emergence of cryptocurrency is that it has made a lot of people rethink our relationship with currency generally, and with the big banking institutions.

For example, in June 2018, Switzerland held a “sovereign money” referendum in which Swiss citizens rejected by a ratio of three to one a proposal to end fractional reserve banking and give sole money-creation authority to the Swiss National Bank. Cryptocurrency wasn’t mentioned in the proposals, but it was on many people’s minds during this vote.

Why? Because the fact that cryptocurrency exists means that there is a very real possibility that global economies will “disintermediate banks from money” as Michael J. Casey suggests, and he also claims that the leaders of this change will not be the activists one typically associates with bitcoin and other crypto assets, it will be the central banks themselves.

They will initiate the move towards a true “money of the people”, because they will have to in order to “remain relevant in a post-crisis, post-trust, digitally connected global economy.”

A non-governmental currency

This might be an anarchist’s dream situation, but for those who want money removed from government control, the move to digital currencies will encourage more competition worldwide by opening the door more non-governmental digital currencies. Plus, when smart contracts are used to manage exchange rate volatility, it is likely that we will find that the people and businesses involved in international trade will no longer need to rely on the dollar, Euro or British pound as the cross-border currencies of choice.

There hasn’t been much enthusiasm for a central bank-issued digital currency (CBDC), largely because the banks didn’t really like the idea. The Bank of England has done research into the concept, but BoE governor, Mark Carney then warned about financial instability if his bank supplied digital wallets to every citizen, because this would then give the man in the street the same right as regulated commercial banks to hold reserves at a national bank.

Inefficient banks

Basically, traditional banks are the problem and not just for cryptocurrencies; they are inefficient with respect to fiat money as well. Their technical, social and regulatory infrastructure is past its sell by date and it’s a costly system. Banks maintain centralised, non-interoperable databases on outdated, mainframes. They rely on multiple intermediaries to process payments, plus ledgers that have to be reconciled against each other using time-consuming fraud-prevention mechanisms.

Banking solutions

There are solutions though: one is to gradually introduce CBDC stating with non-bank financial institutions and cascading it down through corporations and smaller business to individuals. A central bank set CBDC interest rate would also help and could be part of managing the money supply. It is more likely that this will happen first in the developing world where there is a greater need and appetite for something like a fiat digital currency that offers protection from inflation. In the developed world, the banks may take longer to get their heads around the concept of moving away from decades old systems, but they will have to respond somehow, because the crypto genie is out of the bottle.

 

 

 

 

 

Challenger banks are on the rise

Image result for banks

Challenger banks, neobanks, whatever you want to call them, have been making significant in-roads in the banking sector and are attracting large chunks of venture capital investment says KPMG. There are some subtle differences between the two: challenger banks are often established firms that compete with larger financial institutions, while neobanks tend to be completely digital and favour operating via mobile devices, but the difference between them is somewhat blurred. What they do share in common is this: “these banks don’t carry the weight of legacy technology, so they can leapfrog over traditional infrastructure and disrupt the status quo.”

Two of the most prominent – Monzo and Atom Bank—raised $93 million and $140 million respectively last year. Starling Bank, which is ‘digital-only’ is raising a further $54 million in a new funding round. These are all British startups by the way.

Why are so many challenger banks British?

The chief reason for the fact that so many challenger banks are UK-based is this: Britain isn’t as saturated with big banks and their branches as the US, so there is more opportunity for non-traditional financial institutions. Furthermore, the UK was an early adopter of digital banking, dating back to the dotcom era of the late 1990s and early 2000s. Basically, the UK has had a head start in this financial area, although it would be a mistake to think that challenger banks are a UK-only phenomenon.

Challenger banks worldwide

There are currently about 100 challenger banks worldwide: Brazil has Banco Original and Nubank, while Germany is home to SolarisBank and N26 and in Asia there is MyBank, WeBank, Timo, Jibun, K Bank and Kakao.

What advantage do challenger banks have?

They don’t have a legacy system and because most of them don’t offer a full suite of banking services they don’t have to operate within such tough regulatory environments. This means they have more freedom and flexibility, which in turn allows them to develop their customer base faster, especially in developing countries where bank branches are more rare than in the west.

What services do challenger banks offer?

Their focus is usually on niche products rather than trying to provide all the services that the big banks provide. For example, customers can open a current account with a relatively high rate of return and get loans, but they may have to go elsewhere for services such as credit cards, mortgages and wealth management. Some of the challenger banks do have banking licences, although not all follow this model.

Although challenger banks are on the rise, the old guard hasn’t disappeared just yet, and the traditional banks are aware of the threat the challengers pose and are preparing for battle. The traditional banks have the advantage of a large and well-establish customer base and strong branding that promotes trust. The challenger banks will have to earn trust. That will most likely come from the millennial generation over the next decade, because they are the group that have lost trust in the banks their parents use, and this is the audience that challenger banks will need to court if they are to become an established sector in banking.