Digital bank of the future
In recent years, financial technology (fintech) companies, which are mostly start-ups, have increased dramatically in number—from about 1,000 in 2005 to over 8,000 in 2016—and have harnessed many new cutting-edge technologies to offer various financial services, while sidestepping the legacy cost structures and regulatory constraints of incumbent banks and financial services institutions. These fintech start-ups have also found significant encouragement in the form of increasing venture capital investments across sectors. In 2015 alone, an estimated $47 billion has been invested in fintech companies globally.
Technology start-ups are considered the primary disruptors of the traditional financial services industry and its way of working. Along with technology start-ups, a number of non-core players have been entering the banking and financial services domain, primarily through technology innovation and consumer interfacing. Each of these players could potentially disrupt the incumbent banks’ offerings and gain a stronghold in the fintech space. Some of these players, their key strengths and disruption potential include:
E-commerce: E-tailers such as Amazon, Alibaba and Flipkart are disrupting the market by using their large data sets to provide consumer-focused fintech products and services such as payment wallets.
ICT and large technology companies: Information and communication technology (ICT) players and large technology companies such as telecom service providers, mobile device manufacturers and software product companies are seen as potentially big disruptors of the financial services sector as they are able to innovate faster (in technology) compared to the incumbents.
Internet/social media platforms: Internet and social media platforms such as Google, Facebook and Tencent are further entrenching their positions as disruptors by leveraging their large consumer reach to provide new channels for customer service and business models.
Financial infrastructure companies: Financial infrastructure companies leverage their access to the core players’ network and operational knowhow to build their own innovative platforms and potentially disrupt the core players’ growth and evolution trajectories.
Attempts at digital re-imagination
Established banks and financial institutions have been trying to take a stand against being digitally disrupted and have been making attempts at adopting some of the technologies to re-imagine their offerings and processes. These traditional institutions have been primarily adopting three key themes in their fight against fintech-based disruption:
Open innovation: For large organizations, this translates as a process of engaging with external technology solutions, knowledge capital and resources early on in an innovation process. Often, it involves opening up the organization’s own intellectual property (IP), assets and expertise to outside innovators to help generate new ideas, change organizational culture, identify and attract new skills, and discover new areas for growth.
Germany’s Fidor Bank has established FidorOS3, a middleware with an open Application Programming Interface (API) that can connect to existing core banking platforms to offer a range of modern services including lending money to friends, sending money via Twitter and arranging an emergency 24-hour loan. Similarly, Spain’s BBVA has launched a customizable interface called SEED, and Goldman Sachs through the online collaboration tool GitHub allows external coders to try and optimize its capital markets field.
Collaboration: In order to maintain and grow value in the current times of digital disruption, established players are looking to collaborate more closely with others in different industries and with different outlook to identify new ways to generate value.
mBank, part of Commerzbank Group and Poland’s fourth largest by capital, partnered with a telecom carrier—Orange Polska—in 2014 to begin offering a joint (white-labelled) banking service for phones and tablets. mBank is seeking to enhance mobile banking through an app that allows full online banking functionality using a smartphone and a PIN code.
Investments: Venture investing has always been at the heart of the start-up innovation model. But now more than ever, established financial services firms are taking this route to try and generate innovation for their business.
American Express BBVA, HSBC, Santander and Sberbank have all developed corporate investment vehicles over the last five years, each with at least $100 million to invest. In February 2015, AXA, the insurance and investment management firm, launched a €200 million fund to act as “an accelerating force for start-up companies” in its areas of business.
Traditional banks and financial institutions enjoy various advantages over start-ups and non-core players in the form of existing infrastructure (both technological and operational), regulatory compliance processes and frameworks, risk comprehension, scale, customer interface and most importantly, customers’ trust. Incumbents should leverage these competitive strengths to retain a stronghold on their business and the industry.
Vision for the digital bank of the future
Any discussion on technology’s impact on the banking and financial services sector seems to offer only two extreme options to the incumbent players—either the risk of ‘digital disruption’, or, the push for ‘digital overhaul’. The correct path is somewhere in the middle.
An ideal digital bank of the future would not only offer payments through fiat and crypto currencies, but also have fully integrated marketplaces for various value chain players enabled by a multitude of mobile and artificial intelligence/machine learning (AI/ML) technologies, while offering a range of cross-platform service offerings to its consumers globally.
Some key characteristics and services of such a bank would include:
Global onboarding: A mobile app-based e-KYC (Know Your Customer) platform, for onboarding users from anywhere in the world in record time and requesting no more than necessary information. Integration with third-part service providers for tokenized KYC information sharing.
Universal wallet: A single, universal wallet engineered to give users control over their fiat and crypto currencies, including easy management of various currency portfolios, simple transfer of funds between peers, etc.
Universal card: A single, universal card for allowing users to spend both their fiat and crypto currencies across millions of online and offline locations worldwide.
Improved security: Use of blockchain to provide maximum security and privacy to users.
Marketplace: An all-in-one, decentralized third-party marketplace platform for users to trade in stocks, buy assets using all forms of currencies and access to other fintech products.
Jayanth Kolla is founder and partner at Convergence Catalyst, a research and advisory firm.