Technologies Poised to Disrupt the Financial Services IndustryBy Andrew Godsmark, Product Head Ascent NETSOL Europe on 30-11--0001
In an age where all industries have become a subsection of technology, financial technology, commonly known as fintech, has been molded by a handful of milestone technological inventions. The financial services industry has always been at the forefront to exploit what technology has had to offer. After the advent of the internet that shaped the modern world, we are again at a pivot point where several new technologies are creating new paradigms that will change the shape and face of all industries along with opening up new vistas for the financial world.
It is speculated that there will be more changes in the industry over the next decade than there have been in the past 100 years and like the auto or garment industry were completely mechanised and reshaped by technology, the financial industry is at the cusp of being modernised. The next couple of years will see the industry embrace fintech as it can help streamline infrastructure, deepen customer engagement and improve delivery capabilities.
Global Surge of Investment in Fintech
In the last three or so years there has been exciting developments in the fintech sector, matched by equal enthusiasm from consumers and service providers alike. The numbers are certainly reflective of the industry sentiment, in 2014 there were US$400m in Bitcoin investments alone, while future forecasts also seem to be in line with the various predictions. 2014 saw investments soar in financial technologies and reached a record high of US$12bn, indicating industry wide interest and hinting that the digital revolution in the sector is well underway.
China is moving forward with integrating the internet into the financial services industry and 2015 could be a "breakthrough year" said Amy Choi, Vice President of Ping An Bank Company Ltd, China. China is amongst the leading nations of the world along with the US and most European countries in appreciating the impact of financial technology. These pioneering nations and their prevalent demand for innovations in the financial sector to match their already complex financial processes are carrying the development of fintech world forward.
Key Emerging Financial Technologies
As a result of the expansion of wireless technology to even the most remote corners of the world, customers have been mobilized and are always on the move. To cater to this new dynamic, ATMs are evolving too. Wireless ATMs functioning on 3G/4G can be deployed at practically any high-volume usage location, from markets, trade shows, railway stations, special events and concerts to conventions. ATMs can now be placed at strategic positions to influence customers purchase decisions such as shopping centers and high-value goods stores. These high-speed internet based ATMs are not mere cash dispensation machines and offer a lot more.
They have become revenue streams in themselves as they support rich data applications such as on-screen advertising and personalized messaging to target audiences, therefore making them attractive promotion channel for advertisers. The value addition comes from the advantages of Machine-to-Machine (M2M) communications and remote operation and monitoring. These ATMs can communicate with contactless payment devices and are remotely monitored from a control center. Wireless ATMs are much more efficient as the status of each unit and customer transaction can be monitored in actual time from any location, notifying operators of faults, irregularities, cash levels and security breaches. Additionally, there is no ATM downtime costs and are much cheaper to run than conventional fixed line ATMs.
Cryptocurrency and Blockchain Revolution
Cryptocurrency is the first self-restrictive, electronically stored, currency system based on the blockchain encryption technique which makes it tamper proof. Unlike the fiat currency which is a legal tender, the value of which is governed by the relationship between its supply and demand or the commodity/representative money which is backed by a commodity such as gold or silver, cryptocurrency is created when and where there is demand for it and can't be manipulated by government-controlled banks.
Cryptocurrency creates basic monetary units and verifies the transfer of funds instantaneously. The cryptography process used in cryptocurrencies is the renowned system already widely adopted by online payment companies such as PayPal, Google Wallet and WePay which is secure from all third parties.
What is Blockchain?
The blockchain is a decentralized public ledger system that uses a peer-network to record transactions. All transactions are recorded under a given title therefore they are not anonymous. Users contribute in the verification process of transactions, called mining - in real time - for a prescribed compensation. There has not been a single incident, of even the slightest discrepancy, in any of the blockchain systems in use to date and the system is being dubbed as fraud proof.
Once an immutable block of encrypted transaction has been created, it is added to the end of a chain and a copy of that chain is held by all participating users of the network. The encryption is such that any alteration in a single block of a chain by any user will alter the entire chain held by that user and therefore will not match with the corresponding copies of that particular chain held by all in the network. It is akin to a DNA in every cell.
Albeit, the way people make payments is the initial few kinds of transactions being affected by the blockchain technology, PwC claims that the technology has the potential to disrupt several other kinds of transactions and have highlighted few main ones:
- Smart contracts: Set rules that automatically enforce a contract terms.
- Smart property: Using blockchain you can automatically trade properties.
- Notary services: Blockchain systems can keep records of documents and their details, such as the time and date of creation of a particular document.
- Bonded identity services: Secure identity verification through blockchain.
The most promising of these for the financial services industry is the prospect of smart contracts which is garnering interest from financial institutions. These contracts, once configured to the specifications of a lease agreement, can enforce themselves. For example, under a usage based contract, a payment can be triggered automatically on the usage of an asset, or a settlement automatically initiated against a default on a contract term. Thus there is no need for a big central database or enforcement operatives.
This system can also be used to track and record attributes of any high-value asset. Leeane Kemp, CEO of Everledger, in conjunction with Barclays Bank, is using the blockchain technology to record unique attributes of diamonds on a global ledger. This gives transparency over the entire supply chain/chain of custody of any diamond. This is just one-use case already being implemented. Entire fleets of leased cars can be tracked through entire contract life cycles.
The quintessential difference between traditional monetary exchange systems or secure online payments and cryptocurrency lies in the encryption process being coupled with the public ledger system. This protocol eliminates the need for verification by a trusted central third party to validate the transaction and move funds and assets from one entity to the other. This enables the buyers and sellers to interact directly, sharing encrypted data without the need to give out personal information. PwC has tasked a cross-functional team - for more than two years now - to observe the development of the cryptocurrency market and have put out several papers on the subject. In their latest paper "Money is no Object," PwC acknowledges cryptocurrency's potential to disrupt various markets, while dispelling some common misconceptions. They make the case that cryptocurrency has gained acceptance as an alternative "unit of value" and coinage by a critical mass of five key market participants: investors, technologists, regulators, merchants, entrepreneurs and consumers.
It was also noted that the recent use of Bitcoin in some illegal activity has been a cause for concern. However, it is not representative of the industry as a whole and only identifies the need for increased monitoring and governance. It will serve financial institution well to offer or adopt virtual currency strategy to remain the ultimate clearers and settlers of a transaction.
High Frequency Trading
High frequency trading is an example of how fast and powerful computers connected with high-speed internet are changing the dynamics of the financial world. It gives traders the ability to fully automate the transaction of large number of orders at extremely high speeds. These orders are automatically triggered and carried out when certain criteria are met, using conditional protocols. High frequency trading platforms are being widely adopted by large investment banks and institutional investors and are known to give an advantage of more than 500 microseconds for getting Nasdaq (NDAQ) price quotes, using a direct feed from the exchanges.
Contactless payment technology
Presently, out of the estimated 650 million NFC capable phones only 5% are used at least once a month to make non-contact in-store payments. However, with most smart phone manufacturers incorporating contactless payment capability in their handsets and more and more retail stores incorporating the technology this number is expected to rise drastically. It is estimated that by the end of 2016 there will be nearly two billion smartphones users globally, more than half of which will have phones capable of contactless payment technology.
The internet of things (IoT) is not a novel idea by any means and has been around for a long time, a simple point of sale (POS) machine being just one example. However, the buzz around the much predicted imminent storm of connected and interconnected devices does hold merit. In its most advanced and holistic manifestation IoT is a smart network of devices, from everyday personal electronics to industrial machines, that now have computing power, can sense and transmit information and can be operated remotely over the internet, thus giving the user the ability to operate and manipulate these devices remotely. This subtle shift in how we now integrate and operate ordinary devices into an integrated framework is rapidly changing consumer expectations and has awakened technology providers to the boundless possibilities brought about by the prospects of a world submersed in the internet of things.
Estimates of the size of the IoT market varies, with Gartner evaluating it around 26-30 billion devices, with a "global economic value-add" of US$1.9 trillion by 2020 and International Data Corporation (IDC) estimating that the universe of things connected to the Internet will generate nearly US$9 trillion in annual sales by 2020. Whatever the actual figures, the market and its growth is large enough to require extensive financing operations and subsequently powerful enough to alter the face of the financial services industry itself.
Currently, IoT is being driven by sensor and node implementations made possible by innovations in wireless technologies like Bluetooth, ZigBee and RFID - while advances in cellular technology (3G/4G) and Wi-Fi serve as communication highways, conveying collated data to the cloud to be processed and transmitted.
IoT is expected to impact financial institutions and retail banking in a big way. These institution are always looking to attract more savings, increase business volume and give out more credit. The installation of low-cost sensors can tell you when a machine is likely to break down allowing banks insight, thus reducing their risk factor, so they can extend loans to small businesses. Companies like Ford are using RFID's to monitor vehicles so as to offer their customers maintenance and financing options well after the sale of a car. These companies give promotional incentives such as a car model upgrade or family plan extension to offer an additional vehicle on an existing plan at a lower financing rate to increase business volume.
Additionally, under IoT data availability and consumption becomes instantaneous. A simple voice command or swipe on a watch or mobile screen will bring up the data people want to see before making smart financial decisions. These devices keep track of expenditures and give assessments and quotations on the go, helping users curb excessive expenditures and aiding in making the right decisions and investments in the moment. Glasses can already provide instant information on items in a user's view, including costs, plans and assessments on whether a user can afford the item or not.
The emergence of big data and associated analytics are augmenting by IoT as the growing number of wirelessly enabled devices feed into the data pool and in turn take advantages of the same data set to operate applications and provide services. More granularly and in-depth analysed data sets hold value and offer real-world insights from assets and actions that were traditionally much more ambiguous. Financial advice and consultancy is most contextual when delivered in real time, therefore communication with customers is ideal through banking by countless forms, mailed statements and timely updates.
Linking insurance data to investment opportunities boasts interesting prospects. If insurance companies anonymise and aggregate data then investment banks would benefit enormously. For example transatlantic shipping delays can affect sales and will impact stock markets or knowing how many trucks left a car manufacturer's plant will give you an excellent indicator of stock levels and future revenues. If lots of employees of a particular company need travel insurance for some new countries, it is easy to see which region the company is increasing its investment in. However, some cases will require customers to agree with their insurance data being shared. This can be done by incentivizing them by offering discounts or launching other such promotional programmes.
What Fintech Means for the Financial Services Industry
The primary change in the word of finance is the ongoing digitization of banks. In the new all-digital environment conventional banks will have a hard time surviving if they resist to evolve as it is not conducive to their strengths or interests. Megabanks have the cushion and flexibility to adapt and digitise, however for this to work these financial institutions need to recognise the implications of an all-digital environment, and then draw up a strategy for becoming ready for the changed environment.
The most overwhelming impact that the advent of any new technology has on an industry is that it creates redundancies and fintech is no different. Dealers, brokers, traders, money managers and various indirect customer touch points such as call centres that are between the service providers and the end customers as mere "middlemen" are at risk of being cut out and replaced by technology. The rise in internet banking, increased usage of alternative payment systems like Apple Pay and Amazon gift cards and fast adoption of mobile contactless payment technology has brought about the disintermediation of the financial and banking sector.
Money management is an area that stands to gain considerably from new financial technologies. Real time data collection coupled with the ability to act upon that data provides the unique ability to initiate and execute deals and financial contracts from the field, on the go. Financial services platforms can stream data from live feeds, process, acquire consent from customers, digitally verify and make decisions in the moment, essentially capitalising on advantages in time sensitive matters that were conventionally lost. This dynamic and live money management can give customers calculations on the go in order to make smart decisions. Technology brings major benefits to banking such as lower costs, greater transparency and more efficient, convenient and consistent customer experiences.
Technology has altered the way we now approach problem solving and set ways of doing things. This change in human behaviour has increased the minimum level of performance we have come to expect as standard. Consumers now have access to financial data around the clock and now expect service delivery on the go. These changes have evoked an archetype shift in traditional brick-and-mortar financial institutions and forced them to deliver personalised service and user interactions through a host of new communication channels (mobile apps, digital banking, contactless payment systems, machine learning and smart wallets to name a few). This has been made possible by the collection of big data, data mining and advanced analytics tools.
Barriers to Adoption
There still are a few years to go before all these new technologies become completely assimilated into our daily lives and we accept all digital financial institutions as the norm. Resistance by conventional banks, customer's affinity to brick-and-mortar institutions and their mistrust of online only entities (vulnerable to hacks) are slowing down adoption. Virtual banks lack the authenticity that brick-and-mortar banks enjoy, therefore traditional banks will have to transition into a brick-and-click setup, in which they maintain the minimum physical presence required to ensure efficiency that can only be afforded by a physical network of branches and ease discerning customers. The current decade will be essential in the growth and development of fintech as a solid concept for the consumer to grasp.
Future of the Industry
As these disparate yet complementing technologies take hold and develop into an ecosystem for the finance world, financial institutions and financial technology companies will be inundated with opportunities and possibilities, some of which this paper has attempted to allude to. The focus of financial services will be all about real time service delivery, convenience, personalised interaction and remote operations.
An overwhelming number of millennials feel that the banking and finance industry is outdated and are not satisfied with the exchange system and the way money is managed. They also feel that the disruption in this industry will be bottom up and will actually come from outside the industry, with some tech start-up coming up with a product/system that will set the ball rolling on the revolution. While industry giants are slow to realise and adapt, different financial technologies are already incrementally changing the industry for the better putting this unique and gradual industry revolution in motion.
Andrew Godsmark, Product Head Ascent NETSOL Europe
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