Following the 2008 financial crisis, demand for regulation and oversight exponentially increased considering the detrimental role banks played in what would become the largest recessionary period since the Great Depression. Forced to focus on adhering to mandates, banks set aside innovation while technology enabled incumbents recognized an entry point. The 2008 financial crises gave way to the rise of Financial Technology companies (FinTechs) by tackling customer needs in the mobile payments and personal finance space. Dismal approval ratings for banks allowed the introduction of Bitcoin, a means for a trustless, immutable system completely immune to banking and government regulation. The idea behind Bitcoin proliferated an iconoclast point of view towards traditional financial service providers. FinTechs are disrupting the banking system and ten years later, large banks are still playing catch up.
It’s important to note that while financial services may seem out of touch with innovation, they have been on the forefront of technology since the mid 1980’s. However, most of these innovations happened behind closed doors considering the multi-billions of dollars on the line. Starting with low latency cables and the explosion of Artificial Intelligence (AI) in institutional investing, large corporations have kept their most prized possessions locked in a black box. Only until these data-driven quantitatively inclined masterminds left the front office did the idea of a consumer based FinTech come to exist.
Fast forward to present day, mainly all financial services are digitally enabled and provide a wide range of capabilities from peer to peer lending, point of sale innovation, mobile investing, and so much more. Today, one of the most valuable companies in the e-commerce space is a financial service plug-in that allows users to transact as a marketplace directly on any given website.
Originally only seven lines of code, Stripe, the new standard in online payments says there’s an 80% chance any given credit/debit card has been used on the Stripe network1.
Although late to the game, financial institutions are making huge leaps to level the playing field. By taking the back seat for over a decade, leaving it to FinTechs to take risks, make mistakes, and fail fast, banks have watched lucrative market opportunities fly by. Today, incumbents are attempting to catchup through mergers, acquisitions and strategic investment in a range of technologies.
One of the major advantages banks have over FinTechs is the massive amount of data the have collected over the years. A major challenge all incumbents face, both institutions and start-ups, is adequately analyzing the valuable, yet unstructured data. Banks and other financial institutions have expressed limitations in their ability to leverage data as a way to build customer-centric products. Kevin Garlan, Citi Bank’s Head of Innovation for North America, discussed the belief that financial institutions are drowning in customer information. Banks have so much data that large technology companies like Facebook and Google have begun to collaborate in order to share the once off-limits detailed financial information about these institutions’ customer base.
Despite being the gatekeeper to sensitive data, government regulation within the European Union mandates that banks are obligated to provide third-party providers access to their customers’ accounts through open APIs (application program interface). This will enable third-parties to build financial services on top of banks’ data and infrastructure. As European Revised Payment Service Directive (PSD2) becomes implemented, banks’ monopoly on their customer’s account information and payment services is about to disappear2.
However, data is often raw, unstructured, and messy. With hurdles such as ownership rights around data privacy, Global Data Protection Regulation (GDPR) and cyber security risks, it can be difficult to manage and grant access to the appropriate people to analyze and transform the data into meaningful insights. Given these roadblocks, the financial services industry as a whole still has some ways to go in deciding how to deliver material recommendations and suggestions for their customers. It’s more likely that customers will see banks competing not only against banks, but everyone interested in taking part in financial services.
For banks, PSD2 poses substantial economic challenges. IT costs are expected to increase due to new security requirements and the opening of APIs. In addition, 9 percent of retail payments revenues are predicted to be lost to PISP services by 2020. And, as non-banks take over the customer interaction, banks may find it increasingly difficult to differentiate themselves in the market for offering loans3.
Rick Winslow, Chief Experience Officer at Kabbage, described a different perspective based on his experience at various banks and consulting firms. One of the biggest challenges he experienced was being unable to actually access the raw and messy data necessary to build data driven products. Instead, the information delivered was transformed and summarized, therefore, unreliable. Winslow agrees that banks have more than enough data about its customers but not enough data about the world in which its customers live. Winslow believes technology companies such as Google have excelled in building data driven products for its customers because “Google has data about your house, about your car, about your street and the barbershop you go to.”
Google invests in transforming large range of raw and messy data to truly help their customers and their needs. What has hindered banks from securing long-term presence beside their start-up competitors is their limited agenda to organize only data adjacent to the banking industry. Winslow believes companies should aim to create products that cater to customer’s interests and habits. By envisioning the various places and scenarios in which customers will use said product, banks can leverage its data that address customer’s problems and pain points.
The likely passage of PSD2 and Global Data Protection Regulation (GDPR) within the United States poses a great threat to banking incumbents. It will be easier than ever for non-banks to enter the market with financial service solutions. The belief that non-bank FinTech companies will play a significant role in the future financial landscape is well established in the investment markets. Cumulative investments globally in financial technology has more than ten-doubled the last five years and is estimated to exceed $150bn the next 3-5 years4. This encapsulating reality forced banks to not only adhere to GDPR and PSD2, but push past industry adoption towards regulation generation.
Token, an open banking platform is disrupting traditional banking using PSD2 for its own benefit. Token facilitates fast and secure payments through Smart Token technology, giving banks a simple and quick path to PSD2 compliance.
Currently, all the primary payment systems in the world were created over 50 years ago, much before the invention of the internet. Instead of sending money over outdated, slow and unsecure payment systems like ACH and wire transfers, Token hopes to disrupt the payments industry through smart tokenization. Token’s platform gives banks, payment service providers and merchants smarter and quicker data aggregation as well as direct payment channels driven by Smart Token technology.
Token is just one example of the many FinTechs working tirelessly to capitalize on financial services’ lethargic push towards innovation.
Future of Banking Infrastructure
While the race between traditional financial institutions and FinTechs to leverage data goes on, there’s another important facet to consider – new technologies that will spur innovation beyond government intervention and mandate approval.
To quote Big Data and AI expert Matt Turck, Managing Director at FirstMark Capital;
“The timing seems ripe for a new paradigm in technology to emerge. What will define and propel the next big wave of computing innovation? There’s a rational for making the argument that “AI, Blockchain and the Internet of Things” is the new “Social, Mobile and Cloud”. Those trends are still very much emerging, but their potential impact is massive. What new giants will emerge from this paradigm? Just like social, mobile and cloud have fed off each other, those three trends have a very interesting areas of overlap.”
When applying Matt’s insights to the financial services sector, it’s easy to see the future of banking is already upon us. While cloud solutions are still being implemented within banks systematically, mobile and social are already saturated markets. Companies like clearXchange have created and sold P2P/B2C payments company Zelle to Early Warning Services, a consortium owned by Bank of America, BB&T Capital One, JPMorgan Chase, PNC Bank, US Bank, and Wells Fargo.
The next space race in financial services will not only be between banks and FinTechs, but encompassing all parties interested in financial solutions. The opportunity to leverage immutable secure automation will allow true structural economics to provide benefits to operational inefficiencies, cost saving measures, and innovative business solutions.
While other blockchain startups attempt to tackle use cases related to payments and trade finance, the most realistic opportunities for banks to merge blockchain with AI sits in infrastructure. Blockchain startups like Cambridge Blockchain, whose architecture resolves the competing challenges of transparency and privacy, leading to stronger regulatory compliance, lower costs and a seamless customer experiences are challenging traditional back-office operations. The implementation of this technology coupled with Robotic Process Automation, and Conversational AI could eradicate most menial back office jobs while improving the overall process.
Axoni and Clearmatics have collaborated to successfully demonstrate a derivative contract modeled using Axoni’s domain specific language, AxLang, and the subsequent cross-chain settlement of the resulting two cash payments using the interoperability protocol, Ion, across currency chains built by Clearmatics designed to provide settlement finality.
In the demonstration, an option exercise was modeled in a smart contract coded in AxLang, a new Scala-based programming language developed by Axoni which supports functional programming and enables formal verification of smart contracts for Ethereum-compatible networks. Widely publicized incidents involving faulty smart contracts have emphasized the necessity of secure application development. AxLang’s design and its support of formal verification were driven by the need of its clients, the world’s largest financial institutions, for whom Axoni is implementing the broadest reaching and most ambitious permissioned ledger production projects in the world, including post-trade settlement for $11 trillion notional of credit derivatives.
Symbiotically using blockchain and AI on one platform proliferates a technical solution to a psychographic problem. Contemporary enterprise solutions often lack AI security, Turing, automation, and overall scalability of financial service clients. AI Assistants, search optimizers, and CRM toolkits have the opportunity to transform financial services beyond what we currently consider to be ‘solutions’. An enterprise grade AI enabled solution secured on the blockchain alleviates the above problems. Creating a blockchain infrastructure unique to the solution that can learn and adapt to all enterprise grade solutions regardless of the client will decrease Turing and training time while increasing overall usability of the AI while delivering fast and secure insights.
Innovating Business Models
Ten years after the financial crisis, incumbents are finally making innovation a priority and entering markets in which they don’t currently have brick and mortar presence. More and more banks are considering to instead partner with FinTech companies. Previously, some predicted that FinTech companies would put large banks out of business, however collaboration between banking and FinTech is more realistic.
TD Bank has created a budgeting tool called MySpend, built by neo-bank, Moven. JP Morgan has partnered with TrueCar and Roostify to improve the process of securing financing for purchasing automobiles. Wells Fargo created its Well Fargo Startup Accelerator to explore emerging technologies in analytics, payments, and consumer lending.
Collaboration allows banks to reach a larger range of users and may be the best path towards long-term growth. While FinTechs take advantage of the scalability and brand recognition of large banks, banks can take advantage of the agility and customer-centric perspective FinTechs provide.
Winslow cites Kodak’s demise to which many attribute the company’s inability to enter the digital camera business. He counteracts that Kodak ultimately failed because of tech companies such as Facebook and Instagram which introduced a way to more conveniently take and share photos to social media. He explains that companies have to, “be like an athlete in training that is prepared for whatever hurdles comes.”
Financial institutions must be forward-thinking and seek opportunities for growth. With their plethora of data, banks should be able to extract customer insights to develop personalized offerings that meet their customers’ needs. Many banks already recognized mobile commerce and open banking as their biggest opportunities for growth. With the help of data analytics intelligence, blockchain, and AI, banks must take advantage, not scour away from innovation and collaboration.
1. Merchant Maverick. 23 May 2018 https://www.merchantmaverick.com/stripe-payments-competitors-and-alternatives/.
2. Deloitte: Payments disrupted – The emerging challenge for European retail banks. URL: https://www2.deloitte.com/content/dam/Deloitte/uk/Documents/financial-services/ deloitte-uk-payments-disrupted-2015.pdf
3. FinExtra, CA Technologies (March, 2016): Preparing for the PSD2 – Exploring The Business and Technology Implications of the new payment services directive. URL: https://www.ingwb. com/media/1609662/preparing-for-psd2_vroegh.pdf
4. FICO (2014): Millennials and Their Banking Habits. URL: http://www.fico.com/millennial-quiz/ pdf/fico-millennial-insight-report.pdf UXPin
5. Let’s Talk Payments (January, 2014): T-Mobile launches Mobile Money an un-carrier style app, card, account, Personal Finance… URL: https://letstalkpayments.com/t-mobile-launchesun-carrier-style-personal-finance-product-mobile-money/
6. Accenture (September, 2015): Digital Disruption Nordic Retail Banking. URL: https://www.accenture.com/t20150924T055551__w__/se-en/_acnmedia/Accenture/Conversion-Assets/DotCom/Documents/Global/PDF/Strategy_7/Accenture-Digital-Disruption-Nordic-Retail-Banking-Study.pdf
7. Zelle (Payment Service). URL: https://en.wikipedia.org/wiki/Zelle_(payment_service)