Table of contents
Executive summary
Technology has disrupted just about every industry over the last decade of digitalisation. Financial services is no exception. Insurance and investment management, as much as retail banking, were already heavily reliant on information technology. The advances now being made have huge potential to transform – the internal processes of these service providers, how they interact with their financial ecosystems and, most obviously, their dealings with clients.
ShapeLike many of their end customers, financial service companies are investing to save. These technologies can drive down the costs of back-office functions, transactions and staffing (by reducing headcounts). By extracting value from vast data, they can also make more commercially astute decisions, for example, better underwriting in insurance. In the retail banking sphere, this information – pooled through Open Banking in Europe – can shape more personalised, competitive and responsive products and services.
This revolution is already well under way. In Africa and India payments and micro-loans are transmitted by mobile phone, while in more developed countries, smartphones are the new branch network, and increasingly used as electronic purses and wallets too.
When it comes to their finances, it’s not just millennials and Gen Z who expect constant access at their fingertips. Nearly three out of four adults in the US now bank online at least once per month, and Europe (with 70%) is not far behind1.
Banks have to offer customers clear and streamlined ways to manage their finances. Consumers also expect more personalised products and services, and are no longer loyal to the same bank or financial service provider for life. They are as ready to embrace apps for finance as they would music, exercise or mindfulness.
A decade on from the global financial crisis, the banking and financial services industry is facing tough macroeconomic conditions, increased regulatory scrutiny, and growing threats from cyber crime and data breaches. Alongside the potential of new technologies to transform their operations and services, there is the disruptive force of tech-driven start-ups to contend with.
All this amounts to a massive challenge – strategic and operational as well as technological – for an industry that is gargantuan, yet changing rapidly by its standards. The world of banking illustrates the scale. In 2007 none of the world’s top ten banks were Chinese. By 2018, the four biggest were2. China’s banking industry is now bigger than the entirety of the EU’s put together3. JP Morgan Chase is the fifth largest. And in 2018, the USA financial sector peaked with $17.5 trillion in total assets4. This industry is also a major employer, not least in the UK. “1 in 14 British jobs are in financial and related professional services”5.
The stakes are high and investment in new technologies and innovation will be relentless as companies seek cost savings and competitive advantage, new entrants exploit applications more nimbly than incumbents, and regulators try to keep pace with this technological change and avoid the kinds of disruption that could destabilise a financial system on which so much depends.
There are five main technology trends that we believe will attract the lion’s share of financial companies’ investment in research and development in 2019:
The five trends
- Artificial intelligence
- FinTech, InsurTech, RegTech
- Big Data
- Blockchain
- Cyber security
Artificial intelligence
Computer algorithms and applications that perform tasks previously done by humans are changing the world as we know it. All sectors and industries are being disrupted at some level. Tasks, often time-intensive, that had to be done by humans, such as image or speech recognition, can now be completed in an instant, and with increasing reliability.
AI works through technologies such as Neural Networks, Machine Learning and Natural Language Processing (NLP). These technologies are used to create algorithms that are fed data to create innovative applications such as self-driving cars.
In the finance sector, AI’s influence can best be seen in banking. Applied to payment and transaction processes, AI is supporting fraud prevention and boosting detection.
Investment banks, with their bigger R&D budgets, are leading the way, but the technology has begun to filter down to retail banks. In 2018, HSBC announced it would be using AI in the detection of money laundering, fraud and terrorist funding.
AI is playing a growing role in banking not only behind the scenes but on the front lines. As early as 2010, Santander launched its knee-high ‘red robots’ to guide its Spanish visitors to its new visitor centre in Madrid. But now we are seeing the rise of the chatbot, a relatively low-cost application of AI. Customer-facing positions within banks and insurance companies are starting to be filled by these virtual assistants. Meanwhile, UBS has been using Amazon’s Alexa for its online customer service, and digital wealth manager Nutmeg, the UK’s largest robo-advisor, gives its 60,000 clients AI-directed advice on investment management and products.
The growing sophistication of NLP over the last few years has made it harder for customers to tell whether they are interacting with a robot or another human. Chatbots can advise customers on the best investments for their personal needs. Their advocates argue that chatbots have the knowledge to take a far more holistic view than human staff, better meeting the demand for a comprehensive range of services offered at lower price points. This can also have a democratising effect, as more sophisticated investment advice – previously only available to much wealthier clients – can be offered more widely and in a form readily acceptable to digital-savvy consumers.
Operational efficiency can be better served by exploiting AI. In 2017, JP Morgan announced its new Contract Intelligence Platform, or CoIn for short, a system to review legal contracts, “extract value and service our loans”. The US banking behemoth reports that while staff were able to process 12,000 credit agreements per year, CoIn could tackle thousands per second “with less error and greater efficiency”.
AI-enabled tools are also likely to play a part in managing the potential conflicts in Europe between data sharing, driven by the Open Banking initiative, and data protection, under the GDPR customer privacy regulations.
While the power of AI is hugely significant, it’s important to note the potential pitfalls and limitations. Using algorithms can leave companies open to bias. As with all computing, the ‘garbage in, garbage out’ mantra applies. AI is only as good as the data that is fed into it. Inaccuracies will be reflected in the outcomes of the data analysis process. Other industries such as advertising have already seen the negative impact algorithmic bias can have. For example, AI at YouTube broadly demonetised channels and videos. Microsoft highlighted the dangers of teaching AI using public data when its chatbot Tay soon began to parrot the racist prejudices of some of its human correspondents6. In the financial sphere too, there is ample opportunity for innovators to ‘clean’ and improve the quality of data, and to support ever-more efficient pattern recognition.
AI in finance is still only in its infancy. According to the Financial Times, “rather than racing towards an AI- enabled future, the industry is feeling its way forward”. Potentially, all routine tasks that are rules-based, in areas such as insurance and asset management, could be automated. Currently, AI applications are designed to perform a specific task. However, there is the potential for introducing a multi-tasking element that will allow for more sophisticated applications – from fraud prevention or allocation of investments to retail banking services.
The potential to exploit AI in the insurance sector extends much wider and can engage customers in new ways that provide mutual benefits. At least one major insurer is investing in AI photo recognition and smartphone applications that would help householders ensure that their possessions are identified and valued accurately so as to get the most appropriate level of cover and premium.
Finance is a multi-faceted industry with a wealth of potential applications for AI that will enhance services to customers and spur operational efficiency in back- office functions. The technology will drive down costs and automate roles, while also spurring innovation in products and services, and widening the market to new customers as banks and service providers seek competitive advantage, let alone secure their survival in the digital age.
FinTech, InsureTech, RegTech
Within the last decade there has been a pattern of people quitting their jobs in big financial services firms to launch start-ups, often in partnership with technologists similarly intent on shaking up a niche area with new technology.
FinTech start-ups are appearing across the industry. FinTech “seeks to improve and automate the delivery and use of financial services”.7 Revolut, Transferwise and Funding Circle are examples of new, tech-led companies looking to bypass banks by streamlining the business of making payments, currency transfers and lending.
In the area of money transfer and payment services, the market share of FinTech providers more than doubled from less than 25% in 2015 to more than 55% in 2018.
The revenue potential for the most successful entrants is significant. By the end of 2019, market analysts Gartner predict that one in four retail banks will be using start-up providers to replace legacy online and mobile banking systems.
Under the umbrella of FinTech also comes InsureTech, which seeks to create “technology designed to squeeze out savings and efficiency from the current insurance industry model”8 ; and RegTech – innovative technology used to address “regulatory challenges in financial services”9. Research in these sectors is finding technological solutions that can significantly reduce the need for staff, cut costs and speed up compliance
In the same way that big pharmaceutical companies are buying up biotech start-ups using big data to shake up the pharmaceutical and health industry, incubators and mentorships within large banks (such as JP Morgan) are supporting smaller innovators and start-ups within finance. These companies are able to innovate faster than the big, incumbent banks and can turbocharge their growth with access to the big players’ market data and expertise. Meanwhile their hosts have the chance to choose from the most innovative talent and services.
Open Banking is designed to drive this cycle of innovation in mobile and online banking even faster, unleashing further waves of new apps and services. The banking sector is braced for major disruption. There are now roughly 50 to 60 new challenger banks in the UK, 99% of which are tech-driven.
Monzo is the most notable, styling itself as ‘the bank of the future’. Launched with a team of just 300 people, it promised transparency in contrast with the ‘opaque’ banking of the established banks10.
Monzo’s tech-driven approach to banking is popular amongst millennials. For 2019, it was voted the bank with the most satisfied customers, according to Which? Magazine, while incumbents like HSBC and Royal Bank of Scotland trailed at the bottom of the list11. It epitomises a new generation’s desire for a fresh style of banking, readily available on their smartphones, and simple and clear enough to understand at a glance.
A related FinTech trend is platformification – bundling together multiple services onto one online platform to provide users with an automated, efficient and integrated customer experience.
In the US, LendKey – which has pioneered the ‘lending as a service’ model – works with some 300 banks and credit unions to create custom, white-label online lending platforms. The New York-based FinTech company is backed by venture capital providers including technology investment specialists Updata Partners.
Its stated aim is to transform the €3.6 trillion consumer lending market using innovative cloud technology to allow the country’s 13,000-plus community financial institutions to offer low-cost borrowing options.12
Meanwhile in the UK, Yourkeys (no relation) is streamlining the process of buying new-build homes. The startup set out to simplify one of life’s most stressful transactions, tracking the purchase of a home like an Amazon parcel or Uber taxi ride. Its platform offers a full end-to-end service from search to completion with a live timeline showing progress at each step, including offer and acceptance, conveyancing, mortgage and insurance, as well as allowing users to select home upgrades and finishes. Developers can integrate the platform in their own website and marketing.13
These start-ups show how technology can make it much easier and quicker to meet consumers’ financial services needs. In addition, transaction costs can be streamlined and better products and services developed for customers.
Some predict that within the next five years there could be 10 times more retail banks. Whether or not such forecasts are borne out, tech-driven innovation within the financial sector – by established players and new entrants in insurance, investment management and banking – will be a strengthening trend through 2019 and beyond.
Big data
Big data is AI’s big brother. While AI is driven by machine learning, big datasets fuel the intelligence engine.
Banks and insurance companies have access to huge volumes of data and are looking to harness this information to drive efficiencies in their businesses and generate personalised, targeted offers for customers.
Data is a high-value commodity, and data analytics is being used to mine its value across sectors, as with AI. “Big data is an incredibly profitable business, with revenues expected to grow to $203 billion by 2020,” according to Chris Neimeth, COO of NYC Data Science Academy.
Traditionally, data has tended to be stored departmentally within companies in data silos This can be limiting, as companies can have multiple pockets of data, potentially on the same client, without knowing which information is most up-to-date or joining the dots to complete a clearer profile of their customer.
Given the new practicalities of massive data storage, powerful analytics and more intelligent marketing, companies are turning away from the traditional methods of data collection and storage, and instead pooling big data within data lakes and warehouses.
This allows information to travel between departments, constantly updating, and each can see the bigger picture. Handled correctly, big data boosts efficiency and reduces companies’ operating costs.
But there are potentially ever bigger advantages. Insurance companies can make better underwriting decisions based on the wider breadth of data they access. Hedge fund investors can create more sophisticated trading models.
Banks too can identify opportunities to offer customers more tailored and timely products and services. Data- driven marketing, for example, means a retail bank seeing that a customer has booked a holiday, will know to offer currency deals or travel insurance. Alternatively, a customer with a higher salary thanks to a new job or promotion, is offered a suitable investment product based on their new earnings.
‘Predictive banking’ – offering an intelligent interface tailored to the customer’s needs – is a new buzzword for 2019. Spanish banking group BBVA, ranked top for online banking services in Europe in 201714, has developed a data-driven service for customers considering buying or renting property. Called Valora, it allows them to factor in approximate market values for their own and prospective homes and the impact on their finances of mortgage, insurance and other expenses – all from their cellphone15.
Furthermore, Open Banking makes big data even bigger. The EU-driven move to increase competition allows financial institutions to access not only the data of their own customers, but those of competing banks as well. Banks may form a fuller view of new or prospective customers’ financial positions and make quick and personalised decisions on products and services that best suit the individual’s needs.
Big data, like AI, also plays an important role in fraud detection. Open access to data allows banks to better predict the patterns and behaviours of particular customers and therefore spot fraudulent transactions and prevent them from recurring.
Just as the freedom of Open Banking and data lakes make accessing large volumes of data far simpler, they increase the complexity and the stakes, when it comes to processing, management and security.
Innovations around the responsibilities that come with big data, as well as the back-office and marketing opportunities, will continue to be a major focus of investment in the foreseeable future.
Blockchain
Blockchain is a distributed ledger technology (DLT), a database of transactions that has been agreed to be shared across multiple websites, institutions and countries. This sharing of information creates a series of ‘witnesses’, each with an updated copy of the ledger.
Ledgers are saved in blocks across multiple servers. Through cryptography, computers can then discover the next block of information in the chain. Because it has no single central authority, blockchain is safe from cyber- attacks or records being falsified and altered. There is only one source of truth that all parties are privy too.
Blockchain was invented to create Bitcoin, the cryptocurrency launched in 2009 by the elusive and pseudonymous software developer Satoshi Nakamoto. Bitcoins are produced by computers across the world and maintained by volunteer coders. The rollercoaster ride of Bitcoin’s backers has sparked fierce debate among finance experts worldwide, as it has inspired more than 1,500 other cryptocurrencies.
Bitcoin and its imitators should be far more secure than traditional forms of fiat currency (money with no intrinsic value). A cryptocurrency that cannot be hacked or corrupted, and is decentralised, not relying on state backing, seems fitting for the global trading village of today, especially after trust and confidence in traditional banks and currencies were shaken by the financial crisis of 2008.
While cryptocurrencies are impacting financial institutions, the genius of the underlying blockchain technology means it has far wider implications for transactions systems and security, not just in financial services but many other sectors.16
By bypassing the operational bureaucracy of financial institutions such as banks, payments should theoretically be easier, if not quicker, as well as offering greater accuracy, transparency and traceability.
Within the last few years there has been a huge increase in transactions via blockchain. The University of Cambridge’s Centre for Alternative Finance estimated that there were between 2.9 million and 5.8 million unique active users of cryptocurrency wallets in 2017 – and highlighted how these new currencies were supported by a “growing ecosystem fulfilling an array of functions”.17
By allowing web users to create value and verify digital information, blockchain can unleash innumerable innovations in finance as in other industries. Quorum has developed an enterprise version of blockchain, building on Ethereum, the open-source platform for developers and most promising next-generation version of the technology.
Quorum can make blockchain more commercially viable and is more efficient in energy use; the global mining of Bitcoins consumes more power than Ireland or most African countries.18 Quorum also seeks to negate the need for a central authority with a peer-to-peer network while giving its consumers more privacy than other blockchain currencies.
In 2017 JP Morgan announced it was launching – in alliance with ANZ of Australia and the Royal Bank of Canada – a new inter-bank payments platform powered by Quorum.19
Blockchain can speed up payments across borders. TraDove – the “global business social network” – provides “a reliable and profitable ecosystem for buyers and sellers to easily find each other”. The network mines its own cryptocurrency called BBCoins, which can be exchanged globally through TraDove’s “transparent and secure smart contracts” or can be deposited into a shared company account to use for targeted advertising. Founded in 2012, TraDove now hosts over 250,000 users from over 10,000 different businesses worldwide.20
Blockchain is still an emerging technology, constantly updating and evolving, and it will take time to reach maturity. As it is developed with different protocols, programming languages and platforms, blockchain is harder to integrate with existing local and cloud-based systems. This disparity hinders the global world view its champions are trying to create.
The technology can also be slow in comparison to existing systems of payment. In theory, peer-to-peer networks should work in real-time. However, as blockchain hugs system resources while executing transactions, the technology can be slower than conventional processes.
Nevertheless, blockchain is truly revolutionary. It has disrupted the operation of most business domains and will no doubt be a key player in the future of finance and banking. Not least, it holds tremendous potential in security and many other applications and sectors. Large incumbents and individual stakeholders are seeking ways to improve the performance of blockchain. They are building proof-of concepts and exploring techniques for processing transactions.
Their commitment reinforces the view that blockchain can and is moving mainstream. It will be used more widely in the financial sector and not just for payment processing but also other applications – from smart contracts and share trading and registration to currency exchange, receivables funding, and client knowledge (KYC, or know your customer). Not including those uses we don’t yet know.
Cyber security
As we have seen, a common thread – or concern – with technological developments in finance is cyber security. Will these technologies strengthen or hinder the protection of systems and consumers’ data?
For financial service providers and regulatory authorities alike this is a burning question. Reputations are on the line and lost consumer trust is difficult to regain, aside from the potential fines from regulators for mishandling personal information. The industry needs to address security weaknesses and vulnerabilities in all their systems, not least the emerging technologies they are leveraging.
In 2017 the banking and financial sector suffered 134 separate data breaches, almost triple the number for the year before.21 By the half-way mark in 2018, banks had been hit by another 84 hacks, putting the industry on course to continue a negative trend.
As the number of computer systems globally grows exponentially – and businesses, governments and individuals become ever more reliant on them – so does the need for robust cyber security to protect them and keep our data safe.
Many organisations have started transferring their IT infrastructure to the cloud in order to reduce costs. Because cloud storage systems are constantly evolving, they are the perfect space for innovation in cyber security to deal with new threats, business operational problems and system infrastructure challenges. This gives banks further reasons for moving systems to cloud-based platforms like Oracle Fusion.
Boasting “the world’s largest knowledge base of data,” the corporate name Oracle seems apt. It claims the top 20 banks, top 10 aerospace and defence companies, top
20 governments, and top 20 high-tech companies as customers. For them, security is a primary concern, Oracle stresses.22
Consumer demands for instant access to financial services on the go and the shift to Open Banking and sharing of detailed information about our financial lives could leave customers’ data in a more vulnerable position.
Traditional approaches to security risk management and protection of data and infrastructure, such as monitoring firewalls and endpoints, have failed to prevent breaches. Accordingly, cyber security has shifted towards a more preventative approach such as penetrative testing, where simulated cyber-attacks are used to find weaknesses, flaws and vulnerable access points.
Regulatory bodies must strive to keep pace with the increasing risk of cyber-attacks as they update regulations and compliance processes to anticipate the threats from agile cyber criminals. Blockchain holds out the prospect of a more secure technology for highly regulated industries such as banking, due to the technology’s ability to filter system or network security activities in real time and identify manipulated data.
Investment in this area will continue to grow. Global market intelligence firm IDC predicted compound annual growth of 11.4% in spend on security solutions from 2016 to 2021. The imperative for getting cyber security right is compelling.
Some final thoughts
Banks and financial organisations were the pioneers back in the 1950s when they switched from paper- based recordkeeping systems to mainframe computers on an industrial scale. The fintech revolution, and the shift to technologies harnessing cloud platforms, big data analytics, artificial intelligence and blockchain, is no less significant. The ramifications will be far-reaching.
The finance, insurance and investment management sector is ripe for innovation. Much of this will displace jobs. Japan’s Mizuho Financial Group plans to replace a third of its workforce with AI by 2027, while former Citi Group Chief Vikram Pandit believes that within five years 30% of banking jobs will be wiped out.23 However, many new roles will be created within financial service providers and their tech partners. The numbers and the job descriptions will only become clearer as these trends ripple through the sector in the years ahead.
These technological trends can not only transform the cost base and patterns of employment within the sector, they will upset the established pecking order and are likely to usher in a growing cast of tech-savvy and nimble challengers. The competition to offer more tailored and cost-effective products and services to consumers and businesses is intense. The potential gains are spurring investment and ongoing research in these technologies and others to bolster security, regulation and compliance.
Unlike the transition to computing of 60 years ago, this time the wave of innovation breaking across the finance sector has multiple fast-moving currents. Though it may not yet be clear where they will lead, these different technologies will impel a raft of further developments through 2019 and the coming years.
Mark Smith
Partner, Innovation Incentives
Mark joined Ayming in 2018 as a Partner to lead the Innovation practice, which primarily focuses on R&D Tax and Grants. A Chartered Accountant and Chartered Tax Advisor, he has previously held senior roles at KPMG, and holds a Chemical Engineering degree from The University of
1 www.forrester.com/blogs/who-currently-offers-the-best-online-banking-services-in-europe/#edn1
2 www.thebanker.com
3 www2.deloitte.com/us/en/pages/financial-services/articles/banking-industry-outlook.html
4 www.fdic.gov/bank/analytical/qbp/2018jun/qbp.pdf
5 www.thecityuk.com/news/financial-industry-growth-strong-across-the-uk/
6 www.theverge.com/2016/3/24/11297050/tay-microsoft-chatbot-racist
7 www.investopedia.com/terms/f/fintech.asp
8 www.investopedia.com/terms/i/insurtech.asp
9 www.investopedia.com/terms/r/regtech.asp
10 https://monzo.com/about/
11 www.which.co.uk/money/banking/bank-accounts/best-and-worst-banks-a3q5d8c6dj7y
12 www.lendkey.com/about/?sk=organic
13 www.yourkeys.com/
14 https://go.forrester.com/blogs/who-currently-offers-the-best-online-banking-services-in-europe/
15 https://www.bbva.es/eng/general/banca-online/bbva-valora/index.jsp
16 https://opinions.ayming.co.uk/blockchain-digital-penny-drops/
17 www.jbs.cam.ac.uk/fileadmin/user_upload/research/centres/alternative-finance/downloads/2017-global-cryptocurrency-benchmarking-study.pdf
18 https://powercompare.co.uk/bitcoin/
19 www.coindesk.com/jpmorgan-launches-interbank-payments-platform-quorum-blockchain
20 https://medium.com/@tra_dove/tradove-company-ama-d7c9e1b24093
21 www.avoka.com/blog/2018-top-banking-trends-guide-mid-year-update/
22 www.ft.lk/front-page/Oracle-on-course-to-be–1-in-Apps/44-670348
23 www.ft.com/content/b497a134-2d21-11e8-a34a-7e7563b0b0f4
