How will the banking industry look like in 5 years ?
As many traditional banks and financial institutions are filing for bankruptcy, we are also seeing a significant rise of new innovations in the banking industry. New players are coming in with big promises of better services, efficiency and more to the ever-evolving financial industry. The rise in the popularity of cryptocurrency/blockchain is adding more dimensions and lot to think about for customers. Additionally the current financial volatility creates an opportunity for extraordinary innovations that can fulfill the ever changing demand of customers.
The state of banking as we know.....
Anyone who is over 30 years old may recall walking into a bank branch and seeing a dozen human tellers. Nowadays, the human tellers are disappearing fast and in no time, we might just see the hole in the wall. Banking systems as we know of are centralized today. That means that banks control individuals’ money, right to access, and use a complicated and inefficient swift system for money transfers, is exposed to hacking and fraud, and excludes over 2 billion people from the financial markets.
Traditional banking is a largely outdated system. It’s time to forget about going into a branch for a simple transaction, waiting in a line, and dealing with poor service. I expect to see an acceleration in businesses moving their operations online where they have no choice but to embrace cashless transactions- especially in business banking. For small businesses, dealing only in digital transactions can eliminate the risk and effort of handling, storing, and depositing cash. It speeds up the sales process and allows business owners to collect data and provide insight into consumer behavior which will help them make better-informed decisions.
When the internet came along we created a banking system to check transactions online. We then started using mobile phones and other devices then we started talking about mobile banking. But fundamentally we were only letting customers to check balance online using additional devices. Its was only a complementary services. We never reimagined the way we offer services to our customers.
Many fintech companies who positioned themselves as challengers to or disruptors of banks ironically ended up building on top of the business or technology rails of the banks they were supposedly disrupting. Some built front-end skins on top of the technology backbone of existing banks, such as Chime’s relationship with The Bancorp Bank. Others built an entire technology stack of their own but used partner banks to address licensing requirements, such as LendingClub’s partnership with WebBank for loan originations.
“Disruption” has been a keyword in the approach to sectors were technology adoption is lagging. The banking sector is a strange one in this regard. Prop Trading and the Market Liquidity platforms are examples of the industry keeping up with technology. However, those platforms are by and large specifically intended for the banks’ own use, not in support of the banks’ customers.
The banking industry is ideal for disruption on the consumer/customer side, where customers are by and large still paying the antiquated “account maintenance fees”, transaction fees, wire fees, and just generally a fee-based approach to services that should have gone away a long time ago. Let’s be honest here: the bank uses my money to make billions annually in prop-trading. Calling to mind the well known quote: “you’re not the customer; you’re the product.” with regards to TV being a free platform for users (consumers), customers of the Banking Industry are already the product, and the banks are profiting HANDSOMELY off our depository money.
The future of traditional banking : How does that look like?
The banking industry as a whole will be radically different in 5 years thanks to changes being made all the way to the Central Banks. It’s important to specify that there are 2 sides to banking, retail and wholesale, and both are going through their own digital transformation.
The retail banking sector has been able to move into the digital space faster than the wholesale banking sector simply because of the financial “plumbing’ inherent in existing settlement processes. Applications like Venmo, Zelle, Cash App and Apple Pay have already revolutionized payment processing for retail customers by letting them interact directly with each other, almost like using cash. And gig economy companies like Uber Technologies have made it possible for drivers to have instant access to their funds by using an Instant Pay service.
Behind the scenes, though, additional processing is still being performed by the wholesale banks and their digital upgrade has lagged far behind. That is changing and upgrades are finally being made to some existing wholesale payment applications. However, the processes themselves still use an outdated model of account based change that will make banking look radically different in 5 years will be the utilization of Central Bank Digital Currencies.
Utilization of Robotic Process Automation (RPA) By Banking Sector
There are many ways Robotic Process Automation (RPA) boosts efficiency in banking institutions. Automating manual processes is one element; mainly tasks that are repeatable and mundane. The aim is to create standardised workflows, maintaining end-to-end consistency across processes so that they can be deployed throughout an organisation and executed in the same way, every time – otherwise known as a ‘single source of truth.’
A practical example of this can be found in regulatory codes. Banks are one of the most heavily regulated industries in the world, and staff are often tasked with manually interpreting long lists on complex regulatory standards. With RPA, they can simply input the data into the appropriate process, and the correct and compliant output is automatically generated.
RPA implementation begins with understanding existing processes. Every process within an organisation leaves behind a digital footprint containing valuable data – be it manual or otherwise. Process mining is a crucial step in effective RPA implementation because it allows organisations to drill-down into their data, revealing the habits, risks and process behaviours they are usually blind to. This shows how an organisation can refine or standardise processes, revealing opportunities for streamlining and simplifying workflows.
Process mining also allows for data traces to be converted into dashboards and visualisations, enabling teams to monitor end-to-end processes continuously. A clear picture means staff gain operational insights into potential risks and improvement opportunities, which can be shared across functions.
RPA not only works from an internal process perspective, but from an external point of view too.
A significant shift in the banking and financial sector over the past decade is the realisation that customers, rather than product, are the priority. This has been accelerated by the rise of customer-centric fintechs that offer seamless, digital experiences to tech-literate and time-poor customers. As a result, established financial institutions have had to shift their focus to a new way of doing business that puts the customer at the heart of innovation.
Customer-journey mapping (CJM) complements RPA by deriving insights from the different touchpoints of a customer. This is the outside-in approach to link CJM to the enabling processes driving customer-centricity. It establishes processes to log and capture complaints before classifying them and addressing the root cause of the issue. This gives employees full visibility of the most common pain-points experienced by their customers, allowing them to build processes to respond accordingly. Over time, this mapping then evolves into a positive cycle, where data is used continuously to improve customer satisfaction and speed up resolution. This helps organisations understand customer behaviour and connect their processes to predict interactions across future customer journeys, giving them an ‘outside-in’ customer perspective.
Business Process Management (BPM) as a solution.
The 2007 Global Financial Crisis was an indicator of how quickly the stability of financial services can be compromised. This led to stricter controls and measures to improve transparency across the sector. The Royal Commission in Australia has taken regulatory accountability even further.
Banks are one of the most highly regulated industries in the world. Not only that, regulation differs country by country, and as the world continues to transform through digital innovation at rapid speed, compliance standards are ever-changing. The combination of these factors means banks always have to be on the front foot when it comes to compliance, which is why the leading financial institutions are turning to enterprise-wide Business Process Management (BPM) as a solution.
BPM helps financial institutions make conformance checks based on their own real-time data. Process mining is an extremely rapid and accurate method of validating and then automating compliance It excels in identifying non-compliant behaviour within an organisation’s process landscape by comparing the way a process actually runs to the way internal policies and external regulators say it should run, providing both qualitative and quantitative insights. When compliance violations are detected, a platform combining process mining and process management, actions the necessary response quickly and efficiently.
Process modelling provides a visual representation of each process model for easy identification of non-compliant procedures, as well as an automatic report that highlights any risks not covered by a defined control. This is essential information for risk management teams and internal auditors to have a clear view of, to ensure any gaps or oversights are identified and acted on immediately.
With process mining, banks are empowered to respond to changing market dynamics with less exposure to risk. Additionally, banks can use modelling as a tool to trial proposed process changes, meaning business process optimisation can be carried out in just a few hours as opposed to the standard months.
BPM is the ideal way to communicate with regulators, minimising non-compliance risk and therefore increasing an organisations’ agility in the fast-moving financial services sector.
The US and a lot of European countries were moving towards a cashless society prior to COVID-19, the crisis has only accelerated the process. Automated POS systems designed to operate without cash would make it easier for small and medium enterprises to operate without cash. The adoption rate of such systems will be even higher and faster. As the world recovers from the pandemic these systems in use in no time would feel it was there forever.
Use of Cryptocurrencies such as bitcoin, Ethereum, ripple and others gives customers the option to transfer funds more quickly and often at cheaper transfer fees compared to traditional banks. A relatively new industry, crypto has already diversified from just currency and payments, to insurance, lending, investment, and other financial areas. As a result we will see more and more fintech startups using cryptocurrencies as a foundation of their service offerings.
We have yet to see an institutional demand for crypto derivatives catching up to general interest. Currently, most of the open interest across futures comes from miners that want to fix their margins by selling for production. Institutional speculated demand is still so low that the base that we have of 500 hundred million dollars equivalent open interest is just a start for CME. Moreover, it will not be as small by the end of the year: the numbers will triple in size at least - mark my words.
eCommerce has been in use for a while. Due to COVID-19, we’ve witnessed furthermore use of eCommerce for most businesses which otherwise required physical presence of the customers. We would soon see big eCommerce giant to offer financial, insurance and other transaction services using their own cryptocurrency.
DeFi: Decentralized Finance
The future of banking is what is referred to as DeFi, Decentralized Finance. In the new emerging world, individuals will control their own identity, their own assets, their own data, their own finances and will have the ability to interact decentralized with these assets and other individuals/businesses via their mobile or smart devices. These devices can include a mobile phone, smart glasses, smart watch or other Internet of Things (IoT) devices connected to a wired network, secured by blockchain technology. Previous policies including GDPR, Open Banking, PSD2 trailblazed with some of these standards.
New standards like W3C Verified Credentials which includes self sovereign identity is evolving these standards where individuals from anywhere in the world will be able to participate in and control their banking and financial lives.
Technology is slowly but surely eroding the Big Bank Hegemony, and it’s both a welcome change and long overdue. Big Banks will need to catch up, FAST, in order to continue to compete.
A world with fewer in-person financial service interactions means a world with more cybercrime and financial fraud. Fraud prevention is a key area where AI’s ability to recognize patterns is proving valuable and will expand.
Automated customer service interactions via AI chatbots are already being adopted but will expand to include more tailored financial advice. In the future, increasingly personalized AI advisors may be perceived as more trustworthy, objective, and reliable than in-person advisors.
The use of machine learning to improve credit decisioning models isn’t new to the financial service industry. The applications of this technology will expand to new applications, such as monitoring borrower spending behavior post-funding to identify risk patterns for default so a financial institution can proactively take steps to intervene.
Banks and other financial service providers were early to adopt AI broadly. AI allows for faster transactions while giving customers the convenience they demand and significantly reducing operating costs. The adoption of AI will accelerate to broaden existing implementations and expand into new ones.
Pramod Dhakal is a Tech entrepreneur at heart, a natural leader and Agile practitioner. He has spent over a decade in implementing various large scale transformation initiatives in large multinational organizations. He is an author and contributor at Hitechies largely in the technology space.
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