Disruption on its way, are banks ready?
The technolo-gical revolution is shaking up the banking industry like all other industries. Today, millennials are no more interested in using the banking system that was designed so long ago and is so outdated.
Due to the rise of technological innovations, the traditional banking system is now challenged by financial technology commonly known as FinTech. Many tech giants are now acting like big banks and disrupting the legacy banking system, these companies are now offering banking services to consumers in a smarter way compared to incumbent retail banks—examples of such services are Apple Pay or Google Pay besides PayPal.
Millennials are embracing these technological developments for their day-to-day payments as this generation is more technology driver than older generations. Banks have the opportunity to cater to them by embracing FinTech innovation for smarter banking solutions.
The people behind FinTech start-ups are usually smart young people who can better predict the future, they solve existing problems offering better technological solutions. These innovative people are changing the banking world for the better without facing too many barriers due to the size of their start-ups. These start-ups are bringing "new market disruption" in the financial services industry offering a better way to pay, send money, borrow and invest.
Banks, on the other hand, usually struggle to come out of their legacy system and bureaucratic trap, although banks have the power to attract the tech talents, they can hardly come out of their old shells. Just offering internet banking or a mobile app for the current account is not sufficient to face the emerging challenges, although it may be a "sustaining innovation" for banks. Banks should not consider their existing strategy as a permanent strategy, if their current strategy is successful, they should rather see it as a temporarily successful strategy and should look for innovations even while their core business is strong.
Incumbent banks should focus on the following technologies to respond to future challenges:
Distributed Ledger Technology (DLT)
This is a decentralised electronic ledger system that allows record-keeping, sharing and synchronised transactions among the independent computing devices commonly known as nodes. Each participant node of the network updates itself independently.
The "blockchain" is now a buzzword in the financial industry which is one type of DLT, the popular cryptocurrencies like Bitcoin, Ether, Ripple, Litecoin and so on use blockchain platform. Blockchain allows users to transfer value cutting the middleman efficiently, reliably and promptly. A report shows 67 percent of central banks experimented with blockchain in 2017.
Artificial Intelligence (AI)
Although AI has been around for over 60 years, it has only recently received mass attention. AI, in some cases, can perform better than human. The financial service sector is now using AI for compliance, quick transaction processing, mitigating human error, automation, etc.
A revolutionary development in AI for the financial service industry is Robo-advisor, an algorithm-based AI tool for automated financial advice that can analyse market data to automatically manage trading portfolio.
e-KYC and Identity
Through the digitalisation of identity checking process banks can make their KYC process easier and better. Blockchain can play a vital role in storing and keeping records of identity. Many well established financial institutions relay solely on the e-KYC process. These institutions collect and verify the customers' identity through their mobile app. Voice and facial recognitions to verify customers are becoming a new norm in digital banking.
Great App with Great UX & UI
Mobile app-based payments are on the rise, banks need to make their mobile banking apps smarter as smartphones get smarter. Merely having a mobile app to view transactions and to make payments is not sufficient to satisfy the customers these days. Banks need to check how smart and intelligent their mobile app is, whether the app can give a great User Experience (UX). The app should be as seamless as possible and banks should consider why people can use Facebook or Snapchat apps easily but struggle to use their mobile banking app.
Cyber-security
The not very good news is that digital platforms are more exposed to cyber-threats. Mobile, wearable technologies and the Internet of Things (IoT) are highly vulnerable. Just Two Factors Authentication (2FA) is not enough to tackle the increasing level of threats, it is possible to intercept the SMS sent by banks for 2FA purpose due to the vulnerabilities in the set of telephony signalling protocols known as SS7. Banks and FinTech companies need to have a proper system in place to tackle cyber-threats.
The very good news is that The World Economic Forum (WEF) has created a consortium of financial services and technology companies to help protect the growing FinTech industry and its customers from cybersecurity threats.
A disruption is typically an opportunity long before it becomes a threat. Incumbent banks have the opportunity, infrastructure, people, funds, data, and clientele to easily embrace FinTech. If they can come out of their legacy system and bureaucratic thinking, banks now have the opportunity to thrive. If banks cannot think beyond their legacy system, the next best move will be to collaborate, not to compete with FinTech start-ups, but if banks cannot beat them, they should simply join them.
Nazmul H Azad Mishu is CEO, Southeast Financial Service UK Ltd (A subsidiary of Southeast Bank Limited). Email: mishu_bc@yahoo.com