The history of banking has been coterminous with the history of money; banking started at various places around the world soon after the advent of money a few millennia ago. The first genuinely modern “fintech” revolution could be said to be the laying of the Trans-Atlantic telegraph cables in the 1850s and 1860s which enabled instant communication between the major financial markets of the time; it can safely be said that since then, banking has embraced technology warily, at best. However,even in the staid world of finance, things seem to be changing, and at the fore front of this change are the Fintech companies.
Most banks throughout the world acknowledge the fact that while standalone Fintech firms are not expected to cause large business losses in the short term, the greater value proposition offered by these firms are setting them up to be significant competitors over a more extended period. In fact, in the Middle East itself, 86% of GCC banks who participated in a 2017 Ernst & Young survey believe that they could potentially lose up to 15% of their business to Fintech companies in the next five years. Still, the real threat to traditional financial institutions (FIs) comes not from standalone fintech firms; rather, it arises from tech giants like Alibaba and Tencent, and from various mobile telecommunication companies who are at the forefront of fintech innovations, especially in Asia and Africa. The good news for traditional firms is that they can quickly transform this threat into new opportunities in they adopt similar fintech innovations to their advantage.
Traditional banking has historically been a closed ecosystem, with data access restricted to segregated silos. Nevertheless, to keep up with the leaps in technology – most notably, the rise of artificial intelligence (AI) and blockchain-based systems, a more “open” system of banking is gaining prominence. Traditional FIs need to be on top of these trends to provide a more value-added experience for their customers, and to keep up with the intense competition they are sure to face from other traditional FIs and the new-age tech firms.
One of the most significant advantages of FIs is the sheer volume of data that is generated on their platforms on a day-to-day basis. A typical retail bank generates several million data points a day, right from the quantity of money processed to the precise location at which transactions are taking place, etc. This data, coupled with the use of AI, can lead to much more accurate and data-driven decision making. Taking this a step further, banks should aim to transition to a data-driven management decision system, given the breadth of data they possess.
AI can also harvest this data to help FIs fight frauds by identifying patterns which might not be discernible to human inspection. A self-improving AI system can detect new, undiscovered cases and further enhance fraud detection over time. For insurance companies, in particular, AI use should be a no-brainer given the immense scope of automation in their entire process – to speed up the determination of insurance requirements for potential clients, for faster underwriting, and to determine (and lower) the probability of claims for both the insurer and the insured. In banks, automated virtual assistants, or ‘chatbots’ can deliver near-human customer service or advice clients, at costs far lower than current values.
Investments in AI aside, FIs are already waking up to the transformative power of blockchain technology for financial applications. According to a PwC fintech report, 77% of incumbent FIs plan to adopt blockchain on a live, in-use application by 2020. One of the most promising uses of blockchain in the financial infrastructure is the disruption of the global payments systems through easier, frictionless p2p payments systems as the system would eliminate the need for financial intermediaries. While currently, the money transfer startups such as Ripple, OKCoin, BitPesa, and Sentbe have tended to focus on crypto-based currencies, the same systems could be adopted for more traditional transfers as well. Secondly, any financial dealings requiring huge compliances and Know Your Customer (KYC) requirements, for example, trade financing businesses of banks, or regulatory and audit compliances, can be optimized using a blockchain network to enhance accuracy, reduce the time required for settlements and reduce risks. These are but two examples of what a decentralized, distributed blockchain network can contribute to an established financial institution.
Given the large scope of activities that can be accomplished using AI and blockchain, FIs realistically have two choices: they can either partner with existing fintech companies (if not acquire them outright) or invest in their own fintech solutions. Ignoring these ultramodern competitors, however, is the surest way to redundancy over the next decade or two.