Banks Must Dive In and Ride the Digital Wave

Guest Author

Blog By: Tushar Chitra, Senior Director, Product Marketing, Oracle Financial Services

Evidence on banking transformation is mounting every day. One need look no further than FinTechs and their pace of growth. The global financing of FinTechs is estimated to have increased seven fold 1 in the three years between 2012 and 2015. This momentum did not abate in 2016. And FinTechs are likely to continue their bullish run through 2017 maintaining their uber momentum. Without doubt, high growth patterns will be the new normal for FinTechs. In tandem, digital will continue to spread its tentacles across every aspect of consumer life. FinTechs are further set to benefit from this rising digital adoption.

Consider the success of mobile apps such as taxi apps. Pioneering mobile app innovation, mobile taxi apps have successfully redefined the cab landscape. They even created a new group of customers for banks. By virtue of moving their newly registered cab drivers into the banking ecosystem, they shared a part of their success with banks. Banks happily welcomed them, adding a big number of new bank accounts quickly in a matter of days. Left to banks, they would have taken a few years to add the same number of new customers. Such is the impact created by disruptors, whose effects transcend sectors and industries. Also, 2016 recorded a historic feat, largely unnoticed. For the first time the number of card payments surpassed that of cash payments 2. We see that consumer behavior and technology innovation outside of banking is now cascading into banking.

Evaluating the changing landscape and its outcomes are absolutely necessary to a bank’s survival. Let us continue with example of the taxi app, where roping in and retaining drivers is fundamental to their success. Many cab drivers had to open bank accounts only because of them and became part of the financial ecosystem. Now the taxi apps can provide incentives to their drivers through a variety of value added banking services to increase driver loyalty. The driver network can benefit from the new banking services offered by the app. These cab drivers otherwise may not have access to such services. For example, if the cab driver was looking to upgrade his vehicle then he would need a new car loan. With full knowledge of that driver’s history, the taxi app would be better placed to originate this loan instead of the partner bank. However, it would still be the bank which offers this loan. The banks benefit immensely by selling more products and services to new customers acquired through this partnership. By simply participating in such an ecosystem, banks can chart a new path to success. Disruptors such as mobile apps or other FinTechs cannot really act as a bank, and therefore they look to partner with the best of banks that are both agile and innovative. In a fast changing world, banks must recognize that success can come in different ways, forms and places. Going forward, it will be a world of collaboration and partnerships, where a bank will likely play a new but a crucial role.
Globally, regulators and governments are supporting innovation in the financial sector. Europe’s PSD2 and UK’s Open Banking Standard are important initiatives in this context. For example, PSD2 will enable third party providers such as retailers to now compete with traditional payment providers.  With the consent of consumers, retailers can directly seek information from their bank accounts to complete payment transactions without a need for intermediaries. Also, a new group of information aggregators who keep track of a consumer’s multiple bank accounts and their financial history are emerging. Such aggregators will help the users of their platform to engage in ways that will benefit consumers. Consumers can reap the benefits from this arrangement but only if they are willing to share their financial history with a trusted partner. By amending policies in  the financial sector, regulators are hopeful that it will create an environment which will foster innovation, increase efficiency, boost competition and provide a level playing field. However, consumers assent will be mandated in order to use their data. Compliance for data security and consumer privacy is set to become more stringent as banks begin to open up as mandated by regulators. 
Beyond the drive from regulatory authorities, we also see fundamental shifts in technology affecting the banking landscape. State-of-the-art applications of internet of things, blockchain and artificial intelligence such as machine learning have the potential to change how banks operate and deliver products and services. Unleashing these technologies early in the adoption cycle inside a banking setup can yield good results, provided banking executives are receptive to innovation. Robot advisory, for example, is catching on. 
As we move into an ‘Internet of Things’ world, we can further expand our earlier taxi example. Consider a scenario where the cabs are part of an IoT ecosystem. The vehicle generates a continuous flow of information about its usage, condition, driving style, and also maintenance records. Considering this level of detail for a car loan would certainly help determine a fair value for the old car and also help reward the good drivers – at least until the point where cabs become driverless.  One can safely assume that most banks today are not in a position to use this level of information (from IoT) to make decisions. The inertia of banks in responding to technology advancements and their unpreparedness will significantly hamper their growth.  
The amount of regulatory and compliance requirements will increase with new technologies. As regulations compound and volumes of data explode, the challenge for banks will be to deal with this complexity. If not addressed appropriately, banks can become vulnerable to data thefts and hacking. At the same time, it also presents an opportunity for an emerging group of technology companies who specialize in securing banks with solutions that deal with complexities resulting from a combined explosion of digital, data and regulation. We can expect a steady growth for these companies called ‘RegTechs’, a shortened version of ‘regulatory technology’.
As banks get ready to face the incoming tide, here is a list of key criteria fundamental to any strategy:
Know Your Customer: Banks have been gathering customer data and their financial history for over many years. This data resides in the many systems which banks have been running during this time. Despite the wealth of customer information residing within, many banks are unsure of how much they really know about their customers. The number of customers who transact using or with FinTechs / third party players will continue to rise. These newer players, who are at the front of customers, will start enriching their own database with valuable customer transaction information. These players are usually smaller and nimbler without any legacy baggage and operate with modern systems designed for scalability. Accumulating their customer transaction data over time, the newer players will also be able to generate invaluable customer insights in the future, very similar to what banks are aiming to do today. Without doubt, banks at the moment have an enormous advantage over the newer players. However, in order to stay relevant and essential, banks must ensure they consolidate all customer data already residing within their many systems and synchronize all customer data flowing through their different channels today.
Build Partnerships – but start early to influence and innovate: Partnering for growth will be a key element in a bank’s strategy. Banks can establish an ecosystem by collaborating with third party players, retailers, FinTechs, RegTechs, etc and allow for innovative methods in product manufacturing, delivery and customer onboarding. The real test is in their ability to influence and build their partner network. It is important that banks start early and exhibit leadership in developing their ecosystem rather than becoming a late participant. Otherwise they would risk losing their ability to offer their own infrastructure as per their own terms and certifications for utilization. They should constantly engage with IT users, partners and developers to nurture innovation and stay relevant in the evolving landscape. The significance of APIs and an open API ecosystem is growing largely due to their ability to establish such partnerships. If banks have to effectively participate in this API ecosystem, then banks should first simplify how information is exchanged between systems internally and reduce the difficulties arising from legacy systems. While building partnerships, they need to enforce policies which ensure security and protect privacy. 
Make Digitization Top Priority: Digitization is crucial to banking processes with customers initiating transactions anytime and from anywhere, through FinTechs or other players. Customers expect instant gratification without any hassles 24X7. Banking partnerships can only be built based on their ability to fulfill customer needs. A growing partner network will further increase the need for concurrent usage and reconciliation. Beyond responding in real time, banks should be able to use the data generated by customers to contextually engage them either directly or through their partners. Therefore, it is imperative for banks to increase automation and improve systems integration. Digitization is vital to improve productivity, operational efficiency, security and lower risks.  
Get Serious About Cloud: The ability to handle massive volumes of data without hampering the performance of systems crucial to banking can be gained only through cloud. Cloud will improve a bank’s agility and scalability. Non critical functions and non sensitive information are the easy start points that can be moved to cloud. Private and hybrid clouds are other options available for more sensitive and core business functions. Using cloud, banks can offer more services at lower costs. The economics of costs clearly favor cloud as compared to on-premise options. With increasing partnerships, globalization and newer technologies like IoT set to take off, the volumes of data to be handled will further multiply exponentially. Cloud will move from being an option available to banks to something fundamental to their existence.  
In the evolving banking landscape, the above four criteria can be considered essential for banks to break the mould, but by no means is a complete list. 

Tushar Chitra is the Senior Director for Product Marketing at Oracle Financial Services. He can be reached at Tushar dot Chitra at oracle dot com



[1] http://investingnews.com/daily/tech-investing/fintech-investing/fintech-market-size-a-breakdown-of-the-basicssub/
[2] http://blog.euromonitor.com/2016/09/consumer-card-transactions-overtake-cash-payments-first-time-2016.html

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