Today's blog post is a Q&A session with FinTech influencer, Theodora Lau.
When a new generation of aggressive fintechs came on the scene about 10 years ago, they were seen as disruptors of the traditional financial services industry. But instead of supplanting banks, insurers, investment managers and others, the fintechs are now partnering with traditional finservs. Together, the two are learning to co-exist and, often, incorporate some of each others’ best practices.
We had an opportunity to speak with top financial world advisor and expert Theodora Lau, founder of Unconventional Ventures, who shared her predictions for fintech and the financial services industry as a whole in 2019.
According to Lau, both are looking over their shoulders at the innovations coming from China in areas such as payments and platforms on one hand and artificial intelligence (AI) and data on the other.
What’s a fintech? What’s a bank? It’s hard to tell sometimes. Banks are continually adding digital capabilities—or acquiring startups whose technology they need. Fintechs, meanwhile, are moving away from their narrow focus. Lau expects more of the same.
Fintechs: Gone are the days when fintechs had a laser focus on just one thing like peer-to-peer lending, student loans or retirement. They’ve come to the realization that their growth depends on a broader approach. Take SoFi, for example. It started as a digital solution for student loan refinancing, and now offers mortgages, wealth management, personal loans and term life insurance.
Banks: Banks are moving in the opposite direction. They have a broad offering menu, but they’re alienating younger consumers. To remedy this, they’re employing digital offshoots. Examples include Chase’s Finn and Goldman Sachs’s Marcus. Both of these are purely digital units targeting different demographics than their current customer base so that they don’t disrupt those traditional business lines. “They might also just try to digitize their existing operations,” says Lau.
At the same time, branches aren’t going away, but their footprints will likely get smaller. As a result, the technology that’s available to serve customers in the branch will likely change. Lau sees banks adopting newer IT infrastructure and technology to enable this next phase of banking.
Collaboration: Banks and fintechs are smart enough and mature enough to understand that each has something the other needs. We’ll continue to see more collaboration, with possibly more mergers and acquisitions, Lau predicts. For example, USAA, which sells investments, insurance and financial planning to military families, maintains a $330 million fund to invest in startups. The firm uses about half of its acquired companies’ products in its own operations.
As banks move more forcefully into digital, data will loom large. There’s huge upside in using data correctly, but big challenges, too. Financial institutions will need a smart strategy to tackle data on these levels:
Storage: Lau notes that we’re on track to have more than 40 zettabytes of data worldwide by 2020. Where can all of it be stored and how can it be handled securely?
Processing speeds: When you’re dealing with so much data, latency becomes an issue, dependent on the use case. IT departments are looking for solutions that provide faster access to data and flexibility.
Insights: A mountain of data isn’t necessarily useful unless financial services firms can turn it into insights for themselves and their customers. “We need to leverage it to gain a better understanding of what consumers prefer and use that to generate new business opportunities that are useful for both the banks and the consumers,” Lau explains.
Big data helps to power emerging technologies like AI. Again, China has the upper hand, due to the vast digital adoption by its citizens. It wants to be the AI world leader by 2030, according to Lau.
AI holds a lot of promise for financial institutions. Says Lau, “AI is very useful when it comes to being able to get different data sources and generate insights. But it needs to go beyond presenting an insight based on historical data to helping you make the best decisions.”
In the year ahead, Lau expects to see more fintechs and banks go deeper with AI. “I think we’ll start to see the use of AI and data analytics to do more predictive banking, so they’re doing more autonomous functions to become your trusted personal CFO,” she notes.
For example, rather than asking Alexa, ‘How much did I spend on groceries last month?’, the AI engine, with insights from your bank, will be able to predict what the future looks like based on your income and spending patterns, and put aside money for you accordingly.
“A bank should be able to tell us how much we should be saving and investing in for different goals based on what it knows about our behaviors and financial picture—and then execute on that recommendation,” Lau says. 2019 could be the year banks move closer to that holy grail.
Financial data is especially sensitive and the cyber threat is real. All firms are actively working on safeguarding their own data, as well as their customers’ data. The ecosystem in the U.S. is making it more of a challenge than a place like China, which has a much younger, more nimble infrastructure, according to Lau. U.S. banks have legacy infrastructure that needs to be upgraded.
There are some interesting security trends to watch.
Biometrics: During this past Singles Day—China’s answer to Black Friday and Cyber Monday—60% of the payments were done through biometrics, such as fingerprints or facial recognition. These methods of authentication are much more secure than using the typical username/password, which you still see in abundance in the U.S.
Hybrid storage: We’ll also see more security in cloud storage, with a hybrid storage solution being one that makes a lot of sense for financial institutions. In this scenario, sensitive data can be stored locally on premise, where the entity can control the data and have its own compliance.
There’s a balance between what banks and other financial institutions centralize and what they decentralize, taking into account privacy, latency and cost.
A hybrid cloud data solution is a natural next step to address many of the security concerns for banks and fintechs. A hybrid solution—like Oracle’s Exadata Cloud—lets financial firms store some of their most sensitive data locally on-premises and then leverage a public cloud for the remainder.
“A hybrid cloud solution will give them the speed and privacy they need and also be able to deliver real-time insights from different use cases,” Lau explains.
This accomplishes several things, Lau says: First, there’s greater control of sensitive data. Second, it reduces the latency issues that currently plague financial services firms and increases their ability to deliver real-time insights. And finally, it still allows them to outsource the bulk of their data storage needs.
With so many innovations on the horizon, 2019 could very well be the year that fintechs and banks make their marks.
Theodora Lau, founder of Unconventional Ventures, was named one of 44 "2017 Innovators to Watch" by Bank Innovation, ranked No. 2 Top FinTech Influencers 2018 by Onalytica, and named to the list of LinkedIn Top Voices 2017 for Economy and Finance, she's a powerful voice in the industry.