has been a long time coming, but the financial services revolution is finally here! Disruptive trends across markets, industries and demographics are driving new thinking and opportunities for investors, consumers and other stakeholders in the industry. Over the years, money as a transaction medium has evolved, from cash to card, from digital to virtual payments. It seems that advancements in technology will be a catalyst for further disruption. Welcome to the 21st century where Cloud-based technology, cryptocurrencies and borderless banking are no longer the future, but today’s reality.t
So, what are some of the most exciting trends in financial services?
API, Digital and Mobile Banking
Great advancement in digital and mobile technology has changed the way we live, work and communicate. From shopping online to booking a taxi, many of us now organise our lives through our mobile phones. Managing money this way has been challenge, until recently with the advent of neo or challenger banks. Revolut, Monzo, Starling, Atom, N26 and many others have successfully designed what is a “perfect” bank account. They’ve built digital-only, innovative banks offering features such as faster payments, contactless cards and real-time transaction processing. What they offer today’s customer is better control over their finances, using data analytics to access to a mobile market of products and services that best fit their financial needs. Perhaps the best of the latest developments is ‘borderless’ banking, pioneered by Transferwise. It has introduced the borderless scheme to improve efficiency of sending money abroad. It’s cost-effective for small businesses and is not constrained by country or currencies.
Death of a Password
The demise of passwords was constantly mooted over the last 10 years. It is now being hastened by ineffective password security, changes in technology, plus regulatory, commercial and competitive pressures. The rise in data breaches and identity theft is driving a rethink of passwords. Identity theft has reached record levels and the breached organisations are now feeling the pinch, to the tune of USD 6 million according to Dashlane. Great advancement in digital theft is driving changes towards a different kind of online identification process. Visa recently announced that it was eliminating the use of static passwords for its online authentication service, Verified by Visa, from April 2018. Elsewhere, the PSD2 in Europe requires strong customer authentication for all electronic payments. Exemptions aside, financial institutions must now perform two-factor authentication for face-to-face and remote transactions.
Changes in technology are also challenging password dominance. Today, advancements in smartphone cameras and fingerprint sensors enable the capture and verification of biometric details. This makes the new authentication methods, such as fingerprints, facial, voice or iris recognition and heartbeat possible. Smartphones have become a trusted token through the analysis of various device-related factors. Recent innovations such as Blockchain or distributed ledger technology also offer alternative ways to organise and strengthen identity systems.
One Click Checkout
Perhaps the most advanced payment technology has already become a reality in the retail industry. Developed by the visionary team at Smart Engine, it constitutes a blend of image recognition and deep learning software. How does it work? Well, one can take a picture of an advertisement and the application will instantly recognise the product within the advertisement. Then, in real time, the software will locate the same product in a connected ecommerce store, allowing the user to check out in one-click. Such a simple idea streamlines and enhances the entire ecommerce value chain, enabling merchants to close the gap between physical and digital. As digital payments become more popular, it will help firms optimise ecommerce customer experience.
Overlaps between GDPR and PSD2
A revolutionary development in Europe’s payments industry is the revised PSD2, which promises to unlock bank customer data for the benefit of consumers. PSD2 is a key piece of payments-related legislation in Europe, which aims to bring into scope new types of payment services, increasing competition, enhancing security and customer competition. Under the directive, payment institutions will be required to make customer data available to authorised third parties, with the account holder’s explicit consent. Similarly, GDPR is a regulation, which intends to unify and strengthen data protection for data subjects within the member states and will impose new fines on firms that do not adequately safeguard their data. Given, the overlaps between the two directives, one would assume that there have been interactions to align the similarities as well as address the conflicts. And, precisely because of this lack of configuration, it will fall to the national regulatory authorities to interpret the potential differences, with the data protection authorities enforcing the GDPR, while the appointed national financial regulators will take the responsibility of enforcing PSD2.
The eCommerce marketplace
Hot on the heels of PSD2 are the issues facing the high growth of ecommerce marketplaces, who control up to 39% of the global online retail market, according to Gijs op de Weegh (COO, Payvision). This presents any platform that hosts multiple vendors with a great opportunity for massive international growth. However, PSD2 will widen the scope of businesses that need to be regulated, including intermediary parties that handle funds from both seller and buyer, who will be required to own a payment institution license. To mitigate this, licensed payment service providers (PSPs) like Acapture have developed a specific payment solution for the online marketplace client, designed to eliminate all barriers to cross-border transactions and growth. Using artificial intelligence, they have also designed SlicePay, an automated system for simplifying and unifying complex transaction settlements. The huge proliferation of data generated across the online world makes this an extremely useful tool. Not only that, it provides actionable data analysis to improve processes, reduce fraud and strengthen customer services. To prosper in the hugely competitive internet age, the use of data science to optimise growth will critically vital.
Automated KYC Compliance
One of the most anticipated benefits of distributed ledgers is the challenge to streamline and automate ‘Know Your Customer’ (KYC) processes. Fully digitised platforms will eliminate the need for paper documents and offer real time identity verification. Thorough checks through global anti-terrorist and financial crime risk databases, cross-references with stolen ID card databases and third party address verification solutions offer a robust and reliable solution. Pioneers such as Know Your Customer use customer data and documents transmitted are fully encrypted to our secure server using the latest cyber-security technology. Verification data and document scans are presented in a fully electronic form to your risk officer for easy access, electronic filing and customer documentation maintenance.
Digitalisation in the Emerging Markets
Without a doubt, the digital financial services (FS) revolution may have even a greater impact in the Emerging Markets (EM) where traditional banking isn’t widely available. For example, Kenya’s mPESA as we all know pioneered mobile banking, an innovation that has been successfully copied globally. But, FS regulatory restrictions partly hindered the scalability of the technology across Africa. Perhaps it was ahead of its time. Today, the landscape is different. Advancement in technology and regional integration plans opens a new era in EM financial services. “Borderless Banking” in my opinion is a revolutionary step forward, following on from international money transfers, driven by the likes of WorldRemit. “Instant Payments” will also improve business robustness and transparency for all stakeholders. As EM innovators such as Goldswans step up to design solutions that meet local consumers needs, government deregulation of FS, as is the case with PSD2 in Europe, will help, too. “Agency Banking” in some countries is a welcome start towards this change. For the billions of the “unbanked”, who have no proper access to finance, the transformative power of technology would be life-changing.
Forecasting the Future
The future of financial services will depend on continuous innovation that solves problems, with APIs and interfaces that are fully integrated and enabled to collaborate. PSD2 will require banks to open their data, which will enable consumers to aggregate all their bank accounts in one place. As an example, eWise’s data aggregation platform (Aegis) will enable end-users to privately and securely aggregate, store, manage and share their financial information. Another ground-breaking innovation is the augmentation of raw transactional data, a key step in building financial apps that assist consumers in understanding their financial spending patterns. “Categorisation-as-a-Service” makes the process frictionless by combining big data driven AI for auto categorisation. Income verification and spend analysis highlight risk factors used for a richer credit scoring experience, reducing the risk of default due to borrowers’ financial deep knowledge. Understanding users’ spend patterns and behaviours will help firms to develop better Money Management tools: cash flow forecasting, predictive spend analysis and auto-budgeting. Mining data from user’s transactions will determine customer behaviour to help in fraud detection.
Given the challenges that financial services face today, the race for supremacy in the golden internet age is only beginning. There will be winners and losers. Innovators, unafraid to take risk, will face up to the challenges ahead. They will talk to customers, understand what they need and design solutions to solve their problems. Access to data will be key to staying ahead of competition. Any sort of data will give useful insights and intelligence about customer behaviours. Corporate decision-making will increasingly use analytics, artificial intelligence and machine learning. The end-state is that almost every business is going to be automated to the point where very few people are needed to run it. Michael Dubno (former Goldman Sachs CTO) notes that change is coming sooner than later. People will become “a smaller component of financial transactions, as the quality of software and data increases in importance. In the end, their role will be limited to face-2-face value-addition, and not transactional business.”