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Brian OConnell
Brian OConnell

New Technologies Revolutionizing the Financial Sector for the 21st Century

Today, new players turn to emerging technologies and offer new services, giving their clients a fresh experience across product lines

February 12, 2019 | About:

Tremendous improvement in banking services has been made following the global financial crisis, an event that has quickly faded into memory. But these improvements have so far been unable to match growing and evolving consumer demands. Today, new players in the financial sector have turned to emerging technologies and are now offering new kinds of services, giving their clients a fresh experience across product lines.

These rising fintech companies are leveraging new kinds of digital technologies to re-invent vital elements of different financial services, luring in customers from all over the world. The success of these new players has put them in direct competition against traditional financial institutions of all sizes. If the conventional banks do not respond to this threat of tech innovation, they are bound to lose a significant market share to their more daring competitors or, worse, fade into oblivion. In fact, statistics from several consultancies have indicated that these new technology upstarts could capture up to a third of the $250 billion banking revenue within two to three years.

Speaking on the growing fintech threat, Dave Mckay, chief executive of the Royal Bank of Canada had this to say: “That is the fear that we all have. That they (fintech) have these massive, powerful portals that will see consumer intent and initially sell it back to us and take a disproportionate share of the margin in doing so. Or worst case, meet that need themselves.”

Technologies disrupting the financial sector

To remain relevant to customers in the 21st century, banks must diversify and look even beyond financial services, especially now when tech startups are encroaching its markets. Due to their scale, big banks have the advantage when it comes to coping with digital disruption. Adopting and integrating emerging technologies is the best way to maintain their standing in the finance world. Some of these new technologies that will shape the future of the financial sector include:

1. Artificial intelligence (AI)

While tech billionaire Elon Musk has repeatedly sounded the alarm, warning about the unregulated development of artificial intelligence, this hasn’t slowed the advancement and adoption of this technology, especially in the finance sector. AI-based solutions are being considered as a suitable panacea for many traditional banking problems, and analysts now suggest that by 2023 this technology could save the banking industry more than $1 trillion. AI helps bring efficiency to the table by providing customer service automation via chatbots and personalized customer services; this perk is invaluable to large banks with huge client bases.

Due to the ability to quickly scan and extract data, artificial intelligence can also help financial institutions become more adept at detecting fraud and money laundering. Mainstream banks like Citibank now use AI to monitor potential threats and prevent criminal activities in commerce. AI is also useful in risk assessment, enabling better loan and credit offering recommendations.

2. Robotic process automation (RPA)

The increasing need to digitize services and efficiently utilize available resources has led to the development of Robotic Process Automation (RPA), a system of a rules-based virtual workforce capable of handling repetitive tasks customarily assigned to human employees. These so-called “software robots” are helping credit unions, and banks fast-track their growth by implementing pre-programmed rules encompassing a range of structured and unstructured data. Automation allows processes to use data patterns in decision making, enabling it to learn from its past decisions. This eliminates human error and reduces regulatory and administrative costs by at least 50%, bringing a new era of efficiency to the finance sector.

With the advance of cognitive AI-automated processing systems, banks can perform more complex automation, reducing the burden of employees and saving time. JPMorgan has invested in the development of an RPA tool called Contract Intelligence (COiN), which studies a document and extracts data in a short time compared to humans. Other companies that have developed RPA systems include Kofax and Blue Prism.

3. Blockchain technology

When bitcoin surfaced and offered a new and decentralized finance system for its users, major banks started researching the technology underpinning the most popular cryptocurrency in the world. But, unlike the open blockchain operated by many cryptocurrencies, financial institutions are looking to develop permissioned blockchain protocols to help eliminate the need for third parties, save costs and promote trust in the industry.

The blockchain is an immutable and transparent ledger, meaning that data stored on it cannot be altered, reducing the chance for error and fraud. Derivate blockchain applications like smart contracts will allow for automatic execution of agreements, curbing the vice of fraudulent claims and the need for go-betweens and expensive fees.

Despite being apprehensive towards bitcoin, major banks like the Bank of America are now actively researching blockchain technology and looking to develop useful applications for the finance industry. BlockState, a rising investment banking platform also leverages blockchain to provide modular infrastructures and DLT products that will help financial institutions transition to more cost-efficient systems.

Moreover, BlockState allows digital assets and portfolios to become easily accessible, bankable and investible through its white label Actively Managed Certificate (AMC) and Special Purpose Vehicle (SPV), which allows for the setup of structured products within 10 working days.

4. Instant payment

In the age of speed and digitization, instant payment technology is already becoming the norm and will grow to penetrate markets lacking the appropriate payment infrastructure. Regular payment mechanisms are not time-efficient and usually attract extra costs. But with instant payment technologies, banking customers can enjoy almost immediate payment with little to no additional fees.

Transaction speed is an attractive feature for many clients and is the reason why payment networks like Ripple and SWIFT are becoming popular. They offer nearly instant cross-border settlement services for banks all over the world. Integrating instant payment solutions with e-commerce and mobile commerce also presents an opportunity for credit unions and banks to develop new innovative products and portfolio services.

5. API open banking

Open platform banking in tandem with open API integration will change the entire global finance ecosystem, allowing for new kinds of banking innovations that will cut across the areas of customer service, products, partnerships and even service delivery mechanisms. Open or public APIs will improve the customer experience by allowing better interaction with banks. API integration will provide banks with the opportunity to serve as a platform for the creation of new applications by third-party companies, which could bring an end to the traditional retail banking business model of "hooking" customers through profitable lending products.

Embracing the future

With the rapid development of emerging technology, conventional banks have two options: They can either chose to adapt to the changing financial climate powered by the engine of innovation and technology, or they get eliminated from the food chain. The great thing about these disruptive emerging technologies is that they also improve on existing business models, cutting across areas like customer service, cost optimization, enhanced compliance and security systems. They also aid in the discovery of new revenue streams. Therefore, it isn’t surprising that many banks are now ensuring their survival by turning to these new technologies to help streamline their services and give them a competitive edge going into the future.

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About the author:

Brian OConnell
ex-Wall Street trader turned journalist with 20+ years of experience covering the stock market and financial planning.

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