"The past decade has seen the emergence of a growing band of scrappy start-ups intent on revolutionising the financial sector. The next could see them come of age."
Digital technology has transformed business and sparked innovation on a scale rarely seen before. Just as the last ten years saw remarkable change, so will the next decade. Here are a few ways in which the financial services of the future could look very different to those of today.
Big data and Artificial intelligence
Whenever you talk about the future of finance you’ll almost always find mention of big data and artificial intelligence. However, these products are proving devilishly tricky to bake in.
Ten years ago we were already talking excitedly about the prospects of data and AI. While both have transformed multiple sectors, some financial services are struggling to make use of them to their fullest extent. Regulatory requirements and the need to protect customer privacy make any data management strategy particularly risky.
What’s different now to ten years ago, is that the technologies are more developed and banks and other financial institutions are becoming increasingly adept at using them. The advent of the cloud has freed up data making it more accessible and usable than ever before. Organisations of all kinds are finding it easier to work with.
The result is a string of major big data projects among the biggest names. HSBC, for example, used Google Cloud to help it harness data and machine learning to help in its fight against money laundering. Barclays is working with a host of tech firms on multiple projects incorporating big data and AI such as predictive analytics when assessing loans.
Data is the fuel that drives machine learning, automation and AI. The more data available, the more sophisticated algorithms can be to deliver enhanced services.
Banks are already using them for anti-money laundering, cybersecurity and customer service chatbots to name a few. However, these represent the baby slopes of what AI can do. Development is accelerating with the coming few years throwing up all sorts of possibilities. Financial institutions may increasingly lean on AI to deliver services, design products, maintain security and prevent fraud.
Fintech reaches a turning point
The past decade has seen the emergence of a growing band of scrappy start-ups intent on revolutionising the financial sector. The next could see them come of age.
Last year Starling Bank became the first digital bank to become profitable with others expecting to follow them shortly. Monzo Bank raised over $100 million last June, while Revolut raised a staggering $500 million earlier in the year. Venture capital clearly feels this is a revolution with legs.
Everywhere, banks seem to have digital alternatives snapping at their heels, nowhere more so than in money transfers. Traditional services have been slow and expensive. Online money transfers services such as Wise (formerly Transferwise), Venmo and Azimo offer lower remittances and more attractive exchange rates than with traditional providers.
These new players are booming. Experts predict the market to grow by nearly 14% year on year between now and 2026.
Trust and sustainability
13 years on from the great recession, many financial institutions are still struggling to earn back the trust of customers. They have come under increasing scrutiny for their business practices, unfair fees paid for overdrafts and their record on climate change. The days when they could ignore questions of ethics, sustainability or corporate responsibility are gone.
Today they have to earn the trust of customers and demonstrate they are working in a responsible way. Financial products are increasingly coming with elements of sustainability plugged in. Demand for sustainable investment products is expected to double in 2021.
Investors, regulators and regular customers are increasingly attuned to the environmental risks of the old models and want something different. Those companies which have been quick to address these needs have been the ones to feel the benefits.
The rise of China
The next ten years could be fascinating in China. Here the adoption of technology has been even more frantic than elsewhere. Meanwhile the removal of shareholding limits on foreign ownership of insurance, fund management firms and securities signals an opening up of China’s financial sector. It hardly needs to be said that the potential market for these services is huge, with a population of 1.4 billion. Likewise, in India, which has a similarly large population, financial services apps such as Dhani have had success, reaching a customer base of 26 million people.
These factors signal a time of rapid evolution in the sector as all stakeholders move quickly to adapt. The environment is tailor-made for the fintech sector with wide adoption of mobile devices and an upwardly mobile class of consumers who have become increasingly comfortable managing finances over the internet. Established financial institutions have embraced technology partnering with the new fintech pioneers to improve their services.
Take, for example, the digital partnerships signed between Tencent and China’s leading banks or Everbright Bank’s, collaboration with Ping An and Good Doctor to create a healthcare and finance ecosystem.
For a long time, these tech companies were given a relatively free hand by the regulators, but this is changing. New rules have been announced on data protection, microlending and cryptocurrencies among others, as China seeks to protect the integrity of its financial system.
These rules will not necessarily clip the wings of innovation, but they will force tech companies to reassess how they move forward.
Into the future
The next decade, therefore, will see rapid change in the financial ecosystem, but what shape that takes remains unclear. Both established players and new pioneers must address challenges about how technology can be integrated into the existing system to generate real value for customers.
Much will depend on the effectiveness of innovation, the attitude of regulators and evolving market demands.