Emerging technologies and the pace of innovation are reshaping the banking/financial industry and operating models, while influencing the shape and dynamics of the broader financial services ecosystem.
Banks have adopted new technologies to varying degrees. Most banks use elements of cloud computing, a key technology that reduces the costs of rolling out and scaling the online and mobile banking capabilities that digital era consumers expect. Many institutions also are gradually implementing elements of big data and analytics as well as robotic process automation (RPA) to strengthen controls and reduce costs. Other technologies, such as distributed ledger technology and the Internet of Things (IoT), are only in the early stages of commercialization by banks.
Respondents to ISACA’s 2018 Digital Transformation Barometer identify financial/banking as the industry showing the most leadership in adopting emerging technologies. Banks are undergoing a fundamental transformation resulting from a range of technological innovations. Six technologies are currently most prominent in financial innovation: cloud computing, big data and analytics, artificial intelligence (AI)/machine learning, RPA, distributed ledger technology and the IoT. These technologies are at different stages of maturity, and some have the potential to significantly change the industry in the coming years.
Technology Trends & Game Changers
The questions that pops up is: How rapidly is the pace of change accelerating for financial services industry firms, and how are leaders planning to navigate their firms into the future?
To answer these questions, it’s important to first consider that there are some regional and national differences in competitive market structure, regulatory environments, and the global scale of the industry that influence outcomes. Even though the larger G7 economies (Canada, France, Germany, Italy, Japan, the United States and the United Kingdom) are still dominant, in terms of size (assets) and number of transactions, other countries, especially from the large emerging markets, are catching up steadily as well. The growing, emerging economies have been able to more easily implement modern core technology platforms because of the relative absence of legacy investment and integration with 40-year-old systems often found in firms in the G7.
New technologies are allowing banks to re-examine their business and operating models, and determine which functions and capabilities should be retained internally vs. obtained externally. Banks are able to benefit from technological advances made by other organizations in several key areas (such as customer reporting, risk analytics as a service, blockchain) by entering into strategic partnerships with these entities.
Technological innovations also are enabling banks to virtualize more of their banking operations and shift non-critical functions (for example, managed treasury and cash services, white label call centers) to business partners — allowing firms to increase their focus on core services and improve efficiency, while maintaining robust oversight and controls.
We also need to understand that there is a growing customer expectation of what “great” service looks like that often is shaped by “single best user experiences.” The optionality, transparency and affordability of products and services offered by prominent digital era companies have set a new baseline for banking customers’ expectations of convenience, simplicity and customer engagement.
Further, machine learning and advanced analytics are enhancing risk monitoring, controls and risk mitigation across the banking industry. Banks are able to leverage expanded internal and market data and advanced analytics to better understand key customer and financial transaction related-risk factors.
The shift toward digital platforms allows banks to interact more closely with customers, and quickly design and deliver relevant services. Digitizing end-to-end business processes further enables banks to achieve scale and become more efficient, resilient and transparent. As a result, banks are better able to quickly respond to changing customer needs, market dynamics and regulatory expectations.
Maintaining an appropriate balance in regulating and supervising banks as they innovate is not a new challenge. Key examples of impactful, organic incorporation of technological innovations into banking include, among others, the advent of call centers and the shift from paper to electronic/digital books and records. Banks determine the precise design and use of each technological innovation based on customer needs, opportunities to enhance customer value, compliance with regulatory requirements and supervisory expectations, their business models, risk tolerances and other market factors. Banks rely on their first (business), second (risk management) and third (internal audit) lines of defense to maintain compliance. The banking industry’s long and successful track record of safely implementing technological innovations speaks to the effectiveness of its regulatory engagement model.
Policymakers and regulators continue to actively monitor developments within the banking sector, including those that are technology-related, so that emerging, potential risks are appropriately addressed.
To date, banks have safely implemented many beneficial technologies without adverse repercussions to institutions or the broader financial system. Nevertheless, implementing technological innovations, particularly emerging technologies, will always have some element of risk, given the heuristic nature of innovation and new activities and services.
Going forward, digital transformation has the potential to continue to significantly transform the financial services industry and benefit society. It can replace individual banks’ legacy systems, enhance processes, improve efficiencies and strengthen controls. Digital transformation also can provide opportunities for the creation of new products and services that benefit customers. Ultimately, technological innovations hold great promise for the identification of new customers and the provision of financial services to the unbanked or underbanked community in a safe and sound manner.