In the past decade, the financial industry has evolved rapidly – and it’s continuing to change. Transactions that were once only possible through personal visits to financial institutions can now be completed with just a few taps on a mobile phone. If, in the past, you had to personally hand over a cash or a check to pay your bills, now, you can transfer funds online, whether to a friend or to a company.
But, these changes were not brought about by the industry’s determined effort. Thanks to technological advancements that have changed the way the world works, the finance sector was compelled to respond and adapt to today’s digital era. Unfortunately, until now, only 12 percent of financial services companies are mature in their digital transformation.
Take cryptocurrency, for instance. Cryptocurrency came into fruition with the development of blockchain, a decentralized, peer-to-peer financial ledger technology. Blockchain was developed to eliminate the need for a middleman during a value exchange and make transactions faster. Then, sometime in 2010, when Bitcoin became popular and other cryptocurrencies emerged, the financial industry scrambled to understand what blockchain and digital coins are, and started to regulate the cryptocurrency market.
This development also prompted financial institutions to offer consumers more convenient ways to transact with each other and lead to a surge in mobile and online banking solutions. Consumer demand changes as the internet becomes faster and more technologies emerge,. Ultimately, the finance sector must adapt, or else consumers will choose more convenient alternatives and FinTech companies will continue to eat market share of an industry that was protected and untouchable for decades.
The finance industry as we know it is changing and here are the significant technologies disrupting the industry.
Not many people remember a great deal about the 2008 global financial crisis, and even less talk about that fateful Monday when financial giant Lehman Brothers filed for bankruptcy. Fast forward ten years later, and here we are, seemingly fully recovered. Consumers now enjoy more convenient platforms to keep, grow, and manage their money.
But the tech innovations that brought consumers faster banking and payment services are also the very disruptors that financial services organizations are working hard to beat or at the very least, adapt.
The finance industry was quick to adopt cloud computing, with many institutions and service firms realizing its many benefits. Although the financial sector has gradually integrated cloud computing into their business processes, it still has a long way to go. According to Stephan Fabel, director of products at Canonical, financial institutions are lagging behind other businesses as 70 percent of them are only at the initial, or trial and testing, stage of deploying cloud computing as a central part of their IT operations.
With cloud-native FinTech disruptors continuing to lead the path to digital transformation, Accenture estimates it could impact up to 80 percent of existing banking revenues by 2020. To remain relevant and thrive in today’s competitive market, there is an undeniable need for financial institutions to harness the power of cloud computing.
Open application programming interfaces, also known as open APIs, create partnerships and bridge financial institutions, businesses, consumers, and products and service—specifically in the payments sector. It enables different companies’ software programs and applications to communicate and interact with each other, delivering efficient and reliable online banking and improved customer experience. Due to its many advantages, in the recent survey during the SWIFT’s Latin America Regional Conference 2018, 70 percent of the audience indicated that their organizations are using APIs.
Through opening its APIs, financial institutions can now extend their services by allowing other companies to access particular business data and functionalities which they can seamlessly plug into their own digital payments system. In this way, the finance industry can remain competitive and relevant in the digital ecosystem.
Artificial intelligence (AI) and machine learning (ML) are seen as revolutionary game-changers in the finance industry. They have the ability to solve a wide spectrum of complex business problems through algorithms that enable banks to accurately sift through, assess, and leverage millions of data points. Through precise analytics provided by AI and ML, financial institutions can automate processes, assess and manage risks, and detect and prevent fraud.
Although the finance industry is certainly one of the most data-rich sectors, only 32 percent of financial services executives confirmed that they are using AI technologies.
The Internet of Things, also known as IoT, links almost everything under the sun including devices, cars, appliances, buildings, and people through building a network of wireless connections via the internet. Since it brings exponential advantages to businesses around the world, its global market is predicted to grow up to $25 billion by 2020.
With its wide array of applications, IoT is rapidly changing the finance industry—improving security in mobile banking, automating financial transactions and financial activities, and boosting overall customer experience.
Robotic process automation, or RPA, enables financial institutions to automate repetitive business processes and tasks through software robots—a virtual workforce that efficiently performs back office, front office, and support functions. Due to its ability to reduce costs by 80%, reduce time to perform tasks by 80-90%, and boost customer experience, a PwC survey released in 2016 reported that two-thirds of financial services companies are leveraging RPA internally.
Although the term blockchain is more commonly associated with the cryptocurrency market, it could also be valuable to the finance sector. By recording every transaction in a block and adding each block to the chain, financial institutions can have a shared digital ledger that stores and provides real-time transaction data and relevant information on demand. Because it is highly encrypted, the blockchain is immutable—although the transaction data is transparent, it cannot be tampered with once it has been confirmed and uploaded to the blockchain.
Integrating the blockchain technology in the finance sector can prevent fraud, increase business efficiency by 40%, and improve customer experience by around 25%.
Instant payments, also known as immediate payments, is a technology that provides real-time services that allow people to carry out payment transactions electronically 24 hours a day, 365 days a year—enabling consumers from across the globe to instantaneously process transfers and receive payments in real time, anytime and anywhere. By integrating instant payments system with other technology in the finance industry such as open application programming interfaces (APIs), banks can expand their reach and create global opportunities for further growth.
While legacy systems have worked for many decades, it’s no longer the most efficient choice for the finance industry. FinTech companies, unencumbered by these legacy systems, are continuously coming up with innovative tools and systems that will potentially overtake traditional finance models.
The benefits of digital transformation are undeniable. But along with it comes a host of problems that businesses must prevent or mitigate. As such, digitization initiatives must not be done with haste. Existing technologies and legacy systems must be assessed and evaluated carefully, to determine how to digitize each process or every department.
January 9, 2020
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