Banks Must Innovate or Die

Will the ‘FinTech boom’ destroy retail banking as we know it?

From Blockchain and Bitcoin, to Peer-to-Peer lending and Crowdfunding the huge rise in financial based technologies is hard to ignore. Commentators have called this surge the ‘FinTech boom’, and it’s safe to say that this isn’t an exaggeration.

In 2013, around $3 billion USD was invested in FinTech – last year, this number had risen to over $14 billion. That’s almost a five-fold increase in just two years. The result is a long list of financial startups like WePay and TransferWise that are pitting themselves directly against established banks. So, there’s a lot of money and talent floating around in the FinTech sector, but what is it actually doing? What innovative technology is being developed to change the world of finance, and how is it being used?

The most debated advancement in finance has undoubtedly been Blockchain, with 26 banks (and counting) exploring the use of the technology to process payments. It’s not difficult to see why, as blockchain is cost and time efficient as well as transparent. The decentralised method of recording transactions also offers improved security, as any suspicious activity alters the whole digital layout (referred to as the hash) of the system. There’s been talk of creating a distributed ledger with numerous banks keeping records simultaneously. Blockchain technology underpins Bitcoin, which is an anonymous digital currency. However, Blockchain isn’t all about Bitcoin. Just because financial firms are toying with the idea of exploring Blockchain, this doesn’t mean that they want to use Bitcoin. None-the-less, a report from the Bank of England suggested that using a digital currency of some description could add as much as 3% to the country’s economic output – basically, don’t rule it out. Another new technology used by financial companies is Artificial Intelligence. As of March, RBS has been trialling a new AI to help staff answer customer questions. Although banks have used AI before, RBS’s new assistant is different because it has a human-like personality, making interaction easier. In future, the AI will deal directly with customers. Banking firms aren’t the only ones contributing to a monetary revolution – tech giants like Apple and Samsung have started to release their own competitive payment methods.

How will innovation disrupt finance?
For the most part, the disruption caused to finance by the so-called ‘FinTech boom’ will be positive. Commentators have called for innovation on a fundamental level, as data security becomes even more important. Moving finance into the digital sphere will reduce operating costs, lessen the margin for human error and deliver improved overall efficiency. Of course, digitalisation will result in unemployment levels, especially with the adoption of tech like AI which is pretty much designed to replace human agents. However, some customers will always prefer to deal with a human being when making transactions, and the face-to-face aspect of finance is unlikely to go away. If Blockchain takes off in the industry, then banks will become far more collaborative and transparent. Even if financial businesses might not use Bitcoin, endorsing Blockchain technology could create increased adoption of the digital currency. The continuing lack of trust in banks after the banking crisis of the 2000s isn’t going to help established companies fight their corner against major tech firms and startups, either. However, if traditional bankers and insurers can keep up with innovation, they stand a chance of surviving in the transforming sector.

The business perspective
From a business angle, technological innovation in the finance sector is a double-edged sword. On the one hand, the advancements could have very positive effects for efficiency and cybersecurity. However, the changing landscape is also unsettling the established system. The interest of big businesses in offering their own payment methods, for example, has created new competition – and increased investment in FinTech startups has added another dimension. As much as FinTech startups present a challenge to established financial firms, they have also created an opportunity. Businesses have two choices – they can either compete by creating their own innovation labs like Barclays, or partner up with them. Using a strategy of acquisition means that they can stay up to date with advancements and assimilate potential challengers into their existing structure. All of this development is going to directly effecting consumers’ experiences with money, which is going to impact businesses outside of banking like retail and marketing. Retailers have to respond to changes in the way that customers want to purchase items, for instance, offering PayPal as an online payment option as well as the relatively novel contactless card payments in-store.

The rise of FinTech is transforming the world of finance at an alarming rate, forcing legacy banks to innovate or risk being left behind. Whilst technology will have a positive affect on finance this doesn’t mean that banks and insurance firms should do away with their old systems completely – there will always be demand for face-to-face conversations, for example – but the way that people view and exchange money is undergoing a transformation that demands changes in the institutions themselves. This is constantly shown by the sheer number of organisations that are now turning to innovative technology. It looks like adopting new ways of doing things is the only way for traditional financial establishments to compete with the new wave of FinTech challengers.

Does your business offer alternate payment methods? Are traditional companies most challenged by startups or tech giants like Apple? Will the use of Blockchain technology save established banks? Share your thoughts and comments.