Investing to Save, Serve and Survive

Investing to save, serve and survive Trends in Financial Services for 2019 and beyond Technology has disrupted just about every industry over the last decade of digitalisation. Financial services is no exception. Insurance and investment management, as much as retail banking, were already heavily reliant on information technology. The advances now being made have huge potential to transform – the internal processes of these service providers, how they interact with their financial ecosystems and, most obviously, their dealings with clients.

Like many of their end customers, financial service companies are investing to save. These technologies can drive down the costs of back-office functions, transactions and staffing (by reducing headcounts). By extracting value from vast data, they can also make more commercially astute decisions, for example, better underwriting in insurance. In the retail banking sphere, this information – pooled through Open Banking in Europe – can shape more personalised, competitive and responsive products and services.

The convergence of the new technologies we consider here could democratise financial services in ways that may currently seem hard to credit

2 This revolution is already well under way. In Africa and All this amounts to a massive challenge – strategic and India payments and micro-loans are transmitted by mobile operational as well as technological – for an industry that phone, while in more developed countries, smartphones is gargantuan, yet changing rapidly by its standards. The are the new branch network, and increasingly used as world of banking illustrates the scale. In 2007 none of the electronic purses and wallets too. world’s top ten banks were Chinese. By 2018, the four biggest were2. China’s banking industry is now bigger than When it comes to their finances, it’s not just millennials the entirety of the EU’s put together3. JP Morgan Chase and Gen Z who expect constant access at their fingertips. is the fifth largest. And in 2018, the USA financial sector Nearly three out of four adults in the US now bank online peaked with $17.5 trillion in total assets4. This industry is at least once per month, and Europe (with 70%) is not far also a major employer, not least in the UK. “1 in 14 British behind1. jobs are in financial and related professional services”5.

Banks have to offer customers clear and streamlined ways The stakes are high and investment in new technologies to manage their finances. Consumers also expect more and innovation will be relentless as companies seek cost personalised products and services, and are no longer loyal savings and competitive advantage, new entrants exploit to the same bank or financial service provider for life. They applications more nimbly than incumbents, and regulators are as ready to embrace apps for finance as they would try to keep pace with this technological change and avoid music, exercise or mindfulness. the kinds of disruption that could destabilise a financial system on which so much depends. A decade on from the global financial crisis, the banking and financial services industry is facing tough macroeconomic There are five main technology trends that we believe will conditions, increased regulatory scrutiny, and growing attract the lion’s share of financial companies’ investment threats from cyber crime and data breaches. Alongside in research and development in 2019: the potential of new technologies to transform their operations and services, there is the disruptive force of tech-driven start-ups to contend with.

The five trends

1 Artificial intelligence

2 Fintech, InsureTech and RegTech

3 Big data

4 Blockchain

5 Cyber security

3 1 www.forrester.com/blogs/who-currently-offers-the-best-online-banking-services-in-eu- 4 www.fdic.gov/bank/analytical/qbp/2018jun/qbp.pdf rope/#_edn1 5 www.thecityuk.com/news/financial-industry-growth-strong-across-the-uk/ 2 www.thebanker.com 3 www2.deloitte.com/us/en/pages/financial-services/articles/banking-industry-outlook.html 1 Artificial intelligence

Computer algorithms and applications that perform tasks AI is playing a growing role in banking not only behind the previously done by humans are changing the world as we scenes but on the front lines. As early as 2010, Santander know it. All sectors and industries are being disrupted at launched its knee-high ‘red robots’ to guide its Spanish some level. Tasks, often time-intensive, that had to be visitors to its new visitor centre in Madrid. But now we done by humans, such as image or speech recognition, are seeing the rise of the chatbot, a relatively low-cost can now be completed in an instant, and with increasing application of AI. Customer-facing positions within banks reliability. and insurance companies are starting to be filled by these virtual assistants. Meanwhile, UBS has been using AI works through technologies such as Neural Networks, Amazon’s Alexa for its online customer service, and digital Machine Learning and Natural Language Processing wealth manager Nutmeg, the UK’s largest robo-advisor, (NLP). These technologies are used to create algorithms gives its 60,000 clients AI-directed advice on investment that are fed data to create innovative applications such as management and products. self-driving cars. The growing sophistication of NLP over the last few years In the finance sector, AI’s influence can best be seenin has made it harder for customers to tell whether they banking. Applied to payment and transaction processes, are interacting with a robot or another human. Chatbots AI is supporting fraud prevention and boosting detection. can advise customers on the best investments for their personal needs. Their advocates argue that chatbots have Investment banks, with their bigger R&D budgets, are the knowledge to take a far more holistic view than human leading the way, but the technology has begun to filter staff, better meeting the demand for a comprehensive down to retail banks. In 2018, HSBC announced it would range of services offered at lower price points. This can be using AI in the detection of money laundering, fraud also have a democratising effect, as more sophisticated and terrorist funding. investment advice – previously only available to much wealthier clients – can be offered more widely and in a form readily acceptable to digital-savvy consumers.

4 Operational efficiency can be better served by exploiting AI in finance is still only in its infancy. According tothe AI. In 2017, JP Morgan announced its new Contract Financial Times, “rather than racing towards an AI- Intelligence Platform, or CoIn for short, a system to review enabled future, the industry is feeling its way forward”. legal contracts, “extract value and service our loans”. The Potentially, all routine tasks that are rules-based, in US banking behemoth reports that while staff were able areas such as insurance and asset management, could be to process 12,000 credit agreements per year, CoIn could automated. Currently, AI applications are designed to tackle thousands per second “with less error and greater perform a specific task. However, there is the potential efficiency”. for introducing a multi-tasking element that will allow for more sophisticated applications – from fraud prevention AI-enabled tools are also likely to play a part in managing or allocation of investments to retail banking services. the potential conflicts in Europe between data sharing, driven by the Open Banking initiative, and data protection, The potential to exploit AI in the insurance sector extends under the GDPR customer privacy regulations. much wider and can engage customers in new ways that provide mutual benefits. At least one major insurer While the power of AI is hugely significant, it’s important to is investing in AI photo recognition and smartphone note the potential pitfalls and limitations. Using algorithms applications that would help householders ensure that can leave companies open to bias. As with all computing, their possessions are identified and valued accurately so the ‘garbage in, garbage out’ mantra applies. AI is only as as to get the most appropriate level of cover and premium. good as the data that is fed into it. Inaccuracies will be reflected in the outcomes of the data analysis process. Finance is a multi-faceted industry with a wealth of Other industries such as advertising have already seen the potential applications for AI that will enhance services negative impact algorithmic bias can have. For example, to customers and spur operational efficiency in back- AI at YouTube broadly demonetised channels and videos. office functions. The technology will drive down costs and Microsoft highlighted the dangers of teaching AI using automate roles, while also spurring innovation in products public data when its chatbot Tay soon began to parrot the and services, and widening the market to new customers as racist prejudices of some of its human correspondents6. banks and service providers seek competitive advantage, In the financial sphere too, there is ample opportunity for let alone secure their survival in the digital age. innovators to ‘clean’ and improve the quality of data, and to support ever-more efficient pattern recognition.

6 www.theverge.com/2016/3/24/11297050/tay-microsoft-chatbot-racist 2 FinTech, InsureTech, RegTech

Within the last decade there has been a pattern of people Monzo’s tech-driven approach to banking is popular quitting their jobs in big financial services firms to launch amongst millennials. For 2019, it was voted the bank start-ups, often in partnership with technologists similarly with the most satisfied customers, according to Which? intent on shaking up a niche area with new technology. Magazine, while incumbents like HSBC and Royal Bank of Scotland trailed at the bottom of the list11. It epitomises a FinTech start-ups are appearing across the industry. new generation’s desire for a fresh style of banking, readily FinTech “seeks to improve and automate the delivery available on their smartphones, and simple and clear and use of financial services”.7 Revolut, Transferwise and enough to understand at a glance. Funding Circle are examples of new, tech-led companies looking to bypass banks by streamlining the business of A related FinTech trend is platformification – bundling making payments, currency transfers and lending. together multiple services onto one online platform to provide users with an automated, efficient and integrated In the area of money transfer and payment services, the customer experience. market share of FinTech providers more than doubled from less than 25% in 2015 to more than 55% in 2018. In the US, LendKey – which has pioneered the ‘lending as a service’ model – works with some 300 banks and The revenue potential for the most successful entrants is credit unions to create custom, white-label online lending significant. By the end of 2019, market analysts Gartner platforms. The New York-based FinTech company is predict that one in four retail banks will be using start-up backed by venture capital providers including technology providers to replace legacy online and mobile banking investment specialists Updata Partners. systems. Its stated aim is to transform the €3.6 trillion consumer lending market using innovative cloud technology to allow Under the umbrella of FinTech also comes InsureTech, the country’s 13,000-plus community financial institutions which seeks to create “technology designed to squeeze out to offer low-cost borrowing options.12 savings and efficiency from the current insurance industry model”8 ; and RegTech – innovative technology used to Meanwhile in the UK, Yourkeys (no relation) is streamlining address “regulatory challenges in financial services”9. the process of buying new-build homes. The startup set out Research in these sectors is finding technological solutions to simplify one of life’s most stressful transactions, tracking that can significantly reduce the need for staff, cut costs the purchase of a home like an Amazon parcel or Uber taxi and speed up compliance ride. Its platform offers a full end-to-end service from search to completion with a live timeline showing progress In the same way that big pharmaceutical companies are at each step, including offer and acceptance, conveyancing, buying up biotech start-ups using big data to shake up mortgage and insurance, as well as allowing users to select the pharmaceutical and health industry, incubators and home upgrades and finishes. Developers can integrate the mentorships within large banks (such as JP Morgan) platform in their own website and marketing.13 are supporting smaller innovators and start-ups within finance. These companies are able to innovate faster than These start-ups show how technology can make it much the big, incumbent banks and can turbocharge their growth easier and quicker to meet consumers’ financial services with access to the big players’ market data and expertise. needs. In addition, transaction costs can be streamlined Meanwhile their hosts have the chance to choose from the and better products and services developed for customers. most innovative talent and services. Some predict that within the next five years there could Open Banking is designed to drive this cycle of innovation be 10 times more retail banks. Whether or not such in mobile and online banking even faster, unleashing forecasts are borne out, tech-driven innovation within the further waves of new apps and services. The banking sector financial sector – by established players and new entrants is braced for major disruption. There are now roughly 50 in insurance, investment management and banking – will to 60 new challenger banks in the UK, 99% of which are be a strengthening trend through 2019 and beyond. tech-driven.

Monzo is the most notable, styling itself as ‘the bank of the future’. Launched with a team of just 300 people, it promised transparency in contrast with the ‘opaque’ banking of the established banks10.

7www.investopedia.com/terms/f/fintech.asp 11 www.which.co.uk/money/banking/bank-accounts/best-and-worst-banks-a3q5d8c6dj7y 8 www.investopedia.com/terms/i/insurtech.asp 12 www.lendkey.com/about/?sk=organic 9 www.investopedia.com/terms/r/regtech.asp 13 www.yourkeys.com/ 10 https://monzo.com/about/ 3 Big data

Big data is AI’s big brother. While AI is driven by machine ‘Predictive banking’ – offering an intelligent interface learning, big datasets fuel the intelligence engine. tailored to the customer’s needs – is a new buzzword for 2019. Spanish banking group BBVA, ranked top for online Banks and insurance companies have access to huge banking services in Europe in 201714, has developed a volumes of data and are looking to harness this information data-driven service for customers considering buying or to drive efficiencies in their businesses and generate renting property. Called Valora, it allows them to factor in personalised, targeted offers for customers. approximate market values for their own and prospective homes and the impact on their finances of mortgage, Data is a high-value commodity, and data analytics is insurance and other expenses – all from their cellphone15. being used to mine its value across sectors, as with AI. “Big data is an incredibly profitable business, with revenues Furthermore, Open Banking makes big data even bigger. expected to grow to $203 billion by 2020,” according to The EU-driven move to increase competition allows Chris Neimeth, COO of NYC Data Science Academy. financial institutions to access not only the data of their own customers, but those of competing banks as well. Traditionally, data has tended to be stored departmentally Banks may form a fuller view of new or prospective within companies in data silos This can be limiting, as customers’ financial positions and make quick and companies can have multiple pockets of data, potentially personalised decisions on products and services that best on the same client, without knowing which information is suit the individual’s needs. most up-to-date or joining the dots to complete a clearer profile of their customer. Big data, like AI, also plays an important role in fraud detection. Open access to data allows banks to better Given the new practicalities of massive data storage, predict the patterns and behaviours of particular powerful analytics and more intelligent marketing, customers and therefore spot fraudulent transactions and companies are turning away from the traditional methods prevent them from recurring. of data collection and storage, and instead pooling big data within data lakes and warehouses. Just as the freedom of Open Banking and data lakes make accessing large volumes of data far simpler, they increase This allows information to travel between departments, the complexity and the stakes, when it comes to processing, constantly updating, and each can see the bigger picture. management and security. Handled correctly, big data boosts efficiency and reduces companies’ operating costs. Innovations around the responsibilities that come with big data, as well as the back-office and marketing But there are potentially ever bigger advantages. Insurance opportunities, will continue to be a major focus of companies can make better underwriting decisions based investment in the foreseeable future. on the wider breadth of data they access. Hedge fund investors can create more sophisticated trading models.

Banks too can identify opportunities to offer customers more tailored and timely products and services. Data- driven marketing, for example, means a retail bank seeing that a customer has booked a holiday, will know to offer currency deals or travel insurance. Alternatively, a customer with a higher salary thanks to a new job or promotion, is offered a suitable investment product based on their new earnings.

14https://go.forrester.com/blogs/who-currently-offers-the-best-online-banking-services-in-europe/ 15https://www.bbva.es/eng/general/banca-online/bbva-valora/index.jsp 4 Blockchain

Blockchain is a distributed ledger technology (DLT), a Bitcoin and its imitators should be far more secure database of transactions that has been agreed to be shared than traditional forms of fiat currency (money with no across multiple websites, institutions and countries. This intrinsic value). A cryptocurrency that cannot be hacked sharing of information creates a series of ‘witnesses’, each or corrupted, and is decentralised, not relying on state with an updated copy of the ledger. backing, seems fitting for the global trading village of today, especially after trust and confidence in traditional Ledgers are saved in blocks across multiple servers. banks and currencies were shaken by the financial crisis Through cryptography, computers can then discover the of 2008. next block of information in the chain. Because it has no single central authority, blockchain is safe from cyber- While cryptocurrencies are impacting financial institutions, attacks or records being falsified and altered. There is only the genius of the underlying blockchain technology means one source of truth that all parties are privy too. it has far wider implications for transactions systems and security, not just in financial services but many other Blockchain was invented to create Bitcoin, the sectors.16 cryptocurrency launched in 2009 by the elusive and pseudonymous software developer Satoshi Nakamoto. By bypassing the operational bureaucracy of financial Bitcoins are produced by computers across the world and institutions such as banks, payments should theoretically maintained by volunteer coders. The rollercoaster ride of be easier, if not quicker, as well as offering greater accuracy, Bitcoin’s backers has sparked fierce debate among finance transparency and traceability. experts worldwide, as it has inspired more than 1,500 other cryptocurrencies.

16https://opinions.ayming.co.uk/blockchain-digital-penny-drops/ Within the last few years there has been a huge increase in Blockchain is still an emerging technology, constantly transactions via blockchain. The University of Cambridge’s updating and evolving, and it will take time to reach Centre for Alternative Finance estimated that there were maturity. As it is developed with different protocols, between 2.9 million and 5.8 million unique active users programming languages and platforms, blockchain is of cryptocurrency wallets in 2017 – and highlighted harder to integrate with existing local and cloud-based how these new currencies were supported by a “growing systems. This disparity hinders the global world view its ecosystem fulfilling an array of functions”.17 champions are trying to create.

By allowing web users to create value and verify digital The technology can also be slow in comparison to existing information, blockchain can unleash innumerable systems of payment. In theory, peer-to-peer networks innovations in finance as in other industries. Quorum has should work in real-time. However, as blockchain hugs developed an enterprise version of blockchain, building on system resources while executing transactions, the Ethereum, the open-source platform for developers and technology can be slower than conventional processes. most promising next-generation version of the technology. Nevertheless, blockchain is truly revolutionary. It has Quorum can make blockchain more commercially viable disrupted the operation of most business domains and and is more efficient in energy use; the global mining of will no doubt be a key player in the future of finance Bitcoins consumes more power than Ireland or most and banking. Not least, it holds tremendous potential in African countries.18 Quorum also seeks to negate the need security and many other applications and sectors. Large for a central authority with a peer-to-peer network while incumbents and individual stakeholders are seeking ways giving its consumers more privacy than other blockchain to improve the performance of blockchain. They are currencies. building proof-of concepts and exploring techniques for processing transactions. In 2017 JP Morgan announced it was launching – in alliance with ANZ of Australia and the Royal Bank of Canada – a Their commitment reinforces the view that blockchain can new inter-bank payments platform powered by Quorum.19 and is moving mainstream. It will be used more widely in the financial sector and not just for payment processing Blockchain can speed up payments across borders. but also other applications – from smart contracts and TraDove – the “global business social network” – provides share trading and registration to currency exchange, “a reliable and profitable ecosystem for buyers and sellers receivables funding, and client knowledge (KYC, or know to easily find each other”. The network mines its own your customer). Not including those uses we don’t yet cryptocurrency called BBCoins, which can be exchanged know. globally through TraDove’s “transparent and secure smart contracts” or can be deposited into a shared company account to use for targeted advertising. Founded in 2012, TraDove now hosts over 250,000 users from over 10,000 different businesses worldwide.20

17www.jbs.cam.ac.uk/fileadmin/user_upload/research/centres/alternative-finance/down- 19www.coindesk.com/jpmorgan-launches-interbank-payments-platform-quorum-blockchain loads/2017-global-cryptocurrency-benchmarking-study.pdf 20https://medium.com/@tra_dove/tradove-company-ama-d7c9e1b24093 18https://powercompare.co.uk/bitcoin/ 5 Cyber security

As we have seen, a common thread – or concern – with Consumer demands for instant access to financial services technological developments in finance is cyber security. on the go and the shift to Open Banking and sharing of Will these technologies strengthen or hinder the protection detailed information about our financial lives could leave of systems and consumers’ data? customers’ data in a more vulnerable position.

For financial service providers and regulatory authorities Traditional approaches to security risk management and alike this is a burning question. Reputations are on the line protection of data and infrastructure, such as monitoring and lost consumer trust is difficult to regain, aside from the firewalls and endpoints, have failed to prevent breaches. potential fines from regulators for mishandling personal Accordingly, cyber security has shifted towards a more information. The industry needs to address security preventative approach such as penetrative testing, where weaknesses and vulnerabilities in all their systems, not simulated cyber-attacks are used to find weaknesses, flaws least the emerging technologies they are leveraging. and vulnerable access points.

In 2017 the banking and financial sector suffered 134 Regulatory bodies must strive to keep pace with the separate data breaches, almost triple the number for the increasing risk of cyber-attacks as they update regulations year before.21 By the half-way mark in 2018, banks had and compliance processes to anticipate the threats from been hit by another 84 hacks, putting the industry on agile cyber criminals. Blockchain holds out the prospect of course to continue a negative trend. a more secure technology for highly regulated industries such as banking, due to the technology’s ability to filter As the number of computer systems globally grows system or network security activities in real time and exponentially – and businesses, governments and identify manipulated data. individuals become ever more reliant on them – so does the need for robust cyber security to protect them and Investment in this area will continue to grow. Global keep our data safe. market intelligence firm IDC predicted compound annual growth of 11.4% in spend on security solutions from 2016 Many organisations have started transferring their IT to 2021. The imperative for getting cyber security right is infrastructure to the cloud in order to reduce costs. Because compelling. cloud storage systems are constantly evolving, they are the perfect space for innovation in cyber security to deal with new threats, business operational problems and system infrastructure challenges. This gives banks further reasons for moving systems to cloud-based platforms like Oracle Fusion.

Boasting “the world’s largest knowledge base of data,” the corporate name Oracle seems apt. It claims the top 20 banks, top 10 aerospace and defence companies, top 20 governments, and top 20 high-tech companies as customers. For them, security is a primary concern, Oracle stresses.22

21www.avoka.com/blog/2018-top-banking-trends-guide-mid-year-update/ 22www.ft.lk/front-page/Oracle-on-course-to-be--1-in-Apps/44-670348 Some final thoughts

Banks and financial organisations were the pioneers These technological trends can not only transform the back in the 1950s when they switched from paper- cost base and patterns of employment within the sector, based recordkeeping systems to mainframe computers they will upset the established pecking order and are on an industrial scale. The fintech revolution, and the likely to usher in a growing cast of tech-savvy and nimble shift to technologies harnessing cloud platforms, big data challengers. The competition to offer more tailored and analytics, artificial intelligence and blockchain, is no less cost-effective products and services to consumers and significant. The ramifications will be far-reaching. businesses is intense. The potential gains are spurring investment and ongoing research in these technologies The finance, insurance and investment management and others to bolster security, regulation and compliance. sector is ripe for innovation. Much of this will displace jobs. Japan’s Mizuho Financial Group plans to replace a third Unlike the transition to computing of 60 years ago, this of its workforce with AI by 2027, while former Citi Group time the wave of innovation breaking across the finance Chief Vikram Pandit believes that within five years 30% sector has multiple fast-moving currents. Though it may of banking jobs will be wiped out.23 However, many new not yet be clear where they will lead, these different roles will be created within financial service providers and technologies will impel a raft of further developments their tech partners. The numbers and the job descriptions through 2019 and the coming years. will only become clearer as these trends ripple through the sector in the years ahead.

23www.ft.com/content/b497a134-2d21-11e8-a34a-7e7563b0b0f4 Mark Smith

Partner, Innovation Incentives

Mark joined Ayming in 2018 as a Partner to lead the Innovation practice, which primarily focuses on R&D Tax and Grants. A Chartered Accountant and Chartered Tax Advisor, he has previously held senior roles at KPMG, and holds a Chemical Engineering degree from The University of Manchester.

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