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 seen in 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 to the 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. 5 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.