From cashless transactions to branchless banking; cyber security scares to robo-advisers, hints about the future shape of the financial services industry are all around us, but the onward march of technology is bound to throw up unexpected challenges for financial institutions and regulators in the decades ahead, from ensuring access to the right skills and technology to moving quickly enough to deal with new competitors.
A cashless world
Banks could face a society in which cash is no longer king. “There's a high probability that a lot of countries in the world will no longer be using cash in 2030,” says Andrew Nevin, a partner at PwC Nigeria and global leader of the firm’s Project Blue
initiative, which assesses future trends in financial services. “We've already got some countries where this is happening. The two best examples are probably Sweden and Kenya, which are moving from opposite ends of the socio-economic spectrum to a cashless society.”
Banks will need to adapt to the changing landscape. Legacy banks will have to figure out ways to make their systems and branches more effective; newer upstarts may operate without branches at all. Both will need to find ways to provide more tailored products to their customers, but the advances made in robotics and artificial intelligence (AI) could make it more cost-effective to ‘re-shore’ some operations and increase localisation.
“The new norm is going to be a situation where we're technologically advanced, bank on the move and we don't want to go into branches unless we really have to,” says Richard Iferenta, partner and head of challenger banking at consultancy firm KPMG UK. But, he adds: “Technology is a means to an end. The banking sector doesn't want technology just for the sake of it. You want to use it to reduce costs, to access the market, to sell more products.”
Whether new or long-established, banks will need to decide whether to shrink to their core business and outsource services to partners, or expand to provide a wide range of value-added services using more powerful data analytics. Such choices may not be far away – ‘open banking’, in which other customer-facing companies provide services previously offered by banks, is already happening. Uber, for example, effectively makes the financial transaction involved in hiring a taxi all but disappear to the user.
“The bank needs to be invisible,” says Andrew, “embedded in the background of your day-to-day financial life.”
The trend for payments systems to move away from cash and towards bank cards or contactless payments via smart phones is likely to lead to widespread use of biometrics to approve a payment, such as fingerprints or iris scans.
Technologies including Apple’s Touch ID and Samsung’s Galaxy S8 iris scanning and facial recognition smartphone features are already rapidly expanding the role of biometrics within the mobile banking arena. Looking forward, innovations such as vein imaging, scent detection, typing and keystroke analysis, palm geometry, behavioural biometrics – which takes into account individual behaviours such as walking and general interaction – and even DNA testing are set to undergo considerable development in order to make crucial authentication processes smoother.
"The bank needs to be invisible, embedded in the background of your day-to-day financial life"
Shipments of biometric devices for the financial sector worldwide are expected to reach 43.7 million units annually by 2024, from 4.7 million in 2015, according to market intelligence firm Tractica
. Meanwhile, revenue from biometrics hardware and software in the finance sector is also expected to rise dramatically, from $126m in 2015 to $2.2bn in 2024.
In the area of asset management, the evolution of technology should allow for greater automation and optimisation of what a customer does with their money. Robo-advisers have already found acceptance in some corners of the market, but are still in their infancy.
“Essentially, portfolios are put together at the moment by a large amount of judgment with technology behind it; you could reverse this and put much more technology into it,” says Roger Urwin, global head of investment content at advisory firm Willis Towers Watson and co-founder of its Thinking Ahead Group
New, more automated market entrants will also put pressure on margins – escalating competition among traditional firms – while the distribution of wealth products via proprietary advisory channels will become less effective, the World Economic Forum notes in its Future of financial services
Furthermore, the development of AI in the investment industry could drive down profits and force companies to reduce their headcounts.
“The role for humans that's very strong is in creative and social intelligence,” says Roger. “But you can see quite a lot of roles where we will need fewer professionals in the future. In Western markets, it's hard to see there being anything other than a decline in demand for investment professionals around the corner.”
Meanwhile, in the insurance sector the ongoing trend of having internet connectivity embedded into everyday objects opens up the possibility of big changes to the sort of contracts being offered to customers. Research firm IDC suggests that by 2019, usage-based insurance enabled by the Internet of Things will account for at least 15% of the vehicle insurance market worldwide and 10% of the home insurance market. Furthermore, the growth in online insurance marketplaces and progressively commoditised environment will increase the risk of customers becoming more fickle, according to the World Economic Forum. This will push the creation of loyalty through innovation to the forefront of the agenda – with margin pressures also forcing insurers to expand either scope or scale.
While all these changes will certainly be disruptive, there are also benefits to the developments in the offing. Greater speed and efficiency should make it easier to deliver services to a larger and more dispersed client base, and fraud prevention techniques should be enhanced. Andrew points out that “all financial transactions – for better or worse in terms of our privacy – are going to be traceable and verifiable. That applies not just to banking but also asset management, insurance and elsewhere.”
Of course, less scrupulous and more criminally-minded individuals will be able to take advantage of these trends too, which means that cyber security defences will have to be constantly monitored and enhanced.
Technology should also assist regulators and watchdogs, as long as they can keep up with developments. One way they can do so is through regulatory ‘sandboxes’, where new services, products and tools can be tested by financial services firms in a controlled environment. This is a small but growing trend. According to a recent report from Deloitte, Connecting global fintech
, there are now eight sandboxes up and running around the world, including in Canada, the UK and Malaysia. A further eight have been proposed, in the US, Switzerland, Russia and elsewhere.
The predicted revenue from biometrics hardware and software in the finance sector in 2024
One of the newest entrants is Abu Dhabi, which created what it calls its regulatory laboratory in November 2016. The city’s financial hub, the Abu Dhabi Global Market (ADGM), says it received 11 applications to launch services in its initial batch, in areas such as wealth management and digital wallets. It is now considering opening up to a second batch of applications.
“It’s not just local or regional applications. We’ve had applications from the UK, US, Singapore and India,” says Richard Teng, chief executive of the Financial Services Regulatory Authority at ADGM. “It's about creating an ecosystem, a marketplace.”
As shown by the growth of mobile banking in East Africa following the launch of M-Pesa in 2007, these days major developments can emerge in places that might previously have been overlooked, far from the traditional global financial centres.
No one can be sure where the next big development will come from, or what form it might take. Perhaps the only certainty is that technology will be disruptive. For banks and other financial institutions, learning to cope with that will be critical.
“There's a technology arms race,” says Roger. “It’s a reality of today's business environment that any business model is very vulnerable if the technology is not improving all the time.”