Over the past five years, there are 10 tech trends that have shaped the financial services industry (see exhibit 1). These trends are changing established business models and creating new customer experiences. They are occurring across different points in the technology stack – from hardware and server-side improvements all through to client-side consumer-facing improvements. In this article, we show these broad trends, specific use cases and explain how adoption of these tech trends in shaping out across different regions of the world.
At the hardware layer, hybrid cloud is the tech trend to watch. Adopting hybrid-cloud has enabled financial service firms to migrate from a fixed-cost to an operating expense model, where they enjoy elastic scalability and only pay for what they need. This hybrid cloud model has grown along three axes: public cloud, industry cloud and non-core industry cloud applications. Public cloud refers to the popular services like Azure, AWS and IBM cloud; industry cloud refers to highly specialized cloud services that meet the core financial service applications (e.g. banking) and non-core industry cloud are cloud services that offer ancillary services that consumers want. Non-core industry cloud appears to be the highest growth segment. In banking for example, banks want to retain control of their mission-critical core banking applications but will adopt cloud that offers credit scoring/credit card processing especially when the internal capability to develop such software is non-existent.
In the next step of the tech stack is blockchain. Globally, it appears that Brazil is leading the financial services blockchain adoption curve. In April 2020, the Central Bank of Brazil (BCB) launched a data-sharing blockchain platform called PIER, with the goal of expediting the speed at which foreign banks can set up branches in the country. Brazilian fintechs NuBank and Stone Pagamentos have already created products powered by blockchain. Other regions are also adopting blockchain. In the UK, Santander is the first bank to use blockchain to offer One Pay FX, a new international payments service that allows account holders transfer money between Santander accounts in Europe and South America. In the US, JP Morgan has a blockchain product, Quorum. Quorum is a major step towards mainstream adoption of blockchain among financial industries. It is an enterprise-grade, permissioned blockchain technology specifically designed for financial services use cases. However, it appears that despite these early adopters blockchain will not become mainstream anytime soon (see Exhibit 2), forward-thinking companies will need to find creative ways to cross the chasm.
The compute slice of the financial services technology stack is being disrupted by the massive adoption of API platforms at scale, the rise of robotic process automation, the shift to instant payments for international payments (led in part by fintechs), artificial intelligence and cyber security. API platforms work best with open platform banking. In the open platform banking model, traditional banks/insurers serve as a platform providing data and cash management services – allowing third-party firms (fintechs) to build out niche applications using customer level transaction data, product data, personal data and payment data that is accessible through APIs (See exhibit 3).
This model which started in Europe (see exhibit 4), has really exploded globally. In late November 2019, Brazil’s Central Bank set out draft rules for open banking. This has led to an explosion of fintechs in the country. At present, Brazil has 11 fintech startup unicorns.
On the consumer side, new tokenization technologies and the emerging adoption of Near Field Communication technologies had given rise to contactless payments. Fewer consumers need to carry password tokens or cards to initiate/complete transactions. Contactless payment has become attractive for low-value payments. In the UK, contactless has overtaken chip and pin to become the most used in-store payments channel. With the current global pandemic, we estimate that the volume of contactless payments has increased by 2.5X over the past 3-months. Within the insurance sector, the rise of telematic devices have allowed motor vehicle insurers to curate highly personalized risk signatures of their clients by placing telematic devices within the cars of those insured to estimate very specific premiums – this is a true game changer in the industry.
Clearly, there has been a wave of rising tech intensity across each step of the technology stack of financial service players. The key drivers of these have been the existential desire to cut costs, improve customer experience and prevent cyber threats. While the developed world has kept up to speed on broad technology adoption, it is developing economies like Brazil and India that remain on the technology frontier of innovation within financial services. As a financial service firm preparing for certain recovery, there are two actions worth taking: one, run a cost baseline assessment for all your business processes, identify the most expensive business processes and use exhibit 1 as a starting point to see which part of your tech stack needs to be changed to achieve quick-wins in cost and customer experience. Two, disrupt yourself. A PwC report published in 2016 suggests that traditional financial service firms may lose up to 20% of current revenue to fintechs. Don’t get disrupted! Begin to think of each function within your firm as a potential fintech start-up. Think about a few bold tech adoption and business model changes required to shift each function into the frontier of excellence in technology and customer experience.
Poatek is a leader in providing state-of-the-art services across the entire financial services technology stack. We are have a unique combination of strong technical expertise and experience serving clients in the financial services space across Europe, US and Latin America.
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