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Banking is dead, long live banking!

Fintech is changing the way the financial sector operates and how it delivers products and services to its customers.

Technology is getting more sophisticated and now with artificial intelligence (AI), the rise of cloud computing and ‘big data’ analytics, its impact is only going to get bigger.

These developments mean that the world of finance is having to confront some significant issues, and will have to embrace radical change if banks and institutions are to keep up with these new developments.

While the industry is addressing these challenges it also has to contend with managing costs because, while they may want cutting-edge technology, banks also want value for money from their IT teams and the investments they make.

In turn, large scale institutions also have to manage patchwork systems built from a number of different elements over many years, and will want to keep these diverse systems working effectively and that will be a complex, time-consuming and expensive task.

Since the financial crisis industry regulation has also required the use of more complex software in order to better monitor risk and ensure regulatory compliance. Financial trades, for example, have to be effectively managed in order to promote market stability and transparency.

The banking and financial services sector is also faced by a variety of market trends, among them the greater personalisation of services. Consumers want their banks to know them, look after them and provide clear direction when it comes to buying a product or service. The use of AI is likely to change all this as it has the potential to transform the customer experience, as well as force the adoption of new business models.

Another trend is the use of the “intelligent” assistant or agent, with most organisations now moving from basic dialogue and account inquiries, to doing transactions using voice commands. The use of voice, long-term transactional analysis and contextual learnings, alongside individual preferences and behaviours will, when combined with AI, completely change the way in which banks engage with their customers.

Digital services and digital only banks are also appearing with a growing number of institutions creating a digital-only banking proposition, aligning new technologies and solutions with existing business models.

Leveraging technology
Financial institutions are looking to leverage the technical capabilities of fintech start-ups to assist in the development of digital-only banks. It’s with the integration and development of new services that Epiphany, an Italian company specialising in leveraging technology to improve banking services, comes into play.

According to Paolo Spadafora, the company’s CEO, technology has become an enabler for what he describes as the ‘sharing’ economy which has driven a shift from process to access.

“We’re not just talking about transactions and payments but also lending, loans, money transfer, investments and so on. With 5G and the rise of the IoT any device will be able to make those type of transactions,” he explains.

Spadafora argues that while users will have more choice there will also be more complexity, because of the regulations needed to make sure all these transactions happen securely.

“This provides a real opportunity for third party providers and fintechs, because they tend to be more responsive, more agile and faster than traditional banks.”

Spadafora suggests that new forms of banking and new mobile payments apps will benefit fintechs that are looking to specialise in managing what he calls the ‘Human Experience’.

“We use our Digital Banking Platform and Epiphany HX solutions to support banks looking to move away from a bank centric platform towards a more human centric approach,” Spadafora explains.

He expects to see new types of branches being created that act like industry-specific financial consultants, with experts who better understand their clients’ potential and help businesses – and people – access the product or service they need.

According to Spadafora, “Banks need to modernise their infrastructures and adopt forward-looking modern platforms. They need to build products and services around their customers and improve customer engagement and trust.”

HSBC is the world’s largest international bank and with over 40 million customers is one of those established banks Spadafora refers to.
How are these large established banks responding to the challenge of changing customer demand and embracing new technologies?
“Simply, we need to adapt,” says Ranil Boteju, Global Head of Data & Analytics Retail at HSBC.

“Today, as a bank, we are focused on data and technology to meet changing demand and provide what we call ‘helpful’ banking. We’re building a mobile centred service, but one where our customers can also interact with staff when they need to.

“People want convenience when dealing with their bank and they want that engagement to be seamless – they’re also looking for greater personalisation.”

Boteju says that HSBC is using data to glean insights that will help its customers better manage and meet their financial needs.

“How much can I spend, or save? How can I plan for events, save for my pension and so on. By using data we can start to better understand our customers and how they use their money. We use messaging and gentle nudging to help then reach specific goals – that’s behavioural economics in action.”

Data driven machine learning is also being used to solve specific customer problems, Boteju explains.

To deliver this new form of banking, he believes that it’s vital that banks and fintechs come together to create a broader ecosystem.
“How do we partner with technology companies to solve problems and provide solutions – that’s a big challenge for the industry,” he believes.

Boteju also makes the point that banks need to empower their frontline staff, while automating many traditional roles.

“We need to give them the tools to help customers and we’re seeing the creation of totally new job roles too. Algorithm Mechanics, Machine Learning Experience Managers, new roles are being created and are shaping a whole new set of requirements and skills.”

Rise of the FPGA
When it comes to the technology underpinning these new services there are a number of trends driving the market, as Alastair Richardson, Global Business Development – Financial Technology, Xilinx explains.

“Computing after Moore’s Law has shown us that CPUs are not getting faster and in fact are stagnating in terms of clock speeds. As a result, there’s a trend towards greater parallelism so that it is possible to handle the volumes of data being created. That data explosion, whether in terms of electronic trading where market volumes are picking up, or simply understanding how data interlinks, is marking a significant shift towards the use of FPGAs.”

One of the main problems is the nature of the data being generated, much of which is unstructured, so finding patterns and use cases is becoming increasingly challenging, according to Richardson.

“For retail banks, fraud and fraud protection is a big problem so understanding patterns by using data requires much greater levels of processing and compute power.

“These systems also need to be able to handle regulations and reporting requirements. FPGAs can manipulate data more intelligently.”
Despite the dis-advantages associated with CPUs and GPUs, they still dominate the market but with the release of ALVEO, by Xilinx, people now have access to FPGAs in a way that was not possible before.

“Up until now design engineers have been put off by the complexity in the coding styles, in deployment and availability, but that is changing,” Richardson suggests.

For CTOs the move to FPGAs is a step-change from what was seen as a niche product for high frequency traders, to a standardised product that can now be integrated into their platforms.

Above: The Alveo offers a level of power and flexibility, and an ease of deployment, that has certainly caught the attention of banks and financial institutions

“There’s a lot of experimentation going on in this space,” Richardson explains, “especially in terms of AI. But while Google may be developing ASICs, using next generation processing power, I’d question whether it is wise to invest resources and time in an ASIC or CPU when the business model is changing so rapidly. FPGAs, like ALVEO, offer a level of power and flexibility, and an ease of deployment, that has certainly caught the attention of banks and financial institutions.”

Jonathon Middleton, Digital and Technology Policy Manager at UK Finance, an association of financial institutions ranging from large international banks to digital start-ups, sees a growing focus on the use of AI.

“AI is certainly generating conversations within institutions and the banking sector itself is engaging with technology companies like Microsoft,” Middleton suggests.

“We are in a moment of evolution and revolution, when data is becoming essential and AI will lead to sudden changes in the way the industry operates.”
The use of AI raises some serious problems for banks in terms of questions around the use of data and security.

As a result Middleton sees that there are big challenges associated with AI and its deployment.

“There are a number of questions shaping the public debate around AI. Should we do something because we can? These technologies promise much but it’s beholden on all of us to explain why we are doing what we are doing. What is the impact on customers going to be and what are the potential reputational risks, should something go wrong?”

Middleton makes a similar point to Boteju and says that he thinks technology companies and banks need to work better together.
“There doesn’t tend to be a shared language between technologists and financial teams, so we need to change internal governance structures, bring teams together and better align the technology with business aims.

“Another issue that needs to be addressed is the cultural effect bias in data can have and we need to better understand where bias is in a data set. Where are the potential risks, how do you mitigate that risk and how do you ensure that you maintain customer trust. It is easy to see how quickly issues can escalate across platforms.”

New competitors
Trust is associated with traditional banks and institutions. Few people would want to risk their savings or partner with an organisation that wasn’t able to protect their identity and privacy. In recent surveys, however, consumers are placing as much trust in the likes of Amazon, Facebook and Apple as they do in financial institutions.

Among consumers who are looking to change banks, as many as 60 per cent said they were open to Big-Tech firms such as Google, Amazon, Facebook or Apple. These findings highlight the potential impact a technology company, launching a financial product or service, could have. It also suggests that banks will need to focus on becoming better digital organisations and make it easier for digital consumers to do business with them.

That may require partnering with specialists or solution providers that lead these transformations, such as Epiphany mentioned earlier, but the investment is important if gaps in performance are to be closed.

News that Facebook has announced a digital currency called Libra, allowing its billions of users to make financial transactions across the globe, has certainly shaken up the industry, as has the decision by the Bank of England’s to end its close relationship with major high street banks and to examine how to allow digital companies to access its payment system.

Libra is being promoted as a means to connect people who do not have access to traditional banking platforms and Facebook’s decision has been described as placing another, “nail in the coffin for traditional banks,” by Nigel Green, the founder and chief executive of the deVere Group, an independent financial advisory organisation.

Green believes it will accelerate the decline of traditional banks.

“Facebook’s Libra will be able to transact across traditional payment rails. They have partnered with PayPal, Mastercard, Visa and Stripe, amongst others to fuel merchant acceptance of this new digital currency. I believe the purpose of and use for traditional banks will certainly shrink.”

Green argues that cryptocurrencies and fintech solutions are already taking business away from banks as an increasingly globalised and digitalised economy undermines traditional business methods.

“This move by Facebook will certainly quicken the pace of mass adoption and will revolutionise how people access, manage and use money across the world and it will positively disturb the wider banking sector.”

So what will banking be like in the next ten years?

“No one knows,” suggests HSBC’s Bojetu.”Will the bank of the future come from Wall Street, Canary Wharf or Silicon Valley? I’m not sure, but I do believe that incumbent banks do have a number of strengths that will put them at an advantage. They have a tremendous amount of data about customers that goes back over many years and there’s a level of trust and that’s fundamental to banking.”

Richardson agrees. “There will be a need for traditional banks and new products and services will still need to be regulated.

“Innovation isn’t going to stop and banks are investing heavily in fintech, you just have to look at the incubators in and around London.”

Whether it’s cryptocurrencies, blockchain or AI and machine learning technological platforms, even the use of quantum computing, the banking sector is having to contend with fintech companies and new technologies that are completely transforming the competitive environment and it’s one in which the use of digital technologies are making it far easier to invest, manage and spend.

Developments in technology, that use to take years to design and then execute when managed by big financial institutions, are now being conducted in the real world in short order.

The impact of fintechs and how consumers interact with banking and financial providers means that the sector and how it operates will be changed forever.

Neil Tyler

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