The Rise of Challenger Banks
"Challenger" banks are a set of small specialist lenders who are challenging their larger rivals by producing better returns or more attractive propositions than that currently offered from the more the traditional banking establishments.
These 'new kids on the block' are offering better mobile and digital experiences for their clients and greater transparency on money and internal operations. They have the advantage of being able to start fresh and capitalise on the fact that their reputation has been untarnished by the 2008 banking crisis. Another advantage for the challenger banks is being able to adopt an agile and adaptive business model, allowing them to react new trends a lot faster then the incumbent institutions without the burden of expensive brick and mortar branches or a fragmented IT infrastructure.
Although, in reality, these new banks have to work extremely hard to garner trust, speak with authority and in addition provide reliable service. They have to be so much better than their competitors that they drive people to switch their accounts and trust someone new with their hard earned cash. Not an easy task at all and something that banking customers tend to be very reluctant to do.
Fintech Start Ups
Fintech or financial technology start-up companies should be on everyone's radar due to success stories such as Lending Club which went public in 2014 for a valuation of $8 billion. From automated investment services or robo-advisers, to payment processors and alternative lending firms, Fintechs have become appealing for clients and investors for a number of reasons, including ease of use, agility to respond to market trends and marginally cheaper services than competitors.
Examples of this type of company include Funding Circle – a peer to peer lender that matches investors to small and medium-sized businesses. Crowdfunder.co.uk – an online crowd funding platform which allows companies or individuals to create a crowd and collect payments from their backers with ease, another example is Transferwise.com – a foreign exchange money transfer service allowing users to benefit from the "real" exchange rates, claiming that banks and other providers can charge you up to 5% in hidden costs.
So far, the larger financial institutions have responded to the Fintech challenge in one of three ways. A wait and see attitude, reserving judgement until a clear technology winner emerges. The risk here is that they risk being unprepared and will be less able to adapt when it's most needed. The second group have acquired Fintech forms to gain insight and access the new technologies, but then often have trouble integrating new systems with their existing IT infrastructures. Finally there are companies that are investing significant time and money in fixing their own IT landscape, which is typically fragmented and complicated with a hope of replicating Fintech's approach in bringing new offerings to the market quickly through an innovative and agile approach. Although these existing IT teams can be entrenched in decades old regulatory burdens and out-dated IT infrastructure. It's very difficult for existing IT departments to replicate a Fintech start-up company simply by their nature they are starting from the ground up.
Changing an existing business model is always difficult. However, banks and financial institutions stand a chance of being able to take advantage of their position of trust and authority, whilst maximising on their existing client base. The speed in which they adapt and react is crucial, together with keeping customer experience sharply in their focus.
Robots and AI
In the movies, famous robots like Rosie the maid (The Jetsons) c3Po (Star Wars), WallE (WallE) and Johnny 5 (Short Circuit) have kept us entertained for decades. However, robots or robo-advisers more specifically are now looking set to begin their invasion on banking. The biggest opportunity for Robots and AI systems in the financial sector at this time is to extend the problem solving capabilities and productivity of human beings to deliver superior business results through improving speed, accuracy and operational costs. This new evolution in technology comes with the potential that some job roles could be placed at risk - such as bank clerks, loan officers, mortgage brokers and tax preparers.
Sterling Bank & Trust in California have introduced two robots as greeters at the bank's new locations opening in Cupertino and Alhambra, in the Los Angeles area. As part of their 'training,' the two robots made appearances at the bank's San Francisco branches.
More a novelty than providing any significant off-loading of duties during the initial use at Sterling, the robots are highly popular with children and grandchildren, said Steve Adams, senior vice president of Sterling Bank & Trust. The robots demonstrate kung-fu moves and dancing while also greeting customers and handing out bankers' business cards.
The world of AI has developed hugely in the Financial sector in recent times, so much so that there is now a service rather than a person that can decide where to invest your money for you, it's an algorithm, you answer a short questionnaire it then creates a portfolio suited to your profile, and as you're cutting out the middle man investors benefit from lower costs.
The significant benefits and cost savings in these new areas mean there is no turning back, we will see an ever increasing automation of financial services employing AI technology across lots of different financial products.
The potential downsides of this expansion in intelligent technology are primarily concerning privacy and security. In order to make intelligent decisions and predictions on their user's behalves these AI systems need to garner and store a lot of personal information on their users. If not correctly stored and protected these could be liable to being tampered with or potentially being used to fraudulently impersonate individuals. These services will also need to do all they can to ensure security isn't compromised in any way to build trust and to prevent any hacking attempts.
Contactless Payments Evolve
As of March 2016 there are a total of 86.5m contactless cards in issue in the UK, with £1,508.4m being spent in the UK in March 2016 alone.*
It's safe to assume that we've fully embraced contactless payment systems in various forms: Debit and Credit cards, Apple Pay, bPay, Samsung pay, Android pay. These systems use either RFID (Radio frequency identification) or NFC (near field communication) for making secure payments.
Payment providers are now researching and developing Biometrics further than the fingerprint identification, which are already used by Apple iphone and Samsung Galaxy. Vein reading and scanning technologies are also being released as an alternative, as some concerns have been raised about the security of fingerprint technology. Fujitisu have already launched a series of ATM's for the European market that utilise its PalmSecure biometric verification technology alongside contactless and NFC transactions. It is believed that it is practically impossible to cheat a vein scan and research is well underway into retina scanning and cardiac rhythms, to name but a few! Other Sci Fi sounding approaches are Electronic tattoos and a "password pill" that contains a microchip powered by the acid present in the stomach. Once swallowed, it creates a unique ID radio signal that can be sensed from outside the skin, turning the entire body into a password. We're not really sure that this one will catch on though!?
It looks like the future is bright, the future is tech when it comes to the trends to watch in this sector.
So, there you go, our round-up of the trends in financial services you need to keep abreast of in 2016 and beyond to ensure that you're ahead of the curve.
* The UK Cards Association, Contactless Statistics