MarkLogic insight: Banks are the crucible of innovation in finance
“Dr. Giles Nelson is the CTO of Financial Services MarkLogic. MarkLogic is a next-generation data management and integration provider that works with numerous financial services organisations including ABN-AMRO, Credit Suisse and JP Morgan among others. Here, Nelson shares his opinion on how financial institutions are managing innovation.
Banks are the crucible of innovation in finance
Perceptions of service providers in financial services can perhaps, roughly, be put into two categories: old and new. In other words, conservative and innovative. In this worldview, it’s the banks that are conservative, slow-moving organisations with mainframes and real estate where innovation seems to be doing just enough to retain your existing customers. By contrast, the innovation is happening with the fintechs, which are fast moving, with no legacy systems and brimming with new ideas. Thus, the banks will die. The fintechs will create a new, cheaper, easier to use financial system.
But how does this narrative hold up? Some fintechs are indeed being disruptive. Monzo and TransferWise are two often-cited UK examples, with recent valuations of US$2bn and $3.5bn respectively. AliPay, the China mobile payments provider, has around 1bn customers worldwide. But these companies, that once were startups, are the exceptions. In general, it is the established banks that still dominate the provision of financial services. And it is here, whether organically or working with fintechs, that the vast bulk of financial services innovation will be forged.
Yes, innovation is happening in banks. Much of it is not obvious as it doesn’t relate to the retail services that so often catch the limelight and have been the focus of much fintech investment. These innovations are happening behind the scenes. They may be transformational projects that help a business operate more effectively, such as building a better trade surveillance platform to identify compliance issues before they happen or ensuring that customer service is enhanced by integrating legacy data sets that are spread out across the organisation. These projects aren’t high profile, but they are still innovative, and banks are all too aware of the general need to digitally transform. Consequently, some are now beginning to publicly announce how they are transforming themselves into technology businesses.
The vast majority of established banks are also working with fintechs in partnership. Many offer incubator programmes, encouraging startup companies to co-innovate with them, often in physical situ or operating in technology sandboxes. In fact, regulators are also encouraging fintechs to work with them. The UK Financial Conduct Authority (FCA) has put dozens of companies through its own regulatory sandbox that enables companies to test the viability of new services in a less costly environment.
Many banks have also begun to develop digital laboratories to provide investment for digital R&D and to create that much sought-after agility, which can be hard to find in a legacy environment. Recently, BBVA was the latest to announce such a lab, something they are calling an “AI Factory”, with 150 data scientists and engineers. And banks such as JP Morgan, Goldman Sachs and Morgan Stanley are also explicitly starting to commercialise applications that once started as internal projects. Asset management behemoth BlackRock is selling its own fund management platform, Aladdin, to others and has an objective of having over 30% of its revenues generated from software by the end of 2022.
Compared with the fintechs, banks have a lot of financial clout. Monzo raised $144M in its last funding round – a decent chunk of change. However, JP Morgan, in its investment bank alone, has an annual technology budget of nearly $11Bn. A strong market position is enabling these banks to do ‘just enough’ to fend off the fintechs snapping at their heels but also, if they do it right, to strengthen their positions in the industry and create new revenue streams.
And where’s BigTech in all this? Apple Pay and Google Pay were among the first forays into the world of finance from the world’s tech giants, but these were only integrations with the existing financial system. Facebook’s announcement of Libra, a digital cryptocurrency, is more substantial. But, post Cambridge Analytica, are we really, as consumers, going to give Facebook even more insights into our lives? Perhaps some of us will for small payments, but probably not for anything substantial.
This trust issue is another strength of the established banks. A key test is “where is your salary paid into?” and, for the UK at least, the vast majority receive it into an incumbent bank, despite many of these people having a digital bank account too. A survey reported in the FT recently showed that, more than 80% of people trusted a bank most to securely manage their data. The next most trusted was a payment provider on just 7%. Social media providers tended towards zero (no surprise there).
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Regulation provides incumbents with another strength. Increasing regulation since the financial crisis has made it more costly to conduct business. Banks have large compliance teams and pools of expertise in this area to draw one. Any new entrant also has to fit in with the relevant regulations and this inevitably provides a barrier to entry.
In summary, the investment in and the excitement around fintech as a sector is to be welcomed. Financial services organisations have got away for too long with shoddy service and high fees. Competition from disrupters is good. But the very nature of financial services as a mature, highly regulated industry where high degrees of trust are required make breaking in very difficult. Only a few fintechs will make it through to the big time. For most, it will be working with the banks and with their own innovation programmes, not against the, where success will lie.
FIVE things fintechs must do to keep investors onboard
New investors flocked to the stock market during the COVID-19 pandemic. Thirty-eight percent of investors said they had never had a brokerage or similar account before opening one in 2020.
Low or no-fee trading options have helped accelerate the trend – nearly half of new investors said they accessed their account primarily through a mobile app. As FinTechs, how do we create the trust needed to keep new investors in the market and create a fruitful customer experience for them?
The financial industry does a disservice to individual investors if we merely offer tools that focus on making money quickly, an approach that usually backfires. Instead, the surge of interest presents an enormous opportunity for those who want to help more consumers use financial technology to educate them on responsible spending, saving, and investing in order to achieve financial wellness current fintech tools have welcomed individual investors in the door.
Now, it’s time to focus on education and improving their experience going forward. There are several ways those of us in fintech can step up to shape the future of retail investing so that it works better for everyone, starting with the following areas.
Equal access to financial wellness education
Financial health should be available to everyone — but today, not everyone has the educational resources to achieve it. One study shows that only 3.9% of students from low-income schools were required to take a personal finance class. What they aren’t learning in school or from family members, fintech companies can provide on their platforms.
The companies should move from solely offering financial services to a more responsible model of education, advice, and prescriptive choices to help consumers develop better habits and make wiser financial decisions. Not only can they empower consumers and bridge historical wealth divides, but they can also stimulate growth by opening up new consumer segments.
Just as we’ve come to expect that our fitness routines are tailored to our individual bodies, we’re also ready for finance tools that go beyond one-size-fits-all solutions. But only six percent of financial institutions say they’re using the kind of technology that allows them to deliver a deeply personalized experience. Fintech tools need to reflect that financial success looks different for each of us.
For one consumer, it may mean providing guidance on how to pay off student loans early; for another, it may mean prescriptive actions that enable them to stick to a budget for the first time; for a third, it could look like prioritizing environmental, social and governance (ESG) investments, so that her portfolio aligns with her political beliefs.
Now, we are seeing financial technology beginning to meet the demands of personalized finance in a substantial and meaningful way.
The rise of AI-Powered Advice
Big-picture advice and predictive guidance used to be a feature of high-end financial advisory firms — a perk only available to those who could afford it. But thanks to rapid advancements in data analytics and artificial intelligence (AI), that kind of holistic advice is now more accessible than ever. AI-driven robo-advisors can parse many different streams of financial information, delivering customized answers to key questions: Is it time to buy a home, or is it smarter to keep renting? Can I afford to take out another student loan?
Intelligent connectivity powered by AI can anticipate consumers’ needs and next steps, making proactive suggestions that guide them along the path to financial wellbeing. Fintech companies can also help consumers identify when their financial picture becomes too complex for a robo-advisor, and help them find a human financial advisor to meet their needs.
Focus on financial mental health
New investors are quickly finding that the market can be overwhelming. That’s not surprising, financial anxiety is common and studies show that financial stress can have an impact on mental health for some.
It’s not enough for fintech companies to give retail investors access; they also must provide the guidance and support that help consumers manage their financial well-being. Educational tools can ensure that consumers are well informed about their options.
Predictive analytics can anticipate consumers’ questions, serving them key information and insights before they ask. Features that emphasize a comprehensive notion of financial well-being, rather than short-term wins and losses, can also help ensure that consumers are keeping their eyes on the bigger picture.
Gamification for good
The surge of gamification apps has done an impressive job making investing as engaging as playing a video game or joining a social media platform.
Much of the current use of gamification emphasizes short-term thinking, but there’s also an opportunity to help consumers think more broadly about their overall financial picture. One example is peer benchmarking, a feature that enables help consumers to see how their financial habits compare to those of friends and fellow consumers.
Gamification can also be used to incentivize making smaller, smarter choices — for example, rewarding saving over making an impulse buy.
The future of fintech is about more than just broadening access to the markets. It’s about making sure more individuals have access to the tools that can help improve their financial well-being—in the ways that suit their own circumstances and needs. The potential to act within their own set of individual priorities, with their long-term financial wellness in mind is much more empowering to a consumer than simply relying on short-term, high-risk investments.