Delivering on Banking’s Digital Future: Prioritizing Innovation (Part 1)
By embracing a more open mind-set, leveraging a rich set of emerging technologies and collaborating deeply with fintech, banks can increase their competitiveness, reduce operational complexity, and unlock new and more effective ways of engaging and growing a loyal customer base.
In today’s increasingly technologically intensive age, banks must quickly make sense of a rush of new technologies that often originate from outside the sector, either from tech giants (Apple Pay, Google Pay or PayPal) or from a class of focused companies known as fintechs. Those that can’t keep pace risk irrelevance — or worse. This series explores the various facets of innovation in the digital era and looks at how banks can navigate going forward.
Technology-driven disruption is now the rule rather than the exception in banking. What started with the advent of online banking has turned the industry upside down with the rollout of the first smartphone in 2007. The combined forces of social media, mobile, analytics and cloud (SMAC) then paved the way for massive changes in the way consumers interacted with banks, and vice versa — at a time when trust in banks was dwindling following the financial crisis. New, more demanding regulations were taking shape. This meant that banks had to quickly adapt their business, technology and operating models and find innovative ways to attract, delight and retain customer trust, while creating new efficiencies.
Today, innovation is on top of banks’ agenda, and it is driven by digitization – which combines omnichannel consistency, big data, analytics, the IoT, robotic process automation and AI to offer deeply personalized services for customers and produce unprecedented changes in the way banking is done. Importantly, the banking sector seems to be moving away from a closed approach to innovation to a more open and collaborative process that aligns customers and employees with emerging technologies developed and road-tested by fintech rivals.
Innovation Through Engagement
Innovation/Idea Labs (Collaboratories)
From ideation to deployment, innovation labs have been used by companies — especially tech companies — successfully to develop solutions for many types of problems. Such labs thrive on a culture of collaboration and consider failure as a stepping stone to innovation. Google’s X, for example, aims to invent and launch what it calls “moonshot” technologies. Google Glass and the Waymo self-driving car are examples of what Google was able to create through X.
Despite their reputation for being rigid in their approach, many banks have taken enthusiastically to this idea. Banks that have tried this approach include Citibank, Deutsche Bank, Barclays Bank, and Japan’s Mizuho Bank, which established the FINOLAB in 2016 for collaborating with fintech companies and was able to improve its user interface (UI) and user experience (UX). Additionally, banks are leveraging firms that specialize in design thinking and customer behavior to understand what drives customer preferences and needs, and then meet them in a highly contextualized fashion.
Executive Engagement and Crowdsourcing
Another way banks are unearthing ideas for product innovation is by engaging employees, customers and tech enthusiasts. This approach includes dedicated intranet/internet portals to engage customers and other stakeholders, or hackathons that reward those who devise the best solution for a given problem, or identifying and hiring talented developers. USAA, for example, launched an ideas platform in 2010 that engages its 30,000 employees. Using a voting system, the platform helps identify the most popular ideas which are then worked on by USAA’s in-house innovation team. The company was able to implement 1,206 employee ideas in 2017, of which 189 came to fruition. Using this platform, USAA engaged 94% of its employees. Similarly, Banchile Inversiones generated over 100 ideas from its customers by asking them about what they wanted from their financial services.
Developing the AI/Human Operating Model
In order to achieve operational efficiencies and nimbleness in today’s ever-changing digital space, banks are increasingly focused on the application of a “co-working with AI” model in which human resources are seamlessly augmented by and conveniently interact with artificial intelligence. For example, Ayasdi worked with a major bank to improve its liquidity/capitalization stress testing from a nine-month process requiring hundreds of employees, to a three-month process using fewer than 100 specialists who worked with an AI system. Going forward, as the workforce makeup shifts from purely human to a human/AI matrix, bank leadership will need to move from a focus on managing teams of people to managing suites of capabilities.
Emerging Innovation Areas for Banks
By allowing banks to share data securely, open banking standards are expected to launch a new era of data-driven banking innovations. These standards allow banks to leverage open application programming interfaces (APIs) — which have thus far been used mostly for sharing information — to provide enhanced financial services to the customer by opening up banking data. Open banking regulations, such as the European Union’s Second Payment Services Directive (PSD2), allow for the sharing of customer transaction data with third parties that can use it to create new products and offerings.
Nevertheless, banks will have to balance this out with the General Data Protection Regulation (GDPR) mandate to avoid potential conflicts caused by the two regulations. In the immediate future, open banking standards will allow customers better control over their finances in real time. For example, customers can get a consolidated view of their finances that are spread across multiple accounts in different banks. Similarly, borrowers can share their recent spending history with lenders in order to prove their creditworthiness. Over the long run, as the regulations evolve and more data is shared, it will open up opportunities for banks and third parties to create enhanced offerings such as a fintech ecosystem that marries a bank’s products with a telecom provider’s mobile technologies.
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Regulatory compliance continues to be a growing burden on banks. It is estimated banks and financial institutions spend nearly $270 billion on compliance-related costs, a figure that is expected to double by 2022. Because compliance processes remain largely manual, a large chunk of this expenditure goes to hiring compliance and risk professionals. New technology will unlock new and more efficient ways of working. Aided by advancements in AI technologies brought by the increasing presence of fintech organizations, banks are looking to automate regulatory compliance and cut costs over time. Regulatory Technology, or regtech, could automate compliance processes, and is expected to allow banks to extract meaningful insights from the voluminous data in nearly real time.
Regtech advancements could also vastly improve compliance with anti-money-laundering (AML) regulations. Importantly, these technologies will allow banks to interpret future regulations quickly and identify the processes that will be impacted. For instance, natural language understanding (NLU) could identify specific rules and send them to people and departments that need to comply.
Growing competition, productivity enhancements and the demand for personalization have prompted banks to try AI-based tools as well as adding a smart element to the banking experience. Much like Google, Amazon and Facebook, banks see AI-based enhancements as a critical element in differentiating themselves from the competition. The approaches to integrating AI vary. Royal Bank of Canada and Bank of America are using AI to create chatbots designed to identify customer needs and improve customer service. Meanwhile, we’ve partnered with Ally Bank to transform customer experience using Alexa, Amazon’s smart assistant (watch this video to see how).
Regardless of the approach taken, the use cases for AI in banking go far beyond personalized recommendations and chatbots. UBS, for example, is using AI to improve its traders’ performance, and to parse through millions of messages to identify fraud. BNY Mellon, meanwhile, reported substantial operational efficiencies after implementing robotic process automation (RPA). Crucially, AI-based automation is allowing banks to free human resources to do more meaningful work while the robots complete the repetitive tasks.
Innovating with Fintech
Spurred by the push to reduce operating costs through shared infrastructure, while boosting trust and transparency, banks’ interest in blockchain – the underlying technology behind cryptocurrencies such as bitcoin – has soared. This interest is driven by the expected benefits of moving multiple processes to a blockchain. Our study of financial industry executives globally found that 91% believe blockchain will be either critical or important to their firm’s future. Blockchain adoption is expected to drive efficiencies and create more than 5% growth in revenue. To explore the innovation possibilities with blockchain, banks are collaborating with their peers and with fintech startups such as Ethereum. Use cases being explored include clearing and settlement, payments, trade finance, document management and smart bonds.
But banks’ interest in working with fintechs extends beyond blockchain, and it is becoming increasingly clear that despite differences in approach, they stand to benefit from tight collaboration. For example, banks are now looking to improve customer experience with digital — an area that aligns with the interests of fintech start-ups that are applying open APIs, data analytics and automation to create an experience similar to that provided by born-digital e-commerce players.
Nevertheless, cybersecurity remains a top concern for banks and regulators alike as collaboration with fintech companies intensifies. This has prompted the World Economic Forum to create an industry consortium focused on improving the cybersecurity of these start-ups. The group will track the preparedness of fintechs against cyberattacks and develop a point-based scoring system to track their progress.
Part 2 of this series will focus on ways banks can overcome these challenges and prosper in the future.
Adam Chardukian, Manager, Consulting, and Abhishek Roy, Director, Consulting, in Cognizant’s Banking & Financial Services Practice contributed to this article.