The fintech revolution has had a dramatic impact on the financial services industry. From digital wealth management (robo advisors) to automated payment systems, a variety of disruptive technologies have made their mark on the sector. For banks, the rapid development of financial technology poses the threat of losing business to competitors that are quicker to reap the benefits of automating their operations—whether those competitors are other banks that have purchased or partnered with fintech startups, or the fintech startups themselves.
Automating back office processes offers banks a host of benefits: reduced costs, quicker customer response and easier record keeping for compliance purposes. Given the substantial advantages innovative technologies offer in this regard, a wide variety of bank processes are subject to disruption or enhancement through the use of financial technology. An article by sector expert Naresh Kirpalani lays out some of the most notable areas to watch for fintech innovation in 2016, including:
- Further development of the blockchain as a crucial technology in several key segments of banking infrastructure.
- Payments as an area subject to further technology disruption and intense competition.
- Robotic process automation as a means of dealing with processes related to risk and regulatory issues.
- Accelerated innovation at banks and a focus on taking aggressive steps to outsource legacy IT applications and replace them with interfaced applications using APIs.
Other areas that have seen increasing focus by banks attempting to add efficiencies to their back office processes include automated decisioning solutions and digital signing.
In the United States, fintech upstarts—while pushing banks and other financial institutions to evolve with new technology—have not (or at least yet) massively disrupted their businesses. This may be at least partly due to the readiness that some banks have shown to purchase promising fintech startups, preventing them from posing a long-term threat to the bank’s business.
A market worthy of the U.S. banking industry’s attention in this regard is payment processing in China, where three nonbank players now dominate the sector. The same article cites a Citigroup report that questions whether banks in the U.S. and Europe can take advantage of innovation before fintech firms gain the scale and distribution needed to disrupt them. The study expects increased technology adoption at banks to result in a decline of 40 percent to 50 percent in headcount as they make cuts in their branch networks. “Branches and associated staff costs make up about 65 percent of the total retail cost base of a larger bank,” the report stated. It further noted that automation could help remove “a lot of these costs.”
When it comes to payments, U.S. banks have adapted by offering their customers the ability to pay bills online as one method of accommodating the demands of the Internet age. Nevertheless, the success of digital payments firm PayPal and the cryptocurrency Bitcoin shows that this is a market ripe for disruption. As a result, it is no surprise to find that a number of banks have announced that they are working with or investing in blockchain technology to develop their own next generation payment systems. Along these lines, global investment bank Goldman Sachs, private equity firm Bain Capital and MasterCard have invested in firms using the blockchain technology for applications dealing with the Bitcoin cryptocurrency.
In another major development in the field, IBM announced recently that it has finished a pilot project in conjunction with China UnionPay, a Chinese credit card company, to help share loyalty bonus points between banks via the use of blockchain technology. The system the two firms has developed is designed to allow consumers around the world to swap bonus points from their banks, enabling them to choose the rewards they desire. In the United Kingdom, Barclays is the first bank there to partner with a virtual currency company, Circle, which uses blockchain technology to aid its goal of building a template for borderless currency.
Workflow automation is another innovative process attracting interest from banks looking to use technology to improve their operational efficiency. The attraction of the technology for many banks is the ability of these types of solutions to eliminate paper as much as possible and improve the productivity of their overall operations. A study on the benefits of automated workflow solutions revealed that the majority of the institutions queried believed that the ability to increase approval and routing speed was the most significant benefit associated with an electronic routing system.
Thirty-one percent of the banks and financial institutions included in the survey indicated they “desperately needed” a system that was more automated so they could close more loans. One respondent bemoaned the difficulties caused by combining paper documents with a mostly paperless process, as the lack of electronic signature functionality caused the need for a paper signature form, which at times would get lost.
These concerns have led to the spread of digital signing technology, which has allowed banks to improve the efficiency of their back office processes. With the passage of the Uniform Electronic Transactions Act, and the adoption of electronic signatures by leading banks such as JP Morgan Chase & Co. and the Royal Bank of Canada, the practice has spread widely among banking institutions.
In addition to enhancing efficiency by speeding up account origination and other basic tasks, digital signing allows retail bank employees to access customer records more easily, improving their ability to interact with and service customers when they visit a branch. In an article about the process, JP Morgan Chase’s Alan Varrasso was quoted as saying of e-signatures: “This has changed the way we open accounts, manage workflow and provide checks and balances and controls."
The ultimate result of the fintech revolution for banks in North America and Europe is as of yet unknown. Will banks be able to adopt cost-cutting and customer-friendly technology rapidly enough to stave off upstart fintech competitors? Or will banking as we know it be disrupted as other industries have been by technological innovation? A bit of both may be the most likely answer. In any case, what can be said is that the technological innovation unleashed by fintech startups has already had major effects on bank operations—and there is likely still more to come as the automated processes introduced by innovators in the sector continue to work their way through the operational infrastructure of banks both large and small.