Five ways fintech is disrupting the financial services industry

Fintech is the buzzword within the banking industry. It refers to the use of technology across all financial services functions. For instance, the simple task of replacing paper-based processes with software and applications is an example of fintech at work.

Previously, fintech was mainly used for back-office functions by leveraging software to help bank personnel handle accounts, execute transactions, manage customer databases, etc. Today, however, fintech has transformed how banks operate. No longer relegated to the gloomy corners of back-offices, fintech has taken centre stage by making itself indispensible to customer-facing processes. Every digital transaction, be it online shopping, foreign currency exchange, stock investments, or money transfers, is possible at our fingertips thanks to FinTech. How did FinTech come to play such an important role in the lives of consumers?

Drivers of the fintech revolution

Mobility has had a big role to play in the fintech revolution. The penetration of smartphones provided consumers with an easier way to interact with banks and gain real-time views into their bank accounts. Inevitably, as mobile apps grew in sophistication, so did customer demand for intuitive banking services. Today, digital transformation within banks coupled with mobility has transformed the very nature of banking. Customers no longer have to contend with long queues and wait times to deposit money, conduct trades or even request a check book.

The smartphone revolution soon gave birth to another development – the explosion of online payment apps that integrate with bank accounts, allowing seamless online shopping, investments, transfers, and mobile-to-mobile payments. Finally, the rising number of online platforms and applications fuelled the need for faster, smarter and more robust security protocols to safeguard customer data. As cyber-attacks such as ransomware, malware and phishing become increasingly sophisticated, mere login IDs and passwords are no longer strong enough to thwart intruders. Today, merchants as well as consumers need innovative security products that use AI, machine learning and advanced fraud analytics tools to protect their transactions, assets and data.

The disruption of fintech

Here are some ways in which fintech is changing the game for the financial services industry:

1.    Chatbots for customer service – Chatbots are bits of software that use natural language processing and machine learning to continuously learn from human interactions. This is becoming a popular tool for banks to streamline customer-facing interactions such as handling queries or directing customers to relevant departments. For instance, one of Japan’s leading banks is rolling out a chatbot that will help customers find relevant information on their website. Some chatbots can even provide investment advice such as Erica, the Bank of America’s chatbot. Robots, such as the one used by UBS, scan customer emails for trading instructions and execute these autonomously, reducing the time taken from 45 minutes to two minutes. The use of these chatbots not only improves customer satisfaction and reduces costs but also frees agents in call centres to focus on value addition.

2.    Machine learning and AI for fraud detection – Identifying fraudulent transactions is the main goal of anti-money laundering departments. For most banks, this involves a combination of software and people. Security software generates alerts on the possibility of a fraudulent transaction or a virus attack. Then, it is up to human investigators to determine whether the transaction or attack is a false positive or a real threat. With the increasing sophistication of attacks, this time-consuming process can cost banks millions of dollars, loss of data and customer confidence, and negative brand reputation. According to McKinsey, the adoption of data aggregation platforms, machine learning-driven statistical modeling and process automation can transform AML operations by infusing new efficiencies. For instance, data aggregation platforms can mine unstructured transaction and account data to provide a 360-degree customer view and enable faster transaction validation. More importantly, machine learning algorithms can leverage historical records to determine patterns and predict the possibility of fraud and attacks before they occur, reducing manual effort by nearly 50%.

3.    Omni-channel banking and obsolescence of bank branches – As banking shifts from being a branch-specific activity to one that permeates all digital channels (mobile, social and online), the importance of having several brick-and-mortar bank offices decreases. In fact, studies show that the adoption of omni-channel banking is driving several banks to reduce the number and size of their branch offices. In the European Union alone, nearly 9100 bank branches were shut down by the end of 2016 owing to higher adoption of electronic payments and online/mobile banking.

4.    Biometrics for stronger security – There is a lot of interest in finding ways to use biometrics such as vocal patterns, irises, thumbprints, facial recognition, etc., to add an extra layer of authentication for transactions. Biometrics promotes usability by enabling quick authentication, avoiding the frustration that comes with remembering multiple passwords. In fact, several banks are investing in biometrics-based authentication solutions that use the forward-facing camera to scan one’s iris or the in-built thumbprint scanners in smartphones to strengthen security.

5.    Blockchain for digital transactions – Cryptocurrencies are taking the banking world by storm by providing users with faster and cheaper ways to transact. The distributed ledger system of blockchain leverages stringent controls enabling smart contracts and auditable data. According to NASDAQ, the most notable application of blockchain will be in how it transforms payments for banks as well as customers by reducing the cost and time taken to transfer money. Additionally, by building inherent trust, blockchain provides the perfect trading platform for securities exchanges. It does this by ensuring transparency, thereby minimising risk, human errors and transactional fees.

Conclusion

Mobility, smartphones and online payment apps coupled with the demand for secure and personalised banking experiences are giving new impetus to the adoption of financial technology within the financial services industry. Today, fintech encompasses everything from customer service chatbots and machine learning algorithms for fraud analytics to blockchain for digital transactions and biometrics-enabled authentication. Increasingly, retail banks are being upstaged by new fintech players that offer customers all of this and more, making it imperative for traditional banks to make strategic investments in innovative technologies. This will help them upgrade their operations and deliver seamless services for higher customer retention.