{"id":83062,"date":"2021-01-11T05:08:04","date_gmt":"2021-01-11T05:08:04","guid":{"rendered":"https:\/\/www.alj.com\/?post_type=perspective&p=83062"},"modified":"2022-05-11T13:12:49","modified_gmt":"2022-05-11T13:12:49","slug":"finance-primed-for-tech-transformation","status":"publish","type":"perspective","link":"https:\/\/alj.com\/en\/perspective\/finance-primed-for-tech-transformation\/","title":{"rendered":"Finance primed for tech transformation"},"content":{"rendered":"

With technology evolving at dizzying speeds, the future successes of the financial services<\/a> industry will be dictated by who can capitalize on these changes most quickly and exploit them with maximum impact.\u00a0<\/p>\n

Gone is the image that finance firms used to project: of stolid, august institutions, standing steady against the changing trends of the world around them.<\/p>\n

Instead, today\u2019s financial services businesses must, by necessity, present a more dynamic persona; one nimble enough to meet the fast-changing needs of consumers, while making the most of the latest innovations.<\/p>\n

Technology is both a driver and enabler of this revolution. \u00a0Traditional banks have lost ground \u2013 and custom \u2013 to the Big Tech behemoths: to Apple, Google, Facebook, Microsoft, Amazon and others. \u00a0Similarly, startups have struggled to maintain momentum against these industry titans who, by their very nature, have their finger on the button of . . .\u00a0 well, everything!<\/p>\n

Each of these Big Tech \u2018disruptors\u2019 have proved hyper-responsive to changing patterns of behavior.\u00a0 Each comes ready-equipped with the technology to slip effortlessly into new markets.\u00a0 It\u2019s a formidable proposition for both financial services mainstays and startups alike to counter.<\/p>\n

Understanding this new technological environment, while incorporating its infinite possibilities into existing practices, is vital for navigating the future financial services landscape.\u00a0 Not just for businesses, but for customers, too.\u00a0 The last few years have seen a fundamental reinvention of the way we , as individuals, interact with our finances. \u00a0There have been huge benefits for the customer, but also considerable challenges and opportunities for providers. \u00a0And the tech transformation is only just beginning.<\/p>\n

How innovation will become embedded<\/em><\/h2>\n

If financial services providers don\u2019t adapt quickly enough to changing consumer needs, Big Tech firms categorically will. \u00a0At a consumer level, consider the declining use of ATMs for cash withdrawals or deposits. \u00a0A decade ago, cash was used in six out of 10 transactions, but by 2019 it was used in fewer than three in 10 purchases[1]<\/a>. \u00a0Even a few short years ago, the future of personal and business banking appeared to be online<\/em>; now, mobile <\/em>is here to make even online banking appear old and outdated. \u00a0And banking is merely the tip of the financial services iceberg.<\/p>\n

Welcome to the world of \u2018embedded finance\u2019.<\/p>\n

Embedded finance describes how a non-finance business can connect its customers into financial transactions systems directly, enabling customers to forego the need for a separate interaction with the finance provider altogether. \u00a0It is so seamless, it is sometimes barely noticeable.\u00a0 A sat-nav that offers the option to make and pay for a booking at hotels or restaurants displayed on its maps.\u00a0 Or an online retailer that provides a \u2018pay monthly\u2019 package at point of sale, saving customers the trouble of sourcing credit elsewhere.<\/p>\n

For consumers, innovations like these mean less time and less hassle \u2013 and in today\u2019s world, convenience is king.<\/p>\n

\"Nil\u00fcfer
Nil\u00fcfer G\u00fcnhan, Chief Financial Services Officer
\nAbdul Latif Jameel Finance<\/figcaption><\/figure>\n

According to Nil\u00fcfer G\u00fcnhan<\/a>, Chief Financial Services Officer at Abdul Latif Jameel Finance, personal lending, payments, wealth and insurance are likely to be the first services that become an integrated part of consumers\u2019 lifestyles, while loyalty to a single provider will disappear.<\/p>\n

\u201cIn the very near future, as consumers, we will not care which bank, consumer finance company or insurer sells us what we need. \u00a0We will just accept the offer or solution that suits our needs and presents itself to us at the precise moment we need it,”<\/em> she says.<\/p>\n

Companies old and young will need to move quickly to seize the potential of this new frontier.<\/p>\n

\u201cThe question is not how fast tech companies will become car companies, but how fast we will become a tech company,\u201d<\/em> one global car boss explained to management consultancy McKinsey.[2]<\/a><\/p>\n

Indeed, the financial technology (fintech) industry expects embedded finance to become the norm by the end of this decade, with Big Tech firms taking the lead or competing equally with banks. \u00a0In an insider survey of 125 fintech executives, 8.8% of respondents predict Big Tech firms by 2030 will dominate the financial services market, 28% anticipate Big Tech dominating but remaining dependent on banks for regulation, while 24% foresee Big Tech competing equally.[3]<\/a><\/p>\n

\"ALJ<\/p>\n

The trajectory is already evident, as Big Tech firms seek partnerships with experienced financial services providers to gain a foothold in the finance sector.<\/p>\n

\"AppleApple, for example, launched its first ever credit card in 2019. \u00a0The card, run in affiliation with Goldman Sachs, integrates with the iPhone\u2019s digital wallet. \u00a0<\/p>\n

There are no fees for using the card or for missed payments, and the deal offers 3% cash back for third-party providers such as Uber\u2019s ride-hailing and food delivery services. Tech-savvy millennials are the core market.<\/p>\n

Google, meanwhile, is inviting consumers to open digital bank accounts from 2021. \u00a0Its Plex accounts, run in association with 11 banks and credit unions including Citibank, will operate within the Google Pay framework.\u00a0 Google is exploiting the renowned searchability of its Gmail software to help customers better categorize and understand their spending.<\/p>\n

Not to be left out, Facebook is investigating the possibility of introducing its own digital currency, Libra, \u201ctied to a basket of currencies and government debt\u201d[4]<\/a>. \u00a0Facebook\u2019s aim is to make global payment systems speedier and cheaper.<\/p>\n

The story of Libra so far, however, has been far from smooth. \u00a0It is seen as an example of what can go wrong if Big Tech firms underestimate the challenges that need to be overcome in such a sensitive market, not least in terms of legislation and regulatory compliance.<\/p>\n

Holding hands helps overcome obstacles<\/h2>\n

When Facebook outlined its plans for Libra, the firm was pressured by the US government to seek a federal bank charter before proceeding. \u00a0Hardly surprising, given that potentially millions of people withdrawing their deposits from conventional banks could irreparably damage world economies.<\/p>\n

Elsewhere, online retail giant Amazon has endured two false starts. \u00a0Its student loan scheme in the US, launched in 2016 and promising Prime customers a 0.5% reduction on their loans, proved short-lived. \u00a0At time of abandonment, the deal was being probed by a pair of US regulators: the Consumer Financial Protection Bureau (CFPB) and the Office of the Comptroller of the Currency (OCC). \u00a0Then, in 2019, Amazon jettisoned plans to launch its own checking accounts, citing regulatory concerns to investors.<\/p>\n

Google has had problems of its own, facing an antitrust lawsuit from the US Justice Department over concerns it holds a monopoly over search and search-based advertising.\u00a0 At time of writing, the lawsuit is ongoing.\u00a0 Such scrutiny is not limited to the USA. \u00a0In the UK a new tech regulator, the Competition and Markets Authority (CMA), has launched a Digital Markets Unit to investigate the search and social media dominance of Google, Facebook and other tech platforms. \u00a0UK business secretary Alok Sharma said the new \u201cpro-competition regime\u201d would ensure smaller tech firms weren\u2019t \u201cpushed out\u201d.[5]<\/a><\/p>\n

All of which helps explain why Sarah Kocianski, from fintech consultancy 11:FS, argues that Big Tech firms will favor partnerships with financial services providers over becoming fully-fledged lenders themselves.\u00a0 \u201cThe headache of getting and maintaining a banking license would likely be considered too big a risk,\u201d<\/em> she says.[6]<\/a><\/p>\n

Working together, rather than in conflict, may indeed be the future \u2013 hence those eye-catching Apple\/Goldman Sachs and Google\/Citibank link-ups.\u00a0 Several other partnerships are likewise demonstrating that the fusion of technological innovation with industry experience has greater potential than going it alone.<\/p>\n

Tech specialist Parsyl, for instance, has teamed up with Lloyd\u2019s insurance market to devise a new cargo insurance product.\u00a0 It uses Parsyl\u2019s specialist sensors to monitor storage and transportation conditions.\u00a0 In an industry like insurance, pivoting predominantly on risk, technology can help provide the holy grail of certainty.<\/p>\n

Elsewhere, Google has forged a 10-year alliance with Deutsche Bank, enabling the bank to digitize its operations, while co-investing in other new technologies across the banking sector.<\/p>\n

From a financial services perspective, if banks cannot compete with tech firms at their own game, it might be better to join them rather than try to beat them.\u00a0 Considering the ongoing pace of technological development, such mutually-beneficial arrangements might prove the only financially-durable strategy for established providers.<\/p>\n

Phenomenal pace of technological change<\/h2>\n

\"FintechFinancial services providers are already playing innovation catch-up, according to the World Economic Forum, which notes that as of 2019, 43% of US banks were still using the coding language COBOL dating back more than half a century.[7]<\/a>\u00a0 For a worrying number of executives, the WEF declares, the link between emerging tech and tangible business outcomes remains hazy.<\/p>\n

Against this reactionary backdrop, a suite of technologies is maturing concurrently which together have the power to radically alter the banking and wider financial services industry.<\/p>\n

These include:<\/p>\n