The impact of technology on financial services continues to be one of the biggest areas of growth and discussion in Silicon Valley and beyond. Fintech, as the sector is collectively known, encompasses a wide range of practices and ideas, each of which is threatening to legacy banking in its own way.
Key Fintech trends on the horizon include greater use of artificial intelligence in everyday banking, more investment in blockchain projects and growing digitalization of financial services and back office operations.
We had the chance to learn more about these developments last month, when SVIC hosted a tour of Silicon Valley for some of the top figures from Egypt’s central bank. The group’s four-day programme took them to both disruptive startups and established financial institutions trying to keep up with the pace of change.
These were some of the key Fintech trends which emerged from the tour:
Artificial intelligence pushes leaders to become ‘mini-VCs’
At Google, the Egyptian banking team heard from Engineering Director Denis Krupennikov. He confirmed that the tech giant believes the current dynamic in the banking sector for artificial intelligence (AI) to replace low level jobs will continue. This is being driven by a preference on the part of customers to do their banking online or via mobile.
Krupennikov revealed that Google will not itself ever become a bank because of the huge amount of regulation banks have to face. But he stressed that the company does believe its Android Pay service can become a leading force in what is a highly fragmented digital wallet market.
During a talk by SVIC Vice President Andy Zhulenev the Egyptian group heard how greater AI in banking will mean managers will need to start acting more like venture capitalists, nurturing small teams within a bank who are trying to generate innovative new business models. This will come about as core business areas become more and more automated, freeing up personnel to delve into unexplored territory.
With smartphones and computer vision technology, there is less and less need for individuals to go to banks in person in order to prove who they are.
On their tour, the Egyptian bankers saw how startups like Jumio are disrupting the usual banking business model with software which is able to verify passports, driving licences and other forms of identification online in a matter of seconds. This is enabling online-only banks to challenge legacy players who maintain costly bricks-and-mortar operations.
That said, Jumio has worked with established names like HSBC, suggesting that legacy banks understand that they must engage with the shifts now taking place in the market. Jumio has also worked with newer digital businesses like cryptocurrency exchange Coinbase.
Mobile identity authentication also has huge potential to tackle the challenge presented by unbanked populations (individuals without bank accounts). This is an especially acute problem in a place like Egypt, where around 70 percent of the population of 94 million are unbanked. If financial services can be provided to people in rural areas with the help of just a smartphone, huge new markets could open up.
Digital first banking
In the majority of cases, new customers who use a financial institution today do so via digital channels.
This trend became clear when the Egyptian group visited money transfer giant Western Union. Girish Balasubramanian, the vice-president and general manager of product management and operations at Western Union Digital, related the story of how the company has sought to digitize its entire back office operation. Yet it finds that while new customers tend to embrace digital channels for service delivery, established customers prefer to stick with the analog methods they are used to.
At the same time, Western Union is perhaps one of the most highly digitized financial services providers operating today. It has rolled features like money transfers from within the Facebook Messenger app (currently only available in the U.S.). Such services are designed to appeal specifically to younger customers, including millennials, the majority of whom prefer to do their banking online or via mobile.
In Silicon Valley today, just like everywhere else, blockchain is a huge buzzword. All industries are now looking at the technology but thanks to bitcoin and the rise of cryptocurrencies in general, financial services are viewed as an area where disruption is most likely.
The trend which clearly emerged during the Egyptians’ tour of Silicon Valley is for big, established companies to be making investments in blockchain startups without yet knowing how they are going to apply the technology to their business. A “wait and see” attitude is very much prevalent.
One area which has emerged as being of particular interest is permissible blockchains, where access to the distribute ledger is limited to a designated set of users. Critics argue that this sort of blockchain undermines the technology’s core philosophy of being open and free from any centralized authority. But for big companies it appears to be the most interesting development, with both IBM and Oracle telling the Egyptian bankers that they are part of some permissioned blockchains.
Winners and losers
Like all disruptive technologies, the various facets that make up Fintech present both threats and opportunities. They suggest that although big banks may be comfortable today, change is just around the corner and a disruptive startup might be one app away from undermining your core business.
For the group of central bankers from Egypt, the key lesson from their tour was that they need to start building the regulatory frameworks which will govern the use of new technologies in the financial sector. Creating pilot projects in both the public and private sector is another top priority because although several trends have clearly emerged, no one can say for sure what banking will look like in five years’ time or which business models will ultimately come out on top.