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There has never been a more pressing time to talk about digital disruption in financial services.
As in many industries, trends set in place towards the latter end of the past decade have accelerated beyond all predictions over the COVID-19 pandemic. As people turned to technology for their financial needs, most fintech reported a strong first-half performance in 2020 in comparison to 2019.
The key word in here is ‘fintech’. It’s been the most digitally innovative, adaptable finance companies that have thrived in the face of adversity. These are the companies that are set to do well into the next decade, as we adapt, overcome and move on from the challenges COVID-19 has thrown at us.
So where is the financial sector right now? And how will digital disruption in financial services play out this year and into the coming decade?
In some respects, the landscape is varied. Digital payment, savings, and wealth management providers reported significant jumps in transactions - people are cautious about the future and want to save. Meanwhile, digital lending slumped by 8% over the pandemic, with loan defaults up by 11% as lockdowns impacted individual economic circumstances.
But whilst there is caution - as there always is in times of extreme economic upheaval - there is also a recognition that the financial services landscape is rapidly changing. There’s the appetite for investment to match.
Here are our predictions for how digital disruption will transform financial services over 2021 and beyond.
Customer expectations are set to skyrocket
Over the past five years, the finance sector has experienced a huge amount of disruption across the board. Branchless banking, AI-enabled investment tools, and a major CX focus on the part of disruptors have all had a huge impact across the industry.
Previously, industry behemoths could rely on size, large networks, and their ability to weather changing compliance regulations with relative ease to maintain their dominance.
That’s no longer the case. Thanks to the increasing speed with which we’re embracing technological change, disruptive startups have managed to get a foot in the door - and they’re not going away.
With no legacy systems or embedded ways of working holding them back, mobile-based startups have been able to market themselves on the customer experience they offer in comparison to slower, more cumbersome traditional institutions.
As an example, no one really raved about their bank until digital disruptors like Monzo and Starling arrived on the scene, offering:
- Fast, user-friendly mobile apps
- Immediate response customer service
- Rapid release schedules for new features
- Commitment to accessibility and transparency
The CX this offered stood out against a slow, confusing, and inaccessible status quo. Industry incumbents then had to play catch up, expanding their mobile functionality and thus increasing customer expectations even more.
Customer expectations are only going in one direction
Thanks to the pandemic, remote and mobile-first approaches to financial services are now more popular than ever. The effect this has had on customer expectations has been staggering.
In 2021 and beyond, this means that customers can be more demanding than ever of the financial service providers they use. With a wider choice of providers than ever before and an increasingly digital financial landscape, it's easier to switch to one of your competitors if they’re not satisfied.
Because of its convenience (and perhaps because of the CX focus of many mobile-first banks), mobile banking has sticking power. Mobile banking registrations rose 200% in April 2020, thanks to banks closing during the lockdown. Crucially, however, only 40% of new mobile banking customers stated they intended to return to branches after the pandemic. A significant majority of 60% planned to stick with mobile.
All of this creates a landscape in which customers, above all, demand instancy. Customers want immediate access to their savings, immediate resolution of low-level issues, and near-immediate responses to product applications, because they are increasingly aware that this is possible.
Blockchain will continue to drive digital disruption in financial services
Alongside mobile, advances in Blockchain and Big Data tech are likely to make customer expectations soar even higher.
Blockchain has been showing up on ‘must-watch new tech’ lists every year for the past decade. Now, with the initial hype of the 2017/2018 crypto explosion dying down, companies of all sizes are getting serious about how to use Blockchain tech to optimal effect.
Deloitte’s 2020 Blockchain Trends report phrases this particularly nicely:
“A tendency toward Blockchain tourism developed – where we would see intrigued companies come to gawk at the technology, kick it around for a few weeks before deciding they were more comfortable where they currently were. But as we moved through 2019, we saw a fall away in this trend and a greater focus developing on utilizing the technology to solve real business issues and deliver value.”
This has resulted in a second wave of crypto interest. This time, however, it’s fueled as much by established companies as.
For example, Facebook continues to make progress towards the launch of their own digital currency, Diem, whilst the People’s Bank of China are set to launch the digital Yuan over the next few years. Meanwhile, in February 2021 sustainable transport giant Tesla announced they intended to start accepting Bitcoin payments, having bought $1.5bn of the currency.
As well as the currencies themselves, this will see a rise in wallets and payment networks needed to accommodate them.
Blockchain: Not just for crypto
Blockchain-based digital disruption in financial services isn’t limited to cryptocurrencies.
Whilst crypto has always been the use case that has grabbed the most headlines, Blockchain also has exciting applications elsewhere in finance, including:
Security and fraud reduction
Traditionally, bank ledgers have been created using centralized, legacy databases that are easy to hack. Blockchain is a decentralized ledger, with individual encryption for each transaction along the chain verifiable by a public key. Because this key becomes invalid if transaction data changes, corrupted blocks won’t make it onto the chain. This makes it significantly more difficult to hack and also provides a secure, immutable record of all previous transactions.
Creation of more efficient trading platforms
A traditional lending process needs several intermediaries - banks, underwriters, and loan processors, for example - that add time and expense. As a secure, transparent ledger, Blockchain removes the need for these. This makes it ideal for creating fast, inexpensive peer-to-peer lending and crowdfunding platforms.
Blockchain can be used to both speed up payments between individuals - particularly across international borders - and allow banks to operate continuously, 24 hours a day. This isn’t limited to crypto either. Fiat currency, commodity, or any other unit of value can all be processed via Blockchain-based payment solutions instantly, transparently, and at next to no cost. As well as being beneficial for individuals, this could hugely reduce bank operating costs - with one estimate suggesting they could be reduced by a third.
We’re starting to see real-world applications here already. A handful of startup platforms (notably Lendoit) now offer Blockchain-enabled peer-to-peer loans, and Google-backed Ripple Labs has launched the first commercial, Blockchain-based global payments network.
Expect more visibility as startups continue to challenge the status quo, and incumbent financial services providers start to figure out how Blockchain could work for them.
We’re already seeing some green shoots here with DBS, Goldman Sachs and Bezos Ventures all incorporating some form of Blockchain tech over the past year. How these develop, and when exactly regulators decide to play catch up, will offer an interesting glimpse into longer-term trends.
Financial services will discover big data’s true potential
Financial services providers have been gradually adopting cloud technology over a number of years - but haven’t been using it to its full potential. This is partly because they have lacked the right infrastructure to do so.
In 2021, there’s an anticipation that many finance organizations will begin migrating onto Snowflake, Amazon Redshift, or Azure DataExplorer for data warehousing services. The upshot of this is that financial service providers and Fintechs will be able to maximize the insights they get from the data they hold.
When this is coupled with increasingly powerful machine learning-enabled advanced analytics capabilities, this means financial service providers can:
- Collect more data than they could previously, in a similar timeframe.
- Process more types of data - including unstructured data like text, voice and spatial data.
- Process data more quickly, bringing analytical reporting and transactional reports into near real-time.
This has the power to transform businesses in the financial sector both process-wise and on a more strategic level.
Expanded datasets and faster processing times unlock the potential for a data-driven approach to strategic decision-making. Data-first companies will be able to react faster to overcome market challenges and forecast opportunities faster and more accurately than competitors do.
Data technology is a huge investment area for financial service providers
Novarica’s 2021 study into emerging technology investment showed that 20-30% of insurance providers have already deployed some form of Big Data technology, dependent on the sector.
A similar number have invested in machine learning-based AI technology and AI for unstructured text. Image (10-20%) and voice-based AIs (0-10%) were less popular, but not insignificant, areas of investment.
In other words, insurers are investing in both technology that produces more data and the means to process it.
The use cases for this type of data processing power are extensive. More customer data means that insurers can calculate risk faster and more accurately - and can therefore offer near-immediate quotes tailored to an individual customer’s risk profile.
Customer data collected across a range of AI tools can also inform new product releases, service improvements, and long-term trends that are difficult to spot manually. In a nutshell, large-scale data analysis allows financial services providers to become truly obsessive about customer needs, and to tailor their strategy accordingly.
Big tech will challenge the role of traditional banks
Facebook’s Diem currency, mentioned above, is just one of a host of new developments that blend the lines between the tech and financial sectors.
For example, the past couple of years have seen the launch of the Apple Credit Card and Google pouring investment into Blockchain specialists Ripple Lab. And, thanks to the COVID-related spike in contactless payments, more transactions than ever before will be enabled via mobile wallets rather than directly via banks or other financial service providers.
All of this currently amounts to a very small proportion of big tech’s global business interests. Even so, it’s important to take note.
The amount of data large tech companies generate from user interactions is vast and comes at little expense. They also have a significant existing customer base that they can draw in, particularly in developing areas where accessible financial service provision is lacking.
Large tech companies can combine the pull of their existing platforms with Big Data analysis to assess the risk of their potential customers. This removes the need for any sort of collateral for repayment, so big techs are in a position to offer faster, more efficient financial services provided to a wider customer base.
This isn’t so much a ‘right now’ trend as one to watch over the next few years. We’re only just beginning to see what big tech can do here. It will be interesting to keep an eye on developments as big tech navigates regulatory issues in the long term, and potentially moves into developing markets ignored by traditional financial services providers.
Are you a financial services provider?
If so, the biggest takeaway here is that your potential customer base’s expectations have shifted over the course of the pandemic - and will continue to do so over the next few years. This is because digital disruption in financial services is moving fast, and:
- The shift towards mobile-first, customer experience-led fintech has been accelerated by the pandemic.
- Financial services providers are maximizing the use of cloud, AI, and Big Data to meet customer needs faster and make more customer-centric decisions.
- Blockchain is starting to have an impact outside of crypto, making payments faster, more secure and enabling banking without the intermediaries.
- Big tech has the potential to seriously disrupt the financial services landscape.
This means that if you’re bringing a product to market in the near future, the following are non-negotiable:
- Instant, user-friendly and accessible mobile functionality
- A backend that maximizes your capacity for Big Data analysis
- Readiness for on-the-horizon techs like AI, machine learning and Blockchain
If you need expertise in these areas pre-launch, why not get in touch?
At Tivix, we have access to a worldwide network of UX and software development experts who can help you launch a product that flies.
Drop us a message here to see what we can do for you.