Facing the Future: Financial Services Trends in 2020
The financial services sector is notoriously tricky to navigate. Here are some of the trends all financial institutions should be aware of in 2020.
In recent years, there has been a pressing need for financial institutions to digitise. The emergence of FinTechs with their rapid, customer-friendly business approach has meant traditional institutions, such as banks, have needed to adopt their own digital-first approach when building their own offerings. Yet FinTechs themselves face challenges in such a heavily regulated environment, with many new regulations due to be implemented in the coming months.
Whether it’s the digitisation of Know Your Customer (KYC) technology, the growing threat of cyberattacks, the move towards cloud-based data management solutions, or the need for large-scale digital transformation in financial services, 2020 will continue to herald major changes in financial services and the way financial institutions do business.
Let’s take a look at how each of these is influencing the future of financial services, and the drive towards digital within the industry…
Knowing Your Customer…
KYC, or Know Your Customer, procedures have been part of the financial services industry for years. With an ever-growing body of regulations governing the way financial institutions operate, it’s more important than ever for banks and FinTechs to ensure their KYC processes are both compliant and efficient. It’s unsurprising then that the KYC market is achieving growth, especially in the areas of customer identity management, which is due to see a compound annual growth rate (CAGR) of 12% to 2023 globally. Another key area of growth in KYC is the use of machine vision solutions (i.e. the use of AI tech to identify clients through image or video content), which is due to reach a global market value of $18,24bn by 2025 and currently has a CAGR of 7.7%.
Much of this focus on KYC owes to the impending slew of regulations due in 2020, especially in Europe. In the next year alone, three major pieces of legislation are due to take effect within European markets, namely the Payment Services Directive 2 (effective from March 2020) and two iterations of the Anti-Money Laundering Directive (one effective from January 2020, the other from December). PSD2 will require banks to implement a strengthened Strong Customer Authentication for online transactions. Equally, AML6 will impose new penalties on those institutions who fail to take the necessary precautions when addressing potential money laundering.
While traditional banks and FinTechs have taken advantage of these technological developments to some degree, there is still more potential to integrate these into KYC, especially in terms of RegTech (regulatory technology). The use of cognitive engines to keep up with the fast pace of new regulatory requirements, for instance in breaking down large documents into bitesize chunks for the effortless consumption of legal teams, could make a once challenging field of the industry hassle-free, enabling financial companies to prioritise other issues they face.
While the gradual digitisation of financial services has brought benefits to the industry, it has also given rise to cybercrime with potentially devastating consequences. Cybersecurity, and advancements in the way it is addressed by traditional banks and FinTechs, figures heavily in industry trends for 2020. Global investment into cybersecurity in financial services reached $150bn in 2018, unsurprising when an astonishing 70% of financial institutions in the UK alone are reported to have suffered some sort of cyberattack between November 2018-2019.
As with KYC, governments are imposing ever-greater regulations in the field of cybersecurity to ensure adequate protections are put in place by financial institutions. In Europe, the Cybersecurity Act 2019 ensures that the governments of Member States impose penalties on institutions who fail to meet EU cybersecurity certification standards. This will likely drive optimisation into how best to implement these protections, for instance by replacing legacy signature-based protection measures with an AI-based solution which proactively identifies and blocks known malware.
With cybercrime costing financial institutions an average of $18.5bn per year (as of 2018), there’s no doubt that cybersecurity will remain a burning issue in the industry.
Moving to the Cloud…
The trends so far have shown how financial institutions, from long-standing banks to start-ups, need to adapt and update their current systems and processes to stay relevant in the industry. This is nowhere more evident than in data sharing and storage. The growing use of cloud-based storage solutions for customer data by FinTechs has triggered a similar move towards digital solutions by traditional banks, whose current systems are often decades old and ineffective in maintaining the vast quantities of data they store.
By 2025, the amount of data used by financial institutions is forecast to grow tenfold. Indeed, by the same year, the number of these institutions using the cloud to manage data will likely reach 80%. The appearance of FinTechs in financial services has inevitably caused an attitude sea-change amongst more traditional banks, who are now investing more in scalable, accessible cloud storage systems. Through partnerships like the one between IBM and the Bank of America, who launched a purpose-built cloud solution in November 2019, and HSBC’s use of Google’s BigQuery cloud platform in 2018, major banks have been able to better use and protect their data, while at the same time maintaining an adaptable approach to data sharing similar to those implemented by rival FinTech companies.
The key message to both banks and FinTechs over the coming years in terms of data will be that it isn’t something to be ‘stored’, but something to be used. If both can leverage data in efficient and productive ways, both may see significant benefits.
Transforming to Digital…
The transition towards digital is a theme that runs throughout all these trends for 2020. 93% of financial institutions have already begun this process, so there’s no question that this will continue to be the main topic of conversation in financial services in 2020. PSD2 intends to democratise the industry in Europe, making it a requirement for traditional institutions to open their data to FinTechs through use of Application Programming Interfaces (APIs). The codification of open banking into law coincides with customers gradually becoming more dependent on managing their finances through the Internet of Things, whether it’s their smartphone or their voice-activated device.
While on the surface this may seem to challenge traditional banks’ dominance in financial services, a collaborative solution between banks and FinTech companies could prove to be a godsend for the former, enhancing the former’s current offerings with the digital expertise of the latter. Such enhanced offerings could include a real-time, AI-powered financial advice assistant, accessible 24/7 via a customer’s smartphone or voice-activated device. Provided they adopt the right approach, open banking has the potential to place traditional banks front-and-centre of the digital transformation of financial services.
Yet the challenge of an ever-changing industry is equally faced by FinTechs, especially now these companies are gradually being brought into the regulatory sphere. Many lack the expertise or the resource to deal with these, primarily because they have never had to before. Ultimately this challenge forces FinTechs to find ways in which to upscale by moving away from their single-service approach and to expand. For instance, FinTechs have started offering microservices, replacing older, more rigid applications with faster, more secure systems which ultimately provide easier integration between apps and increased scalability. Should regulations change, these systems should be easier to navigate for software developers, allowing quicker changes in response to the volatility of the industry.
2020 will continue to see some major changes to the financial services landscape driven by customer demand for quicker and smarter access to their accounts and a barrage of new regulations both regionally and globally. The more prepared traditional banks and FinTechs are for the multifaceted nature of these challenges, the better they will be able to provide services which are highly flexible in an industry which – as we have seen – changes at a rapid pace.