In all facets of life, today’s consumer has the power at their fingertips to dictate what products they want – and how they want to use them. In banking therefore, a combination of regulation and market forces will mean that business models have to adapt, and fast.
Only last month, for example, the Competition and Markets Authority (CMA) has announced new rules that will require all banks to let customers access details of their entire finances through a single mobile phone app by 2018.
“To illustrate the gap between the systems that lenders are already running and the new generation of FinTech apps we can use the analogy of the Formula One steering wheel. This piece of technology is astonishingly advanced, complicated and impressive, containing a vast range of controls and data fields. But if you connected this steering wheel to a 20-year-old hatchback, you would only get the most basic functionality from the completed machine.”
Research shows that big banks tend to view FinTech in one of three ways: fight, buy or partner.
- Either they feel threatened by the new, nimble and agile players and feel the need to fight back by building their own competing solutions;
- They plan to use their financial might to buy up and absorb challengers under their own corporate umbrella;
- Or they see the opportunity to build an ecosystem of specialist partners to deliver a truly competitive, best-of-breed offering to the customer.
The disadvantage of the first and second strategies is that the pace of evolution in FinTech is simply too fast to keep up either by building or buying. If a bank – no matter how big its budget – wished to build its own technology to compete with the new challengers that spring up, it would likely find that by the time it was tested, compliant and ready to enter the market, it will already have been left behind.
Likewise, if that bank decided to buy an existing player for the sake of speed, it would find that a regular pipeline of next-generation start-ups would keep coming along and overtaking it – hence its investment budget would need to be almost bottomless in order to keep acquiring at the pace of change.
This last option therefore makes the most sense: FinTechs undoubtedly represent a challenge to the status quo, but they still do not have all the ingredients to disrupt the industry on their own: they do not have the customer confidence or robust risk management that the established players have.
The banks, meanwhile, are unlikely to have the level of technology to compete on opportunities such as cards and payments, data security and user experience.
Even FinTech giants such as Apple and Amazon, which are already dominating in the payments space, do not have the infrastructure (or the appetite) to offer a full suite of banking services on their own. So collaboration is required from both sides.
In order to join forces in this way, the right ecosystem is needed: one that has the necessary opensource Application Programming Interfaces (APIs), tools that allow one organisation’s software and applications to be compatible with another’s. Essentially, this means emerging FinTech providers and third party developers can plug straight in fast.
It is by joining forces that banks and their partner tech companies can create the omni-channel service that today’s customer expects.
Before we tackle the implications of “omni-channel” and what it means, we should acknowledge that FinTech is such a broad concept that we cannot possibly discuss it all in one article.
The use of the term “FinTech revolution” is by no means hyperbole: it affects every aspect of our industry, and the future becomes the norm so quickly that it is a headache to keep up. But keep up we must: for example, until very recently cynics may have dismissed technologically enabled concepts such as peer-to-peer, yet today its growth figures speak for themselves.
In the same way we will certainly see cryptocurrencies such as Bitcoin, and the distributed ledger technology Blockchain at the top of the agenda.
But for today’s purposes, we need to focus on the essentials: how technology will give customers the products, user experience and security they demand; and where that technology will come from.
So how do we evolve from multi-channel to omni-channel? Conventional multi-channel banking offers the customer the flexibility to go through their mortgage application process via whichever channel they are most comfortable with – be that via a PC, a mobile device, telephone or in-branch. But the main limitation of this is that they cannot jump between channels half way through, at least not without a certain amount of repetition in the process.
The user data that banks collect through multi-channel usage can be harnessed to create a far slicker experience: something FinTech companies are very good at. The difference between multi-channel and omni-channel is quite simply that the latter is channel agnostic. The customer can, for example, shop around on a mobile, start their application on a laptop, ask questions over the phone, then finish the process on their desktop, all seamlessly.
Retail banking is getting better at this, but so far only within a single product. Nobody has yet come up with a genuinely holistic, “single customer” view with a look and feel that stays consistent for the individual, regardless of the financial product they are dealing with.
As always with banking technology, a big barrier is legacy. This is one of the reasons that start-up companies and indeed whole nations such as Estonia are so far ahead: because they are not hamstrung by great cumbersome legacy systems.
Most of the big banks and financial services brands are already up and running on legacy solutions that don’t always or necessarily interact well with other systems, hence they don’t lend themselves well to omni-channel delivery. But this need not be prohibitive, they simply need to find a way to bridge the gap between the systems they are already running and the new generation of FinTech apps and customer experience.
To illustrate this gap, we sometimes use the analogy of the Formula 1 steering wheel. This piece of technology is astonishingly advanced, complicated and impressive, containing a vast range of controls and data fields. But if you connected this steering wheel to a 20-year-old hatchback, you would only get the most basic functionality from the completed machine.
Similarly with banking infrastructure: a young FinTech genius might create an amazing front end that promises the customer everything, but if the bank’s back end does not feed it, it will fail.
And this is not entirely down to tech, There needs to be an understanding of regulatory compliance, a knowledge of the context of the mortgage industry landscape and also the human psychology of what actually makes a good user experience.
For example, “frictionless” is a current buzzword, not just in banking. But those in the know are already questioning the value of “frictionlessness”. Is it really something to be desired at all costs?
Of course banks need to create as hassle-free a process for their customers as possible in order to stay competitive. If a customer perceives friction such as repetition or a long form-filling exercise in any transaction, they are likely to abandon the process and take their business elsewhere.
But if you take the concept of frictionlessness to its ultimate conclusion, this presents problems. Firstly, while zero-click transactions have been proven to be possible, this removes any interaction whatsoever. Great for convenience, but very difficult for customer engagement.
And more importantly, from a security point of view, if the customer perceives the process as being too easy, they may become disconcerted at the lack of apparent security process. Where personal money is concerned, most humans prefer a tangible element of security hurdles, if only for the reassurance that they are being kept safe.
Then of course, there is regulation and credit risk to consider, another non-technology inhibitor. For these reasons, we advocate “friction-right” rather than “frictionless”. You need to dial your friction levels just so, rather than remove them altogether.
The latest evolution of this is a layer of artificial intelligence that applies the most advanced biometric security procedures that the customer never even perceives, and only intervenes with a security question if the customer exhibits any behaviours that trigger an alert.
For example, we recently deployed such a system for a large UK lender that incorporates behavioural biometrics into an app. It detects not only the details that the user enters, but how they do it: time taken, pressure and movement of swipe or mouse click, keystrokes per second etc. The customer never knows it’s there, but the bank can override it if any questionable behaviours are detected, and the levels of security (or friction) can be adjusted according to the risk score, in real time.
So just as we need to strike the right balance between friction and frictionlessness, we also need to strike the balance between security and obscurity.
Having considered what level of security the customer experiences at the front end, we also need to think about what is required behind the scenes – because without a back end that is 100% secure, a lender will immediately be out of the race. In today’s world of mobile, 24/7 banking, the lender needs to consider a whole new level of security requirements.
Finally, no discussion of FinTech would be complete without acknowledging the power of big data. Quite simply, the move towards omni-channel banking will give lenders an almost infinite quantity of user data, which – if armed with the right analytics and technology to harness it – will bring significant advantages to all areas of their operations.
For example, it can drive loyalty programmes as data and technology allow banks to personalise every aspect of every transaction according to the habits, behaviours and preferences of every individual customer.
It can also deliver substantial benefits to risk management, as predictive analytics can detect and pre-empt potential fraud, as well as accurately identify credit risk.
And big data is a powerful tool to inform investment decisions too, as it can keep banks at least one step ahead of prevailing trends, opportunities and threats.
In summary then, with all of the above opportunities that the FinTech revolution brings, what does the ecosystem look like? What sort of infrastructure do banks need to look for in order to be ready?
The key to a truly omni-channel offering is to integrate three layers:
- The core banking platform (the engine-room which, as we have discussed, may be a legacy one);
- The “middleware” layer – which is where open APIs are crucial to allow the best-of-breed FinTechs to plug their technology in seamlessly;
- And finally, the user experience (UX) layer, with which the customer interacts at the front end.
There needs to be a combination of private cloud – which banks traditionally use for maximum data security; and public cloud – allowing a more flexible and less limited access to and storage of data, in order to scale and get to market more quickly.
We must also not overlook the importance of a “sandbox” provision: a secure area in which in-house and third party developers can build, test and experiment with new products, services and add-ons in a real-life environment without interrupting the seamless service of the live system.
Security is at the root of everything – and as well as the identification and transactional security that the customer sees, the best infrastructure will also have a traditional security framework. This includes data centre, network, infrastructure and application security, security information and event management (SIEM), next generation firewall services (intrusion detection and prevention, anti-virus and malware protection) as well as distributed denial of service (DDOS) prevention services.
There are also toolsets available in this space such as micro-segmentation (Unisys’ STEALTH capability) that encrypts end-points and adds an extra layer of security beyond the firewall.
And in keeping with the pace of development, it is also vital that this integration between front end apps and back end system and processing is continuously managed, reviewed, assured, secured and improved.
Because if one thing is certain, what sounds like science fiction today will be a minimum requirement tomorrow.