The banking and finance industry, like so many others, is navigating a new set of driving forces creating change across social, technological, economic, environmental, and political spheres. This article dives into a spectrum of trends and technologies curated on the ITONICS Innovation OS influencing banking and finance.
During March, two seismic bank collapses sent shockwaves throughout the global banking industry. The collapse of the Silicon Valley Bank is considered the second-largest bank failure in the history of the United States, while the failure of the beleaguered 166-year-old Swiss bank Credit Suisse is a pointed reminder that volatility and uncertainty in global markets continue to disrupt the traditionally stable banking and finance industry. Notwithstanding the complexity of underlying factors that can lead to the demise of a banking institution; a lack of diversification, innovation and an evolving landscape are notable considerations for dealing with complex change.
Characterized by the accelerating forces of disruptive technologies, changing consumer preferences, and global economic influences, the banking and finance industry has catalyzed digital transformation to keep pace. A comprehensive understanding of the forces shaping the industry's future underpins the ability to ensure strategic alignment of organizational objectives.
In the following, we present four forces shaping the future of the banking and finance sector.
Forces Shaping the Future of Banking & Finance
1. Digital acceleration drives the competitive landscape
The speed and agility of fintech firms have outpaced the highly regulated and bureaucratic nature of traditional banking, contributing to the exponential growth of innovative, low-cost, and inclusive digital finance products deemed disruptive.
With increasing investment, the fintech sector is projected to transform industries globally through partnerships with traditional financial institutions. This route of risk mitigation is a necessary adaptation to new market requirements to sustain long-term growth. Big data has the potential to amplify the impact of the fintech industry and its expanding product offering through hyper-personalized services by leveraging artificial intelligence.
According to McKinsey, nearly 200 digital banks have launched since 2015, with at least 274 fintech companies boasting unicorn valuations of more than $1 billion. The choice and flexibility offered to customers by ever-expanding fintech products have transformed the traditional landscape.
The evolving industry holds broad customer appeal. The benefits of decentralized operations, such as blockchain technology, pave the way for a less bureaucratic customer experience, coupled with the advantages of hyper-personalization enabled by AI-driven fintech solutions. ITONICS trend, Personalized Commerce, outlines how brands can leverage the impact of algorithmic intelligence to enhance the customer experience, build customer loyalty, drive revenue, and gain an edge in a competitive market.
As digital acceleration advances, so will the transition to a Cash Free Society, partly driven by the economic and behavioral shift toward Low Touch Living and further facilitated by the availability and adoption of No-touch Payments. However, for economies to fully realize the benefits of a cash-free, digital-first society, governments, banks, and other financial institutions must cooperate to improve Digital Equality.
The broad range of products and services created by fintech has democratized banking and finance. Innovative solutions and the roll-out of key technologies like the 5G Mobile Network are essential in providing underserved communities with affordable and sustainable access to the internet and digital tools that have the potential to improve financial health.
Inspiration: Mobility start-up provides access to vehicle financing
The rising cost of living caused by inflationary forces reduces disposable income and access to traditional finance. Mobility start-up Planet42 provides vehicle financing to people who need help accessing it from their bank. The start-up has received investment capital of $100 million to expand its rent-to-buy vehicle model operations. The combination of poor public transport infrastructure, poor car penetration, and limited access to financial services has made South Africa and Mexico attractive markets for development.
In addition to new flexible financing options, a growing range of subscription models is eroding the market share of traditional financing mechanisms offered by financial institutions.
2. Algorithmic finance powers the future of financial services
Banking and finance are getting “smarter” with the widespread adoption of artificial intelligence (AI). AI technologies such as Natural Language Processing (NLP) and predictive analytics enhance financial service providers' customer engagement and workforce productivity. Financial institutions are building AI solutions that detect anomalies in transactions or communications that point to potential threats, assisting in regulatory reporting and compliance. Meanwhile, algorithmic trading systems are becoming more sophisticated in their ability to anticipate emerging market trends and more accessible to private investors.
While automated investing solutions and robo-advisors facilitate Accessible Investment and promise greater financial independence for the average consumer, Big Tech Regulation is a prerequisite to ensure bias-free algorithms and robust data privacy.
Many of these functions will rely on Machine Learning algorithms capable of tackling problems beyond the computational capacity of traditional algorithms by extrapolating conclusions from data and forming their own sets of rules.
Inspiration: WeBank invests heavily in disruptive technologies
WeBank, China’s first digital bank, leverages AI and leading technology to service nearly 350 million individual and small and medium-sized customers. More than half of WeBank’s employees are engineers and programmers, evidence of WeBank’s commitment to innovation. To achieve efficiency, WeBank invests heavily in technology such as AI, blockchain, cloud computing, and data analytics, resulting in a per-account IT operational cost of nearly a tenth of the cost of regular banks.
3. Responsible investing influences future corporate success metrics
Net-zero emission commitments to combat the global climate crisis underscore the growing importance of environmental, social, and governance (ESG) criteria for investors and financial services providers. Growing evidence shows that integrating ESG goals into capital markets leads to more sustainable markets and better societal outcomes and makes sound business sense. Institutional investors increasingly establish ESG mutual funds and exchange-traded funds to appeal to younger investors who place greater importance on sustainability and good corporate governance issues.
ESG Investing is on the rise. Consumers are putting their money where their morals are and demanding that organizations do the same. Once regarded as mere corporate philanthropy, going Beyond Compliance and ensuring that investments result in a net positive effect (socially and environmentally) now holds financial relevance to gain competitive advantage.
Central to ESG compliance is the need for Radical Transparency throughout business practices and value chains. Organizations can achieve transparency through distributed ledger technology (DLT) to enhance transaction transparency and supply chain traceability. DLT is also powering the growing interest in “impact tokens,” which can serve as proof of a delivered positive impact in connection with a particular investment.
Inspiration: Stripe Climate creates opportunities for positive climate action
Payment merchant Stripe has removed barriers to taking positive action by enabling businesses to direct a fraction of their revenue to help scale emerging carbon removal technologies through their service Stripe Climate. Environmental fintech Cooler Future provides a means to finance green initiatives and make money for investors through bespoke portfolio analysis and climate-related impact-driven recommendations.
4. Open banking and open finance empower people to take control of their financial health
Open finance—sharing one’s financial data with trusted third parties—is rising as more consumers and businesses discover the benefits. Open banking, a precursor to open finance, enables secure interoperability between third-party organizations and financial institutions—permitting tools, products, and platforms to pull data from various financial sources.
Open finance allows access to a broader range of financial products and services, including more tailored and affordable offerings. Through personalized financial dashboards, pertinent customer data, such as cash flow, savings, insurance coverage, and investments, is centralized and displayed alongside product features and prices. This transparent solution makes understanding and improving one's financial position easy.
Open finance is based on the principle of Data Ownership—i.e., customers own and have control over the data they generate and provide to financial service providers. Open finance involves forming partnerships between banks and third parties outside the finance industry, including technology providers.
By leveraging the API Economy, organizations can create Diversified Value beyond conventional industry boundaries. API integration will drive new business models and revenue streams through banking-as-a-service, modeled after Product-as-a-Service offerings.
Inspiration: Finastra powers open finance fostering industry collaboration
London-headquartered Finastra is one of the largest fintech companies in the world. A catalyst of open finance, Finastra enables the financial services world to deliver the future of banking through applications that accelerate the industry and an open innovation platform for banks, fintech companies, and non-banks to collaborate. Finastra’s open platform, FusionFabric.cloud, has opened up over 300 APIs and datasets, enabling the launch of over 200 fintech applications, now consumed by over 700 customers. An October 2022 survey revealed that 85% of respondents agreed that open finance made the industry more collaborative.
Finding innovation opportunities in the banking and finance industry
Applying an industry lens to trend and technology scouting helps organizations direct their focus and resources more optimally. By understanding the technological developments and trends that may present future opportunities in their industry, organizations can equip themselves with the foresight intelligence needed to take decisive, strategic action and, ultimately, gain a competitive advantage.
Get started by exploring the ITONICS Banking & Finance Trend Radar and Banking & Finance Technology Radar, displaying the drivers of change that are most relevant for the banking and finance industry. Here you can deep dive into the implications for innovation associated with each driver, compare drivers across different rating criteria, and view related examples of real-world innovation that address emerging needs and provide novel solutions.
Looking to explore further the impact and relevance of these trends and technologies for your business? Why not kick-start your innovation journey on the ITONICS Innovation OS today?
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