Change is sweeping finance and banking. These innovations could revolutionise how we access financial information and services.
Many of the basic products and services of the financial world have been with us for centuries, if not millennia. Some scholars believe that the origins of trade instruments go back to ancient Egypt while the first joint-stock company was founded in 1606. Yet finance has also always continued to innovate: in recent years this innovation has been turbo-charged by digital technology, new entrants and, in some sectors, changing regulations.
The finance world’s willingness to adopt fresh ways of thinking is enabling it to help companies meet challenges in an environment of greater competition, new business models and relentless change.
1. Blockchain: creating practical solutions
Blockchain, the technology that underlies the cryptocurrency bitcoin, has dominated headlines in recent years. A blockchain is a shared distributed ledger where all transactions are recorded. It is encoded so that data is secure and does not require an external body to guarantee the transaction.
A report for the World Economic Forum, which organises the Davos meeting of business and political leaders, notes “decentralised systems, such as the blockchain protocol, threaten to disintermediate almost every process in financial services.“ Nevertheless, many banks are investigating how to turn blockchain to their advantage and use it for a range of financial services, ranging from payments to settlements to smart contracts and e-identity.
ING and dozens of other banks have invested $107 million into R3, a group developing distributed ledger technology for financial companies. “ING is committed to making it easy for customers to do business with us: both through small and continuous improvements and radical changes. Our investment in R3 stands for the latter. We believe blockchain can become a true game-changer,” said Mark Buitenhek, ING’s head of transaction services. ING has recently conducted tests of a blockchain-powered FX trade confirmation platform in partnership with Calypso and the R3 consortium.
ING is also working with fintechs, the Dutch central bank, the Dutch Payments Association and the European Banking Forum and spent 2016 working on 27 proofs of concept in six business areas: payments, trade finance and working capital solutions, financial markets, bank treasury, lending, and compliance and identity. Some of these initiatives have already borne fruit, with oil trades completed earlier this year using technology developed with ING fintech bootcamp winner Easy TradING Connect and liquefied natural gas trade expected shortly.
2. Mobile payments: joining the dots
Payconiq is an all-in-one app enabling users to make direct payments online, in-store and peer-to-peer. The app makes a direct connection with the customer’s payment account at one of the participating banks. ING created it in 2014 and launched it in Belgium the following year; this year it expanded to the Netherlands and it is now supported by a group of banks in Belgium and the Netherlands. In August, it was announced that Payconiq would expand to Luxembourg with the acquisition of Digicash.
“There are plenty of payment apps in the market, but they don’t all work in-store, online and peer-to-peer, as well as internationally,” says Duke Prins, CEO of Payconiq. “Our initiative responds to the digital revolution and changing regulations in the European payments market.” Payconiq anticipates the introduction in late 2018 of the Payment Services Directive 2 (PSD2) in Europe, which will enable customers to give third parties access to payment details from their bank and to carry out transactions with the customer’s payment account.
In a recent interview, ING’s CEO Ralph Hamers conceded that Payconiq was disrupting ING’s fee income from the card business but said that such disruption is worthwhile because it offers growth opportunities. “I’m convinced that if we don’t do it somebody else will,” he noted. “If you are the first one to disrupt then, yes, you will lose some income on one side, but you will be able to compensate by growth on the other side."
3. Mobile payments: taking an ecosystem approach
In the absence of widespread use of credit cards, China has stolen a march on the rest of the world with regard to mobile payments. These payments account for 74% of all online payments and are expected to grow by 68% in the next two years. The $5.5 trillion market is fiercely contested with Alipay (part of retail giant Alibaba’s affiliate company Ant Financial) battling it out with Tencent, which operates WeChat Pay as part of its phenomenally popular gaming and social media platform WeChat.
WeChat has 900 million monthly active users and has been quick to develop a wide range of tools to ensure they remain within its ecosystem: anecdotal evidence suggest many people now live their entire lives, including all communication, payments and services, within the WeChat world.
As people “spend more and more time in the WeChat ecosystem — and they keep funds in its wallet for peer-to-peer payments, in-app purchases, and other things” – WeChat’s network effects strengthen, notes Jeff Galvin, partner at McKinsey in Hong Kong. The strategy appears to be working: WeChat more than doubled its payment market share to 37% in the fourth quarter of 2016 compared 15.9% a year earlier.
4. Apps: valuable information at your finger tips
By delivering transparency and improving access to information, technology can open up new opportunities. ING Real Estate Finance (ING REF) has created an app that enables clients based in the Netherlands to instantly see how they can make their property portfolio greener and how much they can save.
To create the app, ING REF partnered with an energy consultant. Using data such as the construction date and size (in square metres), the app can determine the current CO2 credentials of any commercial property and the potential savings from a variety of measures such as double glazing or improved insulation. The app is automatically updated as regulations, subsidies and energy prices change. For properties of over 3,500m2, ING REF pays for a more accurate BREEAM/Energy scan.
“The app takes the guess work out of sustainability and makes building a business case straightforward,” explains Jos Jonkers, business manager, ING REF Sustainability. “Moreover, because we can make financing available through ING Groenbank, applicants receive a 0.5% discount on borrowing costs for energy-efficient improvements.” Clients receive 100% finance for their sustainable investment; to become eligible for the loan, they need an official governmental statement that the building is green. “The reaction from clients has been positive and we already have 18,000 properties – or three-quarters of our book – on the app,” says Jonkers. “There’s nothing else out there as comprehensive: we cover 40 different measures.”
5. AI: chatbots that create value – and more
The financial sector, and in particular low cost, passive investment wealth management firms, is increasingly using chatbots or robo-advisors to aid product selection by consumers. Typically these solutions require consumers to answer a series of questions about their investment time horizon, risk tolerance and wealth goals before using a variety of algorithms to determine the most appropriate investment products. In some instances, the portfolio then continues to be managed by the robo-advisor.
In the US, companies using robo-advisors have taken significant market share from more traditional wealth managers: the largest firm now has more than $7 billion in assets under management. In Europe, there remains considerable resistance to the idea of automated investment advice. ING’s Mobile Banking 2017 survey of almost 15,000 people in 15 countries showed that 91% would not let a computer make money decisions for them: just 3% say they are comfortable with robo-advice. Nevertheless, they are likely to become more important in all markets.
Indeed, as artificial intelligence and deep learning techniques are increasingly integrated into robo-advisors, they will become more sophisticated. In the future it is possible that they could rebalance portfolios automatically as clients’ financial needs change, as well as responding to customers’ queries about the tax implications of investments, for example. AI has many other potential uses within the financial sector: natural language programming can play a role in in monitoring risk or creating lending documents to speed up legal documentation, for example.
6. Big data: making sense of information
As a recent report by Accenture notes, financial services firms are awash in data, both from traditional internal structured sources and, increasingly, from external ‘unstructured’ sources ranging from social media to newly accessible government and third-party databases. The key is to understand this information so it can be used effectively to drive innovation and create value for banks and their clients.
Data-driven decision making can enable the discovery of new business opportunities (by identifying clients’ potential needs, for example), enhancing productivity and efficiency (new technologies such as process automation and cloud storage allow firms to handle huge volumes of unstructured data inexpensively).and in risk and regulatory management, according to Accenture. “Big data adoption helps organisations simplify and reduce the costs of taking data from the source and converting it into useable information for regulatory reporting, including such data-intensive activities as real-time simulations and scenario analysis that are often required by the regulator,” explains the report.