In light of Fujitsu’s recent Digital Inside Out report, David Bannister, editor at Banking Technology provides his thoughts on a sector in transition.
There’s a lot of noise about ‘digital’ and the need for financial services firms to come to terms with it as their customers increasingly choose this method of interaction. In my opinion, much of this is marketing hype, and a good proportion is ideological banks-are-dinosaurs agitprop nonsense.
I’d argue that banks are already moving in this direction, on the whole – some are moving faster than others, and some won’t survive the change at all – and there are some interesting surprises in the pipeline as they learn to channel the innovations presented by technology. I’d also argue that it’s not just fintech innovation that is driving this.
If you look beyond the large, mature markets of Western Europe and the US, financial services firms in emerging markets are able to be more agile and deploy ‘digital’ services simply because they don’t have complex legacy systems. In the former Eastern Bloc countries – Poland, the Czech Republic, Slovakia – and the Eastern Mediterranean countries (Turkey and Israel in particular) there has been a lot of innovation in the way that digital functionality is being deployed: retailers using the services of one Polish bank, for instance, can offer customers the ability to apply for instant credit facilities at the point of sale using their smartphones.
The retailer and customer thus both avoid credit card charges and the bank keeps the customer relationship.
Services such as that, and the more visible Apple Pay, give a slightly false impression that the digital revolution is largely happening in consumer and retail financial services but there’s also a lot of activity in wholesale, payments and capital markets that will likely have a greater impact in the long term, but will be a behind-the-scenes revolution that the general public will barely perceive.
The poster child for this is blockchain technology, which promises to completely change the interbank communications networks and the whole structure of the correspondent banking network – which, in turn, underpins global trade.
Blockchain protocols could replace the links in the correspondent banking chain, each of which adds cost and time to a transaction, with an instant and virtually free point-to-point network that can exchange value in any form – currency, property, securities or World of Warcraft tokens. In fact, interest in the possibilities of blockchains is so high that as businesses are already being established, either based around proprietary blockchains, such as the SETL multi-asset, multi-currency institutional payment and settlements infrastructure, or on commercially available versions such as Ripple Labs’ implementation.
Nearly all major banks have confirmed that they are working on blockchain implementations of their own, and the bank-owned interbank messaging consortium Swift has been active in following developments.
The obstacle that is often presented to this rebuilding of basic infrastructures is regulation – are governments really going to let world trade run over instant payment networks without the checks and balances of the existing system? While banks complain about the amount of regulation they have to endure, it can sometimes seem that they protest too much, as if to scare off would-be market entrants.
There is an argument that regulation is an enabler of digitalisation rather than an obstacle, particularly in the retail banking world, where governments are keen to encourage new competition. In the UK, HM Treasury and the Bank of England (and the European Central Bank on a wider scale) are encouraging the development of an open banking API that will allow software developers to easily interface to banking services and provide – well, who knows what they’ll provide; the point is that they will be restricted by their imagination and ingenuity rather than banks’ access policies.
There are obstacles, of course, not the least of which is security, which is something that the banks still have a bit of a lead in, and one which some observers think they can harness to retain customers.
An important fact that the Fujitsu report highlights is the role of government: it is really surprising and impressive the way gov.co.uk services like DVLA and HMRC are paving the way for the digital citizen, and how that integrates with their financial affairs and consumer behaviour makes for a very interesting and exciting future.
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