Today we are going to continue our look at how technology is changing businesses and industries, focusing on the banking and financial sector. This is a highly competitive field where technology is making a huge difference with the proliferation of mobile, online and other innovations. Below we’ll take a closer look at how these changes are shaking up the industry and what it may mean for your business.
Knowing Your Industry
Many technology trends are working their way into the financial sector, affecting banking and lending, financial planning, and CPAs/accountants. Let’s focus on each of these subsets below:
Banking and Lending
Today’s consumers want the convenience of not just online, but mobile functionality. Mobile accessibility is better than ever, and users now expect to review and conduct transactions with mobile devices. Mobile usage is exploding and starting to overtake desktop work as employees need access to critical accounts and applications anywhere at any time, with many completing a majority of their transactions from a mobile device. This trend will continue and require a shift in investment from desktop to mobile application capability.
New virtual credit card (VCC) apps like Google Pay, Apple Pay, PayPal, Entropay and NetSpend are tapping into banking to revolutionize mobile payment. VCCs allow users to transfer funds from their bank account to a virtual card that can be used in online transactions, and even in some physical storefronts today. Apple and Google are connecting bank accounts to their mobile devices and changing the point-of-sale transaction experience. With billions of dollars and non-traditional banking players like Google and Apple involved, significant change is coming, and flexible and adaptable companies will be the ones that survive — and even thrive — in the volatility ahead.
Finally, “cryptocurrencies,” like bitcoins, have also spurred technological development in banking and finance. Perhaps the biggest change on the horizon for the financial industry is blockchain. The blockchain database model was developed to provide independent transaction verification for bitcoin users, but it is now gaining popularity as a way for traditional financial institutions to speak directly through a secure, self-managing ledger, eliminate middlemen, reduce costs, and increase the speed and security of transactions. We also see financial institutions around the world researching blockchain for use with their own forms of cryptocurrencies and VCCs. Some of these concepts get very technical, very quickly, but if you are in banking, you should be very familiar with blockchain and some of these other concepts that will significantly change how transactions are executed and secured over the next few years.
As for those involved in lending, blockchain may also play a significant role, both in terms of security, and how loans are approved and funded. In addition, with lenders having a wealth of information at their fingertips, they can begin to change how they approve loans. Some small start-ups have placed the credit score way down the list in terms of what is evaluated in the underwriting process. They are approving loans based on their social media presence, their LinkedIn network and other factors that may better predict their ability to repay the loan and stay out of collection processes. Used to score a borrower’s risk, these advanced algorithms factor more accurately, while significantly reducing costs related to default and collection activities. How well a company can take advantage of these capabilities could enable them to significantly lower their rates and still have a higher margin than their competitors.
Financial planning is experiencing two key significant trends around Artificial Intelligence (AI) and financial reporting aggregation. AI is continuing to make significant improvements and beginning to impact traditional financial planners. We especially see millennials leaning toward automated, non-personal planning for simplicity and convenience; however, I do believe the relationship component of financial planning will play an increasing important role for millennials over time. The second trend around reporting aggregation is continuing to gain traction. With the ease of which new investment accounts can be opened, and job changes creating additional IRA accounts, it becomes increasingly challenging to aggregate financial information across all the accounts. This of course, makes it difficult to understand and plan asset allocation, as well as manage risk based on the objectives of the investor. Companies that are able to leverage FinTech (financial technology) tools that provide the capability to aggregate financial investment data and take advantage of AI tools while effectively managing the client relationship, will be the ones that are successful in the long-term. And don’t forget about mobile access — which is a critical underlying component in financial planning.
Accountants are surely aware of software like TurboTax that enables customers to file tax returns without outside assistance. What about a system that securely brings all your financial information together automatically, leverages AI to prepare the tax return, and your only job is to review the return and submit? This capability is surely coming (long before simplifying the tax code will ever occur) and will disrupt this space even more for the small tax firms. The larger firms will leverage this capability to lower costs and add value through additional tax advice, as a trusted business adviser to their clients.
The evolution for accountants turning away from compliance work and more to business advisory services will continue and likely advance. How they leverage technology to enable this shift within their own firm will be critical. Furthermore, how they connect with clients to share information (structured data and unstructured knowledge content) will be a potential differentiator. A client portal to share and exchange secure documents, provide various industry insights, or to automate the workflow and review of financial deliverables (also mitigating risk) will become more commonplace and available for smaller firms. To adapt to rapid change and continue to provide value, accounting firms will have to align IT capability to business goals and go deep as a business advisor. They must be able to specialize in their client’s business and industry to be a trusted adviser.
Your IT Budget
Banking and finance is an incredibly competitive field, and keeping up with the competition is crucial. Many surveys about IT budgets in the financial industry show that their amounts have actually been decreasing recently. This indicates that these organizations may be starting to leverage standards to be more efficient with their technology. However, in order to be successful, they will need to continue through the stages of IT maturity to Stage 4 of IT maturity when companies experience valuable ROI and are able to innovate and create significant competitive advantages (this is where disruption occurs). If you are not in Stage 4, getting there is crucial in such a competitive and advanced field, and you should budget accordingly. However, Gartner predicts that the overall IT spend in the banking and securities field will double by 2019, so it is important to prepare your IT standing and budget for what may come next.
A closer look at budget trends in the financial sector can provide good insight into how the industry is evolving and where you should prioritize your IT spending. For example, a survey by American Banker showed that over 70% of CIOs planned on spending more on security in their 2016 IT budget. The remaining two of the top three categories where most CIOs anticipated increased spending were data analytics and mobile banking. Clearly, these are three major areas to focus when planning your IT budget to keep up with the competition.
Security is probably the most vital aspect of financial services’ IT capabilities. With greater accessibility to systems comes a greater risk of a data breach, so locking down and protecting customer and company data are more important than ever. Accordingly, in American Banker’s survey, there were no CIOs that planned on spending less on security in their 2016 IT budget. Stricter government regulations reflect this priority as well. The future of security will continue to evolve, but secure access that balances better protection with usability will be critical. To increase customer security, stronger encryption is needed, as well as improved identity and access management. Multi-factor authentication, which requires an authentication factor beyond just a username/password, is becoming more and more common, and is one of the most effective ways to keep customer accounts secure. But usernames and passwords are on their way out entirely, and it is likely that they will be replaced by biometrics, given the proliferation of fingerprint scanners in everyday consumer devices. Online and mobile banking must account for these changes.
Anyone in the financial industry is no stranger to compliance requirements. There are significant challenges and confusion around regulatory compliance. What is in or out of compliance is not always as clear as it should be with large areas of “gray” to navigate. Add to that, rapidly changing rules, and it is easy to be overwhelmed. From a technology perspective, the good news is that more and more companies will be able to rely on technology to manage compliance requirements. This capability, combined with oversight from trusted compliance officers, can help an organization appropriately balance their compliance decisions.
The banking and finance industries are some of the most volatile in terms of new and disrupting technology. There is so much change and increasing disruption, with new competition coming from different industries. Add to that mix — the complexity around security and compliance, while navigating change and remaining competitive — is a daunting challenge. Of course, keeping up with this rapidly changing landscape is essential to remain competitive. Differentiation is vital, and IT offerings and capabilities that align to the business are the best ways to stand out and become an industry leader today. This means you need to have the right people (including a trusted IT resource) working together with clearly defined roles and processes to support the rapidly evolving needs of the business.