Consumer confidence in the big banks was eroded by the 2008 global financial crisis, while technology and smartphones have created new opportunities for FinTech businesses. And a perfect storm for the big banks.
As Bank of England Governor Mark Carney observed in 2016, “FinTech…will change the nature of money, shake the foundations of central banking and deliver nothing less than a democratic revolution for all who use financial services.”
In 2016, taking advantage of new technology and crowdfunding platforms, Monzo raised £1m in a mere 96 seconds via equity crowdfunding site Crowdcube. This crashed their servers and set the record for the fastest ever crowdfunding raise.
Monzo went on to raise another £21m in funding and secure itself as a challenger bank, putting the wind up long-established high street banks and proving the concept of a community-owned digital bank.
Similarly, alternative banking providers, such as iBAN, are using crowdfunding to fund the launch of new banking apps and features, such as peer-to-peer lending and free international transfers.
These new banking providers promise to put the customer at the centre of their business model, rather than treating customers like a commodity. In fact, a recent global PwC survey found that 61% of bankers thought a customer-centric business model is very important yet only 17% were very prepared for it.
It is this disparity that challenger banks are capitalizing on by offering improved services based on technological innovation, something traditional banks are struggling to adopt due to their large size, complex infrastructure and existing business models.
The same PwC survey found that innovation within the banking industry was considered to be somewhat or very important by 87% of bankers, yet just 11% said that their organization was very prepared for it.
With so much change afoot, the future of banking is likely to look very different in 10 years’ time. So, what can we expect from banking in the future?
Machine learning and predictive analytics
Machine learning has been around for some years now, but it still hasn’t really come of age. Essentially, they are still in school – learning now to provide future benefits.
One of the main benefits to customers will be proactive assistance, not unhelpful hindsight. For example, challenger banks already offer balance warnings and advice, not a notification that you’re already over your overdraft limit.
In future, we will see these systems become even smarter, using behavioural pattern analysis and predictive analytics to find ways to help us save money and prepare for potential financial situations we might find ourselves in. In turn, this should help customers save money, providing more capital for these new banks to operate with.
We are already getting used to new forms of payment, such as contactless cards and mobile payments. So, in a sense, the future is already here.
Yet these systems still have lots of room for improvement. While convenient, contactless cards still have spending limits to avoid excessive spending through theft and fraud. They can still be lost, stolen or damaged. And you will still need your PIN at certain retailers and to withdraw cash.
The future of payment systems, however, may lie in biometrics. There are many biological features that make us unique as individuals. Even identical twins have different fingerprints, iris and blood vessel patterns, for example. These can be scanned and used to help secure our money without the need for PINs or cards, simplifying everything from purchases to online banking.
Banks have access to far more data than any other business. They know where we shop, who we work for, where we’re going on holiday, and almost everything in between. They also have access to vast amounts of data from multiple other sources, such as businesses, credit agencies, investment houses and central banks.
These data sources will increasingly be aggregated to provide a clearer picture of the world – from the micro to the macro level – allowing faster, more accurate decisions and advice. In a sense, banks can act as digital value aggregators, providing real-time value for businesses and customers.
In the spirit of generating value, banks can form partnerships with a network of individuals, businesses and service providers, and can leverage their power to lower costs on behalf of customers.
This stands in stark contrast to today’s approach of building more complex solutions for a higher price in order to compete against other financial institutions. It is this approach that created the complex financial instruments that, ultimately, played a huge part in the global financial collapse.
Technologies like blockchain are enabling a quiet revolution – invisible and seamless – to enable more direct and transparent transactions between users. What started as peer-to-peer trading has morphed into complex networks backed by a digital ledger.
Not only does blockchain cut out the middlemen, offering traditional financial services at a fraction of the cost, it can make financial transactions more transparent and secure. Technologies built on top of blockchain, such as Etherium, are enabling the use of digital smart contracts which make it almost impossible for financial fraud, embezzlement and dodgy trading practices to continue.
Ultimately, this technology can put users in charge of finance, rather than being at the control and whim of global financial institutions.
We believe machine learning, data aggregation, blockchain and greater collaboration will converge to offer users a more personalized and tailored service. Combine that with ever-improving digital assistants and you end up with a network of services that can use data to get smarter and be more helpful to customers, not ‘selling’ products in an attempt to extract ever-increasing profit from them.
Banks of the future can use their privileged position to offer a personal experience and form closer relationships with their customers. We think AI assistants will be the new, personal face of these banking services.
AR and VR
It seems inevitable that augmented reality (AR) and virtual reality (VR) will become a dominant part of daily life. We might interact with people and businesses via VR, gain real-time information in AR, and switch between the two seamlessly.
In this scenario people will be able to gain a real visual understanding of their finances, where they are allocated, and predict what future savings they may need.
About the Authors
Marc Hurr and Daniel Eduardo Suero are co-founders of iBAN Wallet, a money management app that helps you control your finances, connects lenders and borrowers and facilitates the transfer of money between you and your friends. See: ibanwallet.ibanonline.com/
iBAN Online Limited is an Appointed Representative of Resolution Compliance Limited which is authorised and regulated by the Financial Conduct Authority (FRN. 574048).