Keeping up with the tech: 3 challenges finance will overcome in 2020 (outside of coronavirus)

Cyril Diamandi
Cyril Diamandi

Finance vs tech: why finance industry still undergoes digital transformation

As digital becomes mainstream, there is expected to be a collision of two worlds: the financial sector and technology. The lines between industries become blurred and result in digital transformations that financial companies need to embrace to stay competitive in the constantly changing landscape. Now financial organizations can launch digital-only products and services, slashing the number of costly branches and field agents and thus improving customer experience. However, they still have to update their strategies combining new data processing and storage options with advanced analytics and new capabilities of cybersecurity.

3 Major Challenges Facing the Finance Industry in 2020

One of the key challenges that have always determined the destiny of fintech companies is constant competition. However, in 2020 it acquires even more influence as non-financial companies are entering the market setting new standards. Titans of technological innovation are turning their attention to the financial sector becoming the so-called BigTech: they bring a variety of app-related services, from banking to ride-sharing, built in a single app under one roof. 

Thus, Facebook created a new brand Facebook Pay and introduced its own cryptocurrency Libra to make global payments cheaper and faster, Apple has already presented a credit card, and Google plans to introduce consumer bank accounts later this year. Meanwhile, Amazon and Airbnb are partnering with JPMorgan to provide e-wallet and Uber is moving further into finance with Uber Money and new financial products.

All of them provide finance-as-a-service which has the following obvious benefits:

  • APIs use that allows to scale fast and open up multiple markets simultaneously;
  • linking today’s tech-forward business and the legacy financial systems that drive the majority of global commerce;
  • unlocking a new playing field for fintech innovators;
  • delivering exceptional customer experiences for localized and cross-border commerce.

However, it doesn’t mean that these data-rich businesses have plans to become regulated financial institutions: with all the headache of getting and maintaining a banking license (which is also a big risk) they will operate with licensed partners instead of going full-stack banking. In fact, they will just use an opportunity to keep users hooked on the app to drive more revenue. 

But as they have a massive pool of users whom they understand better than anyone else, they are changing the competitive landscape in financial services forcing traditional institutions to rethink the way they do business. To keep up with BigTech and withstand the competition, financial companies need to focus on and improve the following aspects of their work.

Challenge #1: Data breaches and cybersecurity

Due to sensitive data and interconnected systems with millions of transactions handled every day, financial firms become key targets for cybercrime and are hit 300 times more than other businesses. With one hacker attack happening every 39 seconds, fighting off cybercriminals is a daily task for the fintech industry. IT security specialists from the different U.S and European companies provide worrying reports on the security of operations: 48% of financial institutions were breached during the past year and 52% experienced a cyber attack or noticed signs of suspicious behavior in their infrastructure caused mainly by spam messages and bots.

It happens due to the number of reasons:

  1. Use of third-party solutions;
  2. Rapidly evolving, sophisticated, and complex technologies;
  3. Cross-border data exchange;
  4. Increased use of mobile technologies, including rapid growth of IoT;
  5. Heightened cross-border information security threats.

By 2024, cybersecurity spending will increase by $224 billion. On average, one cyber-attack costs a financial institution $1,8 million and even the biggest losses experience smaller companies due to lower investment in IT security. Meanwhile, loss of this data can result not only in negative repercussions for businesses of all sizes but even bankruptcy: 60% of them close operations within half a year after the cyber-attack

This makes financial companies come up with the integration of innovative solutions to stay ahead of cybercriminals:

  • Data encryption and data loss prevention solutions (encoding a message or information to be accessed by authorized parties only);
  • End-to-end data protection (protecting data during transmission);
  • Blockchain and distributed ledger technology (as it requires both a public and a private key, it’s impossible to access data without the right one);
  • Endpoint Detection and Response (deployed on devices to provide continuous monitoring and automatic response to advanced threats).

Security should be built into all aspects of the business, so when it evolves, the cybersecurity strategy can evolve with it. With the digitalization of the industry, financial companies should be quick and agile to update their existing systems. It will help to fight fraudulence, identity theft, espionage, money laundering and avoid the lack of customers’ trust. However, no matter how much you invest in technologies, you will still have to train your employees and customers on how to react in case of a cyber-attack and consider hiring ethical hackers to detect loopholes in the system and resolve these problems before real hackers jump in.

Ethical hacker duties illustration

Challenge #2: Complying to regulations

As the fintech revolution goes, companies have to operate between financial and technology sectors which makes them deal with many strict regulations. Thus, customer concerns over data sharing with unknown third-parties become the main stumbling stone for financial services in 2020. Although it is not brand new and financial institutions are already well-equipped to keep being compliant, smaller companies often have fewer resources to comply with all data security and financial laws which leads to a certain risk. 

Bringing an innovative idea to market and getting government sign-off is a long time-consuming process, and if you decide to expand internationally, it opens up the whole can of different global, national and regional regulations coming into force. One of the biggest rule changes for fintech became GDPR that controls how companies store and process EU citizens’ personal information: large organizations in the UK have already received fines totaling £300 million.

The core message of all these regulations for fintech was to boost innovation and competition, improve security and provide customers with a wider range of financial products. As it is nearly impossible for a human to keep up with, it identified opportunities for the so-called RegTech, a technology tool that helps financial companies standardize regulatorily and automate compliance processes. These solutions are based on a bunch of technologies such as AI, Blockchain and Big Data Analytics and can perform the activities like:

  • Real-time searching and reporting new or reviewed regulations;
  • Analyzing the collected information and sharing its impact with the stakeholders;
  • Updated data processing and validation;
  • Ongoing tracking and monitoring;
  • Predictive problem-solving;
  • Robotics-automated workflow, regulatory and risk management. 
Rapidly developing RegTech solutions

Leading banks like Deutsche Bank and JPMorgan spend over $1 billion early on regulatory compliance control and 64% of small companies have already implemented RegTech tools tobridge the gap between authorities and the financial service market. Flexible, easy-to-integrate and cost-effective analytics tools developed by experienced dedicated technical teams allow financial institutions to quickly identify non-compliant cases within the organization’s activities, compare scenarios and predict potential full-scale market problems instead of regulating after the fact.

Challenge #3. Technology trends change

Being one of the most conservative industries, the financial sector faces many challenges and concerns in implementing new technologies. As 2020 will see more adoption of Blockchain, Artificial Intelligence and Big Data in other industries, there is still little going on in the financial market. Just think about mobile banking apps, IoT-based insurance services, payment systems, AI-powered customer support digital assistants and trading bots serving as high-tech advisory outlets. While many companies already understand that digital transformation is essential, some are still failing to achieve this. 

With the number of connected devices reaching 40 billion by 2022, financial institutions have to adopt a digital-first strategy in order to stay competitive. Thus, they have to invest more in AI, ML, robotics and other workflow automation tools to increase their efficiency and reduce the costs related to risk management and compliance. It also refers to modernizing current data storage solutions and updating existing platforms they operate on to provide more friendly customer experience and enable more progressive solutions

There are 4 key technologies financial companies should implement to effectively manage their operations and become digital-first:

  1. Cloud. The number of fintech companies that adopted a cloud provider is growing at a steady pace: IBM already announced its collaboration with Bank of America to develop a secure fintech public cloud solution. Although now only 22% of them run on the cloud, 2020 will become a tipping point for the industry. The majority of fintech starting today are all cloud-native which lets them be agile and scalable. 

It quickly became the mainstream in banking providing the hybrid of IT, public and private clouds and resulted in such benefits as compliance, governance, reduced costs, enhanced innovation, security, and operational efficiency. The ability of fintech firms to quickly innovate and offer customer-centered services lies in the ground of fintech revolution which is impossible without cloud computing migration.

  1. Big Data. The financial industry has become a leader in the adoption of advanced data analytics: 71% of finance organizations have already benefited from its use as it helps to push the boundaries and offers more personalized products for B2C and B2B clients. Although Big Data is a necessity for fintech companies, it is also a real challenge: a lot of data created by the number of sources increase even more and legacy data systems fail to handle the volume of information coming in.

By 2020 there will be 44 trillion gigabytes of digital data to sort through and determine what is useful and what is not so finance institutions need to take advantage of Big Data solutions that offer customer segmentation (gender, age, economic health, location, online behavioral patterns), fraud detection (prevention of suspicious activity) and risk management (predictive analytics). 

  1. Artificial Intelligence. With 5G and IoT stable connection and explosive growth of unstructured data, there is more information to be analyzed in real-time which makes finance companies turn to AI/ML algorithms. Thus they can become more mobile, gain insights into customers’ behavior and tailor their products and services more effectively. Suddenly, finance organizations can work with large histories of data for every decision made and improve business processes using smart help.

AI makes chatbots provide informed financial advice, helps to detect fraud and guides customers’ investments that led to the creation of such terms as machine intelligence and augmented finance. In fact, 54% of bank customers demand personalized real-time advice while 41% state that they don`t mind taking it from AI and this demand keeps growing. According to statistics, 45% of frontrunner firms that invested $5 million in AI initiatives increased their revenues 3 times while 25% who invested $10 million have also noticed a great change in customer experience level. AI lowered operational costs by 20% which definitely makes it the future for financial services.

  1. Blockchain. Experts say that Blockchain has a transformational impact on the fintech industry throughout the entire spectrum of financial services. Except for cryptocurrency use, it helps with information exchange, automating processes via smart contracts, global payment transactions, security, fraud detection, verification, KYC and loan processing. From monetary transactions to transferring contracts, financial institutions will be applying Blockchain technology more as popularity grows.

2020 offers digital-only banks, APIs use, fintech mobile wallets, online global transfers and other opportunities for business growth which is impossible without keeping up with the changes. Thus, financial institutions have to understand the full use case for these technologies and apply them to offer better products and services to the end-users. Using this driving force, finance organizations will be able to redefine themselves, be more competitive and responsive to the market needs.

Technologies that boost FinTech

Notably, today over 51% of the US and UK companies experience a lack of professionalism to put tech into practice so partnering with a reliable technical development team may be an efficient way to mitigate the talent shortage. Remember that even a smaller innovation like fintech app development or website redesign can boost your sales and attract new customers.

How to get ready for a digital transformation

Taking into account all the challenges, there are 6 key priorities for financial institutions to achieve success in 2020:

  1. Update your current system and IT operating model. Even if the system is serving you well today, it should be updated regularly in order to keep up with a technology-driven world and stay competitive. Think about modernizing the platform, adding some features, implementing automatic regulatory tools or applying AI-powered algorithms to increase performance and offer your customers more options;
  2. Slash costs. Financial institutions spend twice as much as they need for IT operating costs, regulatory fixes, cybersecurity and fraud prevention. Cut expenses by simplifying legacy systems, adapting robotics and AI and using a reliable technical partner to cover all the development needs;
  3. Use technology capabilities. Get more intelligent about your clients’ needs and act in real-time: this is one of the key points affecting the financial industry as it drives more revenue and profit. You need to change the way you interact with your customers using a smart balance of human and machines;
  4. Prepare your architecture. Be ready to connect to anything and anywhere: enterprise databases, cloud services, B2B (partners systems) and B2C (individual mobile devices) connections, IoT sensors, third party sources of big data, etc. There are many complex and diverse systems that can coexist and cooperate;
  5. Take care of cybersecurity. Fintech has been suffering from security risks for decades and now many financial institutions still rely on the model they have used for years. However, the traditional approach no longer works as IT risks constantly evolve. Thus, keeping abreast with it becomes a priority;
  6. Get the necessary talent and expertise. Make sure you are ready to meet all those challenges with the right technical execution team: partnering with a third-party talent to create the right solutions and manage the operations is essential for the finance field.

Implementing these strategies, companies should also pay attention to three C: credibility, collaboration, and customer experience. Customers are always skeptical so building trust becomes a necessary task, especially with new technologies integrated. Partner with similar businesses to create a network of like-minded people and produce perfect, clear, authentic and informative online experience for your customers to build positive long-lasting relationships.

Summary

Transforming the finance industry is certainly not an easy task. Lack of specialists, tools, budget, and knowledge are the main roadblocks for the financial sector. However, the revolution reshaping the financial services creates a lot of opportunities for financial companies to reinvent their business models through innovation. Looking ahead, the mix of new technological advancements, rigorous regulations, capital from investors and globalization of financial services will drive more trendsetting developments in the coming years.