Despite banking has been historically immune to innovations, it is experiencing the demand for a sea change driven by state-of-the-art technologies. The need for urgent rethinking and modernization has been caused by the increasing competition from fintech startups. Traditional banking received multiple injections with technological solutions in the attempt to address immediate consumer requirements. However, most of them are obsolete, create additional friction in financial services, and don't meet the needs of the modern-day human.
Many banks still see themselves as the industry goalkeepers and the fortresses for their client assets, often equating open banking to less security. Yet challenger banks and fintechs take an obvious advantage in the market by offering consumers advanced protection backed by innovative technologies. Banking must proactively integrate tech innovations to rebuild trust, improve customer experience and stay competitive in the era of digital disruptions.
Technologies that will define the future of financial services
Based on the outdated vision of financial services, banks have remained major players over the decades. However, today's situation takes a different angle since emerging fintechs offer much more appealing opportunities for digitally savvy consumers. Banks have a lot to learn from financial startups, especially when it refers to a customer-first approach, real-time data analysis, and an open-platform basis. Blockchain, artificial intelligence, and robotic process automation (RPA) are significant technology disruptions in the banking industry.
Blockchain is a distributed ledger system in which all transactions are verified and approved by all members. It provides multiple users with access to the same data, ensuring the integrity and immutability of the records in a database. There is no central operating system or computer that might be hacked or corrupted. It mitigates many security risks and creates a safer environment for financial operations. Blockchain can enable banks to offer more secure financial services with less friction.
During the last decade, there has been the immense growth of structured and unstructured data, many advances in cloud computing, natural language processing, and machine learning. It creates a favorable environment for the fast evolution of artificial intelligence (AI). AI refers to the simulation of natural intelligence in machines that are programmed to think like humans and mimic their decisions. It allows banks to use huge volumes of transactional and behavioral data to improve decision-making processes in marketing, customer experience, corporate operations, data security, and compliance. With technological social responsibility at its core, AI can foster inclusion, accessibility and equality in financial services.
Robotic process automation (RPA)
In the digital age, amounts of data are increasing exponentially, creating new opportunities and challenges for banks at the same time. This made them realize the urgent need for technology that can mimic human judgments and actions but at higher speed, quality, and efficiency. Robotic process automation can be the answer to this question. It refers to technology that allows easy integration of cognitive chatbots based on artificial intelligence and machine learning into business and banking processes for greater efficiency.
Advantages of using blockchain in banking
Initially, blockchain technology was developed in 2009 as a tracking database for Bitcoin. Today, blockchain opportunities are no longer limited to digital currencies. There are many developments based on blockchain in various industries, including the banking sector. According to IBM, banks expect to integrate blockchain into their commercial production in the next four years. This technology is poised to become the foundation of next-generation banking, based on decentralized trust and full compliance. A recent study by Accenture found that the global banking sector could save up to $20 billion by 2022 by implementing blockchain.
The first large advantage of blockchain is its method of verifying and tracking transactions. It allows avoiding the validation of transactions by third parties and intermediaries. Instead of everything being controlled by a central bank or other authorities, Blockchain produces a shared infrastructure in which all records are distributed between a large number of members confidentially. It is a solid base for confidence that your transaction will be completed as per protocol without the need for validation from a trusted third party. This technology allows building greater trust within the financial system eliminating the counterparty risk.
Blockchain creates an environment able to withstand attacks more effectively than any traditional banking system. The blockchain-based platform is inherently more secure because once transaction data is recorded in a block, it's impossible to change them. Records are shared by a great number of users within the chain, which makes it difficult to hack or shut down. The exchange of transactional data involves the use of digital signatures based on public and private decryption codes. Thus, it's regulated by strict cryptographic rules that ensure higher security. Offering a substantively different level of transparency, Blockchain is an appealing opportunity for banks to reimagine current financial systems from the fraud protection perspective.
The removal of third parties leads to a faster transaction process. Blockchain is a perfect solution for refurbishing a range of digital processes since it eliminates the risk of errors and duplications. This technology allows reducing the settlement time to seconds and the transaction time to minutes. Moreover, it enables 24/7 fully automated transactions.
How financial companies can use Blockchain
A distributed system for loans and deposits
The banking system has proven to be unreliable when it comes to the security of deposits and loans. State regulators leverage traditional currency to secure deposits and loans but it makes them highly vulnerable instead. As an alternative, a decentralized system of deposits based on Blockchain offers enhanced security because there is no single authority controlling all deposits.
Faster bank-to-bank and international payments
Banks can use this technology to reduce the cost and time of money operations while increasing their security. Bank-to-bank payments and international wire transfers can involve Blockchain for higher speed and transparency. In the future, Blockchain can even replace the SWIFT system.
Decentralized client identification system
All credit organizations have to follow KYC ("Know Your Customer") guidelines to verify the identity, suitability, and risks involved with maintaining a business relationship and accepting any application. A shared blockchain-based system might become the solution for financial organizations providing them equal access to the KYC information. It is a secure storage for customer data that eliminates the need for conducting the same research repeatedly by other financial companies.
Automatic insurance payments
Smart contracts can innovate the insurance industry with automatic payments. A smart contract is a transaction protocol that is intended to automatically complete financial actions strictly following the terms of a contract. This solution allows avoiding a lot of bureaucracy and delays with payments, providing the clients with almost instant access to money.
Replacement of costly mediators
Eventually, most financial institutions can't complete their operations without costly subsidiaries. Blockchain can replace mediators and enable banks to deliver cheaper and faster financial services for their clients.
Blockchain technology offers attractive perspectives for the financial industry. There is already a clear algorithm of its implementation in personal banking. The question only is how ready banks are for this innovation.