s the first fintech wave settles in our financial life a new wave starts
promising to deliver more of everything, from disruption to opportunities. Some call it the rise of the robots. In Accenture we are positive that this new fintech wave will make possible to go beyond what todays human-driven processes can provide, at far greater speed, agility, accuracy and cost efficiency.
THE FIRST FINTECH WAVE CARVED THE ROAD TO CHANGE
Technology was once seen as an industry on its own, as global tech companies emerged and made their way into our daily lives ahead of the dotcom bubble in the year 2000. Since then, everything has changed.
As years went by, every industry, sector, and company embraced technology in their own time, with most financial institutions trying to be competitive implementing sustainable innovation and avoiding early adoption. This once
vertical and dominant industry was poised to great changes in the years to come.
It wasn’t until 2015 that the term “fintech” started to be heard around the world and attracting significant investment from venture capitalists, with long conversations being held over the “competition vs. collaboration” dilemma. But as the ecosystem evolved, the environment went from a competitive one led by fear and dominance to a coexistence landscape marked by collaborative improvement (in the majority of markets). Managers, leaders and CEOs of major global banks and financial institutions started acknowledging the real value and benefits of the startup disruption. In that sense, financial institutions have been engaging in new synergetic strategies aiming to improve service and interaction with customers and clients, designing a new future leveraged on startups’ technology, agility, and diversified talent. Startups, on the other hand, wanted the scale, visibility and reach that incumbents had to offer.
RECENT EVOLUTION AND TECHNOLOGICAL CHALLENGES OF THE NEXT WAVE
Along with the innovation that fintechs brought with them, and after a period of adaptation from the incumbent institutions to the fintech wave, these startups set the pace for change by raising a real challenge to banks’ perspective of what lies in the center of their business: the customer. Banking strategy is now led by customer centricity backed up by innovation with its inherent digital transformation at heart. In interviews conducted with over 25 banking BPO service providers, 85% of banks were proclaimed to have ongoing digital transformation projects leading their priorities for FY18 and FY19 and additionally, over 60% of interviewed banks stated they expect to be digitally mature by 2020, a number that has risen from below 20% in 2018.
Fintech firms are much to blame for this new paradigm, considering their reputation on bridging the gap between what banks offer and what customers
really want and need. Their focus on customer experience through fast, transparent, frictionless and personalized services helped push traditional financial institutions to switch their attention to the final customer, by setting omni-experience channels and the building of digital trust as two of their main priorities.
This new wave of innovation inevitably changed the Portuguese landscape, as banks have gone into building new digital experiences through apps and new offerings for their customers (with many incumbents leveraging on fintech startups through partnerships). Following the importance of financial institutions in our every-day-lives, the sector is now expected to further evolve in its proximity to the customer, not so much on territorial presence, but on swift availability whenever it is necessary, building on a much-needed advisory role.
As innovative technologies emerged over the last few years, so did new market dynamics, showing relevant evolutions on what is the financial institutions’ perception over this plethora of available tech. As stated last year, these players were forced to look outwards beyond their borders, given the fact that the
sectorial limits have become blurred due to the wide reach enabled by today’s innovative technologies. Such change lies on two principal structural vectors:
Financial products moving outside the financial industry, with more and more players across many other sectors
trying to capitalize on their unique assets (specially e-commerce players such as Amazon or Shopify and Alibaba, which can leverage on huge customer bases to create lending systems based on trusted customer relationship and solid credit worthiness data), forcing banks to break sectorial barriers and constantly improve their value proposition and time-to-market;
New markets being created with new business opportunities, with banking services now being able to
spread into once unbanked markets (unbanked people still exceed 60% in the Asian, African and Latin-American markets).
THE REGULATORY ADAPTATION TO THE PRESENT FUTURE
ong gone are the questions of what would be pushing what forward: innovation or regulation. The rhythm in which technology (and consequential business opportunities) evolves has made it unsustainable for regulators to stay up to date on every development. But
in due time, they come to help drive the competitiveness and change, ensuring it is sustained by a transparent and trustworthy environment.
The constant technological evolution demands regulatory entities to be in a permanent effort to conciliate innovation and regulation, a noticeable effort across many countries including our own. The main Portuguese financial regulators work towards guaranteeing all regulatory requirements in areas such as cybersecurity, data protection and information aggregation. Additionally, it has recently created a direct contact channel for innovators to reach out and clear any existing doubts.
In Europe, while we continue to see the General Data Protection Regulation (GDPR) providing protection to all citizens and their data, imposing boundaries to the use of data ownership, we have other regulations leaving space for further developments, such as the Payment Services Directive II (PSD2) promoting innovation and competition in payments, and the Open Banking initiative breaking down entry barriers and empowering the customer and its data.
Open Banking aims to move from traditional banking into an ecosystem of third-parties leveraged on application programming interfaces (API), an ecosystem that boosts interaction between banks, insurance companies, fintechs, aggregators, retailers and telecoms, all as one interacting with the customers and under governance provided by regulatory entities. This evolution allows for:
a) a focus shift to customer experience (with the customer in the center of it all);
b) a reinforcement of data as a valuable asset, upon acceptance of the customer of a trustworthy relationship with the data owner;
c) a confirmation of a collaboration environment replacing unilateral and individual thirst for profit;
d) an adoption of the new shared economy across the financial industry as has been happening in many other industries.
ARTIFICIAL INTELIGENCE AT ART DRIVING THE NEW WAVE
oday, one broad spectrum technology stands out for its endless possibilities and potential: Artificial Intelligence (AI).
The maturity of this technology has allowed for general human cognition to be transformed into software code, providing computers with the ability to successfully perform tasks that
until now could only be performed by humans, as they can now interpret events, automate decisions, and take actions. With AI’s potential for massive data analysis and learning capability to point out trends and behaviors, this can be seen as a disruptive innovation that it is undoubtably changing the way business is done, leading companies to refocus their talent in developing cognitive automated processes to deliver the needed agility, accuracy and cost effectiveness to be more competitive.
On one side, AI has the potential to provide cost savings of up to a $1 trillion in the banking space until 2030, according to a report by Autonomous Research LLP. Such savings come from applying AI throughout the front, middle and back-office of financial institutions, with appliances going from security and administrative tasks, to compliance, authentication and underwriting.
And on the other side, new capabilities are enabling new opportunities and improving the way banks and insurance companies provide their services. Data, for instance (now considered by organizations to be the most valuable asset), when used with AI, allows to offer highly personalized products and services to the customers, minimize risks throughout the whole value chain, and follow price optimization strategies to better suit the clients’ needs and increase operational efficiency.
In the face of this new reality and with the rising tendency to move into a sharing economy, Accenture is working towards a brighter future enhanced by a fully collaborative way of creating value. Accenture is actively working to build a fintech and insurtech ecosystem in Portugal by leading a joint collaboration between the most innovative startups and entrepreneurs and forward thinking banks and insurance companies in order to together create cutting-edge products and services. With strategic partners like Associação Portugal Fintech and Nova School of Business and Economics, we aim to share knowledge, experience and valuable tech to create an AI dedicated ecosystem right here in Portugal.
Portugal is more than ever well suited to be a key player in this new revolution and drive the future of AI in financial services, today.
PORTUGAL IS MORE THAN EVER WELL SUITED TO BE A KEY PLAYER IN THIS NEW REVOLUTION AND DRIVE THE FUTURE OF AI IN FINANCIAL SERVICES, TODAY.
very year IDC Financial Insights presents the top 10 predictions for the financial services industries, the "IDC
FutureScape: Worldwide Financial Services Predictions”. Each prediction is shaped by a common set of key drivers that provides a planning tool for technology leaders and their line-of-business counterparts to use in their IT strategic planning efforts.
This IDC FutureScape is a planning tool for technology leaders and their line-of-business (LOB) counterparts to use in their IT strategic planning efforts: it provides the strategic foresight needed to inform technology-based strategies by laying out our top 10 predictions; and each prediction supports a five-year planning process by identifying the timing on the x-axis, and the overall cost and complexity to address on the y-axis.
The predictions are based on a large number of sources, from end-user surveys, financial services organization surveys, vendors and fintechs interviews, and it is a culmination of the tenets of our research over the past few years.
The prediction process starts with key external drivers that are shaping the economy, regulations and other components of our society.
RISING CONSUMER EXPECTATIONS
More convenience, customization, and control
Learning to live with AI
THE RACE TO INNOVATE
Speed of change, delivery, and operations separates thrivers and survivors
PLATFORMS, PLATFORMS, PLATFORMS
Industry competes for innovation at scale
Retrofit the old into the DX world
SENSE, COMPUTE, ACTUATE
Turning data into value
NEW NATURE OF RISK
Innovation to defend against bad actors and comply with increasing regulatory compliance
The challenges of the industry today continue to be shaped by trying to match fintech innovations, meet customer expectations, and protect the brand while resources are scarce and regulatory burdens persist.
And the mission in financial services today is driven by the need to improve customer engagement in selling, delivering, and servicing financial products, payments, and services. Included in this mission is the need for some financial service firms to improve their “brand trust,” providing their customers with a more transparent and secure environment. While some of this will be driven by internal strategy, much of it will be dictated through regulation and guidance. Driving all this is a concept called “connected banking,” which is forcing the industry to disrupt its own business model by connecting to adjacent markets in order to expand the relationship with its customers
and provide an experience that is being shaped by industries outside of financial services.
Despite the significant changes already witnessed in the financial services industry over the past 10 years, the changes from 2019 to 2024 will be unprecedented. The impact of a scaled-up digital transformation (DX) economy on our industry will see more enhanced customer experiences, a proliferation of next-generation security solutions, the expansion of cognitive and artificial intelligence (AI) technologies, and the modernization of back-office infrastructure using open application program interfaces (APIs) frameworks, all aimed to improve efficiency and overall profitability. As part of this digital economy, new rules for competitive success will be built, there will be new roles for IT leaders, and how financial institutions (FIs) interact and engage with fintech vendors will be presented with new requirements and challenges to the status quo.
Worldwide Financial Services Predictions, 2019-2024
2019 KEY PREDICTIONS FOR THE WORLDWIDE FINANCIAL SERVICES' MARKET
By 2020, 60% of all banks will have invested in IoT and NFC to address rising expectations, offering customers and employees wearable authentication for in-branch teller system and ATM transactions
By 2020, 25% of all banks will have achieved a Connected Core by proactively opening core systems to enable platform-based and componentized modernization and thus participation in open marketplaces.
By 2021, 45% of all banks will have invested in automated GRC applications to improve operational performance and substantially reduce the operating expenses associated with manual processes.
Cross-border payment tracking will be improved by the SWIFT gpi quasi standard, but only 10% of banks on the network will monetize it by 2020 with their own data-rich analytics.
By 2022, 25% of personal and commercial lines carriers will have piloted and/or implemented use cases that combine blockchain and IoT to make frictionless insurance sales and service a reality.
By 2021, 75% of Global 200 banks will have established Open Banking APIs with their key business partners, but revenue thus earned from third parties will be less than 10% of total annual revenue.
By 2024, passive robo-advisors will be the standard for the lower-wealth segments, while 40% of the higher-wealth segments and institutional investors will seek alpha from active robo-advisors 4.0.
With the growth and acceptance of consumer and corporate-provided wearables, by 2024, 15% of consumer payments worldwide will be authenticated and/or transacted via wearable devices.
By 2022, driven by open banking and AI, 25% of financial institutions worldwide will be processing transactions initiated by third-party digital personal assistants or will be capable of doing so.
Looking for further efficiency gains and cost savings, 50% of all banks will have moved at least 20% of critical business functionality to as-a-service cloud platforms by 2024.
ADVICE FOR THE TECHNOLOGY BUYERS
Invest in digital and branch solutions aimed at improving the experience for both the customer and the employee. Wearables will be an excellent way to improve authentication in-person as well as remotely.
Plan for and develop a comprehensive automated risk and compliance strategy to avoid siloed solutions that cannot leverage and learn from other systems.
Work with technology partners that can think of blockchain and IoT-enabled use cases as true game changers in customer experience transformation in insurance as well as other financial service industries.
While passive robo-advisors will rule the day for the majority of investors worldwide, most wealth managers will seek a hybrid approach allowing more robust and active robo-advisors for higher net worth customers.
Adopt authentication methods that ensure high levels of security but still provide seamless customer experience. Risk-based transaction monitoring should guarantee high level of security with limited bottlenecks. Wearables are also a user-friendly and secure means of authentication.
Ensure investment and alignment of IT resources serve both the legacy and connected bank sides since each demand different skill sets and pose labor management challenges. This is particularly important for the largest institutions in developed economies.
Tracking payments in the same manner we track packages will become the norm, thanks to the improved SWIFT gpi quasi standard, but banks will need outside assistance on accommodating the changes to their payment hubs.
Prepare for scale by ensuring strong infrastructure capability that not only manages APIs but also secures them without compromising the speed of execution. Issues around infrastructure uptime and availability will be important as the volume of API and data usage increases.
IoT solutions will find their way to the point-of-sale and authentication terminals in stores and bank branches and with adjusters. Security will need to be hardened, and customers and employees will need to understand the benefits for successful implementations.
Develop a Connected Banking strategy that provides the ability to source functionality, workloads, and complete solutions seamlessly from both internal and external platforms and is critical to building agility and flexibility.
By: Luís Roquete Geraldes
João Lima da Silva
Team Genesis @ MLGTS
he fintech industry continues to steadily grow while under a close watch from supervisors in the financial, banking and
insurance sectors. The intersection between technological innovation and regulated activities continues to create significant challenges for disruptive companies, supervisors and incumbents alike.
Incumbents have been trying to strategically position themselves in the fintech sector, either by investing in new business segments or through integration or collaboration with emerging fintechs. Through the development of new platforms and business models, fintechs are trying to access financial markets but high regulatory costs (capex intensive) and the slow pace of change of behavior in traditional financial services still make for an extremely challenging environment.
The regulatory advantage naturally lies with the incumbents. As “newcomers” or “disrupters”, fintechs often start to operate as unregulated entities, developing their business model in stages that allows them to manage the cost of the regulatory burden and, in some cases, their activity dwells on grey areas that are only tangent to the regulated sector. They are able to leverage on this apparent regulatory freedom, which incumbents lack, to develop their activity favoring a “tiered” approach. Incumbents, on the other hand, have the regulatory approvals required to operate in the financial markets therefore making the alignment
of interests/incentives evident. Such explains the confluence between the two opposing sides, manifesting itself through investment, joint ventures or other means of collaboration. This is part of a wider global trend we are observing in Portugal as well although Portuguese incumbents, when compared to other countries, seem more reluctant in making direct investments in fintechs.
Another recent trend shows international fintech scaleups increasingly setting up shop in Portugal and European-based fintech scale-ups taking full advantage of the core founding principles of freedom to provide services and freedom of establishment (Revolut is the most recent example). After being granted the relevant licenses in a jurisdiction where the regulators are predictable and the legislative framework is clear and, inasmuch as possible, stable, fintechs operate in other EU countries through the freedom to provide services or branches by leveraging on passporting rules. From an operational perspective, this helps companies better manage regulatory risk since they are able to limit the bulk of regulatory oversight to one jurisdiction and focus on that country’s specific industry-sector compliance obligations. Companies are then able to better manage and monitor other country specific obligations that apply residually (e.g. rules regarding the prevention of anti-money laundering and terrorist financing).
Interestingly enough, even when Portugal is not the jurisdiction of choice to procure full licensing, international fintechs have increasingly shown interest in setting-up operational centers in Portugal. Our country has unique conditions which make it particularly interesting: high quality level human resources (including foreign language skills), still relatively low salaries and average cost of living, good weather and overall good quality of life.
OUR COUNTRY HAS UNIQUE CONDITIONS WHICH MAKE IT PARTICULARLY INTERESTING: HIGH QUALITY LEVEL HUMAN RESOURCES (INCLUDING FOREIGN LANGUAGE SKILLS), STILL RELATIVELY LOW SALARIES AND AVERAGE COST OF LIVING, GOOD WEATHER AND OVERALL GOOD QUALITY OF LIFE
equity crowdfunding), half of them obtained a license in 2018 while the remaining half were licensed up to July 2019. Regrettably, this is a sector where legal harmonization has not yet been reached at EU level, making it more difficult for national platforms to operate outside of Portugal and foreign platforms to be able to operate in Portugal.
Additionally, assuming Brexit will occur, it will have a significant impact in the sector affecting both incumbents and fintechs, especially if it is a “no-deal Brexit”, with the ongoing re-domiciliation of companies into other EU countries, including Portugal, to continue to be able to target the EU market through passporting rules. As a result of fearing a “no-deal Brexit”, many UK fintechs unicorns such as Revolut, TransferWise, Monese and Monzo have either applied or are considering applying for licenses in EU countries other than the UK, in order to secure the continuity of their businesses in Europe.
As previously mentioned, certain fintechs are only tangent to regulated activities and do not require licensing or authorisations to undertake their activity. This is particularly true for regtech companies. Feedzai and Loqr are two great examples of Portuguese regtech companies with increasing cross-border success and Fractal is a great example of a regtech’s company operation out of Portugal. In this context, incumbents are able to outsource their demand for technological solutions to regtech companies that specialize, for example, in fraud prevention, anti-money laundering, prevention of terrorist financing, onboarding of new clients and cybersecurity through data science and AI, and without the high cost in R&D.
ortugal has recently seen some full licensing applications, particularly from crowdfunding platforms. With currently six platforms licensed and operating on a lending-based model (with one of six also undertaking
Finally, it is also clear that European regulators emboldened the growth of the fintech industry. Supervisory and regulatory authorities for the banking, securities and insurance markets continue to promote innovation and embrace technological solutions to help consumers. In the EU the European Commission has developed an action plan for fintech and EBA, ESMA and EIOPA continue to closely monitor, produce reports and discussion papers concerning fintech which aims at leveling the field between European regulators and procure convergence in the approach and application of regulatory frameworks (which may also help to reduce certain regulatory arbitrage that may occur within EU countries). In Portugal, Banco de Portugal, CMVM and ASF have also devoted particular attention to companies working in fintech, acknowledging the specificities of this sector and the need for a more tailored approach, with Portugal FinLab being in the forefront of this regulatory initiative.
A REASONABLE CONCLUSION
A reasonable conclusion would be that, while still maturing, the European fintech landscape continues to afford a very favorable regulatory environment which should allow it to continue to grow and thrive. Fears of a “no-deal Brexit” will certainly continue to drive UK-based fintechs to continental European jurisdictions with Portugal becoming an ever more popular choice.
SMARTER HUMANS, SMARTER MACHINES:
A SPECIAL ZOOM ON AI & ML IN THE FINANCIAL SECTOR
KEY INSIGHTS FROM THE 2019 AI & ML GLOBAL STUDY
The use of machine learning is becoming the new norm for the financial community as the sector builds smarter machines to drive competitive advantage. In fact, according to the latest Refinitiv AI & ML study, 90% of financial firms are using machine learning and all c-suit respondents affirm it is a core part of their business strategy, while in 2017 only 28% of financial-services’ firms were deploying it.
THE DRIVERS OF THE ADOPTION
Data is core to the way financial-service businesses operate. Any innovation that makes better use of data and enables data scientists to combine disparate sources of data in a meaningful fashion, offers the potential to gain competitive advantage. We are observing key drivers such as the capacity to extract better quality information; increase productivity and speed in processes; reduce costs; and extract more value from data, which all contribute to the adoption of machine learning. The technology is experiencing an increase in the number of applications with more impactful results. While blockchain was a technology looking for an application, machine learning solutions are already in play in the market.
THE OUTCOME: COMPETITIVE ADVANTAGE
e predict that AI/ML will be the single greatest enabler of competitive advantage in the financial-services sector. In
the last few years, there has been an explosion in the use of machine learning, led by applications for image processing, natural-language processing (NLP) and machine translation. Because these new capabilities are largely based on open-source libraries, and can be deployed relatively cheaply in the cloud, the barriers to entry have fallen dramatically. We expect a flurry of commercial and product innovation from organizations of all sizes. Financial institutions have gone beyond experimenting with and testing machine learning, deploying it in key areas such as financial risk management, pre-trade analytics and portfolio optimization.
It’s not news that AI and machine learning are being tested and deployed in businesses of all types. But what is surprising is just how advanced the application of machine learning has become in the financial institutions that we interviewed. Our research shows that c-level business leaders are making significant investments plus have embraced these technologies as mainstream, using them not just to improve productivity, save money or cut costs, but also in key strategic areas including risk management and trading in order to differentiate themselves from competitors.
Unstructured data, as well as data from alternative sources, are increasingly important areas but need considerably more work before their insights are truly reliable. The adage ‘garbage in, garbage out’ has never been more pertinent. If data is the new oil, then much of it still needs a lot of refining and that’s a heavy lift for the consumers of data.
The survey shows that the devil is in the data: data quality (meaning data of poor quality) is the biggest barrier to the adoption and deployment of machine learning.
As financial institutions are actively using machine learning as part of their core processes, they will have an increasing need for more data, and especially that which can be readily accessed and is curated, normalized and tagged in order to be able to run complex algorithms and process massive financial-datasets.
“The most complicated task is to get data which is relevant, reliable and from a secure data source, which therefore has some statistical value.” said a participant.
The opportunity for financial institutions in machine learning is to tap into currently under-exploited sources of data and combine them with existing sources. Although machine-learning capabilities that enable these opportunities are developing rapidly, they are of no use if the data that feeds them is hard to find, poorly curated, dirty and inherently biased.
Financial institutions are further advanced in the deployment of machine learning than expected: 75% of firms are making significant investments in machine learning.
The main applications for using machine learning were in risk management (82% of respondents), followed by performance analytics and reporting (74%), with alpha generation in third place (63%).
Data quality is the primary barrier to machine learning adoption.
Alternative data sources are almost as widely used as market and company data.
There is a desire to use market data and alternative data sources in conjunction with companies’ own data, which requires the combination of disparate data sets.
Advances in machine learning have facilitated the use of sources of unstructured data, such as text-based market news.
C-level leaders are more likely than data scientists to say that machine learning is core to strategy which implies that there is a mismatch between the vision in the boardroom and the reality on the ground.
Data Scientists are more likely to see data quality as a barrier to the adoption of ML than their c-level leaders.
62% of c-suite respondents plan to hire more data scientists in the future as banks and asset managers seek to give themselves a data and technology edge over competitors.
The study also reveals a disparity in how technologies are being adopted and used around the world. Financial institutions in North America (the United States and Canada) are the front-runners. Asian institutions are more advanced in some areas than those in Europe, such as in machine learning being core to business strategy and the projected growth in numbers of data scientists. However, European organizations lead those in Asia in terms of having deployed machine learning. Here, greater availability of advanced tools is likely to materially level the playing field—on both buy and sell sides.
It’s no longer ‘if’ your organization should be utilizing artificial intelligence tools such as machine learning, it’s ‘to what degree’ they should be applied. Companies that hesitate will ultimately find they are behind competitors and could have to scramble to maintain or acquire their edge.
FERRARIS DON'T RUN ON WATER OR CRUDE OIL
t is equally, if not more important, to ensure the data you are using is of the highest quality possible. For in the end, data is just the beginning.
“We see a future of accelerating innovation fueled by wider availability of powerful cloud-based artificial intelligence and machine learning tools dramatically lowering entry barriers and thus changing the competitive dynamic across the industry. But no financial institution will be able to use the technology successfully unless the underlying data is machine ready.
We’re on a mission at Refinitiv to enable smarter humans and smarter machines. We started our journey in artificial intelligence and machine learning more than a decade ago to provide the technology, analytics and real-time, intelligent data for competitive advantage. This survey confirms the important role AI and ML play in the transformation of financial services and can aid your organization on its technology course. In the end, data is just the beginning.” David Craig, Chief Executive Officer, Refinitiv