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Apps. Contactless. Bots. Blockchain. Biometrics, AI, The Cloud... . The financial services industry has committed itself to digital innovation over the last 10 years. It’s just the start.
Banking might seem like a traditional industry. But it has always innovated. From bank notes to cheque books to credit and debit cards, the banking sector’s big ideas have reverberated across the world.
The current pace of change, however, is at another level. Today, technological innovation is re-defining how banks operate and the services they offer to customers.
In fact, it’s even re-framing what a bank is.
Let’s dive into seven of the biggest trends we can look forward to.
#1. Digital innovation starts a new age of self-service
James Brown sang: ‘I don't want nobody to give me nothing. Open up the door. I'll get it myself.’
The Godfather of Soul was expressing – in his inimitable way – the human desire for autonomy. It’s a universal feeling. Any time that consumers are given the opportunity to take back a little control, they take it.
People also want instant gratification. Today, the desire for immediately delivered services is just as strong as the demand for self-service. It brings to mind another song lyric, this time from Queen. “I want it all! I want it now!”
Banking is a good example of an industry that has met these needs. Across its history, customers have always gravitated to self-service innovation – a process that started with ATMs and is now evident in the rise of mobile banking and chat bots.
The speed with which the mobile app has displaced the physical branch has been remarkable. According to 2021 research by Ipsos-Forbes, 76 per cent of Americans say they used their bank’s app in the last year for banking tasks such as depositing a check or viewing account balances.
But today’s apps do much more than providing an alternative to these ‘everyday’ banking services. Thanks in part to competition from fintechs, the banks have enhanced their apps with a constant stream of useful new features. Examples include:
• Financial planning
Many banking apps now let customers group their payments by type. This way, they can see at a glance where their money is going. They can set caps on, say, coffee or personal grooming and receive alerts when they are near their limits.
• Turn a card off and on
If a card is lost or stolen, it’s easy to disable it from the mobile app. Consumers can easily lock the card with a few taps on their phone. They can also report fraud directly from the app, or order a new one and use it to pay online or at stores right away. These features are proving incredibly popular. More than one billion people now use mobile wallets.
• Spare change investing
Here’s an easy way for consumers to save: round up the money spent in a store and invest the ‘spare change’. For example, buy a coffee for $2.75, and let the app round it up to $3 and then invest the 25c. Many banking apps now offer this feature to their account holders.
#2. Contactless payment: set to change the way we pay
Contactless payment took a while to take off. However, by the end of the 2010s take-up was growing fast. Then, in 2020, the pandemic accelerated this usage. Now it’s ubiquitous on cards, mobile phones and wearables.
Rising upper limits on contactless payments have helped. In the UK for example, the ceiling started at £15 in 2014, then rose to £30, before moving to £45 in April 2020. In October 2021, the limit was increased to £100.
Data shows what a difference this made. In July 2021, Visa confirmed it processed 1bn contactless transactions across Europe in 12 months. Its research also found that two-thirds of global consumers plan to increase their use of contactless payments in the future.
So there's no going back now. Customers are sticking with contactless. Indeed, Mastercard recently confirmed it will phase out its magnetic stripe cards from 2024.
Contactless payment was made possible by the introduction of Near Field Communication tech. NFC is an upgrade of RFID technology – a chip that enables short-range communication between compatible devices. These devices can be anything from a card to a tag to a smartphone.
But how does it actually enable in contactless payments? Let’s go deeper.
How does mobile payment work?
When phone makers started to put NFC and QR tech in their handsets, they made it possible for phones to become payment devices. Using NFC, Google and Apple gave banks and card networks the ability to de-materialize payment cards and place them in wallets such as Google Pay and Apple Pay.
This is convenient for customers, since they can load multiple cards into one wallet. It’s also very safe. Why? Because the user has to unlock the app (with a PIN or biometric method) before tapping on the reader. Meanwhile the industry has created advanced security frameworks to protect the stored payment credentials.
In 2021, the industry unveiled an important new innovation to its Card Verification Method on Consumer Devices (CD-CVM). It launched the EMV biometric payment card.
Introducing a contactless card with a fingerprint sensor
The new EMV biometric payment cards embed a fingerprint sensor on the card body to provide an extra element of authentication. This is a breakthrough innovation – especially for those consumers who love the convenience of contactless but worry about the lack of PIN entry.
Biometric payment cards also make it possible to increase spending caps. Some issuers will maintain PIN code entry for exceptionally high transactions, but otherwise contactless without a PIN code entry will become the new normal.
It suits retailers too. No upgrade is required on the POS, as the biometrics check is directly performed on the card and nowhere else. Data is not kept on the bank's servers or sent over the air in store.
Various commercial deployments of these new biometric payment cards are underway. The biggest, by French bank BNP Paribas, is now rolling out in partnership with Thales.
Contactless payment extends to wearables
The other big contactless payment trend is extending the tech to new device types. Manufacturers are waking up to the idea that if you can put an NFC chip in a card, phone, watch or item of jewellery. As consumers become more used to paying with a tap, they are starting to embrace this idea.
Fintech start-ups are experimenting. In Japan, for example, EVERING recently launched a waterproof ceramic NFC ring. The battery-less product requires no charging, and marries fashion with technology. Thales provided the embedded chip and card personalisation services for the device.
Wearable payment devices look good and they are also very secure. EVERING users, for example, can disable the ring via a mobile app linked to their credit card.
#3. Banks are investigating new forms of biometric authentication
As we have seen from the contactless section above, strong authentication really matters. Passwords and PINs offer some protection, but they can be breakable – and people often forget them.
Biometrics offer a stronger protection: what you are, in addition to than what you know or what you possess.
Fingerprint ID may have started this evolution, but biometric innovation is now extending to more unique attributes.
Many banks and card firms are exploring facial recognition as a way of authenticating a customer’s identity. Mastercard has already launched its ‘Identity Check Mobile’ feature, which is better known as ‘selfie pay’. Here, the cardholder can verify his or her identity using the facial recognition technology in the phone. It eliminates the need to remember passwords to confirm online payments.
This kind of authentication is not only safe, it’s also quick. It can reduce the previously time-consuming ‘analogue’ process of creating a new account to just ten minutes.
Another form of biometrics attracting lots of attention is voice. Speaking your identity is not only secure and convenient, it is also better fitted to situations such as driving – keeping hands on the wheels and eyes on the road.
A handful of banks have made it possible to make payments by voice. Royal Bank of Canada (RBC) lets customers ask Apple’s Siri assistant to pay their bills. Siri confirms the name from their payee list and the RBC app automatically debits the account and sends the payment, which is protected by Touch ID or face recognition.
It’s also worth considering the palm print. Palm-based identification relies on vein patterns, which are hidden beneath the skin. That makes them invisible and therefore a little safer than a fingerprint scan. In 2020, Amazon announced a payment system based on palm ID to be used at two of its stores in Seattle. The Amazon One scanner lets people pay by hovering their hand in mid-air.
#4. Banking as a service…can any company be a bank?
Warren Buffett is possibly the world's most famous investor. He knows what he is doing. In June, his Berkshire Hathaway fund invested $500 million into Brazil's Nubank.
It did so because Nubank is now the world’s largest challenger bank. It has 34 million customers across Brazil, Colombia, and Mexico, and a valuation of $30 billion.
Nubank is one of dozens of digital-first banks that are now challenging the incumbents. They have mimicked disruptors in other industries (music, media etc.) by re-thinking the conventional user experience and targeting a demographic that are comfortable with new digital behaviours.
Most of these companies have replaced a branch network with an app. They use algorithms to pull in all sorts of contextual information that’s useful for their customers. Thus, they send push notifications whenever a customer makes a payment and provide rich data about a customer’s spending and habits in easy-to-understand graphics.
They can do this because the underlying technological structure of banking is changing. In many regions, regulars have requested that banks open up access to bank accounts via bank APIs. This has radically changed the competitive environment.
It's even led to the idea of Banking as a Service.
This describes a model in which banks can integrate their services into the products of non-bank businesses. It means any company can offer services such as bank accounts, debit cards, loans and payment services, without needing a banking licence of its own.
They just get permission from customers and use APIs and webhooks.
In the UK, neobank Starling has rolled out a 'white label banking' service. It means that a fintech with a good idea can have its own bank account and payments capability without a banking licence.
#5. Machine learning. Efficiency that adds $1 trillion of value to banks every year?
AI and banking were made for each other. Artificially intelligent machines might struggle to stack boxes, but give them millions of documents to scan and they will humiliate any human competition.
This ability to analyse huge data sets to discern meaningful patterns is transforming banking. AI and machine learning can detect fraud, offer a more personalised customer service, improve the effectiveness of marketing, combat churn and much more.
The impact will be huge. Indeed, McKinsey estimates that AI technologies could potentially deliver banks up to $1 trillion of additional value each year.
There are so many examples already out there. But here are two that stand out. In the US, JPMorgan Chase launched ‘contract intelligence’, which it also calls COIN. The tech specialises in reviewing the bank's commercial credit agreements.
It says a manual review of the 12,000 agreements it issues every year takes 360,000 hours (or 173 years). COIN does it in seconds.
The second example is HSBC's Anti-Money Laundering (AML) system. HSBC teamed with Quantexa to develop a customer surveillance system that identifies suspicious patterns and potential criminal networks in both bank and external data. It screens 5.8 million trade transactions a year against more than 50 different scenarios that indicate signs of money laundering.
#6. Investing in the planet. Banking goes green
Not all innovation involves technology. Sometimes enterprises have to re-think their processes to align with customer concerns. Such is the case with green banking.
Green banking is a new trend that sees banks shift their strategies and activities to focus on sustainable technologies and environmentally friendly lending.
Investment is one area of focus. It is already having an impact. The American Green Bank Consortium says green banks drove $1.69 billion total investment in clean energy and energy-efficient projects in 2020 alone.
But on a more ‘micro’ scale, many banks are now re-thinking their products, services and processes to make them more sustainable.
Take single-use plastics. Banks use a lot of plastic material, so it makes sense to investigate how to recycle it. Suppliers such as Thales are on the case. The Thales Gemalto Recycled PVC card cuts down first-use PVC by 85%.
Recycling is also on the agenda. In September 2019, Thales partnered with a payment card issuer to announce the introduction of the first-ever bank card made with 70% reclaimed plastic collected from beaches, islands and coastal communities. Each new card is made from approximately one plastic bottle.
And finally, Thales has even launched a card that doesn’t use plastic at all. The Thales Gemalto Bio-Sourced Cards is made from Poly Lactic Acid (PLA), which is produced from non-edible corn and is entirely biodegradable.
#7. Blockchain: the next big revolution in digital banking?
In a sense, it’s possible to see most banking services as the process of moving assets from one account to another. Viewed this way, banking is all about databases – and finding the safest and quickest way of transferring information between them.
For a growing number of specialists, blockchain offers a much better way of managing asset transfers than the current system. Blockchains are distributed ledgers, so they are not owned by a single entity. They cannot be manipulated and are accessible to all.
Proponents say this makes transactions cheaper and faster. And since asset provenance and credit history are recorded as immutable components, transactions become less risky.
One area where the blockchain is making impact earliest is cross border payments. According to the blockchain firm Ripple the current method of international payments, SWIFT, relies on ‘disco-era technology’, which debuted in 1973.
Unsurprisingly, Ripple thinks its crypto-based alternative solves the 'problem' of international payments. So, what is the problem?
Well, even in an era of near-instant domestic payments, a cross-border transfer can take up to 10 days and cost up to 10 percent of the value of the payment.
The reason for this is 'correspondent banking' in which banks hold accounts in overseas banks. They debit or credit these accounts when payments are made. But not all banks do correspondent banking, so they have to use partners. The complexity is compounded by the variety of bank processes, local rules and the fact that most processing is done manually.
Blockchain-based systems replace this with transfers using cryptocurrency. A bank converts money into crypto and sends it to the target country, which converts it into local currency and makes the payment. These trades are instantaneous.
Now, the central banks of many nations are looking carefully at the potential of blockchain. And some very well established corporates are now harnessing blockchain too. They include Visa's B2B Connect network, JPMorgan Chase's Liink and IBM Blockchain World Wire.
It seems certain that technological innovation will transform banking as it has other industries. A world of change is coming. What your banking service looks like – and who provides it – will never be the same.
Biometrics in payment: the case of the biometric bank card (white paper)