Technology and the Future of Credit

Part
01
of three
Part
01

Future of Credit - 1

Customer data and AI enables banking providers to prioritize high-value activities and creative solutions around customer experience. As such, consumers would have a more streamlined and more straightforward interaction with their banks.

DATA AND AI FOR PERSONALIZATION

  • Artificial Intelligence (AI) enables the smart chatbots used to provide detailed self-help solutions for clients, thus reducing the workload at call centers. AI systems are intelligent systems that are continuously learning, adapting, refining their algorithms, and improving their results over time based on available data.
  • Customers are exact when it comes to personalization, with solutions such as receiving recommendations that they would not have thought of themselves, purchase guides when shopping for a product or service, mostly based on their previous activity.
  • Customers of financial institutions would like for their providers to know them, look out for their interests, and reward them regardless of the channels with which they patronize the institution, their location, or time.
  • As consumers give banks and credit unions access to their information, they expect to receive continuous value for such insights, such as providing them with information regarding their overall financial status on demand.
  • Using customer data and AI, customer experiences can be transformed to create new banking business models in the future. Banks and credit unions can drive loyalty by using digital assistants that manage routine inquiries effectively and provide personalized advice.
  • AI technologies will enable retail banking providers to prioritize high-value activities and creative solutions around customer experience. As such, "high-volume, recurring tasks can be automated at a lower cost."
  • Wells Fargo, Bank of America (BOA), and Chase are top US banks on top of this technology's implementation. They have each launched Mobile banking apps that provide reminders for their clients to pay bills, plan expenses, and have easier, more streamlined interaction with their banks.

VOICE-FIRST BANKING

  • Voice-first banking involves the use of voice and a contemporary intelligent agent or assistant to communicate and interact with consumers in the place of a human workforce. Voice-first banking is poised to transform customer engagement by making daily tasks much more straightforward for consumers. As many consumers would like their banking processes to be executed swiftly due to their already tight schedules, this technology would serve to eliminate typical lengthy waiting procedures.
  • Consumers favor the use of voice assistants, stating that cooperating with the same affords them a simpler and more streamlined service.
  • As such, many credit unions will transition from the standard account and dialogue sectors to handling transactions that revolve around voice commands. Such transactions could include making payments through the cooperation of voice commands or go as far as utilizing account notifications centered around voice commands or transferring accounts.
  • This technology has an outlook of enabling 50% of all banking interactions in the next five years.
  • As of 2017, institutions such as Ally Bank, US Bank, and Capital One were already engaging consumers through the use of voice assistants such as Amazon Alexa to enable consumers to obtain quick results regarding their finances, among other functions.

OPEN BANKING

  • Open banking, also known as open bank data, provides fintech providers with open access to consumer banking, transactions, and other financial data from banks and other non-bank financial institutions. This technology offers such access using application programming interfaces (APIs). It is one innovation that can transform the banking industry.
  • Under this system, banks grant third-party service providers access and control over the personal and financial data of consumers. These third-party providers are usually tech startups and online financial service vendors. However, consumers still have to give consent to the banks to allow such access, often by checking off a box in the "terms of service" screen of an online app.
  • This innovation would facilitate reliance on networks in place of centralization, thus allowing consumers of financial services to share their financial data securely with other financial institutions. The potential impact of open banking is quite numerous. "For example, open banking APIs could facilitate the sometimes onerous process of switching from using one bank's checking account service to that of another." By looking at the financial data of consumers, the API can also recommend the best financial products and services for them.
  • Besides the consumers, lenders would also have a more accurate description of a consumer's financial status and risk level. That way, they can offer more favorable loan terms.
  • Financial institutions of various sizes are moving closer to an open banking platform future as account aggregation is becoming more common.
  • Open banking initiatives are gaining traction among financial institutions. About 77% of US banks planned to make investments in this area in 2019. However, other countries such as Australia, Brazil, New Mexico, and Nigeria are already on top of this trend.
  • "Payveris recently announced a collaboration with VyStar Credit Union to develop an open-banking focused credit union service organization (CUSO)."

DIGITAL-ONLY BANKING

  • A digital-only banking proposition involves integrating new technologies and solutions to the existing design, brand value, and business model of a banking system. To do so, tech-savvy leaders would need to build technology using a consumer-centric approach. The institution could also utilize the technical capabilities of startup fintech providers to assist with such a development.
  • More non-traditional banking options are becoming readily available to consumers, which is facilitating the switch from banks to customized services and products. This was cited in a report by Accenture, where it was stated that "banking consumers in North America want it all — deals and discounts, convenience, relevance, and banking customer experiences that combine the latest in digital banking with human interaction."
  • Digital-only banking provides better deals and unique customer experience to consumers. They are also a less costly option for the banks implementing them.
  • According to the report, consumers do not mind sharing their data if it gets them what they want and would be willing to switch banks if they don't.
  • Citibank, for example, is developing digital-only products due to the trend of open banking and account aggregation.
  • In 2017, DBS Bank launched a digital-only bank called DBS Digibank.



Part
02
of three
Part
02

Future of Credit - 2

Technology developments such as cybersecurity, big tech companies entering the financial sector, blockchain, and cloud computing have noticeable impacts in the future of credit. For example, the prevalence of cybersecurity threats has led credit rating companies to incorporate cybersecurity risk in their credit ratings. As for Big Tech entering the financial sector, their lack of regulation and the transactional nature of their business might lead them to destabilize credit markets if they decide to pull out of the sector. More on these trends below.

Cybersecurity

  • Cybersecurity encompasses the processes and technologies used to protect systems, networks, and programs from attacks. Some cybersecurity technologies that the finance sector may use include targeted attack detection, threat intelligence, and security for endpoint, ATM, and point-of-sale (POS) machines.
  • Financial services firms experience cyberattacks 300 times more frequently than organizations in other industries.
  • Retail and commercial banks are vulnerable to cyberattacks as a result of becoming more digitized. This can result in financial losses, damage in brand value, and increased regulation which, in turn, will impact their credit standing. Financial services can mitigate these risks through enterprise-wide cybersecurity policy, its enforcement, and the implementation of preventive measures.
  • These cyberattacks can be costly when carried out. In 2017, 8.5% of data breaches in the United States were targeted towards the financial sector, including banks, credit unions, credit card companies, and mortgage and loan brokers. Across all industries, the average cost to US businesses per record stolen is at $225, but for financial services, it's $336. Attacks into online banking services alone can cost a financial institution an average of $1.8 million per attack.
  • The most common attack faced by financial institutions is consumer bank and credit card fraud, but these traditional attacks appear to be declining. The trend is moving towards mobile banking attacks and business customers. Banks in developing nations that haven't implemented strong cybersecurity measures are also the primary targets now.
  • Around 20% of financial services firms say that they are increasing their spending on cybersecurity.
  • In 2018, Moody's announced that its Investors Services Cyber Risk Group will start assisting the organization in incorporating cybersecurity risk in Moody's credit ratings.
  • The credit union sector has been proactive in investing in cybersecurity. The National Credit Union Administration (NCUA) developed the Automated Cybersecurity Examination Tool (ACET) for members, which helps credit unions assess cybersecurity preparedness. This common tool used by many credit unions is helpful since they typically do not have the resources to invest much in in-house cybersecurity.

Big Tech's Entry Into Finance

  • Big Tech firms such as Apple, Facebook, and Google, appear to be adding financial services to their business but shy away from the regulation that financial institutions fall under.
  • Although financial services are less profitable than Big Tech's primary business, their entry into the sector is driven by diversification, access to new sources of data, and to complement and reinforce their primary commercial activities.
  • In August 2019, Apple launched Apple Card, a credit card that the company created with Goldman Sachs as the issuing bank. Unlike most credit cards, customers can sign up for the card directly from their iPhone and, once activated, they can use it immediately with Apple Pay and the Wallet app. Apple Card comes with no fees and with cashback rewards.
  • Facebook, on the other hand, proposed its own Libra cryptocurrency. Because of regulatory pushback, the company transitioned it to support government-backed currencies.
  • Amazon has also created Amazon Lending to provide short-term business loans to Amazon sellers, specifically to finance additional inventory.
  • Companies like Facebook or Amazon, which collect data on users' buying behaviors, might apply their unfair data advantage in their foray into finance. Their approach to lending will likely be more technological and will not involve human intervention. If the credit market appears to be in trouble, these Big Tech firms might automatically cut lines of credit and destabilize credit markets as a result.

Blockchain

  • While traditional financial systems rely on centralized databases, blockchain technology allows financial institutions to run distributed databases that have ledgers that are continuously updated and synchronized. Blockchain also allows for "smart contracts," which self-execute based on previously arranged triggers. For example, an agent can automatically be given a commission after a sale, instead of going through a long approval and disbursement process.
  • Blockchain technology can help update and optimize the credit scoring system to include non-traditional financial activities such as bills payment or purchase history. Credit scores are typically computed based on loan repayments, which can prove problematic for younger people who aren't building their credit, as well as for the 1.7 billion adults globally who remain without banking or credit history.
  • In South Korea, Shishan Bank was granted a patent for a blockchain payment system with credit card functionality. When deployed, users will be able to make cardless payments using mobile device apps, instead of the current system with multiple intermediaries (credit card companies, payment gateways, and a value-added network service provider.) The bank has previously used blockchain technology to speed up the loan approval process, eliminating the manual verification of documents.
  • Colendi is a company that provides credit scoring based on blockchain technology. Users are assigned a "Colendi Score" that is generated by machine-learning algorithms using real-time, non-financial data such as smartphone data, social media data, transaction data, blockchain credit history data, personal data, and 1000 other data points.

Cloud Computing

  • Cloud computing is a way of delivering on-demand configurable computing resources such as storage, networks, and applications via a shared pool ("the cloud.") Since cloud resources are available over a network, users can typically access them regardless of their location or the type of device they use. Users can also rapidly scale up the cloud resources they use, depending on what they need.
  • The financial sector uses a variety of cloud technologies. This includes Infrastructure as a Service (IaaS), which provides them with pay-as-you-go IT infrastructures, such as servers and storage. The sector also typically uses public cloud services, which are operated by third-party providers and are made available through the internet. In 2018, financial institutions spent $37 billion on public cloud services, which grew by 21% from the previous year.
  • Since cloud computing affects digital infrastructure, it is expected to drive the rise of B2B payments, which are expected to reach $23 trillion this year. Cloud technology has also accelerated the growth of the fintech industry, and as a result, fintech accounts for 36% of personal loans in the US by dollar volume.
  • Cloud computing is also essential in handling the big data and machine learning processes required by the financial sector, specifically in the automated identification and investigation of credit card fraud.
  • Still, trust in cloud computing in credit companies seems low, with 83% of financial professionals claiming that they distrust cloud computing. This distrust might be heightened by highly publicized data breaches. For example, Amazon Web Services (AWS), a cloud computing provider, was implicated in the Capital One data breach in 2019. AWS hosted the Capital One database, but Amazon claims that the vulnerability used in the breach was a result of the application Capital One built, and not its cloud computing services.
  • Fiserv is a cloud technology provider that specializes in financial services. Services that they provide to credit unions include account processing solutions, helping credit unions develop stronger engagement with their members, and reducing the cost of IT ownership. Fiserv is the cloud provider for one-third of credit unions in the US.
Part
03
of three
Part
03

Future Technological Trends

Mobile money and Robotic Process Automation are two future technological trends in the fintech industry. Mobile money is driving financial inclusion across several emerging markets, and the fintech industry recognizes the increasing mobile-first and mobile-only consumer segments. On the other hand, Robotic Process Automation is a recent and rapidly growing trend in the fintech industry that is expected to yield a revenue of $1.2 billion by 2023.

MOBILE MONEY

  • Mobile money is a low-cost alternative to performing monetary transactions such as storing, receiving, and sending money as well as making transfers to the bank. It is helping to drive financial inclusion and close the digital divide in the fintech industry. It eliminates the burden of having to worry about internet banking, credit cards, passwords, and PINs, etc.
  • With consumers in the US pointing out "convenience, security, simplicity, transparency, and personalization" as the benefits of fintech innovation, there has been an increase in mobile phone payments, which is contributing to the increased adoption of fintech money transfers and payment services.
  • Mobile money platforms recorded 690 million registered accounts in 90 countries as of 2017, and are evolving to be the leading payment platform for the digital economy in the future.
  • Life insurance and general insurance are some financial industries that are poised to benefit from adopting this technology to attract customers, establish, and renew new policies.
  • Consumers now expect that they should be able to use their mobile phones to meet their daily needs, and more fintech companies recognize the market for mobile-first and mobile-only consumer segments.
  • Mobile POS payments are expected to increase steadily in the US fintech market between 2018 and 2024.
  • About 31 emerging markets have reported an increase in their financial inclusion rates, attributing it to growth in active mobile money use.

ROBOTIC PROCESS AUTOMATION

  • Robotic Process Automation (RPA) involves the use of software and tools specialized in executing recurring, rules-based, and high-volume tasks. This technology helps fintech organizations realize superior business outcomes by extending their problem-solving potential and increasing employee productivity and accuracy. This technology has also demonstrated its ability to handle more than 8,000 fraudulent alerts per month with near-perfect efficiency (99%).
  • RPA combines automation with artificial intelligence to "aid the effective dispensation of banking activities, to manage those activities, and help banks comply more closely with regulators."
  • RPA activities might range from account opening and customer service to processing of loans, credit cards, and customer onboarding.
  • Using RPA tools, fintech companies can reduce the time it takes to process and activate credit cards, as they can handle validation and compliance rules more efficiently than the human workforce. They are also utilizing the same to "improve efficiency, accuracy, and timeliness of business processes and lower operational costs, as well as meet and exceed customer expectations at every point of contact."
  • It is a recent trend in the fintech industry that is rapidly gaining traction and is expected to yield a revenue of $1.2 billion by 2023, with a 400% growth from 2018. If deployed correctly, financial business stakeholders are expected to see a 10-25% cost reduction to run their business operations.
  • While financial institutions are still in the early stages of implementing RPA, it has been cited among the top fintech future trends beyond 2020.
Sources
Sources

From Part 02
Quotes
  • "“Big-tech lending does not involve human intervention of a long-term relationship with the client,” said Agustín Carstens, the general manager of the Bank for International Settlements. “These loans are strictly transactional, typically short-term credit lines that can be automatically cut if a firm’s condition deteriorates. This means that, in a downturn, there could be a large drop in credit to [small and middle-sized companies] and large social costs.” If you think that sounds a lot like the situation that we were in back in 2008, you would be right."