Automation, Artificial Intelligence (AI) and Analytics are changing the banking industry exponentially. The overall impact of these three forces is not a simple addition of their individual capabilities; rather it has a-multiplier effect. That is why I would refer to these three forces together as A3.
These technologies have been in action for decades but now a confluence of multiple factors is leading to increased use of these technologies and a potentially revolutionary impact on the banking. In fact, it is leading to a future where the concept of bank and the way we think of this institution itself will change. There are multiple factors that have now brought these technologies to the center of digital strategies of CIOs/CDOs in the new world. Some of them are elucidated below.
Technology as a Differentiator
Banks now take pride in saying that they are the leaders in technology. In fact, the CEOs of many banks (e.g. ING, DNB) have expressed that they aspire their banks to be tech companies with banking licenses. Banks are differentiated lesser by their product offerings and more by the customer experience they offer leveraging the power of technologies. As a result, banks are focusing on leveraging the power of A3 for building effective virtual assistants/chatbots, applications in fraud prevention/monitoring, AML, and KYC. These technologies rather than being enablers of banking services are now turning into core assets around which banking services are being built, as depicted below.
Availability and Capability of Processing Big Data
The data has increased exponentially over past few years. The technologies to store and process the data have enabled the valuable data analytics available to business and marketing in order to device the strategy to retain the customer base, capture larger share of the wallet, and attract new customers. Structured and unstructured data flowing in are now a resource that everyone wants to tap into. Technology advances in analytics such as Big data, data lakes with the tools such as Hadoop and Spark have turned data and analytics into focal points of banking strategies.
Increased Computing Power
The computing power has increased significantly over last few years and is more cost effective now. That coupled with availability of algorithms built in as part of programming languages such as R and Python has enabled the AI to be developed in a cost and time effective manner.
To understand the impact that A3 is having on banking, we need to understand what the key differentiators and entry barriers are for traditional banks.
Let us look at how A3 is helping non-banking players/Fintechs companies in breaking these entry barriers.
Block chain/distributed ledgers have already demonstrated how the need for an intermediary to bring in the trust factor in international trade. Banks such as DBS are already reducing the need for physical interactions and infrastructure by aiming to be virtually invisible through setting up digital banks with no branches. Basically, what you are trusting is the technology platform and the brand to provide you with the services and carry out the transactions. Hence, in the longer run, people will trust players such as Amazon and Google with strong technology platforms to leverage the best of A3 to provide better services and lower chances of failure than a local bank dependent on manual processes.
There are two key things which enable banks to bring in the required expertise to generate income on customer deposits or offer advice to customers– understanding customer need and understanding of market forces to be able to predict future potential of investments.
With availability of data from various public sources such as social media platforms, e-commerce sites, and in future even data held by banks with open banking/PSD2, analytics in banking will be key to critical value addition. Technology players/fintech companies with strong analytical platforms are also crucial to banks in understanding specific customer needs and provide tailored solutions.
Experience required to understand the current environment and market forces is substituted by the analysis of past data using data analytics. AI in banking will be able to predict future trends and potentials with greater accuracy than earlier algorithms/models. AI is not only able to analyze the past data better but is also able to adapt quickly to changes in market forces, hence bringing in better predictive analytics capability which will enable the strong technology players to play advisory functions better than traditional banks. However, human expertise will still be required to define the AI models which will be easy to acquire by even strong non-banking technology players from the market as supply will exceed demand with robo-advisors coming in.
Infrastructure and Data
With the primary channel being mobile and access to data of third parties through open banking/PSD2, there will be a level-playing field for non-banking players who are strong on A3 to be able to compete with the traditional banks.
With the power of AI and innovative risk models, fintech players can utilize the humungous data available to predict the various parameters for loan underwriting such as risk ratings and probability of default in a more efficient and precise manner than the traditional banks. This has alredy enabled them to tap the consumer loans, and small and medium business segments which traditional banks have limited coverage of. Automation of underwriting processes have brought in speed and ease which have further attracted more Gen X and Gen Y customers.
How the Future is Shaping
With this tectonic shift in the banking industry caused by the emergence of A3 as the driving force, the market leadership picture will be completely redrawn in next 5-7 years, as depicted below.
Strong tech players will capture the major market share and niche players will carve out their own space. Those with low maturity on A3 will either disappear (get acquired) or partner with fintech companies to ride the wave. We are already seeing many trends like tech players opening the platforms powered by A3 for services that were earlier provided by banks (e.g. Googlepay, Amazon Pay).
On one hand, A3 will force banks to cede market share to the new entrants, on the other hand, it will enable banks to get into areas in which traditionally banks were not there and hence generate the new avenues of revenue generation. While we are seeing marketplaces offering banking services (e.g. Paytm’s Payment Bank), we have also seen many banks offering their platforms as market places (e.g. HDFC’s Smart Pay). A3 will also power banks to offer new products taking a cue from its fintech peers as they have already done in many areas such as discount financing, payday loan, and peer-to-peer lending.