Traditional banking IT systems do not meet new service requirements due to the lack of a single standard for devices, an extremely long provisioning cycle and a lack of IT tools to automate O&M operations.
The emergence of new technologies, such as artificial intelligence (AI), big data analysis and machine learning, Internet of Things (IoT) and blockchain, mobile platforms and social networks, have impacted customer preferences and expectations, and therefore today financial institutions need to rethink current and develop new approaches to their service.
Tighter regulation has increased transparency and customer and government confidence in banks and financial companies, but also increased their operating costs.
Large companies that conduct their business using traditional methods have faced not only the threat of rivalry from new digital companies, but also from their traditional competitors, which have taken advantage of the benefits of digitalization.
The development of financial technologies brings not only benefits for market players, but also the threats associated with the spread of fraud in the financial sector, risks of loss of control and control over data and cyber threats.
Despite the fact that the rapid spread of coronavirus infection did not have a strong negative impact on the banking sector, by the beginning of 2021, a decrease in the profitability indicators of banks is possible.
Traditional banking IT systems do not meet new service requirements due to the lack of a single standard for devices, an extremely long provisioning cycle and a lack of IT tools to automate O&M operations.
The emergence of new technologies, such as artificial intelligence (AI), big data analysis and machine learning, Internet of Things (IoT) and blockchain, mobile platforms and social networks, have impacted customer preferences and expectations, and therefore today financial institutions need to rethink current and develop new approaches to their service.
Tighter regulation has increased transparency and customer and government confidence in banks and financial companies, but also increased their operating costs.
Large companies that conduct their business using traditional methods have faced not only the threat of rivalry from new digital companies, but also from their traditional competitors, which have taken advantage of the benefits of digitalization.
The development of financial technologies brings not only benefits for market players, but also the threats associated with the spread of fraud in the financial sector, risks of loss of control and control over data and cyber threats.
Despite the fact that the rapid spread of coronavirus infection did not have a strong negative impact on the banking sector, by the beginning of 2021, a decrease in the profitability indicators of banks is possible.
The financial services industry can reap many benefits from using distributed ledger technologies ( blockchain). Traditionally, the financial services industry is known for its consistently used tools and systems, for example, many banks use systems, some of which are 30-40 years old. Therefore, it is not surprising that the financial services industry is striving to introduce new technologies, because it saves a lot of money. By using a distributed ledger, the trading process is accelerated and cheaper, and banks have the opportunity to become more efficient. Some of the benefits.
1. Instant payments
Transactions can be made in a matter of minutes or seconds, while now the calculations take a week. With the help of blockchain technology, settlements become optimized for users, this will save a significant amount of time and money for both parties. Blockchain will eliminate the need for large numbers of staff in risk control and documentation departments. Thus, banks have a great incentive to study blockchain to optimize business processes.
2. Improved cost optimization
One of the main features of blockchain is that it eliminates the need for intermediaries and makes transactions between two individuals possible. Thanks to blockchain, the financial services industry will completely eliminate the need for useless intermediaries who charge fees for their activities. And if you share one system among several banks, then the costs for it will be even less.
3. Reducing partner risks
Since the transaction is completed almost instantly, this eliminates the significant risk that the counterparty will default on its obligations, which we often face today.
4. Improvement of the workflow process in connection with "smart"
The system of "smart" contracts will significantly reduce the time required for the production of documentation due to the fact that they will be automatically generated after the fulfillment of certain predetermined conditions. An important factor is the legitimacy of such contracts in terms of legislation, they can be fully oriented in accordance with the needs of a particular country. In this regard, R3CEV has adapted smart contracts within their Corda platform. Thanks to automatic settlements using smart contracts, especially complex transactions with financial assets will be more profitable.
5. Transparency
If access to the system is made available to government regulators, transparency among financial institutions will increase and the reporting and monitoring process by central banks will improve.
6. Increasing options for financial solutions in a crisis
In connection with the exploitation of cryptocurrencies or tokens, representatives of the financial industry have more options for resolving crisis situations. After the high-profile hack of Bitfinex, thanks to blockchain technology, they were able not to go bankrupt, and also to return some of the funds to five thousand users. Bitcoins were converted to US dollars and paid to Recover Right Token (RRT) holders in accordance with the recovery strategy outlined after the hack. In 2016, Bitfinex announced that clients affected by the hack would have to accept the loss of up to 36% of their assets, and converted the losses into BFX debt tokens specially issued for this purpose. If this had not been done, no compensation would have been discussed.
7. Improving dispute resolution and error handling
The key feature of blockchain technology is that any entered data is unchanged. They can be tracked in real time as a detailed event log is kept. This simplifies the dispute resolution and error handling process.
It is vital for the financial services industry to innovate and research new technologies to improve its products and services. If today they do not change their offerings and innovate, then new companies will destroy their business, as we have already seen in situations with various startups. Blockchain, or distributed ledger platforms, have many benefits for financial institutions.
Low technological efficiency
Solution: Leveraging machine learning which can increase the efficiency of a companiy by 20%.
Long deployment time for a financial product (up to two months)
Solution: Cloud for the financial sector that allows to to reduce time to deploy a financial product from two months to one day; one-click IT asset deployment; The ability to service up to 200 devices by a specialist.
Territorial distribution of points of sale and the need for quick access to documents
Solution that provides provision of a centralized archive of client files; integration with an in-line scanning system; dossier structuring by types of documents; control of the integrity of the package of documents.
High costs of implementing and maintaining a quality management system
Solution: a complex of software applications that ensures the effective implementation of management technologies: the organization of workflow and control of executive discipline, the integration of electronic and paper workflow, the creation of an electronic archive.
Significant reduction in the percentage of defaults and late payments
Continuous monitoring of a borrower data allows you to significantly reduce the percentage of defaults and late payments.
The ability to create complex, distributed and fully controlled workflows with minimal involvement of application vendors
Solutions based on modern technologies of service-oriented architecture allow you to create complex, distributed and fully controlled technological processes with minimal involvement of application vendors and due to this, in the shortest possible time, solve internal infrastructure problems and enter the market with new products and services.
Reducing operational risks and increasing management efficiency
Solutions that give managers and responsible persons an ability to receive in real time reliable information about the state of the key performance indicators of the organization.
Minimizing the cost of implementing and maintaining a quality management system
The automatic workstation of the quality manager and the formalization of the organization's processes based on the principles of BPM (Business Process Management) allows to automatically ensure compliance with the requirements. The introduction of a quality management system significantly reduces the dependence of the organization on the "human factor".
Digitalization is changing the structure of the economy and business models of companies, the share of emerging markets is growing in the global economy and finance, and the macroeconomic consequences of an aging population are already manifesting themselves as declining interest rates and rising asset prices.
The growing share of non-cash payments is changing the behavior of consumers, who are less likely to withdraw money from ATMs and more and more often pay for goods and services using smartphones and cards. In 2018, according to UK Finance, 5.4 million people (that is, almost every tenth Briton) never used cash, preferring non-cash payment methods; in Sweden, the use of cash has decreased by 80% since 2008.
Platform Economy: Online platforms provide ongoing and growing connections between suppliers and consumers, offering both comprehensive and cost-effective solutions. The largest financial services company today is China's Ant Financial (which includes the Alipay service) with over 1 billion users and without a single branch, just 10 years ago it was Citigroup with 200 million customers. Half of the world's financial transactions today take place outside the banking system.
The sharing and gig economy (the economy of sharing and freelancing) is changing the nature of employment: for example, in the United States, 90% of jobs that have appeared in the last ten years are created in the gig economy; in the UK by 2025, one in three workers will be self-employed - versus one in five today.
Big data: in 2017 alone, more information was created in the world than in the previous 5000 years. More than 4 billion people who use the Internet and over 40 billion digital devices leave multiple digital fingerprints, generating 2.5 quintillion bytes of data every day.
What does this mean for the financial market? Financial companies can support the emerging digital and platform economy by developing a variety of payment methods - efficient, fast, secure, low-cost and cross-border. Integration into e-commerce and mobile applications will allow people and businesses to conveniently and securely pay around the world.
For example, in the Netherlands, 60% of all e-commerce transactions are paid through the iDeal system, launched by the country's largest banks, which allows consumers to make online payments directly from their bank accounts.
Working through Uber, Deliveroo, and other platforms can involve irregular income, which is inappropriate for traditional lending models and cuts off gig workers from bank loans. The use of digital data can strengthen credit scoring and open access to credit for “undervalued” entrepreneurs (more than half of them have found an alternative to bank loans in fintech companies).
The financial sector, with the assistance of the regulator, could be engaged in the creation of a payment system of "tomorrow". In turn, the regulator should develop a national strategy for the development of payment infrastructure and regulation, in particular, support methods aimed at improving digital user identity and cloud technologies.
Artificial intelligence is performing more and more functions, and the financial sector is no exception. The use of machine learning can reduce the cost of provided banking services, ensure their reliability and efficiency. According to the Boston Consulting Group, which examined the Chinese financial market as a case study, artificial intelligence will increase the performance of the financial system by 38% within ten years, which is equivalent to a 27% reduction in working hours.
Financial companies can support all of these economic transitions. Through the use of machine learning and artificial intelligence, fraud protection will improve in the coming decade, financial services will become more personalized and cheaper.
But at the same time, legal, ethical, economic and social problems arise: for example, financial companies and regulators must consider ways to rule out artificial stupidity - errors based on incomplete data sets; how to establish responsibility for data loss and find ways to recover it; think over the protection of artificial intelligence systems from manipulation; maintaining control over it, etc.
Innovation and regulatory change can solve problems, but also bring new risks - or old risks in new forms. History shows that the balance between financial stability and the drive to foster innovation and competition is unlikely to ever be entirely successful.
In the field of cybersecurity, it is necessary to take care of ways to recover data - in particular, the US Sheltered Harbor initiative deserves attention. A cyber insurance market needs to be built to help companies manage the risks of a burgeoning digital economy: the global cyber insurance market is expected to grow to $ 8.2 billion by 2020.
Regulation must be proportionate to the risks: old rules that do not fit the new economy must be rethought or abolished.
The regulator will also benefit from more active technology adoption and digitalization of processes: as the report notes, the Bank of England's prudential regulatory framework is longer than the Old Testament.
To increase technological efficiency, it is possible to create a central repository of all statistical and regulatory reports with the ability to analyze in real time and drill down to microdata: this provides transparency for any data requests and low processing costs for companies. In the long term, regulators should choose to collect data themselves rather than requesting reports from companies.
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