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December 15, 2017

Innovation Unleashed

By Nilesh Vaidya

As digital transformation picks up speed, we’re witnessing major changes in the global financial services industry. Delivering a superior customer experience is top of mind, as customers increasingly adopt digital products and services and digital-only banks challenge incumbents to innovate better and faster.

To keep pace, banks are investing aggressively in digital transformation to enable nimbler processes, improve compliance, control costs, and improve profitability. They are also collaborating with fintechs to learn and acquire innovative approaches and technological capabilities.

To help understand this dynamic environment, we’ll examine some of top trends in the retail banking industry expected to drive future dynamics of the financial services ecosystem.

Advanced Authentication Finds its Voice

The increasing digitisation of financial services processes is increasing cybersecurity risks for banks. To minimise these new risks, financial services firms are continuously seeking new ways to manage the changing threat landscape. Many are exploring advanced biometrics-based solutions to create and maintain a credible identity system.

For example, a major global bank recently began allowing mobile bank customers to make direct payments by voice, using Siri on their iPhones. This intuitive, frictionless process helps make access to services easier, quicker, and more flexible for customers. In 2018, an increasing number of major banks will adopt Voice Payment Access technology, using platforms like Siri or Alexa, integrating these virtual assistants across the customer payments system.

Voice verification is simpler and more secure than traditional payment methods, and customer demand for this service is increasing.  For example, the number of voice payments in the United States alone is expected to quadruple over the next five years. Banks will expand their voice offerings in existing top markets as well as in emerging markets like India, where customers often lack basic reading skills, but are familiar with the operation of a smartphone.

Banks are also exploring new ways to leverage digital identification security beyond authentication. A number of banks are building solutions that go beyond authentication and cover the full transaction value chain, including intermediaries and regulators. These digital identity capabilities not only enhance cybersecurity, but also improve efficiency and help generate new revenue—while empowering customers to self-identify in a digital world.

Cryptocurrency and Other Blockchain Technologies Come of Age

Bitcoin has been in the headlines recently, as investors drive its value into the stratosphere. However, distributed ledger technology such as blockchain also offers tremendous potential for banks seeking to enhance the customer experience and better meet regulatory and compliance requirements. In the coming year, more blockchain-enabled solutions, currencies and payment methods will become available to consumers.

Cryptocurrencies in particular, and bitcoin especially, will move further into the mainstream—if not complete consumer adoption. Investments by Goldman Sachs, Visa, Capital One, Nasdaq, and The New York Stock Exchange in at least one type of cryptocurrency are strengthening its legitimacy and its potential for future consumer and commercial transactions. In 2018, expect to see traditional banks explore the development of networks that can support global cryptocurrency payments.

In particular, banks will test these technologies for uses such as anonymous, cross-border payments, to reduce the identity fraud and blackmail scams rampant within current cryptocurrency systems. Today’s mobile, tech-savvy customers demand services that allow them to control their money from any location—quickly and securely. To satisfy this demand, traditional financial institutions will increasingly partner with technology companies to implement these real-time banking services.

Banks are also looking to blockchain technology to support improved fraud detection, efficient and cheaper know-your-customer (KYC) requirements, and instant payments. For example, Ripple signed up more than 100 clients on its RippleNet blockchain network. When widely adopted and standardized, blockchain is expected to significantly reduce the efforts required to maintain and reconcile financial records, while minimising errors.

Compliance Strikes Back

Concerns about security and compliance are escalating as cybercriminals become smarter and employ new technologies and attack methods. Recent attacks, such as the Equifax breach and the WannaCry ransomware attack, exploited known vulnerabilities in the system, which could have been avoided had firms been more vigilant. Cyberattacks cost the global economy an estimated 1% of annual GDP. They can result in the loss or compromise of personal and commercial data causing financial institutions both financial and reputational loss.

To help mitigate these risks, regulators are increasingly focusing on data privacy. The UK announced a data-protection bill that gives consumers more control over their data. Regulators across the world are also introducing new cybersecurity regulations and standards that could impose heavy fines, injunctions, audits, even criminal liability on firms for a data breach.

Two new sets of regulations, the European Union’s General Data Protection Regulation (EU GDPR) and New York Department of Financial Services’ regulation on cybersecurity, are already in place, and more regulations from other central authorities are expected.

Many banking and insurance organisations find themselves under-prepared for this new legislation, and are scrambling to comply. The cyber insurance industry grew 35% in 2016 to 1.35 billion in terms of direct written premiums, as corporations seek to protect themselves from liabilities related to cybersecurity laws.

However, cybersecurity laws vary among different countries, posing a challenge for multinational companies operating across the globe. Financial services providers are concerned that compliance costs could rise sharply, and are seeking innovative and cost-effective solutions.

Being Proactive is Key

As digital transformation disrupts traditional business processes and introduces new competitive pressures, it’s more important than ever for financial services firms to find more effective ways to boost revenue, cut costs, and deliver a better customer experience. By proactively investing in the right technologies and services, they can position themselves to meet tomorrow’s challenges with confidence.

Nilesh Vaidya is Executive Vice President at Capgemini.

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