Technological change is impacting four sectors, and the financial services industry is no exception to this. Financial services have already transformed tremendously over recent years. First there was internet banking, and then “chip and pin” services. Now there is “contactless” that allows a person to pay for goods and services without entering a card into a machine. Yet writing for Bank Innovation in 2014, Kosta Peric (of the Bill & Melinda Gates Foundation ) argues that there is a lot more yet to come. Indeed, Peric explains that:
“A new wave of technological change is right beyond the next hill, really in the next couple of years. Its most visible symptom is the hyper-connectivity to the internet”.
Peric argues that this has driven changes in a range of different areas, including the use of bitcoin, open APIs to allow consumers to carry out business services via the internet, open source hardware and applications and crowd sourced identity schemes.
Before exploring these in more depth it is helpful to understand the drivers of the change. There are a number of factors driving change in the financial services industry according to Kosta Peric. The first is that the internet can no longer be described as being in its infancy. It has been in existence for 20 years and the consequence of that is that people under the age of 40 have not really functioned without it too much in terms of at work or socially. Even younger people have never even known a life without it at all. These people have greater expectations of financial services (and other industries) than ever before. Another driver is that there are more than two billion people who have no access to financial services through the traditional systems. They have to use cash all of the time. This is partly because a lot of them may be inaccessible and in rural areas. However, as Peric explains, many of these people do have a mobile telephone and this can be used to help to include them in the system in new ways. The third change is that the way people use financial services is different. People now use smartphones and tablets to access financial services and perform tasks associated with managing their money. However, Peric explains that this is usually a complex process requiring the use of many apps. There are calls for a more streamlined approach to being able to manage financial assets. Peric believes that these factors ahead of any other are driving innovation in this field.
Looking at the four innovations in turn, Peric explains that they are:
1. Bitcoin – Bitcoin has been on a rocky road so far, and has been susceptible in some cases to hacking and other challenges. However, bitcoin is emerging as a currency, and is starting to develop the attributes that are likely to make it considerably more used in the general population. It is argued by Peric that once this develops further, these types of currency will be much quicker to use, more secure and even easier to use than current banking options. Customers will be interested due to the low cost of the system and no fees paid to intermediaries.
2. The Business API – a business API is an application programming interface that allows functions to be integrated with one another more easily. In this regard, APIs are able to “grow volumes from existing customers and attract new customers without friction”, argues Peric. APIs may allow consumers to be able to open systems in new ways. For example, a business named Stripe is working to provide businesses the ability to process electronic payments by using their APIs.
3. Crowd Sourced Social Media Based identity system – Peric argues that these systems will be helpful in better understanding your customer – a concept that he calls “Know Your Customer”. This helps to be able to more easily identify customers and confirm their identities, as well as to allow them to open accounts and process transactions. Steps are being taken to be able to confirm identities much more quickly and simply than opening many documents and checking them manually. It is argued that people’s digital reputation will form an important role in this process going forward.
4. Open Source – open source is being used to work on coming up with solutions for many different financial systems and problems faced. This is helping to drive innovation in the industry. It will eventually enable customers to own their own accounts and operate them themselves, and to combine different financial services via platforms.
At Bank Innovation 2014 in Seattle, Kosta Peric describes how innovation can take place at banks using his metaphor of “the castle and the sandbox. An excerpt of his talk can be watched here:
Paula Newton is a business writer, editor and management consultant with extensive experience writing and consulting for both start-ups and long established companies. She has ten years management and leadership experience gained at BSkyB in London and Viva Travel Guides in Quito, Ecuador, giving her a depth of insight into innovation in international business. With an MBA from the University of Hull and many years of experience running her own business consultancy, Paula’s background allows her to connect with a diverse range of clients, including cutting edge technology and web-based start-ups but also multinationals in need of assistance. Paula has played a defining role in shaping organizational strategy for a wide range of different organizations, including for-profit, NGOs and charities. Paula has also served on the Board of Directors for the South American Explorers Club in Quito, Ecuador.