Convergence,Digital Xn,Digitization,FinTech,

Digital Bank of the Future

This Research and Analyst Note evaluates the digital technologies-based innovation and disruption in the banking and financial services sector by various non-core players, technologies at play, current established players' attempts to board the digital bandwagon, and provides a roadmap for the incumbent players to evolve and win in this space... along with charting the vision for the Digital Bank of the Future.

Evolution of Technology in Banking and Financial Services

Technology has always played a key role in the financial sector in ways that most people take for granted and might not ever see. A look at the timeline of the last eight decades paint a picture of continued technology-based innovation and evolution in the banking and financial services industry. The 1950s brought us credit cards to ease the burden of carrying cash. The 1960s brought ATMs to replace tellers and branches. In the 1970s, electronic stock trading began on exchange trading floors. The 1980s witnessed the rise of bank mainframe computers and more sophisticated data and record-keeping systems. In the 1990s, the Internet and e-commerce business models flourished. The result was the introduction of online stock brokerage websites aimed at retail investors, replacing the phone-driven retail stock-brokering model.

Evolution of Technology in Banking and Financial Services

Source: Convergence Catalyst Research

Now, in the early part of 21st century, with the exponential adoption and rise of digital technologies across verticals, the disruption of banking and financial services sector has been expedited. The impact of five key, current digital technologies on banking include:

Internet: Internet banking revolutionized the banking industry. Customers were able to log on from their home computer and see all of their accounts and information on their personal screen. Checking balances could be done, as well as making transactions and payments, validating images of checks and deposit slips, viewing previous statements, bill payments and transaction history could also be searched. It resulted in higher efficiency and time saving for both the consumers and the banks alike.

Mobile Apps: The rise of smartphones and mobile apps has made banking more convenient and accessible. Some of the latest mobile options in banking are designed to increase convenience, and banks are increasingly modifying the way they do business to appeal to the tech savvy, smartphone equipped customer.

Data Analytics: Data Analytics-backed solutions are enabling banks to not only manage the increasing cost of compliance, but also the risk (both monetary and of reputation) of non-compliance. Every single major decision to drive revenue, to control costs, or to mitigate risks can be infused with data and analytics.

Robotics & Artificial Intelligence (AI): AI and robotics are already being used in the financial sector and there are some major advances expected in the area. Banks are increasingly using AI for fraud detection and spot spurious financial activities. Robots are increasingly becoming capable of natural language processing, social and emotional intelligence, reasoning using logics, pattern identification, self-supervised learning, physical sensors, and mobility.

Blockchain: Blockchain’s key characteristics such as decentralization, immutability, efficiency, cost-effectiveness and security are leading to an increasing chorus of support for the technology’s adoption across the entire spectrum of banking for various services including payments, settlements, compliance, etc.

Rise of Non-Core Banking Players and Their Disruption Potential

In recent years, Fintech (short for ‘Financial Technology’) companies, which are mostly startups, have grown significantly in number – from about 1,000 in 2005 to over 8,000 in 2016 – and have harnessed many new cutting-edge technologies to offer various financial services, while sidestepping the legacy cost structures and regulatory constraints of incumbent banks and financial services institutions. These Fintech startups have also witnessed significant encouragement in the form of increasing venture capital investments, across sectors. In 2015 alone, an estimated USD 47 billion has been invested in fintech companies globally.

Total Global Investments in Fintech Companies (USD Mn, 2010-16)

Source: “The Pulse of Fintech” Report, Q2 2017 – KPMG; CB Insights

Technology startups are considered as primary threat and disruptors of traditional financial services industry and its way of working. Along with technology startups, a number of non-core players have been entering the banking and financial services domain, primarily through technology innovation and consumer interfacing. Each of these players could potentially disrupt the incumbent banks’ offerings and gain a stronghold in the Fintech space. Some of these players, along with their key strengths and disruption potential, include:

E-Commerce: E-Commerce players and e-tailers such as Amazon, Alibaba, Flipkart, etc., are likely to be disruptive by using their large data sets to provide consumer-focused fintech products and services such as payment wallets.

ICT and Large Technology Companies: Information and Communication Technology (ICT) players and large technology companies such as telecom service providers, mobile device manufacturers, software product companies, etc., are seen as potentially big disruptors to the financial services sector, as they are able to innovate faster (in technology) as compared to the incumbents.

Internet/Social Media Platforms: Internet and social media platforms such as Google, Facebook, Tencent, etc., are further entrenching their place as disruptors by leveraging their large consumer reach to provide new channels for customer service and business models.

Financial Infrastructure Companies: Financial infrastructure companies leverage their access to the core players’ network and operational knowhow to build their own innovative platforms and potentially disrupt the core players’ growth and evolution trajectories.

Core Banking Service Offerings and the Technology-Based Alternatives

Source: Convergence Catalyst Research and Analysis

Incumbent Banks and Financial Institutes’ Attempt At Digital Re-Imagination

Established banks and financial institutes have been trying to take a stand against being digitally disrupted and have been making attempts at adopting some of the technologies to re-imagine their offerings and processes. These traditional institutes have been primarily adopting three key themes in their fight against fintech-based disruption:

Open Innovation:For large organizations, this translates as a process of engaging with external technology solutions, knowledge capital and resources early on in an innovation process. Often it involves opening up the organization’s own intellectual property (IP), assets and expertise to outside innovators to help generate new ideas, change organizational culture, identify and attract new skills, and discover new areas for growth.

Germany’s Fidor Bank has established FidorOS3, a middleware with an open Application Programming Interface (API) that can connect to existing core banking platforms to offer a range of modern services including lending money to friends, sending money via Twitter and arranging an emergency 24-hour loan. Similarly, Spain’s BBVA has launched customizable interface called SEED, and Goldman Sachs through the online collaboration tool GitHub allows external coders to try and optimize its capital markets field.

Collaboration: In order to maintain and grow value in the current times of digital disruption, established players are looking to collaborate more closely with others in different industries and with different outlooks to identify new ways to generate value.

mBank, part of Commerzbank Group and Poland’s fourth largest by capital11, partnered with a telecom carrier - Orange Polska - in 2014 to begin offering a joint (white-labeled) banking service for phones and tablets. mBank is seeking to enhance mobile banking through an app that allows full online banking functionality using a smartphone and a PIN code.

Investments: Venture investing has always been at the heart of the startup innovation model. But now more than ever, established financial services firms are taking this route to try and generate innovation for their business.

American Express, BBVA, HSBC, Santander and Sberbank have all developed corporate investment vehicles over the last five years, each with at least US$100 million to invest. In February 2015 AXA, the insurance and investment management firm, launched a 200 million Euro fund to act as “an accelerating force for startup companies” in its areas of business.

Need for Taking the Middle Path

Traditional banks and financial institutes enjoy various advantages over startups and non-core players in the form of existing infrastructure (both technological and operational), regulatory compliance processes and frameworks, risks comprehension, scale, customer interface and most importantly, customers’ trust. Incumbents should leverage these competitive strengths to retain a stronghold on their business and the industry.

Any discussion regarding the technology’s impact on the banking and financial services sector seems to offer only two extreme options to the incumbent players – Either the risk of “digital disruption”, or, the push for “digital overhaul”. The correct path is somewhere in the middle.

To successfully evolve as technology-led players, while capitalizing on their inherent advantages, the traditional, incumbent players in the banking and financial services industry should:

Think Big, Start Small, Act Fast!: Most of the incumbent players in the banking and financial services sector are large, global organizations and the current multiple digital technologies led innovations potentially impact almost all of their business offerings, processes and operations. Admitting that the current and emerging digital technologies are here to stay and change the face of their business and industry forever, the incumbent players should develop a new long-term vision for themselves and a roadmap to achieve that vision.

Having established such a vision, the players should start small by developing and deploying new-age technology based solutions within a specific function/business process/geography. And, most importantly, they need to act fast by learning from their initial pilot projects and evolving them across an area, and eventually across the organization in a systemic, yet fast manner

We, at Convergence Catalyst, periodically witness large organizations successfully implement steps 1 and 2 – thinking big and starting small. However, most players falter in replicating the successes of early pilots in a repeated manner aligning with the bigger vision. In most cases, once the first few technology-led projects are successfully implemented, the bigger bureaucratic, multi-geography and hierarchy based decision-making process of the organization steps in and slows down the progress and smooth digital transformation of the company.

Deploy Skunkworks Teams: From a five-member team that worked on the developing the iconic RAZR within Motorola to the six-member team that worked on direct, internet-based streaming of movies at Netflix (while the company was a big player in DVD rentals), small – five-to-eight member – teams comprising of professionals with varied and complimentary skills sets, and with relatively easy access to resources and autonomy, working in a startup mode within a large organization have managed to re-invent and re-invigorate the fates of companies and industries many times. There are many examples of such turnarounds and evolutions in the technology industry

As established incumbent players in the banking and financial services industry embark on a technology-led re-discovery and overhaul, they should adopt the skunkworks model for developing and deploying technology solutions in order to stay relevant and competitive in future.

Vision for the Digital Bank of the Future

An ideal digital bank of the future would not only offer payments through fiat and crypto currencies, but also has fully integrated marketplaces for various value chain players enabled by a multitude Mobile and AI/ML technologies, while offering a range of cross-platform service offerings to its consumers globally.

Some key characteristics and services of such a bank would include:

Global Onboarding: A mobile app based e-KYC (Know-Your-Customer) platform, for onboarding users from anywhere in the world in record time and requesting no more than necessary information. Integration with third-part service providers for tokenized KYC information sharing.

Universal Wallet: A single, universal wallet engineered to give users control over their fiat and crypto currencies, including easy management of various currency portfolios, simple transfer of funds between peers, etc.

Universal Card: A single, universal card for allowing users to spend both their fiat and crypto currencies across millions of online and offline locations worldwide

Improved Security: Use of Blockchain to provide maximum security and privacy to users.

Marketplace: An all-in-one, decentralized third-party marketplace platform for users to trade in stocks, buy assets using all forms of currencies and access to other fintech products.


An edited version of this research and analyst note has been published in Mint's Technology Review on 28th September, 2017.