Devil in the data

The financial services industry is going through dramatic changes as a result of changing customer expectations, the adoption of innovative technologies and the digitalisation of society in general. Contracts are being written by algorithms, artificial intelligence like the humanoid robot Sophia is evolving dramatically and people are trading with virtual money. The banking sector has also reached a digital crossroads.

Digitalisation. Digitalisation is the accelerator and the result of our fast-paced lifestyle. Similarly to other industries, the banking sector also faces pressure to digitalise. Digitalisation may impose significant cost burdens, but on the other hand it will help the banking industry to boost revenues by increasing efficiency, saving costs and mitigating fraud risks. Customers in the 21^st century expect to be able to handle their financial transactions on every possible device at any time: it’s the user experience that counts. In addition, they appreciate innovative services like being able to check their bank account balance through Facebook Messenger or using a money application on their smartphones to arrange for automated small-scale savings from their account each week. Banks have to catch up, otherwise the market may find a way to create substitutes for these services.

Besides the ‘fintech’ (financial technology) companies, another threat or opportunity (chose your standpoint) for the banking sector is the presence of digital giants like Google, Apple, Amazon and Facebook, which have completely shaken up and reframed the industries they originally entered and which are now dedicated to entering new segments and markets such as financial services to broaden their services vertically.

Artificial intelligence. JPMorgan Chase, Wells Fargo and several banks are using AI for chatbots, security applications and even for contract review. But hang on a second! Wasn’t the 1987 ‘Black Monday’ stock market crash caused by automated algorithmic trading? Yes, it was. Thus AI research and development is key to helping decision makers to identify the appropriate areas and level for integrating AI into banking processes to minimise the risk of similar system crashes. 

Blockchain. Recent incidents relating to Bitcoin and other digital currencies have discouraged banks from focusing on blockchain technology. But remember the dotcom bubble? Lot of internet-based companies failed while the internet itself as the basis survived and evolved. Similarly, Bitcoin may fail but the underlying blockchain technology will most probably survive. For banks, “permissionless” open blockchain technology like the Bitcoin ledger may be less appealing simply because the potential risks are still less well understood. Therefore, banks are likely to focus on closed or “permissioned” blockchain technology.

Blockchain technology has great advantages but also has its limits. For example, it is currently unable to process transactions as quickly as the traditional systems of banks and credit card companies. If this feature bug is eliminated without compromising the level of security and proof, theoretically the bank account balance registers of each Hungarian bank could move to a shared blockchain system. If so, a customer transferring money to another customer at another bank would not need to run the operational risk of two banks and the GIRO system as an intermediary.  

Some financial service providers are already developing their own blockchain system. There is no standard widely adopted yet, so there may be a race for the upper hand in permissioned blockchain technology, similar to the race between Blu-Ray and HD DVD technology in the early 2000s, allegedly won by the latter – until the entire concept of storing media on discs was swept away by Netflix and other video-on-demand systems.

Summary. As digitalisation technology, AI systems and blockchain technology get more sophisticated, banks are looking to this technology to gain an edge over the competition. This is the way forward in this innovative and collaborative landscape. Everybody is talking about the digital era in banking, without exactly defining what it is. Thus the question remains: are we there yet? The answer is 42.