Technology’s role in financial services is undeniably transformative, and most financial services firms are either developing or implementing strategies to leverage the latest technologies. One BDO study found that 97% of financial services firms were making inroads into digital transformation four years ago. However, according to McKinsey & Company, only 30% of financial institutions that have undergone a digital transformation report successfully implementing their digital strategy, and the majority say they’ve fallen short of their stated objectives.
Today, we stand at a technological crossroads. Emerging innovations are shaping the future of the finance industry with unprecedented speed while also presenting challenges to decision-makers regarding change management, profitability, and successful implementation. This article will explore seven key technologies, predicted by experts, that are poised to revolutionize financial services.
1. Artificial Intelligence (AI)
AI is driving massive value creation in the financial services sector. It can be used to automate financial advice, customer service, fraud detection, personalized user experiences, analytics, and more. AI is at the top of our list because it underpins many of the financial technologies that are now coming to market.
According to Patrice Latinne, Data & Analytics Partner at EY Financial Services, “Banks and insurance companies have been working with artificial intelligence for several years now. All players in Belgium use AI in one way or another, albeit at different maturity levels. They fit AI into their business strategy and draw up roadmaps that evolve with the technology, their ambitions, and their priorities.”
Some of the key applications of the first generation of AI in finance include fraud detection, customer insights, customer communication, and forms of risk management. Generative AI, such as AI chatbots, is also on financial firms’ radars, but many are still waiting for clear legislation and guidance on how to use the technology.
According to EY, the EU is currently working on such a framework. it will go into force in 2025 and “ensure that AI systems placed on the European market are safe and respect citizens’ fundamental rights and EU values.” With many U.S. firms also eyeing the technology and tech leaders sounding the alarm that AI needs to be regulated, it’s only a matter of time before the U.S. puts forth guidance as well.
Blockchain technology has the potential to disrupt established financial protocols. It offers secure and transparent transactions, eliminates intermediaries, and enables faster and more efficient processes. This most obvious example of blockchain disrupting the financial services industry has been the advent of cryptocurrencies, as well as the volatile markets that came along with them.
However, blockchain holds immense promise in other areas of finance, such as security, payments, and trade. In fact, according to CB Insights, 90% of members of the European Payments Council believe blockchain technology will fundamentally change the industry by 2025.
Currently, businesses and consumers who want to transfer large amounts of money from one party to another must rely on an international wiring system that is both antiquated and expensive. Payments must be cleared through established clearinghouses, resulting in high fees and wait times that don’t support today’s speed of business.
Blockchain could feasibly “remove the middle man” in that equation, allowing parties to use smart contracts to authenticate transactions. Those smart contracts would be backed by millions of independent nodes (computers), which authenticate them based on the data on a blockchain.
Much of blockchain technology is still in the exploratory phase, but many financial firms are already applying the lessons they’ve learned from watching the volatility in the crypto markets. They’re moving forward with pilot blockchain projects or exploring other unique, albeit smaller applications of the technology.
3. Robotic Process Automation (RPA)
Robotic Process Automation (RPA) is an AI-driven automation technology that enables machines to mimic human behavior. Although it doesn’t get as much attention as AI itself, it could fundamentally change how banks and other financial institutions manage tasks and workloads.
In the financial sector, RPA can be used to automate mundane tasks such as administrative processing and customer service. This will free up employees to focus on higher-value activities, such as developing new products and services. It can also reduce costs by enabling financial institutions to scale operations with fewer people.
In addition, RPA allows companies to quickly develop solutions within existing applications or systems, without the need for costly integrations or coding. Finally, RPA can help financial firms better engage with customers by providing more personalized experiences and faster service.
For example, an organization could use RPA to automatically respond to customer inquiries or send out relevant offers based on a customer’s past behavior.
RPA solutions can be implemented quickly. Simple integrations can be up and running in as little as a few hours, whereas more complex implementations can take a matter of weeks — still relatively fast compared to other types of technology.
4. Cloud Computing
Cloud computing allows financial institutions to quickly scale their infrastructure, develop and launch prototypes at low cost, and leverage the benefits of data storage and processing in the cloud. This technology is not new, with almost every financial services firm on the planet using the cloud at least in some capacity.
However, cloud computing is no longer a subject delegated to the IT department. It is quickly becoming a strategic topic in the C-suite, as it promises to play host to next-generation financial products and forecasting capabilities.
According to Deloitte, “Banking and capital markets leaders increasingly recognize that cloud is more than a technology; it is a destination for banks and other financial services firms to store data and applications and access advanced software applications via the internet.”
5. Internet of Things (IoT)
IoT devices can collect and transmit data, enabling real-time monitoring and analysis of financial transactions and customer behavior. This data can be used to improve risk assessment, fraud detection, and customer experiences.
Furthermore, IoT is proving to be a game-changer in the insurance sector, where it’s being used to revolutionize traditional insurance models. For instance, in the car insurance industry, telematics devices are being used to monitor driving behavior in real-time, allowing for more accurate risk assessments and premium calculations based on individual driving habits.
In the realm of health insurance, wearable devices can monitor an individual’s health parameters, encouraging healthier lifestyles and reducing the risk of chronic ailments, which in turn leads to lower insurance premiums.
On the banking front, IoT devices, especially smartphones, are facilitating mobile banking, offering customers the convenience of conducting banking transactions from anywhere, at any time. IoT is also being leveraged for improved security in banking with biometric authentication methods such as fingerprint and voice recognition.
When it’s combined with AI, IoT can help financial institutions gain deep insights into customer behavior, enabling them to offer personalized services and recommendations, thereby enhancing customer experience and satisfaction. Thus, IoT is not only enhancing efficiencies in the financial industry, but it’s also paving the way for innovative products and services.
6. Open APIs
Open Application Programming Interfaces (APIs) enable different software systems to communicate and share data. They facilitate integration between financial institutions and third-party developers, leading to innovative products and services.
As the financial sector becomes more digitized, firms will increasingly rely on a patchwork of technology products to operate and deliver services to their customers. These technologies need to communicate and integrate, which is why open APIs are so critical.
One McKinsey & Company study found that 88% of banks believe APIs have become more important over the past two years. The study also found that 81% think APIs are a priority for business and IT functions. Most large banks are launching API programs and are allocating about 14% of their IT budget to APIs on average.
7. Enhanced Cybersecurity Suites
Cybersecurity technologies are now crucial to protect sensitive financial data and prevent cyber threats among financial services firms. Although cybersecurity itself is nothing new, the technologies that firms are using to protect themselves against threat actors are evolving.
For example, AI and ML are increasingly being used in cybersecurity to detect and respond to threats in real time. These technologies can analyze vast amounts of data and identify patterns that may indicate a potential attack, enabling security teams to respond quickly and effectively.
Extended Detection and Response (XDR) is a new approach to threat detection and response that integrates data from multiple sources, including endpoints, networks, and cloud environments. This technology can help security teams detect and respond to threats that may be targeting similar firms, enabling them to proactively combat threats before they cause damage.
Finally, many firms are enacting new mobile security protocols, leveraging technology like IoT to verify and protect proprietary devices.
Prepare for the Future of Financial Technology
As we stand on the cusp of a new era in financial technology, it’s clear that the adoption and integration of these seven technologies are no longer optional but essential for any financial institution seeking to remain competitive.
From AI and RPA to cloud computing, IoT, open APIs, and enhanced cybersecurity suites, these technologies are transforming the way financial services operate, driving efficiency, enhancing customer experience, and securing sensitive data. The future of fintech is already here. Contact us at OptionOne Technologies to learn how you can embrace these innovations, seize the opportunities they offer, and gear up for an exciting and transformative journey ahead.