Transforming financial services beyond digital

By Daragh O'Byrne | 10 October 2018

Digitization is everywhere – it’s a topic for virtually every industry forum, banks are either committing to ‘digital everything’ strategies, appointing digital banking chiefs or increasing their technology budgets. Some are even launching “digital-only” subsidiaries as a faster way to go digital. Books about banking are stuffed with digitization trends and threats. Even the industry analysts are getting in on the act – with one company creating a digital version of their firm.

Clearly, digital is mission critical but extreme care needs to be taken when evaluating what is and is not ‘digital’.  Technology vendors are touting their latest digital solutions, which begs the question ‘if a bank isn’t digital today does that mean it is analog?’ Are they running on analog computers which need to be replaced with digital computers?

Some people would argue that the slide rule is analog computer – and this was invented in 1662. Later, in 1872 Lord Kelvin invented the world’s first modern analog computer – one that was designed to predict tides. By the 1940s fully automatic digital computers existed – including the Z3 and ENIAC. If digital computers have existed since before banks adopted information technology in earnest, then how can banks not be digital today?

Of course many people argue that it isn’t the technology itself but rather how it is used. They further point to customer convenience – perhaps even citing the way Amazon has transformed retail, even pointing to the dramatic decline in the number of book shops as a guide for the future. While it is true that Amazon has had a transformative effect and in many ways, they are innovative, they are also building on an old concept. Take for example the idea of buying a home from Amazon. There are examples on their website, but here they trail the Sears Catalog which sold more than 70,000 homes across the US from 1908 to 1940. More than 370 designs were shown in the catalog and everything the customer needed was included in the kit. These homes even had the latest technology – central heating, plumbing and electricity. By 1912, Sears was even offering financing options.

Digitization in financial services is about much more than automation, it is about much more than offering products and services in mobile devices. Think about the following example: you are considering buying a home, so in addition to walking around the property, you typically drive past the house again and again. When you stop outside the home, your AI-powered assistant – on your mobile – says: “I see you are at number 32 again, I know it is for sale, and it is in your price range, so I’ve taken the liberty of negotiating a number of home loan offers. Here are the top three and I recommend this one because it has a great life assurance policy. Do you want to go ahead with the purchase?” And when you say yes, the keys are delivered the following day by drone.

Sounds far-fetched? But many of the components needed to make this happen already exist – facial recognition and state identity schemes can be used to establish that the people are who they claim to be. Credit information is available online and credit scores can be determined using a range of information even where credit bureaus are not established. So credit decisioning can be dramatically streamlined. AI can be used to ensure there are no legal, financial or policy impediments. Blockchain registries and smart contracts are already being used in some parts of the world to handle title transfers.

Disruptive innovation is usually considered to be a slow moving process – for example Sir James Dyson spent 15 years creating 5,126 failed versions of Dual Cyclone vacuum cleaner before he made the one that worked. And now Dyson generates more than $3.25bn in revenues. However, the pace of change of technology is accelerating, especially in areas where new innovations are based on combinations of previous innovations – for example, the smartphone wouldn’t be possible without touchscreen technology, lithium-ion batteries, powerful computers, high capacity wireless communications, low cost storage etc.

In financial services terms, many of the key innovations already exist – the next wave of transformation will be in how companies apply them to help make their customers’ lives better. Digitization in financial services is not about the technology – it’s about how you use the technology. In the pursuit of transformation, banks shouldn’t get lost in the hype, they should focus on delivering what their customers want, leveraging technology to deliver it. Retail banks did this with branch banking, ATMs, credit cards, hybrid savings products, etc. They can do it again. The ones who take the lead will end up being on the right side of the technology disruption life cycle.

We, at Nucleus Software are working with 150 of the world’s most innovative financial services companies to help them enhance the way they offer lending services of the future to their customers.

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