Odelia Torteman leads the Deloitte Israel FinTech sector, covering FinTech, InsurTech and Blockchain. At the Financial Symposium of the European Forum Alpbach, she will discuss the hot topic of cryptocurrencies. Read more to get a first idea of her expert point of view.
What are the current main challenges for the financial sector?
The financial services industry is undergoing a profound change in the last couple of years, as a consequence of: new technologies, the entrance of non-traditional Financial Services players to the FSI arena and the changing regulation pushing towards openness. Other factors are the increasing transparency, lower barriers for entry in the market and the new customers' expectations, led by an increasingly connected world.
These changes expose financial institutions to several main challenges:
The modernized regulatory compliance in many cases requires both a technological adjustment and a change in the existing business models. For example, PSD2 regulatory requirements are forcing banks to provide access to previously internal environments and data, pushing them to consider and explore the "banking as a platform" model.
Banks strike the balance between in-house tech for differentiation and externalizing for efficiencies. Legacy platforms are complex, expensive to maintain and impede customer experience. Most banks’ IT-spending continues to be on the rise, while modernizing core infrastructure for agility remains a priority through investments in new technologies. Banks should strategically prioritize which technological activities should be owned in-house and which externalized, and to what extent.
Shift from a product focus to true customer orientation. Customer's expectation are of a real-time on-demand personal service experience. Financial institutions are facing a risk losing control of customer experience (CX) to more technical digital players, and hence should prioritize enhancing customer experience through all distribution components (e.g. client on-boarding, product origination, sales support, etc.) and explore new delivery platforms through Cloud, Micro-services architecture, API management, etc.
FinTechs and Big Techs
New entrants, led by tech giants and an ever-growing number of FinTechs, are eroding traditional banking revenue pools. These agile and flexible non-bank players have already entered the payment service markets, without the need to maintain heavy banking infrastructure nor to comply with complex legislation. As an alternative, banks could embrace FinTechs by exploring open APIs which could accelerate integration with the FinTech community, enabling to leverage and digitize existing services as well as to offer new ones.
Mitigating Cyber Risk
Newer technologies and growing interconnectedness within the FSI-ecosystem are elevating cyber threats. The complexity and magnitude of cyber risk seems to be outpacing current capabilities. As a culture of due care, financial institutions should embed cyber security in business processes, strategy and innovation. They should focus on cross-domains improvement to identify areas in the organization’s security monitoring and respond capabilities. Financial institutions should prioritize and allocate security budget and resources to the most appropriate areas.
Reimagining the Workforce
The challenges mentioned are leading to a change in the required talent and work force of the Financial Services Industry. Automation will likely continue to transform the nature of work and, together with greater diversity in the labor pool, will lead banks and other FIs to rethink their workforce strategy.
Are cryptocurrencies a threat or a chance for banks and financial service providers?
We have seen some substantial developments taking place on the blockchain and cryptocurrencies domains in recent years, with new digitized assets and innovative financial channels, instruments and systems that are creating new paradigms for financial transaction and forging alternative conduits of capital.
User adoption of various cryptocurrencies have grown substantially with a combined cryptocurrencies market value estimated as of April 2017 on $27 billion, and millions of crypto wallets, many of which estimated to have been “activated” in the past two years. Companies based on blockchain technology are continuing to grow, raising an increasing amount of funds and remaining an engine of new business models and innovation. Cryptocurrencies, not just bitcoin, are now supported by a growing ecosystem, fulfilling an array of functions.
Thus, the crypto phenomena cannot be overlooked by banks and other financial institutions. It should be seriously explored for diverse applications, such as an alternative channel for trading and investing, as tokens used for specific use cases or for a business value chain, or as a new market share to be provided with traditional and nontraditional financial services.
However, in order for banks to truly engage and provide services to crypto companies, security and regulatory compliance issues have to be defined and met unambiguously. I believe that with the relevant and encompassing regulatory and standardization frameworks, financial institutions and banks could benefit from the advantages and new business models brought by this technology.
How can IT-systems become more resilient and robust in general? Is blockchain a possible solution?
IT systems and the professionals managing them have to consider many issues in order to fulfill organizational needs. From mitigating increasing cybersecurity risks to analyzing intelligently the ever-growing volumes of data, to managing newly adopted technologies, while adjusting to enable real- time on demand business logics.
In order to meet those challenges and others, organization are working to modernize their systems and practices to enable deployment of applications to cloud or mobile platforms, to helps improve business processes, workflow and communications while also integrating analytics, security and enterprise content management applications. I believe that in order for IT systems to be more resilient and robust, organizations should apply APIs for simple integration from different backend applications, MicroServices for decoupling business processes from one another to enable operational flexibility, and explore becoming cloud based to enable ever-growing scaling.
Regarding blockchain as a solution for IT system’s resilience, blockchain technology can transform processes and operations to be more resilient and secure, as the technology features enable a high level of security and transparency due to its distributed character and the fact that each participants on the process (every node) has its own record of the data.
Yet blockchain technology does not "target" specifically IT systems or any other system within the organization. Rather, the technology targets a specific chosen business/operational use case. Thus, when considering implementing blockchain, one should always examine whether blockchain is indeed the most suitable technological solution which often won't be the case. Relevant applicable use cases for blockchain implementation will be the ones involving multipole parties on one value chain with low levels of trust among them.
To be more specific: How can the financial services industry benefit from the blockchain technology?
The blockchain and its distributed ledger character have many use cases for the Financial Services Industry, ranging from digital identity to payments, trade finance, supply chain workflow automation, automated legal contracts as well as multiple use case for the Insurance industry: from allocating insurers and reinsurers risks to smart contract enabling to pay claims automatically – just to name a few.
The key for a successful deployment of these use cases and for FIs to truly benefit, besides the technological and business consideration, lays on the real collaboration among the different players on each process. For example in order to enable financial international trade processes to be performed on a distributed ledger platform, both the banks, carriers, forwarders, traders and other parties of the international trading supply chain should align and agree to work on one shared platform.
Manager Risk Advisory