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The digital future of financial services: Tech and beyond
Technology is changing the financial services industry, and the digital future poses both value and risk to banking transactions.
The future of financial services has arrived
A couple of years ago, our Center for Financial Services produced a series of longer term outlooks for the financial services industry. The common thread across many of the topics covered was how exponential advances in technology would reshape the industry. Since then, potentially transformative technologies have emerged, challenging leaders to rise to the occasion, as discussed in the firm’s new Tech Trends 2019 report. Digital experience and reality; cloud and cognitive; and other forces covered in that report are impacting banks, insurance companies, investment managers, and real estate companies.
As important as technology is to the industry’s future, I harken back to a workshop I led a few years ago that was attended by many transaction banking leaders from some of the world’s largest global banks. Many in the audience pushed back on the notion that they should be thinking of themselves as technologists, instead saying that their core skill was in managing and pricing risk.
Reminded of their reactions, I thought I’d share my view of how tech and other trends are impacting the financial services industry. Let’s dig in.
Digital identities in the financial environment
The digital human: Our identities increasingly are a complex mix of descriptors that we associate ourselves with. In addition, we are leaving a digital trail as we move through the physical and virtual worlds. All these things—who we are, what we do, how we feel, and what we think—combine into a new kind of identity, which is an asset to be managed and safeguarded. This identity will be useful to financial institutions in many ways. Individuals will become the “payment card” that initiates transactions, and our identities will provide a new source of information for product marketing and risk management. How do firm marketers navigate the line between valuable and creepy? Which leads us to…
Artificial intelligence and cyber: Rapidly increasing computing power and analytical software capabilities have the potential to combine in unintended and unanticipated ways. It’s true that some of these developments are subject to hype and misinterpretation1. But if you look at, for example, the capabilities of generative adversarial networks (GANs) to generate very realistic, but completely fictional, human images2, and combine that with mobile phone cameras’ ability to create animojis, you’ve got something that financial services risk managers should be thinking about. How can banks protect their customer identities and their own production systems as technology outstrips humans’ ability to manage it? What new vulnerabilities will be created?
Aging in place: A recent report we produced in collaboration with the World Economic Forum talked about talent becoming a “people + automation/technology” combination. This is about the aging of that combination, especially at firms in the developed world. People and technology that together entered the industry in the 1970’s are now reaching the end of their productive lives. At some point, financial institutions, especially in developed markets such as the US, Canada, Europe, Australia, and Japan, can’t keep kicking the can down the road. At least, not with technology. On the talent front, financial institutions will need to accommodate the needs of aging workers to allow career elongation opportunities. And perhaps they will need to customize investing advice for multi-decade retirements as well.
BigTechs: Large technology companies are increasing their influence in the industry, both as partners and competitors. Large providers of cloud services to the industry are enabling firms both to take their core systems of record to the cloud and to offer new ways to gain advantage from cognitive processing and the accompanying storage of new forms of data. At the same time, tech mergers in the industry continue, and many types of technology firms are experimenting with providing financial services themselves. Speaking of which…
Industry convergence: Many companies in other industries (tech, consumer, automotive) are enabling or looking to enable financial services as part of their value proposition. And leaders like to pitch the idea that their company is becoming a tech company. What’s the role for financial firms in this converged future? Firms have a central role in providing the fuel for commerce, but how can they capitalize on this without being relegated to utility status?
Other challenges and opportunities
Moving beyond technology trends, I see a couple of other issues that pose both a challenge and an opportunity for the financial services industry. They are:
Isolationism/fragmentation: Brexit writ large. With more authoritarian and/or isolationist regimes combined with regulatory frameworks that possess divergent goals (e.g., consumer protectionism versus inclusion), how can financial institutions—especially those that operate globally or in multiple regions—manage this complexity at any level of cost and capital efficiency? And what could happen to some of their core revenue streams (such as trade finance) if tariff activity increases?
Environmental, social, and corporate governance (ESG): While not a technology issue, financial services firms are looking at–or being looked at–for how to become better corporate citizens. This is true of firms across industries, as the next generation increasingly views ESG as an important attribute in their choice of companies they buy from and work for. For financial institutions, the list of ESG considerations includes leadership inclusion; financial literacy and inclusion; reputational risk; good capital stewardship; and a focus on providing responsible capital for growth, rather than speculative short-term investing or financial engineering.
I don’t know if those transaction bankers were right about becoming technologists, but perhaps a “back to basics” approach is worth considering. Industry leaders could indeed benefit by focusing their efforts on what they do uniquely well: Manage and price risk. As we noted in our 2019 Banking & Capital Markets Outlook, instead of trying to become more like a technology company or a trendy retailer, doubling down on the core of what financial services firms do—intermediation, transaction management, and risk transfer and management, all fueled by digital—may be the future play.
1 Vadim Berman, “The secret life of chatbots,” Techcrunch, September 6, 2017.
2 Jackson Ryan, “This website uses AI to generate startling fake human faces,” CNET, February 14, 2019.
QuickLook is a weekly blog from the Deloitte Center for Financial Services about technology, innovation, growth, regulation, and other challenges facing the industry. The views expressed in this blog are those of the blogger and not official statements by Deloitte or any of its affiliates or member firms.