In the years since the Millennial Disruption Index put the banking industry at the highest risk of disruption, and especially vulnerable to tech start-ups, survey after survey has validated that claim. In the latest edition of the Innovation in Retail Banking study that Infosys presents each year along with EFMA, half the bankers surveyed say that technology companies and start-up challenger banks pose high threat of disruption to their business.
According to these respondents, advanced analytics and Big Data and open APIs will drive disruption, followed by artificial intelligence and Blockchain over the longer term. Asked to score the impact of various disruptive technologies on banking models, 62% said advanced analytics and Big Data would make a high impact, and 79% said it would make at least some impact within two years. This may be seen as a progression of the findings in the 2015 study, which named analytics as the second most disruptive technology after mobility, and anticipated its impact would rise from customer intelligence, social intelligence and real-time analytics.
An example of this comes from ZestFinance, which uses Big Data for credit underwriting. The firm, which was founded in 2009, has helped lenders identify creditworthy borrowers and thereby benefited both parties with higher repayment rates and lower interest costs respectively. In China, where billions are without a credit rating, ZestFinance is using its platform to create credit histories based on shopping data.
Banks have also made large investments in analytics technologies. India’s Kotak Mahindra Bank uses customer intelligence and advanced analytics to identify dormant accounts with a chance of revival.
After Big Data and analytics, bankers (59%) felt open APIs had the most potential for disruption. In India, the Digital India initiative is pushing for greater openness in banking. But even without regulatory pressure, banks are feeling compelled to open up their systems to integrate further with the larger ecosystem, which is occupying a central role in banking services delivery.
The Infosys Finacle view is that a diverse ecosystem of financial services providers will come together to offer “universal banking”—a full range of offerings backed by the best possible experience and shortest time to market—in the truly digital paradigm. APIs would allow banks to join the ecosystem and also accelerate their innovation efforts by giving app developers access to some of their platforms.
Banks, including BBVA and Capital One, are taking a lead. The latter was among the first to open its platform to third party developers by setting up the Capital One DevExchange, complete with self-service registration, instant API access, sandbox testing facilities, documentation, code snippets and reference applications with sample code.
Blockchain, or the distributed ledger in general, has been touted as one of the biggest disruptive technologies of recent times. While 20% of bankers feel that the event is one to two years away, another 40% think it could take twice as long. In any case, banks have got busy developing a range of use cases, especially in the areas of payments and remittances, trade and supply chain finance, digital identity management, smart contracts, document security, loan syndication and treasury management.
Although it has slid from its top spot in the list of disruptive technologies, mobility, along with wearables, is still a force to reckon with. Basic mobile banking has gained sufficient critical mass and is now evolving its capabilities, especially in areas such as biometrics. The smartphone’s native capabilities—camera, mobile apps, and touch screen—make it extremely suitable for biometric authentication, and customers are more than happy to adopt. Biometric technology has made great strides and continues to attract investment as well as regulatory support.
In the coming years, banks need to sustain their investments in disruptive technologies to keep pace with fintech companies and other innovators. That they are cognizant of this is clear from the survey: By and large, banks are investing in technologies based on their potential for disruption. In our view, that’s the only way to go forward.
The writer is vice-president and regional head – growth markets, Finacle