Which Technologies Are the Future of FinTech?
September 27, 2018
The world of Financial Technology or FinTech is becoming increasingly more complicated due to increasing digital financial transaction volumes, increasing risks of cybercrime and increasing regulations as a result. A recent report by BNP Paribas and Capgemini estimated that the total value of non-cash transactions around the world will reach US$726bn by 2020, a huge increase over the 2010 value of US$262bn. Some regions of the world are much more proactive than others in this regard, and some countries like Sweden are predicted to almost completely stop using cash by as early as 2023.
However as the financial industry becomes more digital, there is inherently more risk of cybercrime. Due to the increased risks of hacking and money laundering many countries have launched strict regulations to verify financial transactions online and unfortunately these procedures can be cumbersome to implement. Therefore while digital banking will continue grow, new technologies will be needed to onboard and verify customer identities and transactions in a more efficient manner.
Cybercrime is Growing as Banking Becomes More Digital
As the financial industry becomes more digital, cybercrime is skyrocketing. Banks are having a very difficult time dealing with this massive increase in transactions and cyber theft is increasing significantly. The International Monetary Fund (IMF) estimates that average bank losses from cyber attacks will be US$100bn per year, or on average 9% of an average bank’s income, but could be as much as US$350bn in a worst-case scenario. The report also found that cyber security was the largest threat facing financial institutions today, more than geopolitical risk, new regulations and Brexit. Ransomware, where data is stolen and then money is extorted from the target, has been especially effective against financial institutions in the past year. “Cryptojacking” where a company’s resources are used to secretly mine crypto currencies, is also a new and upcoming cyber security threat facing financial institutions.
Introducing ”Know Your Customer”
As a result of increasing online financial risks such as money laundering, terrorism and tax evasion, the government of the United States mandated verification procedures known as “Know Your Customer” (KYC) in 2002. Many other countries have since adopted similar regulations including the UK, Australia, Canada, India, New Zealand and South Africa. Major companies doing business with companies in these markets are also often also affected by KYC and hence it is a very important business procedure at the global. KYC policies include the following:
1. Customer Acceptance
A policy setting criteria for customer acceptance/rejection
2. Customer Identification
A policy setting criteria for how a customer ID is verified
3. Monitoring of Transactions
A policy aligning transaction monitoring with regulatory reporting requirements
4. Risk Management
A policy setting criteria to categorize customer risk.
Unfortunately KYC is Expensive & Difficult to Implement
Countries doing business with these nations, such as Japan, will need to be increasingly KYC Compliant. However, KYC is expensive and difficult to implement. The process involves a significant amount of paperwork which all must be very easy to retrieve at any time. Customers are required to submit identity documents, which require a huge amount of human labor to inspect. Often separate documents must be mailed to confirm one’s identity which takes a long time as it requires the use of traditional mail, and a back office must constantly prepare and manage all of these physical documents. According to one recent study, the average bank spends US$54m per year on KYC although big banks can spend three to five times this amount. The average time that it takes to onboard a new customer has increased to 32 days and has been increasing over time. Many companies have been forced to set up new divisions to handle KYC, and JP Morgan for example has 13,000 dedicated employees working on only KYC related issues. As more and more consumers use digital financial services this problem will significantly increase going forward.
Digital KYC Can Make KYC More Efficient
Fortunately authentication solutions can help banks better manage the KYC process. Technologies like AI, Biometrics and Blockchain will all be used to make customer on boarding and transaction verification fast, secure in simple and will ultimately reduce paperwork and man hours required, making it easier for banks to implement KYC. For example, AI services can be used to automate many aspects of KYC such as inspecting customer documents and making decisions about the risk profile of a specific applicant. Biometric services like voice recognition can be used to verify a customer’s identity without the need for verification questions. The Blockchain can provide a shared and unalterable ledger which can quickly and cheaply verify any transactions done on a shared ledger. All of these services combined can significantly ease the labor and time requirements of a KYC system.
Biometrics + Blockchain = Lower operating costs, Create a secure and convenient banking CX
Innovative financial institutions are already using new technologies with digital KYC. Japan’s SBI Holdings became one of the first financial institutions in the world to start integrating Blockchain technology and KYC. The system is being built in order to both comply with Japanese financial regulations and also to make the customer onboarding process faster, as many Japanese companies are struggling to keep up with the pace of verifying identities of new customers who want to trade and transact using digital assets. The system will use both cloud and Blockchain technology in order to keep a shared ledger which can easily identify a customer and verify transactions. The new system is expected to significantly decrease costs and improve security. By introducing the technologies mentioned above financial institutions can lower operating costs and create a secure and convenient banking customer experience.
In conclusion, as the financial world becomes more digital banks will struggle with security and regulations resulting in the need for more manpower unless new technologies are deployed to manage this coming growth. Existing regulations mandating customer verification are stringent and labor intensive and expected to become stricter going forward. Fortunately technologies exist which can ease these issues, especially technologies like cloud computing, Blockchain technology, AI and biometrics. Financial institutions should “future-proof” this future growth by deploying next generation FinTech solutions.