Article | April 6, 2020
The world is digitizing, and the world is digitizing because we’re seeking low friction and immediacy. We want immediate responses; we want stronger commerce connections that can scale up to more rapidly. So, within that framework, one can’t expect banking and financial services to stay the same as it has been, because ultimately it has to shift.
Artificial Intelligence is bubbling with a lot of energy at the moment, and so is Fintech. There has been a lot of investment going on in it, and it’s under so much spotlights. The rate of innovations and the abundance of new technologies have sprung up everywhere. Things from artificial intelligence, peer to peer lending, big data, block chain, crowd funding, digital payments, and Robo advisors, just to name a few.
We need to think about FinTech with two capitals T’s that is, TECHNOLGY and TRANSPARENCY. It’s more about technology, enabling the banking industry to do the wonder, and Transparency because it’s a sector where customers can make much more informed choices. But what has made Fintech go so unmask is just the pace of innovations in this space. FinTech has now moved from prevention to resilience. We are just at the tip of the iceberg.
Globally, the value of an investment in Fintech companies amounted to approximately 112 billion U.S. dollars in 2018, which was a record high for the sector. The annual value of global venture capital investment in Fintech companies is increasing and doubled between 2017 and 2018.
This is an industry that is hungry for change because the consumers are hungry for change, and so the big corporations, the incumbents are also ready to change. Consumers want seamless, frictionless experiences. They want all the pain points removed from their banking journey.
Table of Contents
• Artificial Intelligence- Paving the Way for the Future in Banking
- Embracing Conversational AI in Banking
- Driving Personalization in Banking through Artificial Intelligence
- AI-Model for Automated Credit-Scoring and Loan Processes
- Transforming Wealth Management with AI
- Utilizing Robotic Process Automation Software in Banking
• In Conclusion
Artificial Intelligence- Paving the Way for the Future in Banking
Artificial Intelligence has the potential to revolutionize how consumers and businesses handle financial transactions. There will surely be hits and knocks along the way, but AI is not going away anytime soon. It is the future.
FinTech companies want to deliver personalized and cost-effective finance products. To do so, they need to utilize large numbers of data from various touch-points. Introducing the financial sector with advanced techs like big data, artificial intelligence, and blockchaincan facilitate banking and finance go far beyond cashless payments and mobile services toward personalized customer experience that will transform FinTech in 2020.
Financial institutions now know their customers' behavior and social browsing history. The accelerated rise of Artificial Intelligence and machine learning has resulted in banks being able to reduce the number of operations as they embrace the power of automation. Artificial Intelligence facilitates real-time omnichannel integration of these insights to deliver a personalized one-to-one marketing experience for their customers.
AI’s potential can be looked at through versatile lenses in this sector, especially its implications and applicability across the operating landscape of banking.
Learn more: https://www2.deloitte.com/content/dam/Deloitte/uk/Documents/financial-services/deloitte-uk-world-economic-forum-artificial-intelligence-summary-report.pdf
The three main channels where banks can use artificial intelligence to save on costs are front office (conversational banking), middle office (anti-fraud) and back office (underwriting). Let’s explore more on how banks can use Artificial Intelligence to constantly innovate at scale:
Embracing Conversational AI in Banking
An artificial intelligence feature that is redefining customer engagement is conversational AI. It has been viewed as a cost-effective way to interact with customers. Nowadays, conversational interfaces represent one of the biggest shifts in banking user interfaces to date and are modifying how they obtain and retain customers and enhance their brand identity.
According to a study conducted by Juniper Research, chatbots can save at least 4 minutes of a customer service agent’s time. While saving 0.70 USD per query, in the process. Conversational AI has now become the preferred solution for productive customer communication among banks.
The universality of messaging apps, like Facebook Messenger, WhatsApp, Slack, Microsoft Teams or SMS, and the adoption of voice-activated assistants such as Amazon Alexa, Google Home, or Apple’s Siri are bringing conversations back into our banking experiences.
Conversational Banking Experience
For example, the Swiss bank UBS partnered with tech giant Amazon to merge its “Ask UBS” service with Amazon Echo. Customers can communicate with multiple banking processes, via the chat interface, such as reporting potential fraud on their banking cards, applying for an increase on their credit card limit, or getting a breakdown of their recent transactions, and more.
Driving Personalization in Banking through Artificial Intelligence
Customers need banking on the go. They are looking for more personalized experience and expect to transact with banks from the convenience of wherever they are. Data advises that businesses that offer personalized services achieve far better business outcomes. Giving the right individual experience through the right channel at the right time can make banking more personalized. AI can play a significant role in assisting banks to understand customer behavior by leveraging transactional and other data sources.
The Boston Consulting Group has estimated that a bank can garner as much as $300 million in revenue growth for every $100 billion it has in assets. All by personalizing its customer interactions.
• Artificial Intelligence enables banks to customize financial products and services by adding personalized features and intuitive interactions to deliver meaningful customer engagement and build strong relationships with their customers.
• Artificial Intelligence enables a higher degree of personalization and customization by tapping into information such as customer behavior, social interaction, and even health or important event dates, all to create a well-rounded picture of their customers’ profile.
• AI can classify prospects based on financial capability, family size, etc. and offer tailored products.
To carry out extensive personalization projects, banks are looking to collaborate. They’re now teaming up with fintech and software corporations to provide technological capabilities they do not maintain.
In 2019, the total value of transactions in the personal finance segment will amount to $1,092,496 million according to Statista. Remarkably, the market’s largest segment is robo-advisors, with total assets under management of $980,541 million. In 2023, the number of people using robo-advisors is predicted to be 147 million.
Organizations like Optimizely, Braze, and Crayon Data offer the financial sector the means to personalize the customer experience. Crayon’s proprietary AI-led recommendation engine, maya.ai, allows banks to create personalized digital experiences for their customers. All that with the help of machine learning algorithms.
AI-Model for Automated Credit-Scoring and Loan Processes
Artificial intelligence not only automates menial and repetitive tasks. It can be trained to take business decisions that normally require a specific level of cognitive thinking. Lending and credit scoring are the critical business for banks and directly or indirectly touches almost all parts of the economy.
Banks always relied on models and experts to make effective credit decisions. Now models are becoming sophisticated enough to replace experts. Banks and credit scorers are employing machine learning models to track customers’ credit records. And make well-informed decisions on loan approvals.
Banks and credit scorers are employing machine learning models to track customers’ credit records and data. And make well-informed decisions on loan approvals. The AI-based credit scoring model can score potential borrowers on their ‘creditworthiness’ by factoring in alternative data. The more data available about the borrower, the better you can assess their creditworthiness.
This data could include candidates' social media/internet activity and websites visited and online purchases history. By examining the online behavior of a borrower, these models can predict the most credit-worthy candidates for loans. And also predict who is most likely to back out.
In the new digital reality, AI-powered credit decision permits lenders to:
• Fast and secure loan origination process
• Automate borrower`s digital journey
• Find and filter unfit borrowers based on sophisticated proprietary models powered by deep neural networks
• Lessen the operational costs of origination
• Authorize unhindered scalability of the lending business
Transforming Wealth Management with AI
Wealth managers are positively deploying artificial intelligence (AI) to answer the needs of a new generation of tech-savvy high net worth individuals.
According to the 2018 Asia-Pacific Wealth Report (APWR) released by Capgemini, the APAC region witnessed a 12.1 percent growth in HNWI population in 2017, and a 14.8 percent rise in wealth, with the region, now forecast to exceed US$42 trillion by 2025.
One of the AI trends in wealth management is the potential for the technology to move beyond traditional tasks, such as KYC and risk management, to new centers of enhancing relationship management and client experience.
On the one hand, firms are investigating how they can make their relationship managers more productive. On the other, the new generation of clients wants predominant online services, assisting banks to examine how they can optimize their digital offerings.
“Consumers’ and SME’s behavior and needs are changing fast,” said Rosali Steenkamer. There is an immense data explosion with structured and unstructured data. Only big data-driven models, Machine Learning algorithms and Artificial Intelligence can tackle this to serve the right solution to the right customer. Traditional technology is simply not able to deal with these challenges.
-CCO and Co-Founder at AdviceRobo.
Relationship Managers are not motivated to capture datasets. The only solution is to encourage the front office to collect new data, as well as collaborate with colleagues who develop AI-powered products and services. Doing this will drive productivity for Relationship Managers and an enriched experience for their end clients.
Everyday tasks can be handled by AI systems, releasing wealth managers to concentrate on higher-level investment strategies. AI systems can also analyze client data to adequately create packages prepared for specific financial and social demographics. Utilizing AI in finance expands service offerings while also making them more customizable. With a variety of AI tools at their disposal, wealth managers are outfitted with the research and data insights essential to make quicker, more informed decisions for various clients.
Learn more: https://capital.report/blogs/how-fintech-is-shaping-the-future-of-wealth-management/8244
Utilizing Robotic Process Automation Software in Banking
This year robotic process automation (RPA) will continue to impact financial institutions, to help them be more efficient and effective, as well as help ensure they meet federal and state compliance requirements.
RPA is growing rapidly. Recent RPA trends and forecasts anticipate that the market for robots in knowledge-work processes will reach $29 billion by 2021. For the banking industry, robotics outlines a unique and underutilized way to increase productivity while minimizing traditional repetitive and manual-labor-intensive processes.
The accelerated rise of AI and machine learning has resulted in banks being able to reduce the number of operations as they embrace the power of automation. AI facilitates real-time omnichannel integration of these insights to deliver a personalized one-to-one marketing experience for their customers.
So, when we look at these phases of development in the Banking Industry, we understand that it’s not just about inserting technology into banking; there is a larger shift here. Part of the shift is around trust and the utility of the bank. Artificial intelligence and machine learning technologies allows banks to turn vision into reality. Whether you are ready for it or not the AI revolution is poised to provide exciting avenues for innovations.
Article | April 6, 2020
Robotic process automation (RPA) may be a relatively young technology, but it’s already secured a firm foothold in the financial services industry. In the UK alone, 72% of banks, insurance firms and other financial institutions are using artificial intelligence (AI) technology, according to Microsoft’s report, ‘Accelerating competitive advantage with AI’.
Article | April 6, 2020
BNPL (short for "Buy Now Pay Later") is a hot topic in the Credit space. The recent funding round of Klarna (one of the most known BNPL players on the market) of $639 million at a valuation of $45,6 billion makes it Europe’s most valuable startup and shows that investors predict continuing exponential growth for this service.
This anticipated growth is coming from an increased negative perception of consumers towards revolving credit lines, like credit cards. As a result consumers look for cheaper and more user-friendly and convenient alternatives. Especially the younger generation of millennials seems to be attracted by this offer, with 15 percent of them already uses BNPL today, i.e. 5 times more than older generations.
Combine this with the continuous growth in e-commerce for which this type of credit is ideally suited and you can get a feeling why such an astronomical valuation could be justified.
The result is an exploding market of Fintechs offering those promising services, like Klarna, but also Affirm, AfterPay, Cashper, Divido, ratepay, scalapay, Cofidis, LayBuy… Additionally incumbent players like PayPal and AmEx have also started attacking this market.
Although many praise this new product for its user experience and convenience and its promise to offer zero-interest rate credits to nearly anyone, many specialists are also highly skeptical about this new trend, as it can push people in unneeded debt for products they don’t even need.
But what is BNPL and where is this hype coming from? And how is it different from traditional consumer credit cards or 0% interest consumer installment loans offered already for years by car dealers, electric appliances stores or kitchen/bathroom dealers?
In fact BNPL could be considered as the modern, digital equivalent of those consumer installment loans. Its characteristics could be summarized as following:
A short-term financing product
For relatively small amounts, i.e. maximum 1-2.000 EUR as a total maximum credit amount at a specific BNPL vendor (aggregated over all purchases paid with BNPL)
Linked to a purchase of a specific product or service
Usually interest-free, i.e. instead the merchant pays a commission to the BNPL provider.
Very strongly integrated in the check-out process of the merchant. Till now mainly for online merchants (usually as an additional payment method offered via the webshop’s PSP), although BNPL vendors recently have started to expand also to physical payments. Usually this is done by the BNPL issuing a virtual credit card (which can be limited to a specific store) with which the purchase can be done (with the smartphone emulating a physical credit card), but it can also be done via a QR code (generated by the merchant and scanned by the customer or vice-versa).
An excellent user experience, giving a near real-time, frictionless and fully digital origination process of the credit, i.e. in a few seconds the BNPL credit can be opened.
Usually consisting of an upfront payment (typically 25% of the overall purchase amount) at the moment of purchase, followed by a predetermined (= fixed schedule) small number(typically 4) of installments at future dates (typically with intervals of 2 weeks, meaning duration of 2 x 4 = 8 weeks) to reimburse the remainder. These reimbursements are usually done automatically by linking a debit or credit card or direct debit to the BNPL provider. This method is called "Slice-it" (i.e. the payment is spread over time), but many BNPL provider also provide the "Pay Later" method, which is also ideal for online purchases, as it allows the user to usually pay 14 days after his purchase. This corresponds with the moment the customer has received the product and has decided not to return it.
Using a soft-credit score, which uses other info (like e.g. all details of your current and past purchases) than the traditional credit scoring systems and doesn’t affect your credit score (unless there is a late payment or a failing to pay). This leads also to higher acceptance scores (of around 90%) than traditional credits.
The merchant is paid right away and the BNPL provider takes over all the risks, like liabilities due to fraud, chargebacks, defaulting…
If you read those characteristics, this product seems great for all involved parties, i.e.
Consumers get a cheap (often "free"), user-friendly, disciplined (i.e. a fixed well-defined repayment schedule) and frictionless way of funding a purchase, which they may otherwise not have been able to afford.
Merchants can increase their revenues, i.e. multiple studies have showed that people buying via BNPL tend to spend more than if they would be paying with a traditional payment method (i.e. increase of AOV = Average Order Value) and abandon less their shopping carts.
Research has also showed that BNPL can act as a Customer Acquisition Channel as a growing number of users considers BNPL (to be available as a payment method) as a key decision criterium to choose one webshop over another. Additionally the apps of BNPL vendors become more and more marketplaces advertising all their partners.
Nonetheless BNPL is not all sunshine and rainbows. Several pitfalls can be identified, which could endanger its future growth, i.e.
Increased regulation: while many BNPL vendors have slipped through the cracks of severe regulatory supervision (i.e. in many countries BNPL vendors try to be exempt their product from the definition of a credit), the impressive growth of this credit product is about to change this. Regulation will fiercen, as a high percentage of consumers using BNPL already cope with financial difficulties to pay back their installments. One potential improvement could be to demand for more transparency, so that there is an aggregated view of all your pending BNPL payments at different BNPL players.
With more and more merchants offering this service, the product will become a commodity, meaning the advantage of being a "Customer Acquisition Channel" will disappear. One might wonder as well if it is desired that every merchant starts offering this payment method. E.g. in certain countries pizza restaurants are already offering to order your pizza and pay with BNPL. If consumers start using too much BNPL, it will become extremely difficult to keep a good financial overview and the advantages of BNPL like user-friendliness and a disciplined repayment schedule might disappear.
The operational and support model is not always top yet. As BNPL vendors take over all liabilities, it is unclear who is responsible for the delivery of a product. A few months ago I had myself a particular bad experience with BNPL. On a webshop I selected BNPL as a payment method, but never got any invitation to pay. The webshop didn’t want to send the item as they were not paid yet and they referred me to the BNPL vendor, who in its turn referred me back to the webshop. In the end, given the urgency for receiving the product, I said it could be cancelled, which required again a message to both parties. In the end everything got straightened out, but it was not a pleasant experience for me as a user, nor for the BNPL vendor and the webshop who both had a lot of work without any revenue.
A similar issue exists when deciding to return a delivered item and get reimbursed. As a consumer you will return the package to the webshop, but it’s the BNPL vendor who should cancel the BNPL arrangement. Often this requires a lot of hassle for the customer to arrange all this.
This shows the complexity of this model. In this kind of partnerships it is extremely important to align on responsibilities (cfr. my blog "Ecosystems - The key to success for all future financial services companies" - https://bankloch.blogspot.com/2020/11/ecosystems-key-to-success-for-all.html). Ideally as a consumer you would like to have only a relation with the webshop (given the strong embedding of BNPL in the checkout process it is difficult to make a clear distinction for users), i.e. the fact that other parties like the PSP and the BNPL provider are also involved in the flow should be hidden away for the consumer. This is far from being the case today.
With this product being used more and more, customers might also get a negative perception of this credit, as the zero-cost credit comes with a lot of hidden costs. First of all there are considerable fees and interests in case of missed payments (as much as 30% of the invoice amount), but additionally the BNPL vendor is still paid with a more traditional payment method, like a debit or credit card or direct debit. If there is insufficient funding on the bank accounts linked to those payment methods, customers will still pay costs for failed direct debits, expensive overdraft debt interest rates and/or credit card debt interests (which people tried to avoid in the first place).
Additionally BNPL tends to make the origination of a credit so easy, that there is a big risk of putting customers into financial issues for products they didn’t really need in the first place.
BNPL usage still negatively impacts the margin of the merchant. Even though BNPL can be considered as a means to attract additional business (revenue), the cost for the merchant is still considerably higher than other payment methods. E.g. VISA and MasterCard are typically situated around 2-3% transaction commission, while BNPL methods are typically situated between 2 and 8% (usually 4-6%).
Consumers tend to miss out on rewards or cashbacks earned on purchases (often offered by credit card companies). This means an additional hidden cost for the consumer.
BNPL Fintechs are expected to get a lot of competition of incumbent players like incumbent banks and PSPs offering those services themselves. Those players can offer a lot more integrated features (e.g. a full integration in the banking app and an immediate link to the customer’s current account) and can exploit a lot of competitive advantages compared to BNPL Fintechs, e.g. lower cost of capital from deposits, synergies with other products… Although those players have been late adopters of this technology, they are likely to take a serious cut of market share from BNPL Fintechs, once they get the offer setup. Already today, Fintechs, like Amount, have created white-label BNPL products, which can help banks to quickly setup a BNPL product.
BNPL Fintechs are already taking action to address those concerns, e.g. BNPL providers offer
A lot of features to improve customer’s financial literacy. Although very noble, it still seems a bit of window-dressing to please regulators and public opinion.
A shift to also support physical payments, as explained above.
The app of BNPL vendors is turned more and more into a marketplace, where specific (products of) merchants (being a customer of the BNPL vendor) are directly offered, meaning the BNPL vendor becomes the direct customer entry point instead of the webshop.
BNPL vendors are using more and more their collected data for offering targeted marketing, like personalized recommendations, advertisements, discounts in the form of coupons and cashbacks… This can be an interesting additional source of revenue.
Many BNPL vendors are starting to handle the logistics of a transaction. Obviously this allows to ask higher commissions to the merchants, but also allows to provide a better end-to-end support flow.
BNPL credit limits are being increased to allow for more BNPL payments for 1 customer, but also to attack merchants with more expensive product offers, like high-end luxury goods. Obviously this change is slippery slope as it can increase the risk of credit deferrals/defaults and also increase negative perception.
BNPL vendors are transforming more and more into Challenger banks themselves, offering also more traditional banking products.
The apps of BNPL vendors is extended with additional value-added features, like managing spending limits, getting insights into your spending habits, receive personalized budgeting tips, get product recommendations based on your purchase history, initiating refunds…
BNPL vendors are starting to increase the customer relation via loyalty programs (e.g. Vibe from Klarna)
All this seems the traditional story in Fintech. Fintechs come with very innovative ideas, but often have difficulties to make those products profitable and keep their competitive advantage on the long-term, as incumbent banks develop similar offers after a few years and the Fintechs are automatically becoming more bureaucratic, complex organizations (often forced by regulators) similar to the incumbent banks, which they tried to disrupt in the first place (cfr. my blog "Neobanks should find their niche to improve their profitability" - https://bankloch.blogspot.com/2020/12/neobanks-should-find-their-niche-to.html). Let’s see how many BNPL Fintechs are still around 5 years from now.
Article | April 6, 2020
With the threat of the global coronavirus pandemic upon us – knowing which ones are the best Fintech apps to use may get a little confusing for the average consumer. It is no doubt that the entire world has been impacted negatively by the coronavirus (COVID19) lockdown. Regardless of what industry you are in it has been impacted. The limited mobility of goods, services and travel is causing a strain on businesses and personal finance. Your ability to do physical banking, pay bills and basic financial transactions have no doubt changed. The negative financial effects of the coronavirus may change the way we interact with money for years to come. Digital currency and transactions are on the horizon.