Rush of the Financial Industry

1. FinTech will drive the new business model

Countries and regions more willing to adopt new financial models will create winning strategies within their region and position themselves for growth globally too.

Digital Global Currency and other mobile payment options will drive transactions.

Through partnerships, customers will be able to place orders skip-in-line pickup and receive a notification when products and services are ready.

3,000 cash machines disappeared in the UK in the last six months alone and Monzo's Bank in the UK has stopped charging ATM fees. It is predicted that all ATMS will be eliminated within 5 years and most transactions digital with incentives to spend more.

Chase, Citi, and Wells Fargo all charge $2.50 plus 3% of the transaction on overseas withdrawals, while Bank of America charges $5 plus 3% of the transaction, per data from Finder. Banks searching for new ways to service customers will reduce out-of-network ATM fees and instead will be one of the marketing channels companies allocate budgets to. It will show a positive sign towards banks improving partnerships and recognition that when they help customers be successful, they too are successful.

Monzo's choice to eliminate fees in the EEA could help it gain an edge on incumbent banks if others fail to do so. And as the neobank works to deploy its full offering in the US, the prospect of not having to pay ATM fees while traveling in the EEA could act as a perk that attracts new customers, particularly consumers who regularly travel abroad to enjoy friendships and optimize supply-chain relationships for the value of both short term and long term successes.

2. Artificial Intelligence will Scale & Monetise

Artificial intelligence will transform the customer experience enabling a much more customized and appreciated interaction, and improve customer service efficiency.

External APIs will become critical to online banking infrastructure

Mobile and online banking will push banks to improve customer experience

Digital cryptocurrency growth will prompt security and regulatory measures

The implementation of AI coupled with traditional analytics in fin tech will result in great leaps forward in new data sources and methods.

• AI on the front end will be used to secure customer identities, mimic bank employees, deepen digital interactions, and engage customers across channels.
• AI on the back end will aid employees by automating processes and preempting problems.
• AI for payments will be used to significantly reduce and prevent fraud and money laundering, and grow global transaction payments exponentially.

3. Innovative Products & Experiences will Rule

New edge technology is not enough. It is about being able to quickly deliver innovative products, good marketing and data driven iterative product and user experience improvements.

Trucaller, The Sweden-based company, which operates a caller-identification system, is moving further into financial services, per Bloomberg. It has started piloting a program to provide credit to small business owners in India — which make up about 20 million of its 140 million users in the country — via financial partners, and is planning to launch the service for all its users there early next year, according to CEO Alan Mamedi cited by Bloomberg.

Truecaller initially focused on providing information about incoming calls but has since expanded to offer messaging and call functionalities, an ad-free subscription service, and a mobile payments service. Mamedi expects that in three years, Truecaller's revenue will be split equally between subscriptions, advertising, and fintech.

India's small- and medium-sized businesses (SMBs) make up a large share of the economy, yet remain financially underserved. There are over 42 million SMBs in India that employ 69% of India's workforce. However, despite their importance to the economy, just 3% of SMBs are able to access loans via traditional methods. Due to this, SMBs experience a credit gap that's estimated to be worth around $230 billion, per World Bank data cited by CDC Group. And given that nearly half of the country's SMBs are Truecaller users, the service will likely see rapid adoption.

However, India is also home to a tech-savvy population, making its SMBs good candidates to use Truecaller's new services. India has the highest fintech adoption rate globally (87%) among digitally active adults — compared with the global average of 64%, per EY. Additionally, the sector has seen a 60% boost in business via mobile apps, suggesting that SMBs have been keen to adopt new technology. As such, it seems likely that such companies would be willing to access loans from the likes of Truecaller to further boost their operations and growth.

Truecaller is one of many nonfinance companies making a fintech push — threatening both startups and traditional financial institutions. Google, for example, is planning to launch checking accounts to consumers next year, while Apple teamed up with Goldman Sachs to launch a credit card in the US earlier this year, and Japanese software company Line rolled out a new credit scoring service in July.

These companies have already amassed large user bases with their initial offerings, which they can advertise their fintech products to, increasing their chances of success. Given these firms' early success, and Truecaller's substantial user base, tech firms are serious threats to both startups and traditional financial institutions. Moving forward, Truecaller should focus on adding more products to its fintech offering, including checking accounts for small businesses, if it wants to become a true alternative to traditional banks.

• Behind the scenes, payment processes and stakeholders remain similar. But providers are forced to make payments as frictionless as possible as online shopping surges: E-commerce is poised to exceed $1 trillion — nearly a fifth of total US retail — by 2023. 
• The channels and front-end methods that consumers use to make payments are evolving. Mobile in-store payments are huge in developing markets, but approaching an inflection point in developed regions where adoption has been laggy. And the ubiquity of mobile P2P services like Venmo and Square Cash will propel digital P2P to $574 billion by 2023. 
• The competitive landscape will shift as companies pursue joint ventures to grow abroad in response to geopolitical tensions, or consolidate to achieve rapid scale amid digitization. 
• Fees, bans, steering, or regulation could impact the way consumers pay, pushing them toward emerging methods that bypass card rails, and limit key revenue sources that providers use to fund rewards and marketing initiatives. 
• Tokenization will continue to mainstream as a key way providers are preventing and responding to the omnipresent data breach threat. 

4. How to Be the Chosen One?

A proven track record and ability to scale and build profits will become increasingly attractive to investors. Customers will look to see who listens and acts in win-win ways. For example:

• Cost of cash: In some countries, the cost of managing cash is very high due to an especially vast territory, or particularly remote areas including small islands. CBDC could lower costs associated with providing a national means of payment.
• Financial inclusion: CBDC may provide a safe and liquid government-backed means of payment to the public that does not require individuals to even hold a bank account. Some central banks view this as essential in a digital world in which cash use is progressively diminishing, especially in countries where banking sector penetration is low.
• Stability of the payment system: Some central banks are concerned by the increasing concentration of the payment system in the hands of few very large companies (some of which are foreign). In this context, some central banks view CBDC as a means to enhance the resilience of their payment system. 
• Market contestability and discipline: Relatedly, some central banks view CBDC as potentially offering competition for large firms involved in payments, and thus as a means to cap the rents they can extract.
• Countering new digital currencies: Some central banks view CBDC as healthy — potentially necessary—competition against privately issued digital currencies, some of which may be denominated in foreign currencies. These central banks believe a domestically issued digital currency backed by the government, denominated in the domestic unit of account, would help reduce or prevent the adoption of privately issued currencies, which may be difficult to regulate.
• Support Distributed Ledger Technology (DLT): Some central banks see the virtue of DLT-based CBDC to pay for DLT-based assets. If these assets proliferate, DLT-based currency would facilitate automatic payments when assets are delivered (so-called “payment-versus-delivery,” or “payment-versus-payment,” which could be automated using smart contracts). Some central banks are considering the option of providing CBDC only to institutional market participants in order to develop DLT-based asset markets.
• Monetary policy: Some academic scholars view CBDC as a means to enhance the transmission of monetary policy. They argue that an interest-bearing CBDC would increase the economy’s response to changes in the policy rate. They also suggest that CBDC could be used to charge negative interest rates in times of prolonged crisis (thus breaking the “zero lower bound” constraint), to the extent cash were made costly.

Despite these potential benefits, various challenges could emerge. Some of these can be attenuated by the appropriate design of CBDC. 

• Banking-sector disintermediation: Deposits could be withdrawn from commercial banks, should people decide to hold CBDC in significant volume. Banks would have to raise more expensive and runnable wholesale funding, or raise interest rates on deposits to retain customers. As a result, banks would either experience a compression of margins, or would have to charge higher interest rates on loans. The extent to which CBDC will compete with commercial bank deposits in normal times will depend in part on interest rates paid on CBDC, if at all. A non-interest bearing CBDC would come closest to simply replacing cash.
• “Run risk”: In times of crisis, bank customers could flee from deposits to CBDC, which might be seen as safer and more liquid. However, in many jurisdictions, credible deposit insurance should continue to dissuade runs. In addition, safe and relatively liquid assets already exist in many countries, such as government bond funds, or state banks. Though evidence and country coverage is limited, academic studies do not point to systematic runs towards these alternative assets in crisis times. Moreover, if a run occurred, the central bank would be more easily able to meet deposit withdrawal requests with CBDC as opposed to cash. In addition, in many countries around the world, bank runs typically coincide with runs from the currency. Thus, whether or not local-currency CBDC existed, depositors would seek refuge in a foreign currency.
• Central bank balance sheet and credit allocation: In case demand for CBDC is high, the central bank’s balance sheet could grow considerably. In addition, the central bank may need to provide liquidity to banks that experience rapid and large funding outflow. As a result, central banks would take on credit risk, and have to decide how to allocate funds across banks, opening the door to political interference.
• International implications: CBDC of reserve currency countries available across borders could increase currency substitution (“dollarization”) in countries with high inflation and volatile exchange rates. These prospects need to be studied further, along with implications for the international financial system. IMF staff are currently investigating these questions.
• Costs and risks to the central bank: Offering CBDC could be very costly for central banks, and it could pose risks to their reputations. Offering full-fledged CBDC requires central banks to be active along several steps of the payments value chain, potentially including interfacing with customers, building front-end wallets, picking and maintaining technology, monitoring transactions, and being responsible for anti-money laundering and countering the financing of terrorism. Failure to satisfy any of these functions, due to technological glitches, cyber attacks, or simply human error, could undermine the central bank’s reputation. 

In summary, each country will have to weigh the pros and cons of the case for CBDC depending on its particular circumstances.

Countries may consider the option of public-private partnerships that may achieve many of the same benefits of CBDC, while potentially reducing central bank involvement and operational risks. IMF staff have coined this solution “synthetic CBDC.”

More specifically, the synthetic CBDC model envisions private sector firms issuing digital coins to the public (which can either be accounts or tokens leveraging DLT). These firms would thus be responsible for doing what they do best: innovating and interfacing with customers. The central bank, instead, would provide trust to the system, by requiring that coins be fully backed with central bank reserves, and by supervising the coin issuers. This arrangement preserves the comparative advantage of each participant—whether it is a private-sector firm or a central bank—and induces competition among private-sector firms to offer attractive coins and interfaces. At the same time, it limits costs to the central bank, as well as some of the risks.

What are the alternatives to CBDC?

Several countries are working on improving existing payment systems to match the speed and convenience of digital currencies. For example, we understand from published sources that the Federal Reserve is developing so-called fast payments, allowing nearly instantaneous and low-cost settlement of inter-bank retail payments (the Federal Reserve’s “FedNow” initiative). In other countries, similar systems have improved payment services and injected competition in payments, especially if paired with other reforms, such as public digital identities, common communication standards, open application programming interfaces (“APIs,” which allow banking applications to interoperate and to be extended by third-party developers), and data portability and protection standards. 

While improved inter-bank payment systems will bring many of the potential benefits discussed above, CBDC could be complementary, especially in some jurisdictions. Central banks have raised the following arguments: First, CBDC (or its synthetic version) can be DLT-based and thus potentially help spur the development of DLT-based asset markets. Second, CBDC can be designed to work outside the banking system and may thus favor financial inclusion. Third, CBDC could provide competition to banks and induce these to fully leverage the advantages of fast payment systems. Fourth, DLT-based CBDC could facilitate cross-border retail payments, thereby complementing the not-so-easy task of linking traditional inter-bank payment systems.

We generally think that central banks should remain engaged in examining the full range of issues associated with CBDC, including the potential to offer synthetic CBDC, and deepen their familiarity with new technologies.Source: IMF

In Residence programs to integrate new solutions into one of the largest financial institutions globally and support the success of global leaders:

US. Marqeta's performance has continued to surge, with its revenue doubling four years in a row — and payments volume through its platform tripling. Now with a value of almost $2Billion, Marqeta's investment round was reportedly oversubscribed, leading the firm to be selective about its partners, and the funding was earmarked for expansion to new regions and launching new cards. These efforts could propel Marqeta's performance to new heights as they should help it reach new companies and issue more cards than its current total of around 140 million.

The company has been aggressively growing its presence in new markets, opening itself up to new business. Marqeta introduced a new product in Europe to enable clients to develop digital banking solutions, partnered with a company that can help it expand its reach in Europe by simplifying the process for starting a card program, and signed up new clients in the region.

Meanwhile, Marqeta also announced a partnership with Visa that will see the firms offer tools to help firms develop payment applications in Asia Pacific (APAC). Targeting both of these regions should help Marqeta attract new clients and business, and as it extends to even more markets its number of cards and volume should rise even further.

Marqeta will need to prepare for increased competition in order to thrive going forward because more firms are adding comparable issuing products. Adyen recently introduced Adyen Issuing, which lets clients issue virtual and physical cards, and payments technology provider Galileo debuted a new service that enables firms to instantly issue Mastercard-branded debit cards.

Both of these services should compete with Marqeta's business, and because Adyen and Galileo have clients that work with them for other products, they may have the inside track on capturing their issuing business. To combat this, it's important that Marqeta consider developing more offerings so its clients can rely on it for more services, which could stop them from looking for other issuing options. This may be particularly necessary because we predict that at least one major processor will move further into issuing in 2020, adding more serious competition for Marqeta.

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5. Market Drivers

Open Banking rules that require regulated banks to let customers share their financial data with authorised third-party providers through APIs officially went into effect this year, creating new opportunities for fintech upstarts like Anorak, an independent insurance advisor, to create innovative experiences that can help them win customers.

At the same time, Open Banking has created an imperative for established banks to invest in their own experiences lest third parties woo their customers. To that end, a number of major banks, including HSBC, Lloyds and RBS, are working on money management apps that can help their customers track their spending and budget more effectively.

The fintech boom has been driven in part by consumers’ willingness to unbundle the financial services they need, but in 2018, even fintechs started making moves to expand their relationships with customers by offering broader suites of services. In other words, a “rebundling” trend emerged.

When the initiative was first reported earlier this year, an RBS spokesperson told Forbes, “Our industry is changing rapidly and therefore we need to keep pace with this by launching new approaches to better serve our customers” – and added, “we’re focused on using automation and technology to deliver a more efficient banking experience that better reflects the changing way our customers now bank.”

RBS is not alone. HSBC is also reportedly working on its own challenger bank project that will target SMEs in the UK.

While there’s no doubt that established financial services firms are being impacted by fintech rivals, it would be incorrect to assume that entrenched companies and upstarts are enemies. To the contrary, established banks and fintechs are increasingly teaming up.

This was likely driven in part by growing interest in the so-called marketplace model. Under this model, established banks and fintechs create marketplaces in which their customers can discover and acquire financial services products offered by trusted third parties.Traditional financial services will blossom with new financial services o

Incumbent financial institutions will need to quickly get over their fears and more quickly offer digital products. For example, Goldman Sachs digital bank Marcus, signed up 100,000 customers in just over a month

Fintech strengths:

• Fast
• Flexible

Incumbent institution strengths:

• Large number of customers & Long term relationships
• Compliance and regulatory capabilities

Mobile Acceleration

From Mobile Device Management to Mobile Data/Information Management

Data and information-level security will emerge to push cybersecurity away from the device level. In the new BYOD reality, this will further secure key information assets while addressing user privacy by segmenting personal/social from business-critical zones within a single endpoint.

The NextGen Omnichannel Branch: Hyperconnected with Untethered Bankers

2019 will see banks’ continued investment in redesigning their branches to drive end-user engagement and boost productivity. Banks will also focus on untethering their bankers (replacing desktops with mobile/tablets) and improving branch network connectivity (SD-WAN, wireless, 5G) as they adopt branch of the future models.

Upskilling the IT Workforce

Financial institutions will make IT workforce upskilling a top priority. For instance, with infrastructure migrating to code, companies will need to effectively retrain and upskill current hardware engineers as “software engineers with a hardware spike.”

Additionally, Corporate Digital Responsibility as an extension of Corporate Social Responsibility will force banks and other large financial corporations to evaluate the societal implications of their digital transformation choices on their employees and customers.

5G Mainstream Adoption

The proliferation of 5G cellular networks will change the financial services industry through increased speeds and system capacity, higher data rates, and reduced latency. 5G will force banks to reevaluate their LAN and WAN infrastructure plans at both branch and data center levels, with some organizations pursuing the opportunity to play at both consumer and network-provider roles.

Blockchain will Enable Universal (Self-Sovereign) Identity

Blockchain use cases within the financial services industry will expand beyond inter-banking applications (e.g., capital market settlements and international payments) to begin addressing the holy grail issue of “universal identity.” Blockchains run by banks may ultimately enable a self-sovereign identity model with KYC/AML attributes that is PSD2 and GDPR compliant.

Quantum Computing will Change the Game

Advances in quantum computing will lead to more accurate predictions in fields like algorithmic trading, public health, meteorology and more. In the short term, we’ll likely see investments in quantum-resistant cryptography to better protect from enhanced brute-force cybersecurity attacks as well as the development of quantum-enabled algorithms. Early availability of quantum computing on public could also significantly accelerate cloud adoption.

In the west fintech companies have increased the number of payment options.

In other economies, cash, checks and credit cards are being virtually eliminated and the majority of transactions are digital.