For financial services, the digital revolution is just beginning
NEW technology has made it faster, cheaper and easier than ever to access financial services. But in many cases, the services themselves are still essentially traditional. That is about to change.
There are some positive developments in this transformation.
Consumer payments are now available on many platforms and in most cases, transactions are almost instantaneous.
The number of cashless transactions is expected to almost treble to three trillion between 2020 and 2030. The Asia-Pacific region is predicted to grow the fastest on this front, with cashless transaction volumes growing by 109 per cent from 2020 till 2025.
At the same time, artificial intelligence (AI) is playing a more significant role in loan decisions. Some financial institutions, including HSBC, have harnessed the technology to improve individual investment decisions.
Blockchain, meanwhile, has started to make inroads in the acceleration of trade finance and the proliferation of digital assets.
BT in your inbox
Start and end each day with the latest news stories and analyses delivered straight to your inbox.
Open banking capabilities are also becoming more common, with the advent of open application programming interfaces (APIs) that continue to enhance customer access beyond banking capabilities.
These are significant improvements, but there is much that has not changed. We may no longer use cheques to conduct our everyday business, but we still have chequing accounts.
Much of the small and medium-sized enterprise (SME) sector and corporate banking is still subject to shortcomings, including slow transactions and incompatible systems. Trade finance still generates a mountain of paperwork.
Even cryptocurrencies, for all the promises of revolutionary change that accompanied their birth, have proven too slow, energy-intensive and volatile to be scalable to where they might challenge traditional currencies.
New technology and almost-universal connectivity have revolutionised how people and companies interact with their financial service providers. However, the grand revolution in the nature of financial services seems to have stalled.
If the subtext of the digital banking promise was to have new services accessed in new ways, the delivery of such services has not kept up with the revolution in new channels.
As an industry, financial services are still in transition. Bank margins have fallen by 25 per cent over the past 15 years and markets are worried about future profit growth. A report from Boston Consulting Group estimated that less than a third of banks are meaningfully investing in digital financial ecosystems.
But as cloud computing, open APIs and embedded finance reach an inflection point, their intersection with emerging technologies such as blockchain, AI and quantum computing will create a digital Big Bang, which will change financial services beyond recognition.
Take, for instance, this not-so-distant future scenario, when blockchain, embedded finance technology, generative AI, and the adoption of environmental, social and governance (ESG) data are commonplace.
Through blockchain, a company can ensure transparency in its supply chain. Every product manufactured will have a unique blockchain-based digital identity that records its entire journey from raw material to distribution.
The company can also leverage embedded finance solutions to streamline payments. Smart contracts on the blockchain, meanwhile, will automatically trigger payments to suppliers upon successful delivery and verification of ESG compliance, reducing administrative overhead and ensuring that funds are allocated efficiently.
For consumers, the integration of blockchain and AI into people’s daily routines will result in behavioural shifts that will have an enormous impact beyond the banking industry.
Here are three areas that will likely be transformed in the next five years:
Product traceability: Consumers will be able to use their smartphones to scan QR codes on grocery store products or online to make informed choices about what to purchase based on ESG data. The blockchain technology behind these codes will provide detailed information about each product’s journey, including its origins, ethical sourcing practices, and carbon footprint.
AI-personalised shopping: Shopping apps will use AI to analyse users’ previous purchases, preferences and values on sustainability. Such apps will then recommend products that align with consumers’ priorities. For example, if a consumer prefers products with a low carbon footprint, the app can suggest eco-friendly options.
Payments with central bank digital currencies (CBDCs): Using CBDCs for payments provides consumers with additional transparency and security. Through such payments, consumers will know their transactions are efficient and traceable, reducing the need for traditional banking intermediaries. Consumers will also be able to allocate their spending based on purpose-bound money, to ensure funds that have been allocated for specific purposes are being used as such.
We are venturing into a world where financial infrastructure is being recalibrated to be more intuitive, efficient and insightful – and with an inherent lean towards sustainability.
The technology is available. What matters now is how the different types of technology interact and engage with each other; the policy and regulatory guardrails needed to ensure the safe and responsible execution of capabilities and standards; and most importantly, the talent required to execute this for it all to work in concert.
Ultimately, every component of the financial ecosystem needs to work together to deliver the anticipated change in speed, efficiency, sustainability and value, on a scale never seen before.
The writer is HSBC’s Asean chief digital officer
Copyright SPH Media. All rights reserved.
