Technology has changed – and is still changing – many industries, but none more so than financial services. From the introduction of ATMs, to internet banking via apps, to today’s seemingly new online-only digital banks, technology is transforming the business models of banks.

The new digital banks are trying to make inroads into the market share of the incumbents by offering agile, digitalised alternatives, says Richard Firth, CEO of MIP Holdings, who adds that the trend for automation and digitisation is visible across the value chain, from customer contact and lending to mortgages, payments and alternative financing. “We are seeing the transformation of banking, and those companies that can master new digital capabilities will not only be the leaders, but the only survivors.”

Firth says that the process of digitalisation is not always obvious, and a number of factors are influencing how banks approach this – including the use of third-party platforms or whether they develop their own in-house platforms. In contrast, the new “digital-native” banks have no legacy challenges and are better able to make use of emerging technologies such as automation and Artificial Intelligence (AI).

“The industry is moving from the sentiment of ‘we need an app’ to ‘we need AI’, but too often the banks are implementing technology for technology’s sake, or to keep pace with what competitors are doing. To effectively compete with digital banks, traditional banks must match the technology solution to a real-world problem,” Firth says.

He points out that the many regulations in force today are forcing banks to comply with requirements that are rooted in digital initiatives, effectively levelling the playing field. For example, data privacy regulations apply to financial institutions across the board, whether they have the most recent technology or are still paper-based. “So at what point will a ‘digital bank’ be forced to do what the incumbents do today?” Firth asks.

Similarly, established and traditional banks have already started making use of more advanced technologies that their newer counterparts may not have, mainly because they have bigger budgets to invest. Firth says that financial institutions are all working towards digitisation, and the differences between traditional and “digital” banks are not as easily identifiable as they were a few years ago.

“If you ask any board or executive team in a company what they understand by digital transformation you will get a different answer. That is why MIP talks about socialising technology. This is about making sure that a traditional internal business process is defined, documented, automated and then shared or socialised externally with a consumer or customer through a layer of technology and devices. For me, the lack of understanding this key transitional phase is exactly the same as blockchain technology: Every non-technical person says you must invest in blockchain, but very few people actually know what the tech is about,” he says.

“As a matter of fact, I am finding non-technical people refer to Bitcoin as blockchain and vice versa. A fund manager recently said that many of their clients want to invest just 1% of a portfolio in blockchain, but the client then invests in Bitcoin. I think there is confusion, and many people don’t understand that Bitcoin is just an implementation of Blockchain.”

According to analysts, banks are also learning critical lessons about workflow, or business process socialisation, in this new world—for example, how to more effectively manage handoffs between man and machine, and where typical process redesign/re-engineering can be put off or even skipped in favour of automation—particularly where systems are likely to be replaced.

In the new world, the strategy will be to lose the supervisor, Firth says. This means that a system or process, which was designed to make use of a supervisor to make a decision on behalf of a customer, can now be designed to ask the customer for their choice by using a relevant connected device in real-time to complete a complex task.

Also, McKinsey says that despite some early setbacks in the application of robotics and artificial intelligence (AI) to bank processes, the future is bright. The technology is rapidly maturing, and domain expertise is developing among both banks and vendors – many of which are moving away from the one-solution-fits-all “hammer and nail” approach toward more specialised solutions. The key here is that AI can only work once it understands the data and how previous processes, decisions or outcomes have been achieved based on a similar set of criteria.

“This is why I was surprised to see a digital bank issuing a bank card. Cards increase administration, delivery and management fees, and the use of IOT and devices we will see a decline in the use of cards over the next three years. AI and big data aggregation are growing in the financial services sector because they are helping to drive the total self-service of accounts. In the future, automation will allow clients to pick and choose services that were not traditionally offered by banks such as health insurance, travel and group risk,” Firth says.

“McKinsey sees a second wave of automation and AI emerging in the next few years, in which machines will do around 10% to 25% of work across bank functions. To capture this opportunity, banks must take a strategic, rather than tactical, approach. For example, fintech may displace banks’ current lending operations with things like peer-to-peer lending. With the rise of more digital banks, necessity is now forcing the sector to seriously consider the opportunities presented by AI and automated decision-making.”

Ultimately, the question has now become “what is a digital bank?”, rather than “are traditional banks digitising fast enough?”. “Are supposed digital banks just banks, and are incumbents becoming digital banks? For example, Investec does not have any branches, much of their service is automated; they have fantastic self service capability and they also have a card. Is Investec now a digital bank?”

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