Banks and insurers continue to adopt high technology such as artificial intelligence (AI), blockchain and tokenisation. They are co-opting so-called ‘FinTech’ competitors, while gearing up to contend with GMAFIA and BAT.
Robots vacuum our floors and mow our lawns. Some cars can self-drive. Many sales are made sans human intervention. Ever more news reports are written by machines (but not news features such as this – yet.) What’s the future? More of the same, and finance is no exception.
Remember finance 1.0?
Scroll back 20 years to a bank or insurance office. Paper, lots of it. People, a fair amount of them. Printers, to grind out all that paper (and to give us a third P.) Nowadays, there is little paper and hardly any people. Printers are passé (except in the rare cases you really need one). For that matter, for retail banking and insurance, who even goes to their offices anymore? Ok, some still do, but just over half of Europeans and two-thirds of Americans instead go online, according to Statista.com and Bank of America. In leading countries such as Norway, Denmark and the Netherlands, 9 of 10 such transactions are done electronically. And it’s not just payments or buying car insurance, ever more tasks are dehumanised. Helplines are ‘manned’ by talking computers, mortgage payments and account opening/closing are automated, access to money and information are controlled by passwords, PINS, electronic fingerprints and voiceprints. There are even robots to help the robots. One major US bank uses ‘bots’, says consultancy McKinsey, to annually handle some 2 million IT requests from its 250,000 (human) employees.
More automation is coming
The trend is nowhere near over. Auto auto-claims handling is coming in insurance, says Jesse McWaters, leader of the World Economic Forum’s Steering Committee on Artificial Intelligence in Financial Services. You smart photo the dent in your car, upload it to the robotic claims adjuster, who (or is it which?) squares the repair with your body shop. In future, you might talk to a retail bank through digital assistants like Amazon’s Alexa or Apple’s Siri. Meanwhile, hedge funds and equity managers are starting to use AI and big data to generate returns. For example, McWaters points out, fund-manager Blackrock uses machine-readable news and satellite photos to hedge some of its bets in commodities and manufacturing.
Even in the genteel world of private banking
Julius Baer is deeply committed to understanding automation. One example is its participation in F10, an ‘incubator’ of FinTech start-ups that is rapturous about all things IT. Still, COO Nic Dreckmann refuses to be swept away in the euphoria: the bank’s investments, he insists, must support its sole mission of serving high-net-worth clients. Tagging along with inventions aimed at retail, institutional or investment banking – not in Julius Baer’s remit – would be an expensive distraction. From this sober perspective, the bank sees three concentrations in tech. One is the automation of compliance. Financial regulations are ever more onerous, so Julius Baer recently launched an automated digital process, DiAS, to let its relationship managers comply with rules but not lose time with clients. “The client will not notice any difference in his or her service,” notes Nicolas de Skowronski, Head of Advisory Solutions, “and that is exactly the point.” Another concentration is cybersecurity, protection against online hackers and criminals. The bank has an internal team dedicated to repelling attacks and remediating any that succeed, plus there is ongoing training to make all employees ‘cyber-safe’. Finally there is tokenisation, which is basically the same as securitisation (dividing ownership into shares) but with a blockchain approach to registering ownership. Tokenisation could infuse liquidity into illiquid assets such as fine art and real estate that are popular with the wealthy. So Julius Baer recently entered a partnership with tokenisation-pioneer SEBA Crypto, a nascent ‘crypto bank’.
If you can’t beat ‘em, join ‘em: FinTech co-opted
This kind of partnership, somewhat against expectations, has spread its way across financial services. Only 3-4 years ago some observers expected FinTechs to rise and swallow their conventional competitors, but instead, both sides have often chosen to join forces rather than fight. In 2018, reports FinTech market-researcher MEDICI, major mergers included ten banks buying 13 FinTechs, two asset-managers purchasing another two and five insurers acquiring another five, all totalling to USD 1.4 billion. On top of that, says market-researcher CB Insights, another USD 38 billion in minority stakes also piled in, much of it from established financials. That traditional and ‘alt’ financiers would cooperate was probably inevitable, says WEF’s Jesse McWaters. FinTechs boast lots of shiny tools, but existing institutions (the good ones, at least) own relationships and trust. Combining the two can beat going alone.
But what about the Big Nine?
The latest, potential threat to traditional banks comes not so much from FinTech but from tech, that with no prefix. They’re typified by America’s ‘GMAFIA’ (Google, Microsoft, Amazon, Facebook, IBM, Apple) and China’s ‘BAT’ (Baidu, Alibaba, Tencent). Rumours periodically swirl about Amazon launching a payments bank, while Baidu has already started aiBank. Facebook Chairman Mark Zuckerberg has yet to swap his signature hoodies for pinstripe suits, nonetheless in June he put a shot across financiers’ bows by unveiling a digital currency called Libra. The aim is to offer online payments, cheap – a concept similar to that of PayPal, a FinTech founded in 1999 before FinTech was a word, now a USD-15-billion public company about one-quarter the size of Facebook. “It is clear that the tech giants are making a move into certain areas of banking,” notes Nic Dreckmann. “They have deep pockets and are approaching finance from a very different angle. Going forward, I think we will see much more from them.”
The good news for Dreckmann and his colleagues at Julius Baer: the next wave of digital disruption is most likely to catch on in areas where the human touch is not a key differentiator. “Private banking is much more about personal advice and not so much about automation,” notes WEF’s McWaters. “That’s not tech’s speciality, so for the tech giants it might be out of reach.”