out of apertures shone

The financial services industry is going through a period of extraordinary transformation. After centuries in which pen, paper and physical cash ruled banking interactions, digital technology is now bringing a new level of analysis, connectivity and transaction power literally to customers’ fingertips.

These changes have happened in just the past few years — and they serve a new generation of customers, who have grown up in the digital world. They demand convenient services and new ways of accessing them, wherever and whenever they want. They need agile, rapid services operating in real time that are competitively priced and personalized, and all this needs to happen in a safe environment, where their data is protected.

Financial technology — or “fintech” — can offer all of that. Whether it is nimble start-ups or technology giants, such as Google, Apple Inc, Facebook Inc, Amazon.com, Inc and Alibaba Group — they will all draw upon their expertise in technology to deliver personalized and interactive financial services and products for their highly engaged and tech-savvy customers.

Relations between the emerging fintech players and the established banking industry are sometimes portrayed as challenging, even combative.

Some traditional banks worry that the fintech wave will disrupt the banking industry in the same way that music downloads disrupted the record industry and Uber Technologies Inc is disrupting established transport industries.

However, the reality could not be further from the truth.

Banks and fintech companies are entering partnerships of collaboration, giving banks access to new and exciting technologies, and giving fintech companies access to funding and scale of market opportunity.

Banks that can adapt, embracing the innovations and utilizing technologies offered by the fintech industry, stand to reap new opportunities, and even extend their share of the market.

So far, the banks that have digitized have focused on the most routine customer transactions, such as mobile banking and contactless payments, which have taken off massively.

There is a substantial shift of transactions from branches and ATMs into mobile banking, along with a decline in both cash and check transactions. A significant number of people in Asia, particularly in China, are using contactless cards and smartphones to pay for purchases and settle bills.

To improve speed and efficiency, and better understand customers’ needs, banks are also using data to analyze customers’ purchasing behavior, and then channel tailored suggestions to them on their smartphones.

Using HSBC as an example, we are investing almost US$2 billion to do this, and have adopted a mobile-first strategy. The goal is to completely redesign our customers’ experience through mobile channels.

We have launched Apple Pay, Android Pay and have a WeChat integration under way to address the Chinese market.

We have also introduced a voice-ID login that is available for our more than 20 million customers, and we are piloting touch ID across major markets, as well as other new identity verification projects.

This is not only about launching apps and adding convenient features. It is about our giving customers more direct control over their financial lives.

As the world becomes increasingly more digital, the number of passwords people have to manage has become a serious challenge for many customers.
To help with this, banks have in recent years begun investigating biometric solutions for authenticating mobile banking users that balance both security and simplicity.

The vast majority of financial institutions that have implemented biometrics have done it for mobile banking password replacement. We will see more launches of biometrics for other functions, such as step-up authentication for riskier activities (payments or money transfers), out-of-band/second-factor authentication (replacing the SMS-based second-factor authentication), cardless cash withdrawal and more in the coming years.

Fintech innovation and adoption will continue to bring big changes in the coming years. The best way for banks and fintech start-ups to succeed on this journey is if they create a strong ecosystem of partners.

Banks can more easily and quickly adopt new technologies to offer customers cutting-edge, added-value digital services.

Fintech companies can collaborate with established firms to integrate themselves into the existing value chain to address a lack of market experience or regulatory expertise.

Fintech collaboration is not about grabbing for the “next shiny object,” it is about intuitive product design, ease of use, and 24/7 accessibility. These partnerships will become a way to fill in the gaps, so banks and fintechs can complement each other.

A cultural fit and a deep understanding of the partnership is key, as is the avoidance of unnecessary dependence.

Our approach at HSBC was to set up a Strategic Investments team, which scouts the start-up landscape, identifying companies which are potentially good investments, and which provide technology we can use.

We believe that when we act as both investors and customers, we get more value from new companies, and they get more value from their relationship with us. This is critical to nurturing the kind of technological innovation that is necessary to make financial markets and systems more efficient, and to improve the overall customer experience.

Over time, there will be a move to more of an ecosystem model, where more people will be working together, with new relationships.

The disruption and evolution of financial services is not a zero-sum game. The innovations introduced by new start-ups or technology giants are not existential threats to traditional financial institutions. Instead they are opportunities for banks that continue to evolve towards a customer-driven digital model. It is a win-win for all.

Darryl West is group chief information officer at HSBC.