Which tech has the greatest potential to transform banking?
A whole array of emerging technologies could grant a crucial edge to banks that can apply them successfully. How do their innovation specialists go about finding a winning combination?
In the long shadow of the 2007-08 global financial crisis, concurrent advances in three technologies – smartphones, 4G cellular networks and cloud computing – sparked an explosion of innovation in financial services. Their convergence enabled mobile banking: the sector’s most significant development in generations.
Just over a decade later, the industry is again “on the cusp of another inflexion point”. That’s the belief of Prakash Pattni, MD of digital transformation at IBM Cloud for Financial Services. He predicts that progress in tech including 5G, blockchain, artificial intelligence and quantum computing will trigger “another spurt” of innovation.
“People talk about data being the new oil,” Pattni says. “Well, blockchain is the new oil rig, and AI is the new refinery. The coming together of these things makes it an exciting time to be part of the industry.”
Given that R&D is notoriously costly and success is never guaranteed, how do banks approach experimenting with tech that might just as easily fall by the wayside as revolutionise their industry?
As head of innovation, global functions, at HSBC, Steve Suarez is particularly well qualified to answer this. He believes that the secret to successful innovation is to stay focused on “how to make things cheaper, faster and frictionless for people”. The bank is “constantly scanning the horizon to see how we can apply new technologies. We want to gather data that enables us to personalise banking and give our customers what they need, quickly but also securely.”
The London-based American applies what he calls a “three horizon” approach to innovation. Horizon one concerns “the stuff that we already know well and will incrementally improve things in the short term. Horizon two, which is about two or three years from now, concerns technologies that are fairly new to the industry – blockchain, for instance. We look at how we can provide use cases with these to make the bank better.”
He continues: “And then there is horizon three, which is about the long shots. Right now, they include the metaverse and quantum computing, which could turn out to be a game-changer for financial services.”
The possibility that a horizon-three punt might come off is clearly exciting to Suarez, but he’s careful not to get too preoccupied with the potential benefits of such tech.
“We’re all betting on these technologies to achieve an advantage. There are huge opportunities, but we also need to look at the risks from a security perspective and work out how we might need to structure ourselves,” he says. “As we process 1.5 trillion transactions a day, we understand our great responsibility to protect all customers.”
HSBC’s recent horizon-three R&D activities have included hiring experts in quantum computing and announcing a three-year collaboration with IBM to explore applications for this nascent tech and so ensure its “organisational readiness” to take full advantage of it.
The bank has also bought a plot of virtual real estate in an online gaming space called The Sandbox, marking its first significant foray into the metaverse.
The term ‘metaverse’ was coined by sci-fi writer Neal Stephenson in his 1992 novel Snow Crash. He was referring to a digital realm in which humans, avatars and software programs could interact and where property could be purchased. Suarez indicates that HSBC intends to stay loyal to Stephenson’s original meaning.
“We will be building on our plot, putting in virtual stadiums and working out how to better serve our customers,” he says, hinting that the bank might seek to engage with sports and e-sports fans in the metaverse.
Jehangir Byramji is senior innovation manager and fintech lead at Lloyds Banking Group. He also revels in exploring potentially transformative emerging tech and “analysing weak signals from other markets and regions that the bank can use in the future”.
Byramji’s approach is slightly different from that of Suarez, though. He organises the bank’s IT innovation work into three broad categories: data; AI (particularly machine learning); and Web3 (tech based on decentralised systems such as blockchains) and the metaverse.
“On the data pillar, there’s this whole idea of ‘hard’ and ‘soft’ identities. Younger people are more worried about losing their social media profile than their passport,” he says. “They are more likely to embrace machine-to-machine payments. As a bank, you therefore need to think about non-traditional ways of processing their data.”
In this category he also places digital twins – virtual representations of real entities “to help you understand both your own organisation and its customers and clients”.
But Byramji is most enthused by the latest developments in machine learning. “You’re going to see more intelligent agents, just as much in the physical world as in the data realm,” he says, adding that the internet of things will play a key role in this field. “Some of our clients have connected factories or farms – the latest combine harvesters are covered in sensors, for instance – so we’re asking how we can use the data these smart machines gather in an intelligent way and work with clients to better serve them.”
Given the sheer range of possibilities, banks must remain focused on use cases that are most likely to benefit the customer, Byramji stresses. Otherwise, it’s a waste of time, money and effort.
“We’re starting to see quite gimmicky AI, with deep-fake videos and things like that,” he says. “While they are interesting developments, we have to remember our first principle: better serve our customers.”
That said, Byramji can’t help but be fascinated by the longer-term potential offered by Web3.
“Banks are unpicking blockchain technologies more effectively than they did a few years ago. We are starting to understand smart contracts and other capabilities that minimise risk and build trust,” he reports. “With these related technologies, I think we can form relationships with fintech firms, build ecosystems, develop new markets and unlock some exciting opportunities.”