Digital Transformation: The New Normal for Financial Services
By Stephanie Kannimmel, BSc PPE Student at King's College London
During the COVID-19 pandemic, technology has been helping to save lives and keep businesses afloat through contact tracing, contactless commerce, and remote working, keeping people connected without the risks. The tech industry once prided itself on “disrupting” other industries, but now offers the means to stabilize them. With the acceleration of technology during COVID-19, including e-commerce and digital banking, financial institutions now need to embrace technology more than ever, while staying vigilant of the risks associated with it.
Financial institutions are responsible for keeping their clients’ money and data safe, but the increasing digitization of financial services, especially during COVID-19, has led to exponential growth in cybercrime. Although firms within the financial services industry have generally been aiming to leverage technology to improve efficiency in services to clients, this process was accelerated greatly with the COVID-19 pandemic.
This accelerated shift to technology has led to a myriad of different kinds of cyberattacks and threats to cybersecurity, including identity theft, phishing, data theft and manipulation, ransomware attacks, and attacks on banks’ payment systems. According to LexisNexis Risk Solutions, financial services companies in particular were a significant target for cybercriminals this year, accounting for 62% of 868 million automated bot attacks recorded between January and June. Advances in 5G and deep fakes have increased the efficiency and effectiveness of cyberattacks, making them more difficult for firms to detect.
Despite the volume of cyberattacks and threats to security that have grown due to the rise of remote working and digital services during the pandemic, addressing cybercrime has generally been pushed down on financial institutions’ list of priorities due to the pandemic also causing disrupted workflows and reduced staffing levels, among other issues. Out of 1,005 IT departments surveyed in firms, 47% said cybersecurity budgets were cut, and 54% reported that security took a back seat to prioritising equipment for work-from-home arrangements during the pandemic, according to Barracuda.
To stay ahead of evolving cybercrime risks and to prevent the existing risks emphasized by COVID-19, financial institutions need to respond to cybercrime in a way that corresponds with the markets they operate in. Firms should consider all remote access as medium to high risk, and adhere to approaches such as multi-factor authentication, corporate VPNs, and keeping operating systems up to date. Compliance and risk divisions will also need to shift to be aware of increased cybercrime, considering the impact a cybercrime event would have on their firm and ensuring that the firm’s playbook has clear procedures should a cyberattack occur. Financial institutions should also have a detailed threat communication plan for clients, regulators, and the media in the event of an attack to make aware of potential risk. To make this easier, financial institutions should work together to pass on information about threats and share case studies.
E-commerce and digital currency
COVID-19 has led to an accelerating shift away from physical cash in many economies, with e-commerce and private cryptocurrencies taking its place. The introduction of mobile banking apps before the pandemic hit and during its peak has seen a surge in the number of users over past years at dramatic rates. In Asia, digital banks are on track to be introduced in 2021 through internet banking and e-wallets. With the consistent growth of companies such as Grab and Gojek in Southeast Asia, the e-commerce industry grew substantially in the first six months of the year as consumer spending shifted from offline to online. This has led to enormous competition between financial institutions willing to go digital versus those that are not.
Additionally, central banks are weighing the introduction of digital currency in several countries, following China’s lead through the introduction of e-commerce in a number of major cities. Digitalizing currency would make money more trusted and convenient to use, solve problems of lags and delays in stimulus checks during the pandemic, and would give central banks more insight into the movement of money in the economy.
Both the rise of e-commerce and the potential move to digital currency by central banks has a number of implications for commercial banks and all other firms within the financial services industry. For financial institutions moving to e-commerce, risks of cybercrime and growing concerns about privacy and digital surveillance are apparent. Furthermore, aggregators such as Grab and Gojek in Southeast Asia offering e-wallets and purchases of goods within the app could pose problems for banks within the region that do not offer digital payment methods, which could see falling profit in coming quarters.
Central banks implementing digital currency could pose a threat to commercial banks’ retail deposits in the advent of a cashless economy. However, central banks are discussing limiting the scope of digital currencies to curb this. Even so, financial institutions are likely to have to create a strategy in the event of a transition to digital currency, and to ensure that they provide e-commerce services.
Continued demand for cloud infrastructure services and increases in spending on specialized software have been on the rise in financial institutions. Demand for such technologies has increased further during COVID-19 as organizations encourage employees to work from home. Thus, the process of digital transformation through embracing technologies such as Artificial Intelligence (AI), Blockchain, and the cloud has been greatly accelerated due to the impacts of the pandemic.
Blockchain was previously associated with cryptocurrencies such as Bitcoin that introduced it. However, it has much more to offer to industries and organizations within the public and private sector in terms of securing, sharing, and using data. As such, blockchain has and will continue to revolutionize financial services and other sectors in different ways than it was originally intended to.
The rapid surge of interest in blockchain technology was the catalyst that made the financial services industry realize it could transform markets for the better by moving to common data processing instead of data sharing at a market level. PwC analysts expect the surge in funding and innovation to continue as blockchain and FinTech move from a retail focus to institutional use. Furthermore, blockchain technology could support organizations in rebuilding and reconfiguring operations after disruption brought by COVID-19, underpinned by improvements in trust, transparency, and efficiency.
Once adopted by financial institutions, blockchain technology will allow firms to use a shared market-level digital application instead of a platform where institutions build and run their own distinct applications that are out of sync. This streamlining will reduce deviations and errors in data processing significantly, transforming processes that financial institutions rely on by increasing efficiency. Blockchain can also be applied to payments and financial services including the use of digital currencies and identity management to curb fraud. This will improve security, transparency, and performance in the financial services industry. Regulatory compliance divisions can also use blockchain to keep up with regulatory change across geographies more efficiently as processes that automate data verification and regulatory oversight is streamlined.
In existing alliances between companies in the tech and financial services industries, AI is used by financial institutions to address key pressure points, reduce costs, and mitigate risks by targeting capabilities such as logical reasoning and the identification of patterns. The ability of robots to sense details within their environments and to recognise and respond to information with safe and useful behaviours is expected to become even more complex in the future. PwC expects AI to experience modest gains in the next 3-5 years, and rapid gains in the years following those once technological hurdles are overcome.
The future of AI serves as a potential tool to transform the financial services industry, especially after COVID-19 challenged the way that financial institutions have operated in the accelerating move to digital platforms. AI-based compliance is on the rise in combating financial crime that rose during the pandemic. In remote working, the rise of digital tools and services means that compliance and regulation technology approaches have to be upgraded for flexibility and accessibility. Compliance divisions are also beginning to use AI to improve Anti Money Laundering (AML) practices, due to AI’s accuracy in automation, analytics, and predictive risk management. The move to regtech was further accelerated by the pandemic highlighting the importance of having flexible systems of compliance that can work in any setting. As such, in order for financial institutions to meet their internal needs, create more engaging relationships with clients, and to stay competitive as consumer spending patterns evolve, increased AI and digital capabilities ae required moving forward.
COVID-19 has highlighted the importance of technology in becoming an integral part of financial institutions’ culture, processes, and values. Going forward, firms in financial services need to become comfortable with technology and embrace it to realize their full potential. Even after COVID-19 is gone, tech will be here to stay as the new normal for financial services is bound to be a digital one.
What do you think? Let us know in the comment section below!
Interested in writing for us? Click on the 'Write For Us' button at the top of the page!