The Weekly Extract from Extractable is a condensed roundup of digital experience news for financial services institutions, and our take from San Francisco.
This week we discuss the growing number and reasons for fintech partnerships. We review how FIs are deploying AI and machine learning to combat fraud. Lastly, we look at the impact of BigTech and fintech on wealth management.
Fintech Partnerships and Credit Unions
Back in early August we wrote that fintech and FI partnerships are “an effective strategy for expanding capabilities and accelerating digital transformation.” This sentiment was echoed on a Payments Journal podcast with Cliff Thompson, VP of Business Development at Avidia Bank and Tim Sloane, VP of Payments Innovation at Mercator Advisory Group.
Sloane notes that these partnerships allows banks to expand their market, “increasing the depth of friction and connectivity a company has to its customers and providing new revenue opportunities.” In turn, Thompson adds, partnering with banks give fintech firms access to clients that they would not have been able to reach.
FIs can also gain a focus on customer experience that they haven’t been able to garner through traditional FI customer feedback methods. Sloane notes, “independent software vendors are all about understanding the market that they’re supporting and distributing software that is right on target for that market segment.”
In an article in Banking Exchange, Andrew Steele from Activant Capital proposes a different kind of partnership for fintech firms. He notes that “every new fintech startup on earth is lining up to get a meeting with” neo-banks. Fintech firms see these partnerships as a way to build a network that can beat the big banks. Steele adds, “But if you are relying on them alone to scale your fintech startup, you’re in for a tough road,” as there is saturation in fintech-neobank partnerships.
Steele proposes that fintech firms look elsewhere, “the big banks have a cool, rich uncle: credit unions. These are banks with a community feel.” While neo-banks have added as many new customers as neobanks, CUs total deposits dwarf what neobanks can muster.
On the part of CUs, Steele notes that they need technology and better customer experiences and are easier to deal with than bureaucratic banks. “Why are these credit unions so hungry for new tech? Because the big banks they compete against have marketing budgets that would make Don Draper blush, branch coverage from your corner store to Hong Kong, and billion-dollar tech budgets. To the credit unions, the choice is simple: partner with entrepreneurs who make them stand out, or step aside.”
Steele counsels fintech founders,“if you want your impressive new algorithm to get media coverage and impress your friends, then target neo-banks. But if you want to build a billion dollar company, focus on the credit unions.”
Fighting Fraud with AI
Steve Morgan, Financial Services Director Europe at Pegasystems, writes in an article in Finextra that fraud has continued and perhaps accelerated during the pandemic. He writes, “Data from Barclays Bank on reported scams from January to July 2020, found that fraud went up 66 percent in the first six months of this year. As a result, consumers will be more aware of the risks of banking online and could put some people off from banking digitally altogether.”
PYMNTS quotes Stephen Ritter, chief technology officer of Mitek, in their own article, “it’s unfortunately very common that the fraudsters take advantage of moments of weakness. They try to achieve what they want to achieve when people are distracted. [Consumers] are more worried about their health than they are vigilant about the emails they read and the links they might click.”
PYMNTS notes that fraudsters haven’t changed their tactics. However, during the pandemic “they have been devastatingly effective.” Ritter suggests that FIs should perform behavioral analysis of user accounts as a method to conduct robust, risk-based decisions on identity. “If someone’s making a $1 payment, that’s one thing in terms of risk and the level of assurance that we need. If someone’s making a $2,000 Zelle transfer, that’s something else. It’s all about the specific use case.”
Beyond identification and authentication, many FIs are investing in artificial intelligence tools to fight fraud. According to another PYMNTS article “These investments are paying off, according to fraud prevention specialists, with 80 percent of experts saying AI reduces payments fraud and 63.6 percent of FIs citing AI as a valuable tool for halting fraud before it succeeds. These systems are commonplace at large FIs with more than $100 billion in assets — 72.7 percent of which leverage AI — but only 5.5 percent of all FIs reportedly have an AI-based system in place.”
PYMNTS suggests that small organizations can close the AI gap by deploying machine learning tools “that can learn from its own analyses instead of operating based on unchanging protocols. ML systems take into account past transactions and apply these rules to future analyses to detect financial crime, making them gradually more adept at fighting fraud over time. This means that banks’ investment in the technology will increase in value as MI tools become more familiar with FI systems and the techniques that fraudsters use to crack them.”
As technology gets more sophisticated, fraudsters are adopting new techniques. In an article in ITPro, Bobby Hellard writes about the growing concern of Deepfakes within financial services. Hellard writes, “Deepfakes, which are doctored or realistically edited videos and images, are a growing problem for a number of industries.”
Identification startups like Mitek and iProov are providing solutions to address this problem. “HSBC has become the latest bank to sign up to a biometric identification system. The bank will introduce it in the US where it will check the identities of new customers by using live images and electronic signatures,” Hellard notes.
Other companies to adopt Mitek tech include Chase, ABN Amro, Caixa Bank, Mastercard and Anna Money, according to an article in The Financial Times.
Hellard quotes iProov, “As the arms race begins between deepfake generators and deepfake detectors, enterprises must prioritise their security measures and consider how they can protect their customers from sophisticated attacks.”
It’s clear that FI digital roadmaps must include cybersecurity and anti-fraud measures. While digital brings the possibility of better customer experiences, it also brings a new level of security concerns.
The Impact of Fintech and BigTech on Wealth Management
Those of us that work or have worked in the wealth management industry know that traditional banking relationships continue to be the standard. However, the high touch model is starting to look quaint.
As Adam Snyder writes in an article in The Fintech Times, BigTech and fintech “have opened a Pandora’s box of customer expectations. All customers, but in particular the Gen Y and younger generations, demand a seamless, real-time and hyper-personalised experience that complements their digital lifestyle.”
Francois Botha writing in Forbes makes a similar point. “Although they are digital natives, face-to-face meetings are still important to over 60% of Millennials. These should be supported by social media communications and technological innovation that enables this generation to access what they need to when they need to. Finding new, engaging ways to address the pains that future wealth owners face can help traditional organizations to pivot into the new era.”
Snyder examines the results of the annual Capgemini World Wealth Report. In short, the report makes the case that BigTech firms, aided by fintech, are making significant inroads into wealth management due to their focus on the customer experience and the ease of use of digital technologies.
Elias Ghanem, Global Head of Market Intelligence at CapGemini, counsels wealth management firms to “strengthen their digital capabilities and bridge CX gaps to better prepare themselves for potential competition with BigTechs.” They should also be looking at BigTech firms as possible partners, in an open banking future.
Botha has a similar recommendation: “For traditional private banks and wealth managers to compete, it is not about replicating this 1:1. Instead, it is about translating the value of private banking services into a Challenger / Neobank / digital wealth management type offering. To do this requires active research into client pain points through next generation client engagement and listening.“
In closing, Snyder makes a statement that we endorse, “In an uncharted and uncertain future, firms who are ready to reinvent themselves and adapt to their evolving ecosystem will be best positioned for success.”
We would add that the time to move on reinvention is now. Firms that wait until some undetermined future to act will not survive.