5 Technologies Shaping the Financial Services Industry

The financial services industry is set for vast and disruptive change. Covid-19 has elevated the need for digital platforms and services. Open banking is eroding barriers between finance and retail. These are the 5 technologies shaping the industry this year.

1. Embedded finance

Embedded finance tech had a strong 2021, securing $4.24 billion in Venture Capital, almost triple that of 2020. The overall value of the embedded finance market is set to exceed $138 billion by 2026, increasing from just $43 billion in 2021.

According to OpenPayd research, 96% of European brands plan to offer embedded payments within the next five years. This will disintegrate the boundaries between banking and other platforms, giving easy access to investments, payments, and lending.

Embedded lending, otherwise known as Buy Now, Pay Later (BNPL), is just one example of the growth potential for embedded finance. Solutions like PayPal and Klarna currently dominate, surveys revealing that 62% of us have used BNPL 5 times or more.

The integration of financial services into non-financial platforms is set to continue to grow in 2022, with 54% of business leaders making it a top priority.

“The beauty of embedded finance is that it streamlines financial processes. Before the development of embedded finance or banking, there was usually a gap between a consumer and the company they did business with. (...) Embedded finance companies have found a way to act as the bridge or close the gap between themselves and the consumer.”

- Scott Raspa, Head of Marketing, Hydrogen

2. Climate Technology (ClimaTech)

Climate technology (ClimaTech/cleantech) - technology that addresses our impact on climate change – is a burgeoning market. Reports indicate that 6/10 technology start-ups in the UK are currently focused on creating green tech.

The potential for carbon reduction in the financial services industry is not an opportunity. It’s a necessity. Estimates put the industry’s annual paper document output at 507 million, equivalent to the deforestation of 50,000 trees each year. An 80% reduction in paper is predicted to save the industry up to £1.3 bn annually.

Many next-generation technologies such as AI, blockchain, and cloud computing have a greener footprint than their incumbents. Other technologies have arisen to address this emergent green consumerism, such as Joro, which translates spending into a metric for your carbon footprint. As awareness of environmental issues grows, ESG will continue to rise on the agenda. Stakeholders may begin to look at carbon savings when considering technology budgets as a predictor of growth.

"There is potential to better channel and incentivise investment in technology areas that have the greatest future emissions reduction potential."

- PwC, State of Climate Tech 2021 Report

3. Cloud platform-as-a-service

Cloud computing enables financial services to develop platform-as-a-service (PaaS) models that adapt to the needs of their customers. By fully embracing the cloud, institutions can deploy services rapidly and at a much lower cost than traditional software.

18% of enterprises were utilising cloud services in 2018, compared to an estimated 28% by the end of 2022, with adoption rates to continue to rise beyond this. The global cloud computing market is set to grow from $445.3 billion in 2021 to $947.3 billion by the end of 2026, with 85% of banks focusing on PaaS as their primary area of growth.

Banks and other financial providers have seen that the cloud offers results too good to ignore. Utilising the cloud to deploy PaaS models could unlock:

• Potential operational cost savings of 50%
• Flexibility to quickly build propositions 
• Increased data and asset protection
• Hyper-personalisation for consumers
• Competitor differentiation

"Platform-as-a-service (PaaS) allows an organisation to leverage key middleware services without having to deal with the complexities of individual hardware and software elements, increasing efficiency."

- Sacha Labourey, CEO, CloudBees

4. Artificial Intelligence

Banks and other financial organisations are getting serious about AI. According to estimates, AI technology promises a potential 22% reduction in operational costs by 2030. This amounts to more than $1 trillion.

81% of banking executives believe that AI will be a key competitive differentiator, with ¾ of C-suite executives stating that those who don’t scale AI in the next five years risk going out of business.

An estimated 60% of FS organisations are already using AI in some processes. This includes robotic process automation (36%), virtual assistants or conversational interfaces (32%) and machine learning (25%) to detect fraud and support underwriting and risk management.

AI technologies have potential in many areas, including:

• Personalising customer services
• Boosting revenue and productivity

• Reducing errors rates and detecting fraud
• Improving risk management and algorithm training
• Automating underwriting and anti-money laundering (AML) 

It is estimated that the global annual value of AI and analytics could reach $1 trillion, with the machine learning market set to reach $8.8 billion by the end of 2022, along with banking-related chatbot interactions set to grow an overall 3,1505% between 2019-2023.

"Whether in accelerated trading, automated call centres, real-time fraud prevention, or other financial services, AI is helping financial institutions drive the future of finance for their customers and clients."

- Kevin Levitt, Global Business Development, NVIDIA

5. Cybersecurity software

Financial organisations are 300x more likely to be targeted by cybercriminals due to the amount of sensitive customer data they hold. The situation is exacerbated as digital transformation shifts communications and services online.

In 2021, the FS industry had the second-highest average cost for data breaches out of all sectors, with each breach resulting in average losses of $5.72 million - a 238% increase in the cost of fraud. Several key technologies will become more commonplace over the next few years.

Biometrics

As a method of detecting individuals through physiological aspects such as facial features and fingerprints, biometrics offers FS companies strong payment and identification capabilities. Studies have shown that 61% of individuals believe that biometric identification is as or more secure than a password, offering banks and other financial businesses a method of protecting digital assets, preventing fraud and building digital trust. The biometric market is forecast to be worth $104,959.6 million by 2028. 

Authentication

As a more cost-effective solution than biometrics, two-factor authentication (2FA) helps to provide an additional protective barrier against cyber risk, preventing 80% of data breaches when in use. 2FA has become increasingly common, with 79% of surveyed individuals stating that they used some form of 2FA in 2021, compared to just 28% in 2017. However, the sporadic availability of 2FA as a security option is still concerning.

Email Encryption

The volume of emails sent by financial companies increased by 81% during Covid-19, with email often used to transfer documents and confidential data to customers. Email is a channel regularly associated with data breaches due to its lack of built-in security, with 83% of businesses suffering email-related data breaches within 12 months.

Email encryption services such as Unipass Mailock scramble the contents of your emails, turning them into code and preventing unwanted third parties from accessing the data. The global worth of the email encryption market is expected to increase from $3.4 billion in 2020 to $11.8 billion in 2026.

The key to success with cybersecurity is balancing risk with usability. Though security is necessary, it shouldn’t get in the way of efficiency, if anything, it should look to improve upon it.

"Consumers are eager for a future where opening a bank or brokerage account doesn’t require three forms of cumbersome identity checks and passwords containing every letter of the alphabet."

- Dr Jau Huang, CEO, Cyberlink 

Is your firm focused on the right technologies to keep up with the pace of change? Read the full report: 20 Technologies That Will Make the Financial Services Success Stories of 2023.

Further reading:

• 5 Processes your Financial Services Digital Transformation Has Overlooked
• 8 Secrets to Creating Change in Financial Services Without Rocking the Boat