More than likely, you have heard the term financial institution on the news or have seen it written in an article, but what does it actually mean?
Commercial banks like PNC or TD may pop into your mind first, but a financial institution actually refers to a wide group of enterprises that facilitate monetary transactions.
This could be traditional banks, which most people deal with on a near-daily basis, but it could also mean an insurance company, a brokerage firm, investment company, credit unions, and so on.
The diversity of companies and enterprises that fall under this one umbrella means that financial institutions require a wide variety of technological solutions to continue running as smoothly and smartly as possible.
As technology continues to rapidly change and grow, shrewd financial companies need to evolve in order to stay ahead of the next breakthrough.
Blockchain is More than Cryptocurrency
Despite the naysaying and doomsday predictions from finance bigwigs like JP Morgan Chase’s Jamie Dimon and Goldman Sachs’ Lloyd Blankfein, cryptocurrency has already kick-started a revolution within the financial industry.
However, under all of the headline-making and energy-sucking crypto-mining lies the real innovation – blockchain – and financial institutions should be looking very carefully at its potential.
The decentralized and automated nature of blockchain naturally minimizes the need for intermediaries, and as a result, offers better security and faster transaction speeds for payment services, inter-institutional transactions, borrowing, fundraising, and more.
In the current model, a simple payment between two individuals in different countries could bring processing fees of over seven percent. With a Bitcoin payment service like Bitpay, peer-to-peer payments can be made for fees as little as one percent.
Likewise, a reliance on intermediaries can make transfers between banks cumbersome and which can take at least a few days to process. With a decentralized blockchain, middlemen like SWIFT can be eschewed for a more direct and transparent means of transfer.
The value of blockchain lies in its ledger simplification and transparency. Once a transaction is logged in the chain, it is near impossible to alter or delete, and that kind of security begets change.
Right now, the industry is only seeing the tip of the iceberg for blockchain’s potential. The hope is that they can veer in a new direction and exploit this innovation, instead of simply smashing directly into it.
Using AI to Streamline Customer Service
The Amazon Echo has become one of the most successful consumer electronics devices in recent memory, and a major reason for that is the user experience. People simply like talking to Alexa.
What does that have to do with the financial industry?
It all comes down to that simple phrase – user experience. More and more, people are gravitating toward either text or voice-based interfaces as their ideal way to communicate with the companies in their lives.
Instead of creating elaborate technological hubs with steep customer learning curves, the more logical solution, especially with the advent of quasi-intelligent conversational interfaces, is to tap into a little humanity.
With the learning potential of cutting-edge AI systems, banks could conceivably tailor chatbots to the individual on a large scale. Each customer would have service interactions that are personalized to their specific financial situation, all while maintaining a friendly conversational tone.
Cracking the BaaP Nut
Several major international industries have been upended by platform-based models. Think Uber or Airbnb; these companies have become leaders in their industries by relying on user-generated value instead of large fleets of cars or huge real estate portfolios, respectively.
The tried and true financial service business model – creating a product or service and value of your own and then selling that to customers – is quickly becoming a dusty relic. And if the major financial institutions are not careful, they could find themselves a victim of their own bureaucratic inertia.
With that said, no viable BaaP model has emerged as of this writing, but some pundits and experts are predicting that industry disruption could happen as early as 2020.
The key to unlocking the potential of BaaP lies in how financial institutions choose to rethink the way they make money. Traditional methods and financial products will not work for a BaaP, and identifying an alternate revenue stream, whether that is through user data or some other means, is incredibly important.
One answer for this problem is collaboration. The platform successes seen in other industries have come through mutually beneficial competitive partnerships, and this has helped drive innovation and increase capabilities. Financial institutions looking to break out as a BaaP will likely find greater success if they pool their resources with other like-minded enterprises.
With all of these innovative and potentially disruptive technological solutions now available for the financial service industry, staying the course and sticking to tried and true practices will inevitably lead to extinction.
Every lasting company has sought out innovation and tested, evaluated, and eventually adopted new technologies – and financial institutions are no different.