Financial Services Disrupted: Open Banking And AI

The banking industry is undergoing a major transformation. Banks and financial institutions are continuously exploring new ways to leverage technology to reduce the cost of operations, improve customer experience and speed time to market. Among these challenges, two technology developments stand out in terms of their potential for disruptive innovation.

Open banking— empowering the customer

Data sharing between banks and authorised third-party applications (such as personal finance managers or payment aggregators) has been tried with some success in parts of Europe and the US. The real push has been driven by two recent regulatory developments: the EU Payment Services Directive (PSD2) and The UK Competition and Markets Authority (CMA) initiative on open banking. However, when it comes to the Middle East, things are a little different.

Fintechs have undeniably disrupted the traditional banking model. The regulatory burden is escalating, and the regional correspondent banking relationships are witnessing a dynamic shift. Amidst all this, the industry is also expected to make a transition to open banking—which raises issues of its own. Concerns around data sharing and cybersecurity are prevalent and must be taken seriously, but the industry must also find solutions to enable it to put this discomfort aside and realise the benefits on offer.

The PSD2 mandate and the UK open banking initiative are going to create a level playing field for incumbent large banks and new entrants alike. Both these initiatives, which are expected to be implemented in 2018, will unleash fierce competition for market share and see the launch of many innovative services using secure open APIs which banks will have to provide. This will enable European banks to continue vying for a bigger share in the global banking and financial services industry. The open banking model encourages sharing data through open APIs and works towards developing an open banking standard.

This data exchange between banks and third-party application service providers will enable consumers to: get a 360-degree view of all their banking accounts and cards; manage finances using a single sign-on app; find trustworthy and objective information on products and services of different providers in one place for comparison; and initiate payments from various accounts using a single app.

Quite a few fintech companies are witnessing renewed attention from industry stalwarts on public facing APIs, partner focused APIs, and internal APIs. Banking and nonbanking entities need to gear their processes towards an open banking paradigm as it gains momentum.

Artificial intelligence—endless opportunities

Banks and financial institutions sit on a treasure trove of data. Many have analytical tools in place to extract value from this data, but it is here that artificial intelligence (AI) can bring real value. Machine learning, cognitive computing and natural language processing capabilities can maximise the insight banks can extract from this wide availability of data. The first, and arguably the most critical, aspect that AI can cater to is fraud identification. Fraud impacts both the bottom line and the reputation of the bank. Although banks, of course, have detection solutions implemented, they are not fool proof yet.

AI can help identify fraud for intervention, using a combination of: rules and reputation lists, where a human encoded logic is used supervised machine learning, where the machine is fed historical data of fraudulent behaviour to flag suspicious activity today unsupervised machine learning, where hierarchical clustering or principal component analysis are used AI can also help to catch human error, for example to prevent fat finger trades. Another major aspect where AI can make a real difference is the customer experience. An AI solution can help delve deeper into both structured and unstructured data to bring out meaningful insights. This can uncover hidden patterns, subtle buying preferences and triggers for dissonance of customers. Once you know your customers better, you can personalise your engagement with them. You can be proactive rather than reactive.

These insights and customer knowledge will further help the industry create more intelligent and customised products and services for customers. In fact, a few Middle Eastern banking groups are already piloting an AI driven virtual assistant with a limited set of customers. There are also a few banks that are currently using beta versions of chatbots to improve customer service and loyalty. Perhaps this is where the most significant opportunity lies—in AI’s ability to automate the frontline. Chatbots are already being implemented and tested across several organisations globally. The financial sector can also use them to reduce human managed processing and automate customer engagement, freeing up bank employees for more value-added tasks.

Strategic challenges

One of the biggest concerns when it comes to technology in the financial sector is the protection of data. Integrating new technology into the architecture has its upsides. However, it cannot be done at the expense of data security. In the open banking system, there are still lingering questions around custody of data and its protection. There are audit trails and regulatory requirements that need to be taken into consideration.

Sharing of sensitive data also requires a certain type of infrastructure laced with security protocols, technical connections and governance rules in place. For Middle Eastern banks, the downsizing of correspondent banking relationships is another strategic challenge that needs to be addressed. Lack of data transparency may cause a few international banks to exit regional relationships which could threaten business.

Another limitation that the industry faces today is the knowledge available. It is important now to look for AI experts—who can take up leadership positions for AI in organisations? The industry must encourage the right skillsets and may need to consider training employees to handle new technology.

Embracing the future Although there are a few challenges that can be envisaged around AI and open banking right now, the cost of not embracing these innovative technologies is going to be exceptionally high in the near future. Banks must combine technology with human intuition at this point. Once they achieve it, they will be better positioned to meet the demands of today’s digital customers.