KuppingerCole Report
Advisory Note
By Anne Bailey

Emerging Technologies Fostering Digital Business Innovation: Finance Industry

The relative success of FinTechFinTechs drives the conversation surrounding finance and emerging technologies, and their products are capturing the hearts and minds of consumers. But despite the disruptive reputation of AI, blockchain, and IoT, FinTechs are not competing in a dramatically different way than legacy financial institutions. FinTechs provide the same services, but choose to specialize their service offering as opposed to legacy institutions which have worked to provide a panacea of services to retail, corporate, and investment clients. This Advisory Note gives insight on how to respond to changes in the financial services industry.
By Anne Bailey
aba@kuppingercole.com

Content of Figures

  1. Figure 1 The Changing Ecosystem
  2. Figure 2 FinTech Characteristics
  3. Figure 3 Areas of FinTech Disruption
  4. Figure 4 How to Respond to FinTechs
  5. Figure 5 Comparison of AI/ML Use Cases Built on Historical Data, Real-time Data, and Repetitive Tasks
  6. Figure 6 Data Inputs for a Fraud Prevention with AI Use Case
  7. Figure 7 Data Inputs for an Algorithmic Trading with AI Use Case
  8. Figure 8 Data Inputs for an Automation with AI-Supported RPA Use Case
  9. Figure 9 Data Inputs for a Customer Attrition Prevention with AI Use Case
  10. Figure 10 Data Inputs for a Chatbots with AI Use Case
  11. Figure 11 Data Inputs for an Asset Valuation with AI Use Case
  12. Figure 12 Comparison of Blockchain Use Cases Based on Decentralization, Ledger Functions, Sequential Ordering, and Smart Contracts
  13. Figure 13 Process Improvements in Cryptocurrency & Digital Coin Transfers with Blockchain
  14. Figure 14 Process Improvements in Trade Finance with Blockchain
  15. Figure 15 Process Improvements in Intrabank Communications with Blockchain
  16. Figure 16 Process Improvements in Digital Wallets & Exchanges with Blockchain
  17. Figure 17 Process Improvements in Mortgage Applications with Blockchain
  18. Figure 18 Comparison of IoT Use Cases Using Real-World Objects, Real-Time and Standardized Data, and Locus of Control
  19. Figure 19 Examples of Smart Devices in Bank Ecosystems
  20. Figure 20 Examples of Smart Devices in Insurance
  21. Figure 21 Examples of Smart Devices in Voice Banking with IoT
  22. Figure 22 Examples of Smart Devices in Building Risk Profiles
  23. Figure 23 Role of AI, Blockchain, and IoT in Identity Use Cases
  24. Figure 24 Self-Sovereign Identity & Emerging Technologies
  25. Figure 25 Reusable KYC, Customer Onboarding & Emerging Technologies
  26. Figure 26 Risk-Adaptive Multifactor Authentication & Emerging Technologies
  27. Figure 27 Value Delivered by Emerging Technologies

1 Executive Summary

Customer expectations are driving change in the financial sector. Users are developing a lower tolerance for time delays and transaction fees, and req ...

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2 Highlights

The vast majority of FinTechs are simply leveraging the cost-saving benefits of digitization to offer more competitive prices to their customers and r ...

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3 Competitive Landscape

The financial services industry has been disrupted with a plethora of new entrants – FinTechs. They typically offer single services for the lower pr ...

FinTechs are primarily responsible for this shift, through the shift to mobile, provision of a narrow scope of related services, and the ability to re ...

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3.1 Payment Services

A key event in transforming the payment services sector is the Revised Payment Services Directive (PSD2), requiring banks to make customer account and ...

Banks are being edged out of payment services, replaced by Payment Initiators and Account Information Service Providers empowered by PSD2. It is likel ...

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3.2 Lending Services

Lending FinTechs have reached moderate maturity; their growth rate is rapid, but the critical mass has not yet been reached to maintain profitability ...

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3.3 Stock Trading and Credit Scoring

A few aspects of financial services can be fully automated, which are well-suited to AI solutions. These tools are highly mature; automated trading an ...

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3.4 Online Banks

Online Banks have high maturity; they have been available on the market for decades, and provide a limited number of services with high reliability. H ...

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3.5 Emerging Service Providers

Emerging service providers are those who create ready-to-implement solutions for traditional financial actors that leverage emerging technologies. The ...

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4 Artificial Intelligence and Machine Learning in Financial Services

Artificial Intelligence allows companies to automate repetitive tasks and leverage mathematical analysis. AI and ML in financial services include frau ...

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4.1 AI and ML Comparison Matrix

Working from an internal-to-external perspective, AI in financial services can include fraud detection, algorithmic trading, attrition prediction from ...

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4.2 AI and ML Use Cases

Fraud detection and KYC compliance can be supported through algorithmic verification of new accounts or of account activity. KYC compliance can be sup ...

Trading with the aid of AI leverages the mass of data that is available for stock trends and prices. Large amounts of data are what allows AI tools to ...

Automation of operations can be applied generally across all industries, but has particular use in the financial industry to automate credit scoring o ...

Client attrition prediction allows companies to identify clients who are exhibiting behavior that indicates their impending exit. AI enabled tools can ...

One of the closest AI enabled customer interfaces is with chatbots. Using NLP, chatbots can answer customer questions on demand, recommend products or ...

Asset valuation can be automated through AI by expanding the factors which contribute to the value of an asset, much like an AI-supported risk assessm ...

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4.3 Implications of AI Deployment

The implications of AI tools are widespread cost savings. In each case, the tool performs a repetitive and labor-intensive activity more quickly and t ...

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5 Blockchain in Financial Services

Blockchain has the potential to revolutionize intrabank communications infrastructure and become a key technology in updating trade finance processes. ...

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5.1 Blockchain Comparison Matrix

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5.2 Blockchain Use Cases

Blockchain infrastructure creates the opportunity to use cryptocurrencies in the financial sector and would appear to be suitable given the benefits f ...

Trade finance built on blockchain can provide significant time and cost savings. Decentralized management and tamper-proof records of events builds tr ...

Intrabank communications stands to gain time and cost savings as well by using blockchain to support secure, instant, and trusted communication channe ...

Some digital wallets and cryptocurrency exchanges record transactions on the blockchain. This gives the benefit of having a transparent ledger of tran ...

Like many processes for large purchases, a mortgage application depends on the appropriate action and documentation of many parties. Because each step ...

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5.3 Implications of Blockchain Deployment

Blockchain solutions are a transformative change, completely redesigning the infrastructure to facilitate transactions or communications. The implicat ...

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6 Internet of Things in Financial Services

The financial sector is adapting to mobile devices, but the Internet of Things comprised of sensors on real-world objects will impact the financial se ...

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6.1 IoT Comparison Matrix

IoT is most suitable in data-rich environments, where a sensor can be placed to measure constantly flowing data. In the financial services sector, the ...

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6.2 IoT Use Cases

There is a high maturity for capturing benefits via smart devices in the ecosystem of a single bank. ATMs, online banking and mobile apps, smart home ...

Insurance bolstered by IoT devices has low maturity. There are clear benefits from more accurate and real-time information, but the limited control th ...

Voice banking through smart home devices has achieved a moderate level of maturity. Individual banks partner with smart home devices to allow the user ...

Building a customer risk profile is standard practice in the financial sector, and IoT devices can expand the amount of data that is available for the ...

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6.3 Implications of IoT Deployment

The impact of IoT in the financial industry will be severely limited if external companies are controlling sensor placement and data collection. Data ...

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7 Digital Identity in Financial Services

To improve both the security and user experience in the open banking environment, it is necessary to have interoperable digital identities. Blockchain ...

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7.1 Digital Identity Decision Matrix

Emerging technologies play a different role in redesigning digital identity. Blockchain typically provides an underlying architecture for secure stora ...

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7.2 Digital Identity Use Cases

Self-sovereign identity (SSI) is the most drastic identity use case enabled by the emerging technologies. SSI is a philosophical concept that allows t ...

Reusable KYC is a use case that is particularly attractive to financial services, who must regularly expend time and resources to establish the credib ...

Risk-adaptive multifactor authentication (MFA) is now required by PSD2 regulation, which has stimulated a rise in AI-based multifactor authentication ...

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7.3 Implications of Digital Identity in Financial Services

Digital identity manifested as any of the above use cases has the potential to create an interdependent network of identity verifiers, users, and serv ...

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8 Regulatory Notes

The PSD2 and GDPR are key regulations to consider when operating in the European Union. The PSD2 opened the door for many FinTechs to enter the paymen ...

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9 Recommendations and Conclusions

FinTechs have not yet achieved dominant market shares in any aspect of the financial sector, but they have significantly changed customer expectations ...

When taking an aggressive mobile-first strategy, generational aspects will be important to consider. Aging populations and their wealth management pre ...

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