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Three fundamental innovations in the pipeline for the financial sector

2017 May 10 at 09:22AM

Fintechs are currently revolutionizing the financial sector completely. Technologies such as mobile, cloud, big data and AI are used to meet the increased demands of customers. At the same time, they are replacing conventional financial products: According to a PWC study, 20% of the banking business is threatened by Fintech. 

Fintechs are ahead of the classic financial institutions in terms of cost efficiency, transparency and user-friendliness. „Banking is necessary, banks are not, "says Bill Gates, verbalising the fears of the financial institutions. C2C banking is already a reality. Banks must therefore use digitalisation as an opportunity and take a look at our summary of the exciting innovations on our horizon.

Blockchain

Although Fintech's technology can effectively deal with traditional payment methods, blockchain is still a foreign concept to many. A blockchain is a decentralized database which in each data record continuously stores a hash value of the respective preceding data record and is thus protected against subsequent manipulation. It is thus a self-constructing, neutral system that cannot be manipulated or hacked, unlike classic databases stored on servers.

The information is reconciled and verified with millions of computers. In this consensus mechanism, there is no longer a central administrator, but a ‘majority says’ true-finding. The existence of a trustworthy instrument to check transactions for their integrity is thus unnecessary. It is assumed that the protection against manipulation is only at risk if a single attacker dominates over half of the entire network.

The idea of the blockchain originates in the virtual cryptography Bitcoin, but it has the potential to change the entire financial system and areas beyond. However, it contributes mainly to transaction security as compared to centralized systems. The Bitcoin Blockchain has been around since 2009 and is the oldest of its kind. It has a size of over 120 GB and is distributed to approximately 6700 accounts. Paying with Bitcoins does not incur any charges, such as credit card companies, and no personal information, such as name and address, is required.

The Bitcoin Blockchain works as follows: multiple transactions are grouped into data blocks that have a checksum. These are again combined in pairs in a hash tree whose header contains a hash value. This value is then stored in the subsequent header and so on. Therefore, no single transaction can be changed without simultaneously changing the header and all subsequent data blocks.

What for some appears to be an abstract system for shady online business is slowly arriving in the real economy. The Deutsche Bundesbank is currently developing a blockchain prototype for the securities market together with Deutsche Börse AG. IBM recently presented a new service called Blockchain as a Service.

Biometric Identification

Unlock your smartphone with your fingerprint? It has longevity and everyday availability on its side, and it should prove to be far safer than the passwords and pins of the past. In international security, for example at airports, the fingerprint and iris scan is already a reality. So why not exploit biometric verification for financial services

Biometric authentication could solve one of the core problems of today's financial economy by providing both convenient and secure access to online banking and online payment for customers. Biometrics replaces personal characteristics and makes personalisation more than ever possible. Methods such as fingerprint, iris scan, voice analysis and facial recognition have greatly improved. State of the art prototypes are already usable, but the actual implementation by financial institutions is still a long way off.

A study by the credit card company Visa also found that banking consumers have the highest confidence in the application of biometric data. In general, more than 60% would agree to use biometric technologies. According to the study, 81% of Germans trust banks in terms of biometric identity confirmation, followed by payment networks at 69%, department stores at 57% and online brands at 52%. On the other hand, only 28% of consumers would trust their biometric data to authorities.

In the choice of authentication, three-thirds of the interviewees prefer the fingerprint as the safest form, followed by the iris scan at 68% and the face detection at 48%. However, the iris and facial scan provide greater protection.

PSD 2

The PSD2 (EU Payment Services Directive) divides opinion: Is it the end for classical financial institutions, or a huge opportunity? It brings with it one of the biggest changes in the banking sector.

The Directive becomes effective in January 2018 and obliges financial institutions, among other things, to open up their infrastructure to third parties. For banks, this means that they lose the sole sovereignty over their customer accounts: Fintechs, in particular, can then offer modern, individual banking solutions to account holders. For this, only the approval of the customer, not the bank, is necessary.

These independent solutions allow, for example, account owners to manage accounts across banks in a clearly laid out app. It also allows them to benefit from Fintech industry innovations that their own banks have not yet offered.

There are already some API banking providers, but access to bank accounts is still at the discretion of the bank, which can withhold it at any time. PSD2 makes this access comprehensive, which will make Fintech's expansion much easier. 

Want to learn about the digital trends in the banking and insurance industry? Then read our free white paper "Digital Transformation of Financial Service Providers" and learn which trends are here to stay.
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