We often hear about sectors ‘facing disruption’, but few industries today are experiencing it at the same level as the finance industry. Fintech startups are changing the face of finance with new technologies that are making banking easier, faster, and more intuitive. Their growth is outpacing that of the traditional players in the industry: the value of fintech bank assets grew by more than 105% between 2013 and 2022, compared to 75% among traditional firms in the sector.
The growth of these companies, coupled with developments across decentralization, cybersecurity, artificial intelligence and so many other areas, sends us a clear message that ‘disruption’ to the finance industry is going to continue for the foreseeable. As we’ll see, this disruption presents finance firms with various challenges, but lots of opportunities too. As long as firms continue to innovate themselves, they have little to fear from the trends that are reshaping the industry.
In this blog, we’ll look at the key trends that financial companies need to be aware of, and the challenges and opportunities that they represent. We’ll also explore why and how firms must innovate to ensure that they seize those opportunities, and evolve into organizations fit for the future.
Innovation in Finance: Key Challenges
Digitally-native challenger banks are growing in popularity among consumers. In 2018 in the UK, just 1% of consumers were banking with these tech-savvy entrants. Fast forward to 2022 and that figure has risen to a more concerning 8%. Consumer fintech brands, which include Revolut and Monzo, among many others, offer customers a radically modern banking proposition. They provide richer insights into spending and allow a more seamless transfer of money from one account to another. Now, other players are emerging which are offering similar experiences to B2B customers.
Most importantly, fintech challenger banks align their operations with the behaviors and needs of the modern customer: neither Revolut nor Monzo have any physical branches because the young consumer of today doesn’t want them. Traditional banks are beginning to catch up by offering better in-app banking experiences, and this is a welcome trend that will help them to stave off further market share being swallowed up by newcomers. On top of that, banks need to regain consumers’ trust. According to Edelman’s Trust Barometer, global trust in financial services was at 54% in 2022, down 3% on 2019. Fintech doesn’t simply offer new features, it represents change. Traditional finance companies are tasked with convincing consumers that they have their best interests at heart in a global economic climate characterized by fear and uncertainty, while simultaneously revamping their services and processes.
Elsewhere in the fintech space, Buy Now Pay Later (BNPL) startups are offering a convenient and interest-free way for consumers to borrow money to pay for impulse purchases. Providers such as Klarna and Afterpay are joined by countless others offering similar services, and some are even offering their technology as a white-label service to retailers. The threat to traditional lenders here is clear. The question is whether they too will offer faster access to interest-free credit, and take on all the risk associated with it.
Cryptocurrencies & Decentralization
Cryptocurrencies and decentralized models will continue to threaten established institutions. Lending in particular faces disruption in the years ahead. DeFi (decentralized finance) uses smart contracts as part of a blockchain-based system which removes the need for an intermediary, and DeFi now boasts a total locked-up value of $2.1tn, 50x greater than just 10 months ago, according to McKinsey.
Cryptocurrencies themselves remain volatile and unregulated, but if traditional firms can adopt elements of the blockchain technology that underpins them, they can modernize and improve their own processes. Smart contracts, for example, can be used to automate processes by running automatically whenever predefined conditions are met.
Cyber-Security & Regulation
On top of all the innovations in finance coming from startups and new players, traditional firms are also having to contend with the growing threat from hackers. As cyber threats become more sophisticated, so too must defenses against them. As we’ll see, consumer banking is moving in a more open, data-driven direction, and banks will need to balance this with safeguarding that data amid increasing regulatory challenges.
Data protection will continue to play a key role in these regulatory challenges, but in the years ahead, finance firms can also expect to have to adhere to increasing environmental, social or governance (ESG) regulations. The issue of sustainability is going to grow in importance as governments set more challenging requirements on CO2 emissions and other environmental factors, and innovation is going to play a vital role in meeting those requirements.
Innovation in Finance: Golden Opportunities
While there are undoubtedly plenty of challenges for financial firms to contend with, other trends in the industry provide ample cause for optimism. New technologies promise strong opportunities for innovation in finance that have the potential to revolutionize businesses and better align their services with changing customer needs and behaviors.
Artificial Intelligence (AI) is set to play a major role here. According to McKinsey, AI could generate up to $1tn per year in added value for the global banking industry. AI is predicted to help banks and financial services companies improve financial modeling, speed up processes, offer better and more personalized user experiences, and even play a key role in protecting customers’ data from cyber threats.
The biometric payments industry is expected to be worth $18.6bn by 2026. A growing number of providers are entering the market allowing consumers to pay for products with their fingerprint, their smile, or even a wave. This is a trend riddled with privacy and data-security concerns, but if banks can overcome these challenges then they can offer the most seamless of payments to their customers. Mastercard launched its own ‘smile to pay’ service in May this year.
As part of financial services companies’ ongoing digital transformation, cloud computing is expected to play a greater role in their processes. The benefits of cloud computing, which refers to the delivery of computing services such as servers, storage, and software, are powerful and many: it can dramatically reduce infrastructure costs, increase efficiency, and make services more responsive and easily scalable.
The growth of no code/low code app development software provides fantastic opportunities for innovation in the finance industry. These platforms enable the development of new apps in a way that requires little to no coding knowledge. By removing the need for skilled developers, these tools promise to significantly lower the barriers to innovation when it comes to app development. Banks, for example, could be able to add rich new features to their existing customer banking apps or develop new ones from scratch without the need to hire expensive specialists.
Open Banking is a new development in the sector that will allow banks to offer a more data-centric service, aligned with the needs of the modern customer. Open banking grants access to consumers’ financial data to third parties in order to provide a holistic banking service based on a more complete understanding of a customer’s behavior and spending patterns.
Sharing data in this way, albeit with the customer’s consent, will bring its own security concerns. Yet according to PwC, ‘the future of banking is open’: 71% of SMEs and 64% of adults are expected to adopt open banking services by the end of 2022. Innovation in cyber-security will need to go hand in hand with innovation in open banking.
For insurance companies, innovation in the Internet of Things (IoT) may help to restore some of the trust in institutions that has been lost in recent years. In car insurance for example, IoT is being used to offer services and prices to customers based on their actual driving behavior rather than simplistic and generalized characteristics such as age and gender.
The Importance of Innovation Management in Finance
These are just a few of the innovations in finance that companies in the sector can adopt to radically improve their products, services and processes. The finance industry is undergoing relentless innovation, and traditional finance companies have to respond to that by being relentlessly innovative themselves.
But how can finance companies become relentlessly innovative? To ideate, develop, and implement innovations consistently and effectively, innovation management software is vitally important to any modern organization. An innovation management software ecosystem will allow you to carry out the full range of activities that make up an innovation program. You’ll be able to research trends, start-ups, technologies and anything relevant to your innovation efforts, run idea challenges across your employees or customers, and manage your pipeline as ideas are developed into innovations.
Let’s run through the key activities that innovation management software facilitates and makes easier:
Trend Management: Knowing what is going on outside of your own organization is of vital importance in deciding where to focus your innovation efforts. Trend management software allows you to research emerging trends and evaluate their relevance to your strategic objectives. A finance firm will be able to monitor developments across the global finance industry, but it can be just as valuable to research trends in other sectors. Often, there will be transferable value which can be used to create powerful new products and services in your own industry.
Innovation Scouting: Innovation scouting software allows companies to lower many of the barriers to innovation. Rather than taking on the considerable risk and resources necessary to develop innovations in-house from scratch, scouting enables businesses to search for technologies, start-ups, patents and other resources that can help to cut down your time-to-market. Banks, for example, might use scouting to identify emerging disruptors in the fintech space, and either partner with them to adopt their technology, or acquire them outright.
Idea Management: Every innovation begins life as an idea. Idea management software enables you to gather ideas on specific challenges or on any aspect of the business from your chosen audience, whether it’s your employees, your customers, or other groups of relevant contributors. The challenges you choose to run might be informed by the outcomes of your scouting or trend management research. You can then use the software to screen and evaluate your audience’s ideas, and implement those with the highest potential.
Continuous Improvement Software: While innovation management software can be used to gather ideas for game-changing, disruptive innovations, it can be just as valuable when used to crowdsource ideas for ongoing improvements to existing products, services and processes. By reaching out to the two groups of people that know your business best – your employees and customers – you will find a wellspring of valuable suggestions for optimizing your offering.
Innovation Portfolio Management: Innovation management software also allows you to monitor and manage your innovation activities. Using its project management features, you’ll be able to build a business case for each of your innovations and manage their implementation every step of the way. Once launched, a wealth of reporting features will allow you to measure your ROI and share your program’s performance with the rest of the business.
Innovation Management Best Practices for Finance Organizations
These activities should all be facilitated by any innovation management platform, but not all providers offer the same depth of functionality. The best software will be rich with features that make your job as easy as possible. Here are some of the features and attributes that finance companies have told us are especially important to them in their innovation management programs:
Every organization has its own specific set of corporate requirements, and innovation management software should be able to accommodate them. Advanced self-admin capabilities and configurable workflows will give you the power to build your innovation management program on your own terms and make it work for you.
At the same time, what fits one area of your business might not necessarily be right for another. As such, look out for the ability to create unique processes or subsystems for different divisions, and multi-lingual translation if your business operates across the globe.
As we’ve seen, security is of fundamental importance to any finance company and is set to become ever more important in the future. Your system should be able to comply with the regulatory demands of any market you operate in, and involve strong security credentials and confidentiality permissions. You should also be able to choose how to deploy your system, whether on-premise at your own site or within a secured cloud environment.
Seamless & Intuitive Use
For organizations in any industry, innovation management software should be simple to use, not only for those running the program but for those submitting ideas and everyone who engages with it. Your system should therefore have a responsive design to engage customers or employees on mobile devices.
To ensure that your software fits in seamlessly to your business, it’s vital that it can integrate easily with any legacy systems or external platforms that your company uses. This could include single-sign on (SSO) functionality, or connection to your company’s communication platform of choice, such as Jive or Yammer.
Powering Innovation in Finance with Qmarkets
Traditional finance organizations are faced with an existential challenge: to remain relevant in the face of a constant barrage of disruption. To do so, innovation is crucial. Using innovation management software, banks and financial services companies can weather the storm of disruption and emerge stronger than ever, leveraging cutting-edge technologies to launch new products and services that align with the needs of the modern consumer.
If you’re interested in finding out more about innovation management, head here.
To discover more about our software that drives innovation management programs at leading finance companies around the world, take a look at our product pages.