OPINION: Will Innovation Benefit Customers?
The financial services industry is abuzz with the potential of blockchain, artificial intelligence and machine learning. I wish it was just as enthusiastic about improving basic services for its customers.
Two recent experiences may colour my views. In the first, I received some proceeds from an insurance policy which they decided to send by cheque. Despite it being the 21st century my bank said it would take a week for me to access the money – the standard clearing cycle, an extra day because I had used an ATM to deposit the cheque (at my branch), another extra day due to the amount plus a break for the weekend because, off course, computers cannot process information on a Saturday or Sunday.
Secondly, I spent time in the US over the summer and despite all the shops having machines to pay by card using a PIN number instead of a signature, this only actually worked in one place. The process has operated smoothly in Europe for years and in the UK we have moved onto contactless payments where you just touch your card for purchases lower than £30.
In a speech today Yves Mersch, member of the executive board of the European Central Bank, said the digitization of financial services could result in new business models or products with disruptive potential in the financial sector. He acknowledged that distributed ledger technology has the potential to fundamentally change securities and payments business but cannot be adopted by the Eurosystem until many functional, operational, governance and legal aspects have been resolved.
Mersch said the next stage of the development of market infrastructure will consist of three components – the consolidation of cash and securities settlement systems; a Eurosystem collateral management system and finally, settlement services to support instant payments.
“By November 2017 end-user solutions for instant payments in euro should be made available at pan-European level by payment service providers,” he added. “The Governing Council has decided that it will launch and closely monitor an investigation with market participants on the necessity of extending settlement operating hours for a subset of its regular settlement services up to 24/7/365 to allow for real-time settlement of instant payments.”
However while this investigation is going on, competitors to the traditional payments industry are not standing still. Ripple, the venture capital-backed payments startup, this month raised $55m to expand its enterprise blockchain solutions and add more banks to its global network. Chris Larsen, Ripple chief executive and co-founder, said: “Our mission is to make cross-border payments truly efficient for banks and their customers, and in doing so, lay the foundation for an Internet of Value where the world moves money as easily as information.”
Moving money as easily as information is helpful and useful to people. These are the reasons that Paul Volcker, the former Governor of the Federal Reserve, gave in a speech in 2009 when he explained that his favourite financial innovation of the past 25 years had been the ATM. He said: “It really helps people, it’s useful.”
Concentrating on being helpful and useful is one way to rebuild trust in the financial sector and, more importantly, remaining relevant. An Accenture report estimated that just UK banks could lose up to losing up to 43% of their current payments based revenues by 2020.
‘In addition to the dramatic erosion of their payments revenues, banks are also set to see their interest-based revenue streams impacted by a loss of ‘customer ownership’, resulting from the displacement of bank-customer interactions by fintech or progressive traditional financial services companies,” added Accenture.
So banks should listen to Mr. Volcker. You can be useful and helpful before rebuilding your whole infrastructure using blockchain, artificial intelligence or machine learning.
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