A new era of innovation for the banking sector

New technologies have an impact on how banks manufacture and deliver financial services to their consumers, as well as introducing new fintech and big tech actors into the financial services production and delivery process

FREMONT, CA: Financial innovation, in the form of new products like new types of securities, new technologies such as credit scoring, automated teller machines, and new institutions like venture capitalists, mutual funds, has long been a defining element of the financial sector. Specific technological breakthroughs, such as smart phone technology, the internet, and application programming interfaces (APIs); artificial intelligence (AI) and big data technology; and distributed ledger technology (DLT), are supporting the current wave of financial innovation. These new technologies have an impact on how banks manufacture and deliver financial services to their consumers, as well as introducing new fintech and big tech actors into the financial services production and delivery process.  This could have ramifications for existing financial organizations, particularly traditional banks. It may also introduce new sources of systemic risk, posing regulatory and policy issues.

However, a new era of innovation has arrived. Mobile phones (particularly smartphones), the internet, and APIs have facilitated faster information sharing, the creation of new delivery channels, and the better utilization of economies of scale. This has further allowed new distribution channels, a shift away from traditional brick-and-mortar branch structures, and the introduction of new payment service providers – ranging from mobile phone carriers supplying mobile money to fintech businesses offering digital wallets. More competition has also been facilitated by the internet, which allows users to evaluate products and pricing of various financial services among providers, as well as platforms that allow customers to move deposits between banks as conditions change.

The growth of cloud computing has facilitated the creation, processing, and application of big data and applied statistics for assessing and controlling financial risk, owing to the information technology revolution. Over existing methodologies, such as traditional (mainly static) credit scoring models, AI and machine learning provide an improvement in screening and monitoring models. Several studies have demonstrated that big data is more effective than traditional ways in predicting default trends, such as banks relying solely on credit registry data. Other operational and broader risk measuring and management operations, including fraud and cyber incident monitoring, anti-money laundering, and compliance checks, could benefit from AI and big data in addition to credit scoring.

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