FinTech grows up

When Snoop Dogg disrupts your business, you know you’ve got problems … and “Gin and Juice” ain’t one.

The rapper is among those investors backing Robinhood, a popular FinTech (financial technology) app that makes trading stocks simple and free. Both Apple and Google say it was one of the 10 most downloaded apps of 2015.

“As the use of technology continues to grow exponentially, the consumer’s demand for convenience is growing with it,” says Michael McAndrews, director of network security services at WGM Information Security Services in Scottsdale. “Over the last several years, the financial services industry has seen remarkable growth in consumer’s use of technology to access money and transact business.”

Whether you’re a gangsta rapper, the CEO of a bank or a consumer looking for an auto loan, there’s no doubt that you’ve seen how FinTech is transforming the way we think about financial services. FinTech allows companies to serve their customers better and makes it easier to get paid for your goods or services, but it also presents challenges. And at a time when the mountain of regulatory challenges facing the financial services industry seems overwhelming, the last thing it needs is the challenge of keeping up with the Joneses … or the Robinhoods.

Industry impact

“Banks are becoming technology service firms that just happen to sell financial services,” says Cathy Cooper, executive vice president and Retail Banking Group manager for Washington Federal. “It has become a central component of every strategic initiative we undertake.”

That effort is vital in today’s tech-driven business climate. To keep up with the competition, traditional financial services firms have ramped up their FinTech efforts dramatically and the effort is paying off. Mobile banking apps from JPMorgan Chase, Bank of America, Capital One and Wells Fargo ranked among The top 10 U.S. banking and FinTech apps in 2016, based on ratings. Although they lack the bells and whistles packed into other more innovative apps, traditional firms score higher in fraud protection and transparency, two key concerns for FinTech customers.

Banking side bar“The single biggest development is the wide use and availability of mobile finance applications,” says Tim Lipsky, senior vice president of digital strategy for Desert Schools Federal Credit Union. “Not just banking apps or the ability to complete mobile deposits from your phone, but the wide range of credit reporting, fraud protection and even real estate shopping applications that are now available.”

But mobiles apps are just the appetizer in terms of how technology has transformed the financial services sector. Email and text messaging have also turned the industry upside down.

“There has been a dramatic migration to electronic communication with clients and other financial institutions, accompanied by an equally dramatic increase in requirements and focus on cybersecurity,” says Eric Nystrom, director of process and technology at MRA Associates. “Across the board, today we are almost exclusively using encrypted web portal and email communication with clients and other financial institutions, where five years ago we often used U.S. mail, fax and telephone communication.”

Charles Schwab got ahead of the tech trend and was named to Fast Company’s 2015 list of the Most Innovative Companies in personal finance after it launched a fully automated investment advisory service, Schwab Intelligent Portfolios. It is the only investment advisory service using sophisticated computer algorithms to build, monitor and rebalance diversified portfolios based on an investor’s goals, time horizon and risk tolerance without charging any advisory fees, commissions or account services fees.

“The Internet and technology in general has allowed our clients to research, trade, open accounts and interact with Schwab from the convenience of their homes, their offices and nearly anywhere on their smartphones,” according to Ed Obuchowski, senior vice president of Advisor Technology Solutions for Schwab Advisor Services. “One of the biggest challenges that Schwab, and frankly every firm that has an online presence must contend with, is protecting our clients from online threats and fraudulent activities.”

Challenges ahead

While Jim Patterson, CEO of UMB Bank’s Arizona Region, says the regulatory environment is still one of the greatest challenges financial institutions face, the industry faces the added challenge of trying to balance innovation that enhances the customer’s experience with fraud, compliance and other areas of risk that might be introduced when adopting and adapting to new technologies.

“There are new types of payments contemplated every day, whether it’s paper-to-electronic, peer-to-peer, real-time or mobile transactions, and we need to be able to continually enhance our offering to keep up with — and lead this — positive momentum,” Patterson says. “That’s where FinTech can play a role and provide a great way for us to work with those entrepreneurs to create the symbiotic relationship between banking and emerging technologies.”

Bryant Andrus, president of KeatsConnelly, says technology is changing so fast that by the time his team members are comfortable with a new technology, it can be outdated.

“Additionally, financial companies are targets for cyber-attacks because of the amount of information we have on our clients,” Andrus says. “We have to be extremely diligent about ensuring our technology for safeguarding our clients’ data.”

The greatest threat to the financial services business continues to be the theft of access tokens, credit card numbers, PIN codes and passwords, experts say.

“Whether obtained from breaches or phishing, these transactional validation means are increasingly vulnerable,” McAndrews says. “The relationship between demand for more convenience and the need for increased security will continue to be a difficult balance for financial services businesses.”

Opportunities await

In an interesting twist, UMB has taken on an innovative “if you can’t beat them, invest in them,” strategy to compete in the increasingly tech-heavy financial services sector.

“We believe there is a real opportunity in our communities to create, innovate and accelerate business in the FinTech sector,” Patterson says.

To that end, UMB has invested in several FinTech startups and accelerator programs throughout the company’s footprint as a means to support local entrepreneurs and gain access to the latest in financial technologies.

“When we have homegrown startups that are transforming the way the financial and technology industries are doing business, everyone benefits,” Patterson says. “We also benefit by having insight and awareness of the developing technologies and how those can assist our clients now and in the future.”

Another potential game changer in financial services, particularly the traditional banking system, is the industry is in the early stages of exploring a new digital currency technology.

“With each new generation of young people, acceptance of new payment technology, including digital currency, has become more prevalent,” McAndrews says. “In order to keep up with consumer demand for faster and more convenient access to their funds, financial services companies must move to embrace these new technologies.”

Perhaps the greatest threat to the traditional banking system is the Blockchain, according to McAndrews. Probably most well-known for its use with the digital currency Bitcoin, a Blockchain provides near real-time transaction settlements with multiple layers of verification. A Blockchain is a distributed ledger database that uses a cryptographic network to provide a single source of truth.

“Compared with traditional clearinghouse systems, the Blockchain has shown promise by settling transactions more quickly and at a lower cost with greater security,” McAndrews says. “A Blockchain allows untrusting parties with common interests to co-create a permanent, unchangeable and transparent record of exchange and processing without relying on a central authority.”

Within the financial service industry, many large financial institutions are already experimenting with private Blockchains and industry experts expect more to come in 2017.

“Much the same as The Check Clearing for the 21st Century Act (Check 21) changed banking and expedited the movement of funds in 2004,” McAndrews says, “the Blockchain promises to do the same in the near future.”