December 30, 2015
The year 2015 wasn’t particularly about banks, but it certainly was about FinTech. As bright entrepreneurs found traditional players’ vulnerability when it comes to implementing innovation, FinTech startups saw a dramatic rise and success. Free from legacy systems and strict regulatory pressure, FinTech startups along with tech giants rapidly jumped into the financial services industry and gained a significant adoption. We have collected some examples of banking industry giants that are embracing their own solutions or joining hands with other global banks to regain control over the financial services industry, which seemed to be threatened by actively evolving FinTech.
In October 2015, in a joint prepared statement, the CEOs of Bank of America, BB&T, Capital One, JPMorgan Chase, U.S. Bank, and Wells Fargo said, Our customers want the ability to make payments to anyone, in real-time, making funds instantly available in the recipient’s bank account. To achieve this, we are combining our collective, bank-owned digital payments network (clearXchange) with our fraud, risk and authentication assets (Early Warning), to further ensure that our customers can send money, confidently, securely, and in real-time via their financial institutions. Some of the most powerful global banks consolidated their efforts to own the authentication process instead of outsourcing it to independent FinTech startups. The most powerful bank-owned alliance in authentication and digital banking industry could be a sign that banks are looking to embrace their own opportunities.
Another important example—Dutch banks. The growing attention and usage of digital services have led Dutch banks to join hands in launching a pilot for a new interbank digital identity service in 2016. The service will allow a customer with an online banking account in the Netherlands to login to commercial and government service providers’ websites without the need for maintaining multiple accounts. The banks will be collaborating through the Dutch Payments Association and will be working with Innopay on a pilot which will go live next year and let participating customers use their online banking details to access services from the Dutch tax authority and an insurance company.
Europe is rich with examples, as BBA, Payments UK, the Council of Mortgage Lenders, the UK Cards Association and the Asset Based Finance Association—five British trade associations—are set to merge their efforts to create a stronger lobbying power, backed by nine British banks, including HSBC, Lloyds and Barclays, and building society Nationwide. The effort towards a merger is also aimed to cut costs and increase efficiency and power over European regulations. There are four financial services sectors that could be considered for this review: retail and commercial banking; wealth and asset management; investment/wholesale banking; and insurance.
The United States’ financial industry giants are not falling behind fostering innovation in-house. The US Patent & Trademark Office website revealed in September 2015 that Bank of America had filed a patent on a System and Method for Wire Transfers Using Cryptocurrency. The patent deals with using a system that would decide on one optimal method for money remittance. The system in this process would use multiple cryptocurrency exchanges, wherein a funds transfer initiated by one customer could be exchanged via one cryptocurrency exchange, and at the receiving end, they could be re-converted to currency using another cryptocurrency exchange. The different cryptocurrency exchanges mentioned include OKCoin, BitStamp, BTCChina, Cryptsy, CoinMarket and Justcoin. However, they also mention that this list is not exhaustive.
Speaking of in-house innovation, it is worth mentioning that a team of computer engineers from the Commonwealth Bank of Australia have built a working blockchain in their innovation lab in Sydney which will be used to show regulators how blockchain might be used to reduce risk and costs of making international payments or other applications. Many banks feel they can reduce, or eliminate altogether, various costs, by adopting some sort of common shared ledger and let that proliferate through the industry, Mr. Swanson commented. He also added that the technology could also assist regulatory monitoring for systemic risks in financial markets. It is possible that by easing the way for blockchain adoption with regulators, the Commonwealth Bank is looking to pave its own way with blockchain technology.
Blockchain technology has been a hot topic; a growing number of financial institutions are looking to leverage the opportunities with blockchain. Philanthropic investment firm backed by eBay Inc. Founder Pierre Omidyar, Omidyar Network, recently announced its investment in eCurrency Mint (eCM), a Dublin-based company that has pioneered a new technology to enable central banks to issue digital fiat currency called eCurrency. Funds raised will open up eCm technology for central banks globally to enable them to evolve their national currencies efficiently and securely and to keep up with the digital world. The difference between eCurrency and various forms of private sector digital value available today is that eCM is issued by a central bank and has the same legal and monetary status as notes and coins. Moreover, eCM is an end-to-end solution that combines hardware, software and cryptographic security protocols to enable a country’s central bank to not only issue digital fiat currency but also fully manage its operation, including the ability to monitor its movement through payments systems in near-real time, as explained in the release. Once acquired by a country’s central bank, eCurrency can only be minted by the central bank offline. eCurrency’s security features can be updated in real time to stay ahead of threats.
While on the topic of blockchain, a very interesting example of massive collaboration of banks is R3 CEV. Nine banks collaborated in mid-September to develop common standards of blockchain technology by backing a blockchain startup called R3 CEV. Thirteen more banks joined by the end of September. In October, three more banks joined the R3CEV collaboration, taking the total count to 25; in November, five more banks joined hands to make the total number of banks in the R3CEV collaboration to 30. Here are the 30 banks that are collaborating: Goldman Sachs, JP Morgan, Credit Suisse, Barclays, Commonwealth Bank of Australia, State Street, RBS, BBVA, UBS, BNY Mellon, Mitsubishi UFJ Financial Group, Citigroup, Commerzbank, National Australia Bank, Royal Bank of Canada, SEB, Societe Generale, Toronto-Dominion Bank, Bank of America, Deutsche Bank, Morgan Stanley, HSBC, BNP Paribas, Canadian Imperial Bank of Commerce, ING Bank, Macquarie Bank, Wells Fargo & Co, Mizuho Bank, Nordea Bank, and UniCredit. The latest entrants are BMO Financial Group, Danske Bank, Intesa Sanpaolo, Natixis, Nomura, Northern Trust, OP Financial Group, Banco Santander, Scotiabank, Sumitomo Mitsui Banking Corporation, US Bancorp and Westpac Banking Corporation. The consortium now has 42 banks and is focused on establishing protocols and standards for using blockchain technologies in financial services.
Out of security concerns, over 500 European banks have registered .bank domains to reduce cybercrime. Particularly, 550 European financial institutions, including the Royal Bank of Scotland and Santander, have registered to obtain .bank top-level domains (TLDs) since US Internet regulators launched it in June 2015. The private company fTLD Registry Services, which is owned and run by the banks, was set up in order to manage the registration of .bank TLDs. The institutions involved include the British Bankers Association, the European Banking Federation and the Royal Bank of Scotland Group. The .bank domain will be managed by a financial industry advocacy group, ensuring that all websites ending with .bank are owned by real banks conducting real business with consumers around the world.
The State Bank of India (SBI), the largest bank in India, is another interesting example of traditional financial institutions powering in-house solutions. In August 2015, SBI announced the launch of its mobile wallet service SBI Buddy. SBI Buddy is competing with ICICI Bank’s Pocket, HDFC Bank’s PayZapp, Paytm and MobiKwik. The move is significant because the mobile wallet business in India is growing rapidly. SBI has a customer base of more than 280 million of which 16 million are mobile banking customers. As SBI is considered as one of the most trusted banks among common Indians, SBI Buddy has a truly great chance for wide adoption. Among banks, ICICI bank was the first to introduce Pocket, a mobile wallet solution that integrates prepaid card and a basic savings bank account. In June, HDFC bank launched the PayZapp app, an all-in-one mobile payment and money transfer app, through which HDFC bank customers can perform mobile commerce, pay bills and P2P payments.
Moving to another continent, an interesting case is poised by Wells Fargo, the first US-based financial institution, to pilot a fusion of voice and face biometrics to authenticate customers—a feature that will be rolled-out to CEO Mobile iPhone app users in 2016. By identifying business customers’ faces, voices and mobile devices, biometric authentication makes it extremely difficult to spoof the true user. Biometric technology is emerging and accelerating change in financial services, said Danny Peltz, Executive Vice President and Head of Treasury Management at Wells Fargo, at a press release. We continue to explore and test new safeguards for our business customers. Currently, Wells Fargo is also testing another biometric authentication technology that scans the veins of smartphone users’ eyes to verify their identity. This additional security feature will also be available to CEO Mobile iPhone app users in 2016. Earlier in December, Wells Fargo also announced its plan for a technology that will let customers start a transaction, such as withdrawing cash, on their phone before heading to an ATM. Customers will complete their transaction at the ATM, where they will enter their PIN and a one-time code generated by the smartphone app. Wells Fargo said its virtual card service will be available in the late third quarter or early fourth quarter of 2016. Wells Fargo customers will still have the option of using plastic cards at the ATMs.
As rigid as banks may appear for bold FinTech, they have something FinTech lacks but needs—extensive customer base and financial power. These two factors can significantly shift the financial industry trends in favor of banks once they decide to jump into innovation implementation.