Financial Sector Forecast: Digital Maturity

Open banking, innovation in core systems, automation, financial advice based on artificial intelligence, and more – the leading technological trends for the coming year indicate that the financial sector is reaching a level of digital maturation that is enabling a transition of focus to the customer. We spoke with Amir Shary, VP and Division Manager, FinTech & Digital at Matrix, about technological innovation in the financial sector.

Corona has led to tremendous digital acceleration in the financial sector, perhaps second only to that seen in healthcare. For example, in the first year of Corona, an international study that followed digital changes at 318 banks on five continents, found that many had implemented new digital processes for opening a bank account (about 34%), remote identification and approval (23%), and other customer actions. Some of these digital products were developed rapidly, in an attempt to ‘translate’ physical services into digital channels. This sometimes resulted in a digital product that had one foot in the physical world and the other in the digital. With the shift to digital, regulatory developments (open banking), and the growth of the fintech industry, customers have learned to expect more from their digital financial experience. In 2021, over 50% of participants in a study in the US stated that a well-designed mobile app is a major consideration when choosing a bank. The study also found that the leading influencing factor for customers who changed their bank during the Corona period was that their old bank had a poor mobile platform (and not, for example, high fees, which has been one of the leading factors in the past). To meet these high expectations, banks are shifting their focus from their own needs to those of their customers.We spoke with Amir Shary, Manager of the FinTech & Digital Division at Matrix, about disruptive innovation in the financial sector and the trends that we should expect to see in the coming year.

Digital maturity

More sophisticated products, innovation for the entire supply chain, and adapting products to suit the customer and their needs.
“When you think about the technological trends that are gaining momentum and are expected to be dominant in the coming years, we see that we are entering a stage of digital maturity,” says Amir. “Digital products are becoming more sophisticated, innovation is being applied to the entire supply chain, and products are much more tailored to customer needs. In fact, what many of the current technological trends have in common is that they are designed to improve the added value offered to the customer. We see, for example, financial organizations that are adapting the applications they develop to different demographic groups, instead of offering one generic product that provides the same experience to everyone. After all, a customer who is a young parent, for example, has different financial needs and digital capabilities compared to a customer who is in their 80s. Similarly, automation tools and the advanced capabilities of artificial intelligence and machine learning are also being leveraged. For example, Canadian bank RBC has developed an artificial intelligence service called Nomi, which acts as a financial advisor to customers, offering them forecasts regarding cash flow, among other things. This is a significant added value for the bank’s customers. But, perhaps the most significant trend, which is expected to lead to innovation and expansion of the basket of services that financial organizations offer today, is the open banking revolution.”

Open banking and the open API revolution

What happens when ownership of our financial data returns to us, and what does disruptive innovation really look like?
At the core of the open banking revolution is the change in regulations requiring banks and credit companies to transfer customer information (with their approval) to other entities, including fintech and technology companies. This is information that has until now been the exclusive property of the bank where the account is held. The idea behind the change is that the customer’s information belongs solely to the customer themselves, and can improve their financial situation by enabling them to broker between financial entities – for example, negotiating better interest rates or reduced commissions. Therefore, the customer is the one who should decide whether to allow the information to be disclosed and shared with other entities, which are not necessarily the bank or their credit company.“This change, which has been with us for a long time, in a theoretical sense, has only recently begun to take shape in reality,” says Amir. “It marks a turning point in the balance of power in the market and the transition of that power to customers.” Recently, at the 11th Corporate Conference of the Israel Securities Authority, Chairperson Anat Guetta said that, as early as March 2022, the ISA intends to grant the first fintech licenses to new, upcoming players. This is a dramatic statement, because for the first time there is a deadline for licensing fintech companies in the field of financial information services and payment services. For many years, financial organizations have become accustomed to the fact that their clients’ data is an exclusive asset, and now, following the regulatory changes, we as customers can decide to hand over the financial data that has been accumulated in the organization to an outside party, as needed. “Whereas, at first, financial organizations treated open banking with suspicion, today they are also beginning to enjoy the infinite possibilities that such a move opens up for them. Open banking enables a significant expansion of the basket of services that banks offer to their customers. For example, if a bank decides it wants to reduce the amount of time it takes customers to open an account, they can now explore ways to make it easier for them, implementing automation processes from fintech companies to make the process smoother, and maybe obtaining some information automatically through an external company rather than the customer having to fill out forms. Originally, the goal of this change was to broaden the range of financial services, increase competition and deliver more value to customers, but today, the open API revolution is much broader than open banking, creating a unique opportunity to develop innovations based on information sharing, opening doors to new markets, and creating business collaborations. This is a rare opportunity for all entities in the financial sector to extend their boundaries. The only limit in the emerging ecosystem is the scope of entrepreneurship and the business development capacity of the companies that are joining; the biggest beneficiaries of all this are the customers – that is, us. “

Combining advanced ML and AI capabilities

Combining advanced ML and AI capabilities in automated processes: fast and efficient handling of financial documents, automated financial consulting and more
The adoption of artificial intelligence solutions is starting to enter the mainstream financial sector. Banks and financial organizations are increasingly using AI  technologies to develop new products and profit channels, to gain a deeper understanding of customer needs, and to improve the user experience. “Financial organizations today understand the immense value that artificial intelligence solutions offer,” says Amir. “In a survey of financial organization executives conducted in 2020 by the World Economic Forum, in collaboration with the Cambridge Center for Alternative Finance (CCAF), 64% of participants estimated that in the next two years artificial intelligence technologies will be intensively integrated into the organization’s systems. One example of applications for artificial intelligence in financial organizations would be using machine learning to recognize unusual behavioral patterns of customers, to identify customers who may be about to close their account, so that the bank can take proactive steps to keep them. Another example is artificial intelligence that provides financial advice to clients about investment avenues, or giving them tips on how to manage household expenses. Another application concerns the streamlining of behind-the-scenes processes, for example, for reviewing and approving financial documents.“It should be understood that financial organizations receive huge amounts of documents. Take for example doctors’ invoices submitted by patients to medical insurers for copayment. Until recently – and in many organizations, it still happens today – documents have been submitted either physically or digitally and, behind the scenes, there are people whose job it is to go through and check these documents. A lot of manpower is required to do this, and in some cases the associated overhead outweighs the benefit. Meanwhile, from the customers’ side, this sometimes leads to a long wait for answers from the organization. An algorithm that identifies and analyzes documents can result in large savings in the organization’s resources, as well as shortening customers’ waiting time and improving the experience.“Take for example, CoDx – a solution developed by Matrix, which answers the need of companies that are interested in realizing a digital transformation, but are required to handle a large volume of photocopied documents and unstructured information – for example, certificates, proofs of ownership, invoices and the like. This system has the ability to capture images of documents, process and analyze them. The idea is to automate form-integrating processes using machine learning and artificial intelligence technologies, and thereby save on manpower, streamline the organization’s operations, and ultimately significantly shorten processing time for customers. So, CoDx will receive an invoice and extract information from it, classify the document, extract the sender’s details, the amount of the invoice, activate an algorithm that checks eligibility, including whether the invoice can be transferred to the “green” fast track of certificates, and finally make a refund transaction. A process that in the past would have taken several days (even for an invoice of just 100 NIS) now takes just a few minutes, and requires no human involvement.”

Modernization of core systems

How do you progress to the next stage in the digital transformation?
In the period following the initial outbreak of Corona, there was a phenomenon whereby products that were, on their face, digital actually belied behind-the-scenes processes that were outdated, cumbersome and slow. In many cases, no matter how digital they are on the outside, these outdated core systems compromise the customer experience. Let’s take check deposits as an example. In the past we deposited checks manually, but today we all make digital deposits. Now try to imagine the following scenario. The bank enables us, the customers, to deposit checks digitally, but decides to leave the whole behind-the-scenes process as it is, from printing the checks themselves to having a bank clerk manually deposit them the following day. So, in stark contrast to the quick experience of the deposit, customers are kept waiting for long hours for the check to appear in their bank account. In this case, no matter how easy and simple the digital deposit process is, you still get a bad customer experience, because we expect the money to be deposited into the account quickly.”Organizations today know that in order to meet customer expectations, they must take their core systems and architecture to the next level,” says Amir. “They understand that a complete digital transformation requires modernization of all the links in the chain. Core systems are often based on old technology that is ill-prepared to address the processes required in working with digital channels. The question arises as to how to approach such a complex project.“In the past, the tendency was to develop new systems based on new products and/ or technologies, and to completely replace the old systems. But the development of a completely new system takes many years, and can endanger the organization. As a result of such a move, one UK bank ground to a halt for a few days, sustaining enormous damage. Today, the tendency is therefore to favor less heavyweight projects, that are based on what already exists. The trend of modernizing (rather than replacing) core systems enables banks to get the most out of all the new technological options available in the market, while maintaining what is still relevant and useful from the old systems. Therefore, I expect that this will be the preferred approach in the coming years.”

This year, financial organizations are also flocking to the cloud

Another significant channel for innovation, which in turn leads to a better customer experience, is the cloud. In the last two years since Corona entered our lives, many organizations have been rapidly releasing digital products, in order to provide a quick response to the ever-changing needs of customers. In this respect, the cloud offers a great advantage, thanks to its flexibility. In addition, the cloud now offers a complete ecosystem with a variety of solutions, such as data & analytics, information security,