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Time's up for old finance: technological disruption driving financial evolution

Ross McGee
Ross McGee

Introduction

As the digital revolution continues to rewrite the rules of modern operations, a pressing question emerges: is traditional finance running out of time?

For centuries it has largely remained the same. Despite the radical changes which have happened across civilisation, altering what we trade, who we trade with, and how we trade, the financial sector which supports them has remained relatively rigid. This is seemingly no longer the case.

In a post-pandemic world where technology unapologetically took the limelight for two years of lockdown, it appears that even those pulling financial strings cannot put it back in its box. With the disruption phase now over, in this whitepaper, we will explore what evolutions have occurred due to the growing confidence, acceptance and necessity of technology, and whether they are finally ringing the bell to call time on old finance.

The second coming of WFH

Movement of money is fundamental to financial health, but movement doesn’t seem to be pivotal in every sense. More and more financial professionals are continuing to stay put at home. Whilst much from the pandemic we have been hasty to wash our hands with, one – maybe surprising – aspect of it survives: remote working.

During two years of isolation, business leaders were divided on the viability of WFH, with many profusely denying it as a long-term solution. However, it appears to be as strong as ever in a sector that offered the firmest rebukes against it.

A quote from David Solomon, CEO of Goldman Sachs, on WFH.

Today, two out of three banks offer some form of flexible working, and when it comes to fintech, insurance and investment firms, this rises to 80%. Even big names who hold significant symbolic real estate are joining this move – this year, HSBC has shown commitment to act on their 2021 statement of reducing office space by 40% by initiating an early exit from Canary Wharf to help with its continued move towards a hybrid model.

Ultimately, such actions across the financial sector leave Lloyds and their intent to extend their London lease beyond 2031 as an outlier. So, what has changed? Is the financial sector slower to move with the times, or are monetary factors behind this change in stance?

With 90% of hybrid workers feeling productive from home versus only 12% of managers believing this, and HSBC witnessing net losses in Europe, it feels as though finance’s move to remote working has come begrudgingly. Instead, a necessity to retain top talent and save money at a time when a third of UK office workers said they would quit if they had to work fully in-office, both appear to be significant factors.

However, regardless of the exact cause, it is only possible thanks to technology. Zoom, Teams, Monday.com, etc., are all enablers of this revolution. Whilst people power and economics might be forcing a more permanent change to WFH, technology is making it possible.

Inevitably, as a by-product of ushering in such change, there becomes the need for additional aids or technologies to ensure that WFH is not only possible but also a success for the financial industry. This has led to the development of:

  • Collaborative software which is designed with neurodiversity in mind. Financial firms like EY and J.P. Morgan have been championing neurodiversity for longer than others, recognising that the skills it offers are perfect for their sector.

    However, remote working requires specific accommodations for neurodivergent employees due to differing communication styles and ways of absorbing information. Knowledge sharing and task management tool, Ayoa, has therefore proved popular for finance teams seeking to remain productive and neuro-inclusive whilst WFH.
A quote from Cris Griffiths, Ayoa CEO, on the benefits of neurodiversity in finance.
  • Security-intense financial software adapting to the reality of individuals accessing sensitive information from any location. The likes of Aurum overcomes this by allowing their clients to host their data wherever they prefer. It has also developed an in-app notes system to ensure that any concerns over potential fraud can be raised with colleagues as quickly as if they were sitting next to one another.

With technology making the old way of “at desk” finance a rarity, such technological advancements are a welcome addition to the tech stacks of CFOs and their teams. Attracting the best talent, meeting emission targets, and remaining commercially viable are all made a bit easier thanks to embracing the second coming of WFH via technology.

The rise of challenger banks

Technology is not only disrupting how and where financial institutions work. Tech-first challenger banks are also contending the principles of how to “do banking”.

Common challenges to traditional banking

  • Online rather than in-person
  • Quick innovation over rigid procedures
  • Easy collaboration with third parties and fintechs vs. wariness

However, having swiftly won the hearts and minds of many people, hurdles are forming for these new, alternative financial institutions. For instance, despite their lack of stature and resources, they are still held accountable to the same regulations as established banks. Whilst this is important, it is a difficult feat for small entities that must focus on attention-grabbing, customer-centric services in a highly competitive space. Not only has this resulted in challenger banks being highly scrutinised by the FCA, the All Party Parliamentary Group for Challenger Banks and Building Societies has also recognised that “excessive regulation” disproportionately impacts them compared to traditional institutions.

Despite these high-level struggles, on the ground, challenger banks aren’t experiencing problems. In fact, UK challenger banks gained the market share of business lending for the first time in 2022. Through £35.5bn of loans, they provided 55%. On a consumer basis, there are now approximately 20 million challenger bank customers (just under a third of the UK population). Evidently, their alternative approach has resonated greatly with businesses and individuals alike.

When these figures are examined more closely, it becomes clear that challenger banks are being driven by younger customers. This highlights the importance of their new approach to banking – it is resonating with those who will be leading tomorrow. As a result, whilst challenger banks are sowing the seeds for dominance in the future, traditional banks are witnessing their demise.

A pie chart showing the age demographic of Monzo users.

Trust in trust, or is trust trickling away?

The likes of Natwest, HSBC and Lloyds might gain comfort from the fact that in 2020, only 17% of Brits believed that challenger banks were as reliable or trustworthy as traditional institutions. However, this is a security built on history rather than the future.

Already, it has eroded as a defence for traditional banks. This is seen by how in 2021 60% of consumers would already consider a bank with no physical branches, and by 2022 93% in the UK considered it safe to bank online. Evidently, although trust is still traditional banks’ best defence, it is becoming less prolific as acceptance of technology increases. As Mark Mullen, Chief Executive at Atom Bank says, people can now “get online [and] vote with their fingers” to show where they want their money managed. Legacy alone therefore doesn’t appear to be enough to sustain customers. In fact, it is also a problem. By sticking to old-school ways of banking, traditional banks are costing themselves in monetary terms.

With the cost-of-living crisis heightening alongside interest rates, businesses such as high-street banks are seeing their overhead costs increase. Consequently, whilst online challenger banks are being seen to offer consumers better saving rates, established firms are not. Arguably, this is due to their extra costs. However, the press and even experts such as the Treasury Committee believe high street banks are “blatant[ly] profiteering”. Either way, established institutions are risking their reputation, losing customers and struggling to be competitive.

A bar graph showing the difference in interest rates between challenger and traditional banks.

Challenging changes

With challenger banks seemingly holding the blueprint for success, all banks must aim for agile adoption of technology in a bid to please customers. However, changing the direction of a speed boat compared to a freight ship is a very different task.

As challenging as it might be, committing to change is already generating benefits for those bold enough to break their mould. Take J.P. Morgan as an example. By following the challenger model to create CHASE UK, they have successfully attracted over 1 million clients since launching in September 2021, reflecting the power of embracing tech and fusing it with established trust.

Evidently, banks need to innovate with technology in mind to find a route to long-term survival and maintain superiority. To achieve this in a way that fulfils modern customers’ standards, banks must first revolutionise their internal processes.

Why? Because to compete in a digital-native landscape, smooth operations and seamless experiences are essential. Neither can be guaranteed unless there is a strong foundation with the capacity to grow. Moreover, improving digital banking facilities will only increase transaction speed, complexity and volumes, inevitably placing greater demand on back-office functions.

Banks must therefore look to update their reconciliation to overhaul antiquated processes and build from the bottom up with a rock-solid foundation. Automation, machine learning, customisable dashboards, frictionless ETL, and scalability are now all a must.

Cheering all the way to the bank

Ultimately, challenger banks are doing well right now. Furthering tech is now synonymous with being a popular choice, and that is the choice they banked on.

Along with pleasing customers and businesses, they are also doing well for themselves. Monzo, Starling Bank and Revolut are all part of the top five UK fintech companies – an industry which saw more deals than any other sector in the UK for the last three years.

Such success sends strong signals to high-street banks. Change is unavoidable.

Responsible data

Data exploitation is one of the major issues of today’s world. This is a growing concern for individuals and governments as our society increases its reliance on digital data sharing. As such, in 2016, the infamous GDPR laws came into effect, replacing the highly outdated 1995 Data Protection Directive.

Whilst GDPR was undoubtedly a step in the right direction for general data laws, it doesn’t always translate effectively into the world of digital payments. As always, the law therefore has gaps when it comes to technology.

For instance, whilst “special categories of personal data” like payment of medical bills or donations to political parties should not be processed according to GDPR, in PDS2 regulations, the European Data Protection Board (EDPB) states that if there is “substantial public interest on the basis of EU or national law”, such data can be investigated. What this quantifies as is murky, to say the least. Moreover, the EDPB’s insistence for PSPs to implement “technical measures” to stop unlawful investigation of special categories is appallingly fragile, considering that from a practical standpoint, it’s not even known if this can be achieved with technology yet. All of this ambiguity leaves a lot of space for data collection to become data corruption.

In fact, Nigel Farage having his Coutts account closed due to Natwest believing his “xenophobic, chauvinistic and racist views” were putting their reputation at risk is a prime example of this. By no means is this the most sophisticated use of data – merely a name was tied to an account – but it raises questions about how “special categories” of data are used, especially with more and more invasive data collection happening.

Bubble map of various forms of payments data which is collected.

This latest scandal shows how complex society’s and finance’s relationship with data is becoming. Plus, this will only become more complicated with the likes of Britcoin (a UK digital currency) on the horizon. People already fear the state being able to control how much CBDC they possess at one time, what interest rates people could be offered depending on their identity, and even if their funds could be frozen if they act in a way that the government disapproves of.

Such concerns about the future of data usage strongly imply that whilst data’s assent has been unstoppable for the last decade, it might soon be reaching its pinnacle as it comes to saturate every aspect of our lives. This won’t mean that data suddenly becomes obsolete, but in time, further restrictions are bound to occur, ensuring that data is not a source for corruption.

Quote from Aurum Solutions CISO, Steve Bates, on data regulations.

Consequently, companies with models relying on invasive data usage should heed these imminent advances as a warning sign that they must adapt fast. Fortunately, finding the balance between optimising data and ensuring compliance is already something which firms in the most heavily regulated industries are ensuring with ease.

Principally, this begins with confirming the integrity of their data and then moving forward with equal levels of integrity. Automated reconciliation platforms like Aurum are prime tools for achieving this.

Financial literacy

The way people learn has changed drastically thanks to the rise of technology. However, whilst the experience has altered, the end goal is the same. What is different is the amount of people it is reaching and the expectations they subsequently have for everything to be delivered seamlessly and digitally.

When placed in a financial context, we are witnessing technologies’ ability to educate resulting in shifting expectations about personal finances. How is this happening? It all starts with new technology making the proliferation of information more accessible, including that relating to finance.

Social media was never designed with this in mind, but for younger generations on TikTok who are desperately wondering how they can set themselves up for a prosperous life amid a cost-of-living crisis, their platform of choice is providing plenty of useful content. In fact, 42% of Gen Z are getting financial advice from what they dub FinTok.

Financial advice has always been available, but this new medium means that it no longer comes at a cost and doesn’t require in-person meetings with brokers. As a result, it is reaching billions of people – by 2021, TikTok videos tagged #PersonalFinance received over 4.4 billion views – and having a transformational impact – in the first six months of 2021, 46% of 18 – 34 year-olds became more interested in finance, and one in five credited TikTok for this newfound enthusiasm.

Their hunger for financial independence is not going unnoticed. With Gen Z increasing their time on finance/trading apps by 102% during the pandemic, financial institutions have a growing and clear audience to go after. Given that this generation has strong expectations for seamless digital experiences, this has resulted in new apps being specifically designed to not only gain their custom but also continue their education. After all, despite younger generations gearing up to be the most financially savvy of all time, they still have a learning gap to close between themselves and baby boomers, who scored highest on a recent financial literacy study by the TIAA Institute.

Examples of financial firms aiming to endear themselves to this new audience by actively improving their digital offerings range from Mastercard and Hana Bank investing in their mobile apps to the likes of Zogo and Mint, which gamify financial learning and offer hyper-personalised saving advice based on paycheques respectively. With technology encouraging younger generations to engage with finance via two means (social media and seamless apps), and younger generations clearly responding to these influences, a cycle is growing and gaining momentum.

A circular diagram demonstrating how learning finance tips from TikTok results in more being learnt by younger generations.

Low years, high numbers

Pairing the empowering and easy-to use nature of technology together is resulting in younger generations doing more than just learning about finance. In fact, they are actively part of the financial community.

60% of Gen Z are already investing, which is extraordinary considering that despite having many more years on the planet, only 37% of baby boomers, 33% of Gen X and 30% of the silent generations have ever invested before. If this trend continues – as already the most active generation in investing – Gen Z and beyond will make back-office operations extremely busy with further transactions, additional platforms, and increasing complexity.

Firms therefore need to invest now in behind-the-scenes processes to take advantage of what they have been waiting decades for – greater engagement with their services. Ultimately, they should focus on their ability to scale and adapt, both of which are only possible if they have a reconciliation platform which can do both.

As the foundation of any financial operation for compliance, data, accounts receivable, accounts payable and more purposes, reconciliation platforms will truly be the crux to those in the financial industry being able to safely and competitively cope with the greater level of transactions which new, financially literate generations will bedriving.

Progressing payments industry

Within the financial sector, there is a seemingly unstoppable catalyst that has chiselled out space for it to have its own industry – payments.

While payment technology has created its own reputation, undeniably, the expectation it has evoked in businesses and consumers alike is the driving force increasing its dominance. This is clear by how the growth of instant payments is increasing at rates of 40 - 60% globally and continuing to grow even in the UK and China, where the technology is already extremely popular. In modern life, seamless payment operations are therefore no longer a bonus; they are expected and adopted with an insatiable appetite.

Whilst this has seen the payments industry be welcomed with open arms by those in commercial settings, its acceptance is now seeing it percolate into other areas too. A significant indicator of how crucial payment technologies currently are is that they are being embraced by traditional financial institutions, which previously felt threatened by their presence.

As many as 86% of PWC’s 2021 survey respondents predicted this trend, stating that “traditional payments providers will collaborate with fintechs and technology providers for innovation”. However, it is already being enacted with the likes of Mastercard investing in South African-based telcogroup, MTN, and connecting their virtual payments service to the latter’s digital wallets to enable international payments without a bank account. Such collaborations are beneficial for customers and essential for the payments industry as a whole – they give it a way into the establishment and further its aura of legitimacy.

With payments securely embedding itself amongst reputable financial firms, along with being expected by consumers, it has also gained itself access to the workings of the UK government. Whilst not up and running as yet, Amanda Dahl, the Deputy Director of Government Digital Services, has stated that they’re working to find ways for “GOV.UK Pay [to] offer open banking, which means that people will have the option to pay for services conveniently using their own banking app”. Once more, an advance such as this – to the core of civil life – indicates that payments is having an impact which cannot be ignored.

Defaulting to higher volumes

Evidently, the benefits of payment technology make it the default throughout our lives. From PSPs to BNPL, digital wallets for regular debit payments to purchases via wearable tech, payment technology is now how people conduct their financial business.

This has already seen transaction volumes soar but with payment innovations not letting up, and neither their popularity, no doubt in time they will get even more popular. In fact, real-time payments are forecast to reach 511.7 billion globally by 2027.

A graph showing that real-time payments are increasing in the UK. A technological disruption to old finance.

With nearly every commercial party interested in receiving more payments faster, payment technology offers many benefits. However, they must be mindful that the higher volume of transactions it facilitates comes with a caveat – they must still be reconciled accurately. Fortunately, the powerful innovation characterising the payments industry has spread to other markets, prompting those concerned with financial regulations and data to develop.

In other words, due to payment innovations, reconciliation platforms must now seamlessly connect to infinite providers and possess the ability to scale infinitely whilst reconciling automatically in real-time. Without such advances, the payments industry progresses beyond control.

Weaponised payments

Payments have undoubtedly taken a considerable hold over our world, transforming how society operates on a daily basis for the better. However, its sizeable influence has meant that the industry has also become a battleground.

Just like how in the past there have been divisive races to promote ideologies and to dominate outer space, payment technology is now seen as a way to exert control. Whilst Western payment innovations have traditionally held a monopoly, the rise of alternatives from different parts of the world is a testament to this new competitive dynamic which the entire payments industry is experiencing.

In fact, in just the last few years, there has been the creation of China’s Cross-Border Interbank Payment System (CIPS), UnionPay, and Russia’s System for Transfer of Financial Messages (SPFS) to rival the West’s long-established Society for Worldwide Interbank Financial Telecommunication (SWIFT) and Clearing House Interbank Payments System (CHIPS).

Bar graph showing how long various international financial systems have been in place.

Despite being relatively new developments, CIPS and SPFS are already making headway to disrupt SWIFT’s dominance.

Bar graph showing how many countries use SWIFT, SFPS and CIPS.

Evidently, the potential exists for these innovations to threaten the superiority of legacy Western technology, and this will only become more prominent as American allies continually expel certain countries from using SWIFT as an economic sanction. Despite being intended to damage foreign economies, such actions only make foreign nations more determined to develop their own payment infrastructures.

Away from geopolitics, when assessed through an innovation lens, the weaponisation of payments is therefore clearly generating the possibility for greater benefits to be felt by consumers and businesses alike. Independent national payment initiatives like Kenya’s M-PESA and India’s Unified Payments interface have done precisely that – decreasing extreme poverty by at least 2% and empowering the underbanked, respectively. Now, with the added fuel of political tensions driving payment innovations, no doubt even greater benefits are about to be generated.

Whilst this might at first be hard to comprehend for America and its allies, headlines such as UnionPay surpassing Visa for the first time with the largest market share of debit card transactions and the Chinese Yuan becoming the world’s fifth-largest payment currency will undoubtedly act as wake-up calls.

Adding fuel to the fire

Payments is an industry that never needed more fuel but now has it. New technologies are no longer being merely created to craft better experiences; they are being designed to grasp control of world influence.

Keeping up with the evolution of the payments industry has therefore entered a new phase – one where more systems than ever will be in play and transactional volume is set to soar to new heights. With payment systems advancing, so too must back-office operations by possessing the ability to connect within infinite APIs and scale without limits.

Disruption without delay, embrace technology today

In our increasingly digital world, traditional finance is undergoing a significant transformation driven by technology. This shift brings both new opportunities and challenges for financial professionals and institutions. One noticeable change is the simplification and acceleration of transactions thanks to payments technology. Digital banking is also reducing reliance on brick-and-mortar branches, offering customers better savings rates and convenience.

How financial professionals, teams and firms choose to react to this is independent to them. They could either embrace the digital revolution of finance or choose to continue as they always have. However, one thing is certain, with tech-native generations entering the workforce, digitalisation being embraced in every other element of life, and all financial stakeholders already benefiting from technological innovations, technology is now a driving force within finance.

Considering that technology always results in greater speed and unfortunately opportunities for fraudsters, another guarantee is that volume of transactions will continue to soar whilst becoming increasingly suspect to security risks. It is therefore crucial that the digital revolution of finance includes that of back-office operations, especially those which are responsible for inspecting the integrity of data on a transaction-by-transaction basis.

To prepare for finance’s continued digital development, fortify your back-office with the next-gen reconciliation software, Aurum. Fully flexible, unlimitable scalability and designed with security in mind, embrace the future of finance, together with aurum.solutions.

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