Trends in digital banking

The lack of U.S. regulatory oversight of the cryptocurrency industry has been one factor impeding the acceptance of cryptocurrency by the traditional financial services industry. But recent and forthcoming regulations, such as the Anti-Money Laundering Act of 2020 (AMLA 2020), may soon mandate increased governmental regulation of the cryptocurrency industry. 

In sum, it’s likely that traditional financial services organizations will face increasing pressure to become much more involved in cryptocurrencies in the next few years and governments will be scrambling to enact regulatory legislation. The imbalanced regulatory state — with some countries taking a harder line than others — may also shift the balance of power for cryptocurrency companies and users. This is particularly pertinent for financial organizations with an international presence.

Criminal activity in this sector is also worth watching. Fraud and hacking top the list of crimes that federal and state authorities fear the crypto financial services industry may be vulnerable to. In fact, in August 2021, the PolyNetwork crypto platform was breached, with $600 million of its customers’ assets temporarily falling into the hands of hackers.

2. Decentralized finance

Cryptocurrency has enabled another trend that may profoundly affect the financial services industry: decentralized finance (DeFi). Examples of DeFi platforms include Maker, a decentralized lending platform, and Compound, a decentralized money market protocol. DeFi platforms offer all the services that traditional financial services organizations offer without the need of an intermediary, with blockchain technology and computer code replacing the traditional role of the bank. 

The DeFi financial model allows anyone to have access to financial products and services online in a decentralized and borderless environment. In some ways, DeFi has the potential to eliminate the need for traditional banks.

In roughly an 18-month period corresponding with the emergence of DeFi, around $80 billion of capital has been transferred to DeFi platforms — and each dollar represents funds diverted from the traditional financial services system. 

As DeFi gains traction and increasingly competes with the services provided by traditional financial organizations, the industry will likely need to embrace and, to a degree, adopt DeFi methodologies as evolutionary innovations. More efficient and streamlined internal processes and compliance workflows will be key to morphing DeFi from an existential threat to an opportunity for these organizations.

3. Anti-money laundering

Money laundering has long been a concern for the financial services industry. Since the enactment of the Bank Secrecy Act of 1970 (BSA), financial services organizations have been responsible for helping to monitor and report activities that may be associated with money laundering. But just as technology has expanded the toolset that criminals can access for laundering money, so has technology armed financial services organizations with an array of sophisticated “weapons” for detecting and reporting money laundering activities.

For several years, government has urged financial services providers to be more proactive in deploying the tools of modern technology in the fight against money laundering. In 2018, several government agencies, including the Federal Reserve and the FDIC, issued a joint statement promoting the adoption of technology in identifying and reporting money laundering: 

“The agencies recognize that private sector innovation, including new ways of using existing tools or adopting new technologies, can help banks identify and report money laundering, terrorist financing, and other illicit financial activity by enhancing the effectiveness and efficiency of banks’ BSA/AML compliance programs. To assist banks in this effort, the agencies are committed to continued engagement with the private sector and other interested parties.”

In 2020, Congress passed AMLA 2020, which is designed to strengthen and expand anti-money laundering laws while encouraging the use of technology in maintaining compliance with those laws. In essence, AMLA 2020 expanded the 1970 BSA act by subjecting the financial services industry to significantly broadened regulatory compliance and enforcement actions, along with enhanced penalties for compliance violations. Simultaneously, the 2020 Act encourages the use of technology in detecting and reporting illicit financial activities. 

The act mandates that each financial regulatory agency appoint an innovation officer charged with providing awareness and guidance in adopting technological innovations in anti-money laundering. The intent is to help financial services organizations make sense of digital trends and comply with the Bank Secrecy Act (BSA). For compliance officers and anti-money-laundering professionals, it may provide their employers the push they need to modernize practices. AMLA 2020 also directs the U.S. Treasury Financial Crimes Enforcement Network (FinCEN) to brief Congress periodically on relevant emerging technologies.  

The impact of this legislation on financial services organizations is hard to understate. A 2018 General Accounting Office study of 11 banks found that direct costs associated with BSA compliance ranged as high as $21 million for a single financial services organization. And noncompliance with anti-money laundering rules can be even more costly from a financial and reputational perspective. Capital One, for example, was fined $390 million in early 2021 for anti-money laundering violations spanning multiple years.

Financial services professionals bear the brunt of the burden in ensuring compliance with anti-money laundering regulations. The good news is that technology can significantly ease that burden. Simply shifting searches from a manual process to an automated process, for example, can eliminate the many false positives that expand workloads and diminish accuracy.

4. Financial services regulations

For highly regulated industries such as financial services, changing technologies can spur the need for new or restructured regulations that reflect the realities of the modern, digitalized environment.

There is a significant gap between current financial services regulations and the digital world in which financial services providers must operate — a world that’s expected to be impacted by more technological changes in the next few years, further broadening the gap between regulations and reality. Regulation often is reactionary, as evidenced by the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010. Although the impact of that legislation is still a large piece of the reality for many in the financial services industry — from its enhanced checks and balances to its emphasis on creating a physical paper trail — it came after the financial crisis that closed more than 450 U.S. banks. 

Rules cannot go back in time and fix the problems that preceded them. They are also slow to change on their own, as evidenced by the challenges that financial workers have found with adhering to physical documentation practices in a remote work environment. This puts the onus on financial services organizations to address issues on their own, even as the rules behind them become a moving target. 

Regulating agencies such as the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency are already at work digitizing the regulatory process to keep up with technological advances in finance. This will drive the financial services organizations themselves to enhance their own digital capabilities with a move toward automation, so their processes and employees can stay aligned with this changing regulatory scene.

5. Data and digital analytics

Technological advances have enabled the generation and storage of vast quantities of data. And the rate of accumulation and the diverse array of sources is continuing to accelerate:

This presents an opportunity and a challenge for the financial services industry. Data is most valuable when it is usable and accessible. For financial services providers, digital analytics is a means of maximizing the value of data, harnessing it for providing greater insights into customers and the processes that serve them.

With the aid of artificial intelligence and machine learning, digital analytics can power basic financial services operations with greater efficiency and accuracy. Data analytics already is an essential part of front-end workers’ daily duties in managing customer relationships and protecting the financial services organization from bad actors. The use of automation in identification verification and fraud detection is imperative for flagging and managing risk in an increasingly digital and wide-ranging environment. But, as with all trends, it also represents a two-edged sword.

Organizations that seek to leverage the benefits of digital analytics to solve real problems are likely to profit greatly. Conversely, financial services organizations that fail to embrace or properly use digital analytics may soon find their ability to onboard and serve customers severely diminished. The competitive landscape for financial services already includes players such as Google, Amazon, and similar tech companies for whom data analysis and digital best practices are commonplace. Staying relevant and keeping financial services organizations secure now requires playing on the same field as digital-native organizations.

How to prepare your organization to stay ahead of the curve

Meeting the significant challenges of these trends will occupy the attention of every financial services organization in the next several years, if it doesn’t already. A common thread running through the five trends is technology — and technology is the solution that will help traditional financial services providers prepare to meet those challenges. 

Here are a handful of recommendations for using technology to prepare your organization for the future.

• Replace manual processes with automation to streamline internal workflows. Many financial services organizations remain mired in manual processes that simply can’t provide the speed and accuracy that are so essential to remaining competitive in the digital age.
  With automated technology, you can keep up with evolving customer expectations driven by fintech competitors, as well as innovations such as cryptocurrency and DeFi.

• Use tech tools to reduce risk. Whether you’re onboarding new customers or considering new investment instruments, technology and automation can help by sleuthing out potentially risky customers and third parties.
  For example, a sophisticated investigative platform can give you:
• Fast and accurate real-time identification verification for customer onboarding, including remote identity authentication
• Risk verification and alerting
• Identity theft detection and alerting

In addition to keeping your business secure in the long term, these capabilities can help you quickly and accurately verify the identity of a business or individual investor — so you can be sure, for example, who really owns the cryptocurrency you are considering.

• Leverage technology to ease the burden of anti-money laundering and regulatory compliance. Automated anti-money laundering technology can significantly ease the burden of BSA and AMLA 2020 compliance for financial services organizations. As regulators become increasingly digitized, building your own digital capabilities can help your organization stay ahead of the changes to come.
• Use analytics to bring out the value of your data. Of all the advantages of technology, perhaps the most valuable is its ability to make data usable. The success of fintechs at leveraging their data to win customers away from traditional financial services has made digital transformation an imperative for these organizations.

For financial services organizations of all sizes, technology provides the answer for surviving and thriving in a world significantly changed by technology. And for organizations that have been doing a bit of virtual napping as evolving technologies leave them behind, it’s time for a wakeup call.