The Digitization of Money and Financial Services
Sequent Staff • February 24, 2020
If we look back at the evolution of commerce, from bartering and banknotes to coinage and modern-day cryptocurrency, money’s value is derived solely from the fact that its acceptance is universally tradeable.
Money has been a part of human life for over 3,000 years. In 600 B.C., the Kingdom of Lydia, located in what we know today as Turkey, minted the first official currency. Around 700 B.C., the Chinese evolved from coins to paper money.
From the beginning, currency was restricted to the forms of coinage and banknotes for thousands of years (sure, there have been innovations–mostly to prevent criminal activities such as counterfeiting or coin clipping, a crime that in 17th century Britain carried the death penalty if caught). Physical currency remained standard for nearly five thousand years, until the first disruptive wave of innovation began to appear in the last few decades: Mobile Payments and Cryptocurrency.
The power and size of the micro, the emergence of the smartphone, and the rise of high-speed communication networks have revolutionized real-time control over payments. With mobile payments, we increasingly see new entrants to the traditional financial services: companies vying for acceptance for point-of-sale payments (Apple Pay, Samsung Pay, We Chat Pay and AliPay, to mention a few). In the cryptocurrency world, Bitcoin has established itself as the ‘gold standard’ but isn’t without its challenges (for instance, it isn’t widely accepted as a means of payment.)
Historically, new entrants have found it very difficult to break into the financial services industry...but not anymore. The technology advancements that have started to disrupt the form that money itself is taking, are helping Financial Technology firms to disrupt the status quo and find a path in. These disruptors are often fast evolving start-ups, focused on solving a consumer pain or challenge using an innovative technology or process. They are supported or spurred on by regulatory support and government initiatives, the likes of PSD2 and Open Banking, and have attacked some of the most profitable elements of the financial services value chain.
These changing market dynamics have had a significant impact upon institutions that have been household brands for hundreds of years. It isn’t unheard of for these banks and financial services firms to subsidize important but less profitable parts of their business. These firms are having to change their business models to survive. The days of free banking are ending, and these stalwarts of financial services are having to innovate or die.
What does the bank of the future look like?
We can’t predict accurately, but it certainly isn’t the bank of yesteryear. We are already seeing a reduction of brick-and-mortar branches as consumer behaviors change. In today’s integrated world, not every consumer that needs financial services turns to a bank to get them.
For example, in Southeast Asia, what started as a technology platform to call a taxi, Grab is rapidly moving into the mobile payments and financial services space with Grab Money and its mobile wallet. In China, WeChat has evolved from a messaging app to over 600 million users using WeChat Pay for its P2P payments capabilities. We are witnessing more and more examples of technology being used to find efficient matches between providers and consumers, rather than the traditional intermediaries.
20 years ago, the internet had just started to take off. Back then there were 361 million internet users…in the entire world! Even in its infancy, smart banks and financial institutions began to restructure their business units to focus eBusiness. By 2010, there were over 1.9 billion internet users, and today its nearer 4.5 billion (with over 55% being based in Asia).
In this new era of digitalization, traditional institutions are still allocating resources to take on their digital agenda. However, aggressive disruptors are peeling away layers of their business with increased security and user experience innovations. While traditional banks have learned to rest on their reputations, non-traditional players have learned how to work smarter and develop superior technologies.
Technology innovations are great, but this next evolution comes at a cost: providers really can’t pay enough attention to cyber-security, cyber-crime, data breaches and system hacks.
We have all seen Hollywood films where a bank robber would wear a mask and brandish a sawed-off shotgun. Armed with a can of energy drink and a computer, today's criminal can have just as much success without the risk of being detected. Not a month goes by where there isn’t a high-profile news story about hackers and cybercriminals harvesting information.
Banks and financial services firms have been battling hackers and information security risks for years, with many organizations still relying upon the security infrastructure they put in place decades ago. Those security controls, models and frameworks are often perimeter-orientated, controlled encryption and password technologies. The growing number of cybersecurity events that we are witnessing only highlight that these traditional approaches are no longer sufficient.
Information security risks and the cybercriminals behind them are constantly evolving, and that evolution has been dramatic over the past two decades. Unfortunately, the financial services industry has failed to keep up with the pace of change. Until harvestable data the cybercriminal can harvest has no replay or resell value, these attacks will continue to dominate the headlines.
Maintaining Trust and Security
Trust and security have become a new battle ground for the financial services industry and it’s a battle they must win if they are to retain happy customers. Globally, mobile payments continue to increase in volume, with consumers doing more of their banking online and via mobile devices. Convenience has become a must for consumers. They want the ‘Uber’ experience from banking providers.
Tokenization has become the definitive weapon against cybercriminals–being able to replace valuable information with data that has no reuse value if it falls into the wrong hands. Tokenization is the next generation of security for the modern mobile world, and is one example of the innovation required.
Tokenization platforms empower banks, transit agencies, access control providers, and any other card or key issuer to securely digitize their credit, debit, transit, loyalty, ID cards or keys; distributing them to their own application, or any others, using the technology partner’s platform.
Best-in-class tokenization platforms require three core components:
• Token Service Provider (TSP)
• Card and Wallet Management Platform
• Trust Authority
We live in a world where digital comes first, and if our banks and financial services firms are to remain relevant, they must be prepared to operate in an environment of constant change. This can only happen if they are willing to integrate new strategies that challenge their own status quo. These organizations need to prepare their business model to connect to anything, anywhere at any time.
Connected commerce is here, so the question to ask big business is: how safe is your data and how are you protecting the interests of your clients and stakeholders?
Here are a few of the endpoints that will need to coexist and cooperate:
• Enterprise databases, data warehouses, applications, and legacy infrastructure
• Cloud computing and cloud services
• Connections and networks that business third party systems at partners and suppliers
• Infrastructure that link to apps, wearables and mobile devices at the level of the individual consumer
• Third party ‘big data’ sources
• IoT sensors and devices
The systems used to manage money and the associated data flows are diverse and complex.
As companies start to deal with new classes of end user, brought about by the likes of Open Banking and PSD2, financial institutions need a more sophisticated view of federated identity management.
Tokenization is the key to balancing control and accessibility. It is also the way that best-in-class organizations are assembling the security to protect the institution against cyber-threats without having to replace large legacy technologies which aren’t broken.