The Strategist

Moody's: A digital revolution in the banking industry is coming

04/25/2018 - 14:20

Moody `s rating agency published a study in which it says that development of modern banking technologies already has a revolutionary impact on the world banking industry. The agency's experts believe that those banks that introduce new technologies into their work attract more customers and get more growth prospects. On the other hand, those that hold onto traditional ways of doing business have all the chances to lose customers and risk their profits.

Moody's study says that modern banking technologies are already having "a revolutionary and evolutionary impact on business models of banks, financial infrastructure, product pricing models and profitability. They divide all banks into two conventional parts. Those organizations, which are already actively developing a digital strategy, will be able to strengthen their business, expand their client base and improve their efficiency. In turn, lagging banks will lose customers and potential for new price models, and the competitiveness of their cost structure will decline."

The agency's experts note that in Europe there are already a number of mobile-only banks that appeal to the younger generation (not older than 35 years) and gradually take customers away from traditional banks. For example, the researchers call Monzo and Revolut among the leaders of the new banking market in the UK, and Orange Bank - in France. Founded in Berlin, the first pan-European mobile direct-bank N26 is also very actively attracting customers among representatives of the "digital" generation.

Moody`s stresses that the demand for services provided in conventional offices will be reduced not only in Europe, but also in North America. This allows banks to reduce their costs and change the focus of work with customers - from physical offices to more efficient alternative digital and mobile platforms. Another situation is observed in low-income countries where the population historically was deprived of a developed network of bank branches and welcomed banking networks only in the last few years. However, the growth of retail banking networks from a low base coincided with the development of modern banking technologies. Therefore, in countries such as Kenya or Tanzania, penetration of mobile banking technologies is not restrained by the habit of using bank branches as in many developed countries.

The report notes that the prospects for financial technology solutions around the world depend on four key factors: compliance with customer expectations, competitive dynamics of competitive development by banks of such technological solutions, infrastructure factor and state regulation factor.

As examples, Moody `s experts lead the introduction of distributed registry technology (blocking) into the banking industry, the use of artificial intelligence and a computer system for advising clients (robotic financial consultants).

The agency's experts admit that it is too early to expect tangible financial benefits in the near future. After all, implementation and use of this technology depends on a very large number of participants performing a number of complex and specific tasks: from concept development and its approval to its practical integration into the work of companies and markets. Nevertheless, Moody`s believes that blockchain technologies have great potential in a number of sectors of the financial market: securities issues and their trade, settlement and clearing operations, provision of depository services for securities and financial instruments. Introduction of blockchain in these segments will significantly improve transparency of the entire system, as well as its control by all participants in the process.

Unlike blockchain systems, computer systems of advising clients already now can boast of their participation in managing significant volumes of financial assets. Robotized financial advisors are also used in assessing risks of certain portfolios and forming an optimal set of financial instruments in the current market environment. It is reported that introduction of such systems allows a one-third to three-fold reduction in costs that banks carry for maintenance of ordinary financial advisers. Over the past year, the volume of assets managed by robotic consultants has doubled in the US - to $ 200 billion - largely due to increased demand from customers from the Millennium generation. At the same time, the agency notes that even such volumes constitute still a very small fraction of total assets under management - only about 1% in the US. This, however, gives considerable scope for development of such technologies in the banking and investment sectors.