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Banking for the Digital Age

New technologies in banking are restructuring the way the industry operates. As consumers’ needs are shifting to convenience and rapid operation completion with minimum effort, novel approaches to banking are emerging. So what does the industry look like today and how is it expected to change in the nearest future?

The future of banking

With the rise of novel technological approaches, supported by the successful experience of all world shifting to online during the pandemic, the future of technology in banking is filled with innovations. Technologies like the Internet of Things, mobile banking, and fintech software development and partnerships help deliver solutions that meet the customer needs of today. Personalized software that is fast in solving users’ problems is to be the leading product in the industry driven by these technologies.

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The Internet of Things

The Internet of Things (IoT) implies connecting devices via the Internet into a network, which allows them to exchange data. As the use of the Internet keeps growing and is expected to reach 75 billion IoT devices by 2025 (compared to 30 billion in 2020), IoT solutions are becoming inevitable in new age banking. Integrating the technology in the industry allows for effortless, convenient payments that are contactless and secure, such as scanning users’ biometrics to confirm the payment.

Some of the areas where these triggered payments can be used are automotive services, like car washes or parking, connected home appliances, delivery and renting services, vehicle sharing and transportation, manufacturing and logistics. In particular, an IoT-driven solution helps connect a user’s device with a device in his or her surrounding, such as when a person arrives at a particular location, and complete a payment automatically.

The initiative is already being brought to life by FINN Banking of Things. By identifying the user’s location and syncing with the device at a gas station, a certain sum will be automatically withdrawn from the user’s pre-filled account to fill the tank. In such a way, a user only has to set up a budget for gas once a month (or other time frames), and it will be charged whenever the service is used.

Invisible tickets for public transport in the Netherlands is one more use of IoT for banking. All a user needs is their smartphone — the device recognizes when he or she hops on the train (invisible tickets for buses and trams are still in development) and starts tracking the journey. When they arrive at the destination, the ride cost is just charged from their connected bank account. No plastic pass or credit card is needed to check in or out of the station, as well as there’s no need to load the pass in advance.

Another example of similar technology is under development at BMW — with the help of IoT, cars will be able to identify a free spot for parking at the driver’s destination and complete the payment on their own in advance. This adds to the convenience and saves time, both on finding a parking spot and paying the fee.

Even though automatic pre-set payments are nothing new for us today, it’s a different thing to have devices set and complete payments on their own. While still in development, these solutions significantly add to the comfort of our everyday lives, taking the hassle related to routine errands out of our minds.

Mobile or pocket banking

Mobile banking implies using smartphones or any other pocket-size device like a tablet to perform financial transactions. These can be something as simple as checking your balance and making a payment or more complex operations, like wire transfers.

Mobile banking
Mobile banking can be divided into 2 types, namely banking via SMS and mobile apps.

  • Banking via SMS

Banking via SMS is rather an older technology that implies performing transactions via text messages. This option is most suitable for those users who don’t have a smartphone or Internet connection, or if the device is not supported by the banking app. Instead, the user’s phone number is tied to their banking account and can be used for interactions through SMS.

The list of operations a user can perform via SMS is shorter than within an app but still includes the basic ones for emergency cases. These include balance checks, transferring funds between users’ accounts and blocking an account or card, among all. By sending commands like ‘AVAIL BAL XXXX’ (where XXXX are the last account numbers) via a text message to the assigned banking number, a user gets a reply with the account balance.

The app users, in turn, have access to banking operations through an application the financial institution provides. Interactions through the app may cover a wide variety of operations, like wire transfers, tracking bank account activity, receiving notifications, and others. These even allow getting assistance via live chat or a chatbot.

Using mobile applications expands the opportunity for users’ convenience in operations and fast, effortless transactions. Mobile banking provides 24/7 access to your bank account to run any operations you need within just several clicks. Besides, you have a clear image of your finances in terms of your expenses and account balance, which takes just seconds to check. Mobile banking is also secure due to strong authentication methods.

  • Alternative mobile payments

Besides pocket banking, mobile phones take it further and allow for alternative payments. Among such, mobile payments, digital wallets, and contactless payments are all a part of the future of banking.

  • Mobile payments

Mobile payments imply paying with your phone via solutions like Google Pay and Apple Pay, which give your phone access to your credit card. This works great for online payments since you don’t have to enter your card’s information for every transaction. You just choose the card you want to pay with and confirm it via a chosen authentication method, like phone password or FaceID.

  • Digital wallets

Digital wallets allow creating a prepaid account where you can store money to pay with later. PayPal and other digital wallets are yet another great solution for online purchases, especially since the number of online shoppers hit 256 million users in 2020 and is expected to grow by 13% up to 2025 in the US alone.

  • Contactless payments

According to the Bank of England, the percentage of cash transactions decreased from 60% to 23% in 10 years (2009-2019), which was later even more affected by the pandemic, too. With this being said, contactless payments, both cashless and cardless, are becoming the primary choice among consumers.
Even though contactless payments have been around for some time, innovative banking solutions in this area keep coming up.

  • NFC and wearables

Besides using mobile phones for contactless payments via NFC, new devices are entering the game, like watches and even jewelry. For example, a Japan-based company has launched EVERING, a ceramic ring equipped with an NFC. The ring has no battery and is waterproof. The owner can connect the ring to a credit card using a dedicated mobile app, along with performing some other actions, like disabling it.

  • QR codes

While paying with NFC technology has already become a part of our daily lives, QR codes are taking it to the next level, allowing us to perform more complex transactions by just scanning one.

Driven by the COVID-19 safety measures, cardless ATMs have been launched in India. Powered by Mastercard, the novel ATMs allow withdrawing cash by scanning a QR code and confirming the transaction in an app. In such a way, you don’t have to carry the card around and can easily get cash in just several clicks.

In such ways, contactless payments provide new opportunities to users, leading to the end of the cash era.

Banking as a service, APIs, and fintech partnerships

Years of competing over customer data between fintechs and banks have transitioned into something completely opposite. Banks and fintechs are now collaborating into fintech partnerships to share customer banking data, which is actually beneficial to all parties.

The partnerships have led to the occurrence of new technology for banking, Banking as a Service (BaaS). BaaS expands the capabilities of a fintech by allowing its customers to perform operations that used to be exclusive to banks, such as fund transfers, payments, loans, and others.

In detail, fintech receives access to banks’ capabilities through Application Programming Interfaces (API), which provides communication between the company and the bank and is become known as open banking. Companies that are not registered as banks get the entire scope of features a bank has while being backed up with the security and legal requirements of a financial institution.

BaaS platforms generate income on the fees the company pays to access data at the financial institution via the APIs it opens. An alternative way of monetization is charging a regular fee from the end-users.

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New age banking: use cases

Due to fintech partnerships, banking is now easily embedded in various activities. The BaaS model sets win-win conditions for both parties: companies can provide a better customer experience to their clients while the financial institution can get access to a wider pool of users in a cost-effective way.

An example of open banking would be if people could take a loan at, let’s say, Target. While the loan would be handled by a banking institution in terms of all paperwork and the actual funds, the representative would be a third party, Target. In this case, the bank might even stay completely invisible, but it still gets the revenue and customers.

Another example of a BaaS in use would be a company that provides any service, such as car repairing, offering their branded credit cards to the clients as a payment solution. In such a way, the company appears as a third party with no banking license that uses the service provided by a financial institution so that their clients can pay for the service with ease.

Then, personal finance management is a big area where fintech partnerships occur. The rise of open banking allows for more convenient finance management, hence provoking the emergence of dedicated apps. Via open banking, apps get access to users’ bank accounts to provide users with a financial overview via a user-friendly interface. Apps like Mint and You Need a Budget (YNAB) can connect to various banks via their APIs so that clients of those banks can use the app to track expenses, divide transactions into categories and plan budgets, among other activities.

Subscription management is kind of a subcategory of the personal finance management niche. While it’s easy to lose track of your money with automatic payments to subscription services here and there throughout the month, apps like ApTap and Subaio gather all user’s repeating payments and allow managing them in one place. By getting everything laid out in a single application, users get to track what they pay for regularly, like utility bills or streaming service fees, and can cancel a subscription from the app.

Instant checks for credit application approval potential are another opportunity created by open banking. Via accessing documents from diverse financial institutions, which used to take a long time since the papers needed to be pulled manually, apps like Afterpay and Klarna allow seeing the credit history of an applicant almost instantly and come up with a likely conclusion regarding their credit application. As for the users, they also benefit from the ability to compare various lenders and apply to those that are most likely to approve their applications.

Overall, opening APIs to third parties has provoked the emerges of many fintechs, leading to numerous fintech partnerships. This means that open banking facilitates the integration of financial products into various industries, allowing users to get brand new, personalized solutions.

What would be the next banking technology

It’s looking like the existing novel banking technologies will continue to expand to provide a wider pool of opportunities to both the industry players and consumers. Along with that, banking is taking a level up with blockchain technology and cloud computing.

Banking future technology

New banking technologies

Blockchain technology

Speedy transactions are the demand in today’s rapidly-paced world, so exchanging information between financial institutions and transferring funds within the shortest period of time is the next technology in banking. Blockchain technology is quick and safe, free from any manipulations and completely accessible since it doesn’t belong to any equity.

Among all, blockchain makes international payments instantaneous and extremely affordable. As an alternative to SWIFT payments, which usually take up to 10 days to be completed and charge a fee for each transaction, the sender can exchange the money to be transferred to cryptocurrency and send it to the crypto wallet of the recipient, who will then convert it to the local currency. And there you have it — an international payment completed within several minutes, risk-free and inexpensive.

Leading global companies in finance like Visa and IBM have already added blockchain-driven products to their opportunities, like Visa’s B2B Connect network and IBM’s Blockchain World Wire.

Digital-only banks & services

After the pandemic, it’s become completely normal for institutions to have no offline presence and only operate through a website or mobile platform. And this applies to banks as well, provoking the rise of digital-only banks. Online-only banks provide an opportunity for easy sign-up and 24/7 access to bank services, as well as quick P2P transactions and advanced identity authentication.

Cloud banking

Moving data and applications to the cloud are definitely the next step for the industry, just as it is in other sectors. Cloud computing applied to banking can allow for more effective synchronization, data security, easier scalability, and other driving abilities for banks and financial institutions.

Summing up

New technological advancements bring new possibilities to all sectors and finance is one of them. If IoT solutions that are represented by wearables, contactless payments, and mobile banking are something that we have already gotten used to, such technologies as blockchain, cloud-banking, and digital-only banks are something that will take the world of financial services by storm.

If you’re looking for a partnership to bring a new banking product to the market, reach out to us so that we can contribute to banking with future technology together.

  • Author Ivan Muts
  • Published March 07, 2022
  • Category Software development
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