What

Future Awaits
Banks After

a Pandemic?

WRecently, I shared with Expert magazine my thoughts on the impact of the pandemic on the financial sector. The conversation went beyond discussing the consequences of the coronavirus, turning into a conversation about global trends in the development of financial services and banking.

I publish here the full text of the interview exclusively for my blog readers.

What areas in the development of new financial technologies do you consider key for the market? Does the picture change year by year? Why?

On the issue of trends in the financial market of Russia, I share the vision of the Central Bank, which identified the following priority areas: big data and data analysis, digital banks, mobile technologies, artificial intelligence, robotics, biometrics, contactless payments, distributed ledgers and cloud technologies.

The key trends are digital banks, artificial intelligence, robotics and contactless payments.

The rest, of course, are valuable, but unstable. For example, two years ago, the market discussed the active integration of biometrics. It was assumed that the data of citizens will be digitized and a new era will begin, but this did not happen. Blockchain is also an interesting technology, but it has not yet been found suitable for practical and sizable business projects. On the other hand, artificial intelligence has already been successfully used as a working tool in many banks and fintech.

The picture is changing, and there are countless reasons; this process is not always predictable. Politics, a strong interest and passion for a particular technology from big pocket organizations also matter here.

Is the current situation caused by the pandemic influencing the fintech industry? What trends in this industry, in your opinion, may arise in the post-pandemic period? Do you see new niches for your bank? What kind of niches?

Undoubtedly it renders, first of all, on online services: shopping, payments, insurance and so on. The time period for developing such services has been significantly reduced. Now it takes months, not years.

During self-isolation, interest in mobile banking and online microfinance services grew significantly. Now these are the main ways to manage your personal finance and cash flows from home. During the pandemic period, customer activity in digital channels increased significantly across all financial segments: securities brokerage and asset management, SME transactional banking. Insurance, which is one of the last financial businesses still operating mainly offline, is under strong pressure to go online.

Among the niches that have again become in vast demand, it is worth highlighting NFC payments that reduce physical contacts and all types of investments on the securities market that have received a surge in activity due to market volatility. Also, with limited transportation and closed borders, one of the ways to support entrepreneurs was to search for the nearest suppliers and buyers. For example, in the wake of demand, Chinese banks have quickly created simple e-commerce platforms so that their customer base for small trade businesses remains active and restarts in a remote environment. This allows merchants to sell goods through non-cash banking transactions.

Do you consider the “death” of physical money on the horizon of the next 10–20 years inevitable? Can digitization of payments become total on the whole planet? Why?

In the foreseeable future, physical money will go away, everyone is interested in this.

Governments will be able to better control the cash flows of citizens. Business will not need to collect cash, the risk of physical robbery will decrease. Individuals will be able to more reliably protect their savings, and pay for a good or service via fast and safe electronic payment.

The situation with the virus will definitely speed up this process, electronic money is absolutely safe from the virus. The whole world is confidently moving towards an increase in electronic payments, and Russia occupies the first place in Europe here. There are three factors of such growth: the rapid development of Internet and mobile banking, contactless payment, the launch of a Central Banks’s Quick Payment System; the growth of e-commerce; the appearance on the market of non-bank payment services that allow you to make payments without opening a bank account.

However, this is unlikely to happen in the next 10 years. There are several issues and tasks to be solved yet.

The technical aspect is that every person on the planet should have a smartphone and a stable internet connection. A number of initiatives are currently underway, but the prospects and timing of their implementation are not specified yet.

The legal side of technology will inevitably raise the issue of privacy and citizen rights. In the electronic world, everything is transparent and all operations are monitored and controlled.

The political aspect requires states to think over the whole process so that the transition to digital currency does not limit those who do not have the opportunity to have devices for payment or not have the skills to use them.

The state will definitely reduce the use of cash to a minimum. There is already successful experience globally: in China it is almost impossible to pay in cash, only cards or WeChat.

Do you see the growth limit for the client base of traditional financial institutions? What can it be connected with? Do you think that clients will not be redistributed in favor of traditional financial institutions, but in favor of high-tech companies that provide, among other things, financial services? Why? Give examples.

The limit has already come in payments, just look at the same WeChat, a parallel financial system has appeared in China thanks to fintech. The same situation is happening in India, Africa, where internet companies and telecom are taking over banking functions.

The main problem is the ossification and overregulation of banks and traditional financial companies.

The banking industry has been formed a long time ago, since then it has not changed much. You still need to open accounts, pass strict and inconvenient identification processes. It is not always easy for the client. Fintech understood this: it gives the customer a friendly product. Therefore, the future of traditional banks, if they do not change their approach, is rather gloomy. At least in retail banking.

Surprisingly, companies like WeChat, global champions in messaging and social networking are also not a universal solution. For example, India has banned payments through WhatsApp because it is not controlled by the government. Perhaps the future of payments is in the hands of local tech champions like Mail.ru and Yandex in Russia. One of the possible scenarios is ultimate domination of decentralized finance.

If we talk about deposits and lending, banks and financial institutions have advantages here. Firstly, they are protected by law. Secondly, a successful lending business requires a lot of capital, high risk diversification and the scale of activities that are difficult for a fintech company to achieve. Thirdly, banks are actively adopting new technologies from fintech and preparing for a fight. Lending to banks is the main business, and they are not going to lose this market.

Is the obvious advantage of decentralized systems over centralized at the moment preserved, or was this idea caused by a wave of hype, which has now exhausted itself? Is there a great future for blockchain?

To simplify, in the first wave of the blockchain, two functions were implemented: value store (in Bitcoin) and transaction (in Ripple). Therefore, they had a good speculative component, but they did not find widespread application.

Now we are seeing the second wave. It has really brought many interesting projects: low-level credit, investment, p2p protocols based on smart contracts. They are more promising for implementation in the banking sector.

In addition to independence from a central counterparty, cryptocurrencies and decentralized finance are much closer to democracy than the existing system and fiat money: in many cryptocurrency systems, the holder of this currency becomes a shareholder. Of course, a lot depends on the regulators, their desire and willingness to allow decentralized finance, which is difficult to control. So it is possible that we will get an even more centralized and transparent state system of payments, but based on modern technology.

A global Deloitte survey showed that 83% of executives of the companies are convinced in the advisability of using blockchain and investing in the development of this technology. Zebra Technologies Corporation named blockchain one of the trends in the world of technologies that will affect the decisions of CIOs and process managers in 2020. According to Mindsmith analysts, in Russia 6 of the 10 largest IT companies already use blockchain. And even despite the decline in investment, in 2019 there remained a high interest in technology.

Now industry representatives are using blockchain and other innovative technologies more efficiently. At the peak of the popularity, the main motive was “to somehow implement the blockchain,” but now it is used more and more to solve particular problems.

How do you think the process of “merging” of non-financial and financial businesses will take place? Are there any such examples? What will a diversified leading company look like on the horizon of 10–20 years (your futurological forecast)?

The synergy of financial and non-financial services results in ecosystems: many heterogeneous services are collected in one place to expand the value proposition for the client. The bank and the retailer, the bank and the insurer, or even the bank and the social network, can offer the client completely new services, in new ways, through new channels.

The merging of financial and non-financial markets will create the conditions for the emergence of new, somewhat heterogeneous, somewhat duplicating, and somewhat complementing each other products, services and their delivery channels. As an example of Russian companies combining financial and non-financial services, Yandex, Sberbank and Tinkoff Bank can be singled out.

While there is no universal solution, the market is sorting through different models. In 5–10 years, we will see which of them turned out to be viable and which of them were unsuccessful.