With rapidly changing consumer spending trends, the rise of e-commerce, and the growth and success of both fintechs and big technology companies in the financial services space, the banking industry needs to innovate and adapt quickly to remain relevant.

Digital demand soars

Perhaps the biggest trend in financial services, is the digitisation of the economy. As more digital services are offered, consumers and users of those services are increasingly driving the uptake of such services. While this is an established trend, it has been accelerated by the Covid-19 crisis. Lockdown measures meant that there were only certain ways people could access the services that they needed to live their lives. Equally, there were only certain ways that service providers could actually fulfil those services. Many banks and other service providers found in lockdown that if you cannot provide your service digitally, you are simply not able to do business. 

"We have seen some really radical shifts, for example, 50% of UK consumers have not used cash since the crisis started, 20% of European consumers used e-commerce for the first time, and a similar percentage have used digital payments for the first time," said Nick Kerigan, head of innovation execution at Swift. "Those things have really been given a big push. If you think about our role at Swift in this context, it's basically to help our community to adapt and to be successful in that digital economy going forward."

Rival companies and operating models

On top of the fast pace of change of customer demand, incumbent banks face a race to rethink their business models to be able to compete and make a profit in the digital world. The companies in financial services that are performing really well today tend to be those that operate a platform business model, where they act as intermediaries between lots of customers and lots of people that want to connect with those customers.

The platform concept in financial services enables new companies to enter the market and create new value. That means not only creating new applications, but also the ability to embed financial services into any situation. Uber is an obvious example of this. When you get in an Uber car, you don't fumble around for your credit card, it has all been sorted out in the background. For the driver, their insurance has been sorted out as well, they don't have to call the insurance company on every journey. That ability for anybody to be able to add financial service functionality to make their proposition better is now possible, whereas in the past it was too complicated and technically difficult. Small businesses in particular, which make a very tiny margin on the business, are taking advantage of this. An example Simon Torrance, senior advisor, Rainmaking; accelerating digital transformation working group, World Economic Forum gave revolved around a shop that used to simply sell bicycles, which can now sell insurance at the same time. The financial services side of the transaction can make a very high margin for the retailer.

"Some retailers now make around 50% of their profits from insurance, whereas they used to just sell bikes," said Torrance. "There's this huge new capability that is available, and now everybody is thinking how they can put it into their proposition. The opportunity is for those that can enable this, and the value of that opportunity is worth about an estimated US$7 trillion. That figure is double the total value of the world's top 30 financial institutions today."

With a scale of opportunity that great, the question then becomes who is going to take that? Banks have the opportunity to take a piece of this pie, as long as they can reinvent a business model that is fit for the future.

Collaborating to get ahead

Innovation comes from having the ability to understand and identify where a firm could be doing a better job. Today, banks can look to fintechs to provide a signal as to where disruption can happen. Being able to partner with fintechs is incredibly important, as there are things that fintechs will do that are better, because they have the advantage of having the expertise to solve a very specific kind of problem. They also tend to generally be starting from new technologies, and also have usually have a small group of people running them that are incredibly passionate and fast-moving. On the flip side, big banks typically have the scale in terms of customer base and trust, and also the regulatory understanding and awareness in terms of how to operate in a compliant environment. Together, there are rich opportunities for partnership.

"We've seen that approach to partnership happening in the banking space to a greater or lesser extent, and certainly that's what Swift is seeking to do as well - to strongly partner with the fintechs in the space," commented Swift's Kerigan. "For example, we just took part in the G20 BIS TechSprint hackathon, where we worked in partnership with a fintech called Suade Labs. We were seeking to solve a real industry problem around how to make liquidity reporting more effective and real-time. That was a really good collaboration, so we're looking to do more of that going forward."

While the bank- fintech relationship is very collaborative these days, this could also be applied to the big technology firms. Taking cloud migration as an example, it is 'BigTechs' that are usually providing those services for the banks. Equally, in the recent news about Google Pay added a bank account functionality, the reality is that while Google controls the front end, the account piece of the solution is being provided for by big banks, most notably Citi. That's also a partnership model.

Digitisation of financial institutions

A major challenge for banks is to both service the new digital demands of their customers, while at the same time innovate their own internal processes. Many banks have big programmes underway, whether that is digitising the front end, or responding to market changes and enabling through the unbundling of the back end. This is where one of the major digitisation themes, cloud technology, comes in. Most major banking institutions have programmes to move to the cloud and take advantage of that. With established systems and established applications, that is not an easy task.

"We've been innovating on two streams when it comes to cloud," said Swift's Kerigan. "One is working with the team that's creating our new cloud-based product, called Alliance Cloud. We are looking at how we actually create tools that will help our clients migrate to this new solution. The second stream is about how we then adapt our existing products and convert them so that they can be used in the cloud when our clients are ready to do so."

Another key area for banks to incorporate into any new business model is the use of tools such as AI and machine learning in the field of data management. Moving from analysing past events and looking backwards to be able to predict things going forwards is where, in the short to medium term, some of the most interesting use cases are emerging. There is potential, for example, to be able to better spot fraudulent transactions, and to be able to reduce financial crime and money laundering.

"We all want to reduce fraud and financial crime, so there's an incentive there for a collective effort," Kerigan noted. "Actually putting in place much more intelligent models to be able to better analyse that and better detect that, is potentially an industry benefit that Swift is able to solve for.

Underpinning smarter use of data is the migration to ISO 20022 as the global payments message standard. This provides the ability to put much more structured data through the payment system, allowing for greater understanding of what is going through the system, as well as enabling that data to be used to create value added services.

In conjunction with the migration to ISO 20022, a big part of Swift's new strategy is to create a new platform to enable the end-to-end management of transactions. Whereas today's model for correspondent banking sees one bank send a message to another bank, who sends a message to another bank, and so on forming a chain, the new Swift transaction management platform will encompass that entire chain within it. Banks will interact with the platform and Swift will manage transactions end-to-end.

"What we're aiming to do is to create the payment rails of tomorrow," says Kerigan. "This transaction management focus and the new platform, alongside ISO 20022, will provide some really important benefits to both the banking industry, but equally importantly to the end businesses and consumers. It will cover the traditional business-to-business (B2B) space but will also enable then an expansion of services for Swift into small businesses and to consumer payments as well."

Innovation as a community

While Swift has been around since 1973, the fact that it has come up with a fresh approach to innovation offers an example to banks as to how they can do similar. While banks have their own innovation teams and policies, it is also true that some joined-up thinking can help propel the banking community into the digital future.

"We'd certainly like to invite people to come and innovate with Swift," concluded Kerigan. "We know we can't do it alone, so we would really like people to come and innovate with us, to solve the challenges that we face as a community."