Ten years after the financial crisis another challenge is lurking ahead — new technologies. Some of them have the potential to disrupt the financial system again, reshaping completely its relationship with governments and customers alike. But will this happen? The answers to many questions are still uncertain.

The future of financial technologies has been among the central topics of discussion for the Latvian financial sector this year. It started building up in 2017 with the submission of proposals to the European Commission (EC) by Latvia’s financial industry associations and later with the Finance Latvia Association’s approval of the Open Digital Finance Framework, which has the ambitious goal of bringing Latvia to the forefront of open digital finance in the EU by the end of 2022.

Early this year the topic was followed by expert discussions about the regulation of remote identification and onboarding, as well as about the overall vision for the financial industry as such. And some time after that Valdis Dombrovskis, Vice-President of the EC, presented to the Baltic financial industry the EC’s Action Plan on Financial Technology, which lifts the curtain on the EU’s set of priorities for the near future. In this article, we give you a picture of the most hotly debated issues.

Picking up the speed

Ding-dong! It has been recognized that there is a need to move from the situation where every company stands for itself towards an ecosystem economy, where everyone who has been proved to be of value can participate and profit from what one is doing best. Bigger institutions need not only to ensure exponentially faster growth and adaptability, but also to deliver real value to the end customer. Because today the challenge is not about technology and figuring out its applicability — technology is not a goal in itself. It is much more about sustainability, customer trust and proving that a new business model can run for decades, not just for the current moment. Maybe that’s why the revolutionary tagline “in few years there will be no banks and FinTechs will take over” which was on the tongues of many analysts and businesspeople a few years ago, is not heard much these days. Banks are still there with their aura of tradition and prudence. But what should be definitely gone by now is slowness and reluctance to engage in change — this is something that no company working in the financial sector today can afford.

So what’s the plan?

March 8th, 2018 was marked by a special event, which was covered extensively not only by traditional media, but also enthusiastically shared across social networks by FinTech start-ups, industry enthusiasts and anyone excited by new opportunities. The European Commission unveiled details of its nineteen-step FinTech Action Plan to promote the digital transformation of the financial services sector. The initiative had long been awaited by all member states, and NGOs of the financial sector in many countries, including Latvia, had submitted their proposals for it last year. And with the launch earlier this year of the EU Blockchain Observatory & Forum by the European Commission, we can hope to become fully equipped to make Europe a single market with rapid advances in new technologies, such as blockchain, artificial intelligence and cloud services — a safe market and one that is easily accessible for consumers, investors, banks and new market players alike.

These steps are especially welcome because the USA and China have taken their financial technology markets so far ahead of Europe. It is anticipated that it won’t be long before they decide to come and compete for the European financial services consumer market. “The rapid advance of FinTech is driving structural changes in the financial sector. In such a fast-moving environment, overly prescriptive and precipitous regulation carries the risk of undesired outcomes. However, there are also risks that refraining from updating policy and regulatory frameworks may place EU financial service providers at a disadvantage in an increasingly global market. There is also the possibility, for example in the case of cyber security, that key risks remain unaddressed,” states the communication from the Commission about the action plan.

Sandboxes and crowdfunding

Among many other activities this year, the Commission will host the EU FinTech Laboratory, where European and national authorities will engage with tech providers in a neutral, non-commercial space during targeted sessions on specific innovations. It is planned that a comprehensive strategy on distributed ledger technology and blockchain will be worked out, addressing all sectors of the economy. Additionally, the tech providers will consult on how best to promote the digitization of information published by listed companies in Europe and how to connect national databases using innovative technologies, which should give investors far easier access to key information required for their investment decisions. Workshops will be run to improve information-sharing in the field of cybersecurity, and, finally, the Commission will present a blueprint for best practice regarding regulatory sandboxes, based on guidance from European supervisory authorities. Regulatory sandboxes are gaining popularity, mostly in developed financial markets. This term refers to a regulatory framework that allows FinTech startups and other innovators to conduct live experiments in a controlled environment, under the supervision of a regulator.

At the same time the Commission has outlined new rules that will promote growth in crowdfunding platforms across the EU’s single market. Crowdfunding is currently underdeveloped in the EU when compared to other major world economies. Once adopted, the proposed regulation will allow platforms to offer their services across the EU on a single base of regulations regarding information disclosure, governance and risk management, as well as a coherent approach to supervision. Crowdfunding will improve access to funding, especially for start-ups and other small businesses.

And who will be leading the way?

What all this means for banks is that they have to step up their game and move faster, embarking on a fundamental transformation. Developing and implementing everything in-house and taking six months to say yes or no to an idea doesn’t work anymore. Baltic banks already have a good track record of working with FinTech startups, making them integral partners — testing, analyzing and embedding new products into the bank’s ecosystem and customer’s interface. The financial sector is now all about becoming even more intuitive and all-encompassing. The market is crowded and nobody is waiting for clients to come to them. Sooner rather than later, supportive and easy-to-use customer services won’t suffice on their own anymore and the question to ask will be not “where should a customer click next?”, but “who will do the clicking instead of the customer?”. This is where AI and robo-assistants come on the scene. And banks who have gathered so much data about customers’ financial behavior over the years are in a good place to take the lead in bringing personalization to a whole new level.

At the end of the day, it doesn’t matter to the end user what channel the service is supplied through, as long as it brings value and is simple enough to use. It’s so much easier to maintain one relationship (with a bank) than a dozen (with payment companies, wallets, investment services, analytics apps and others) and so having your smartphone screen crowded with endless app icons. And those companies that are able to make themselves trusted information operators now will be at the wheel, deciding which product to add or not to add. And those who control the interface will also control relationships with customers, as well as the end price — and thus have much higher earning potential.

The transformation of competition

Digitization is nothing new; we have seen it advance for about five decades now. But further developments call for another kind of competition in the market. Banks no longer look at FinTechs as companies which will eat their lunch, but instead see them as companies which could help them to strengthen their position on the market. Working with FinTech startups might not be the most predictable process in the world, but in order to create a customer-driven ecosystem, the inflow of new ideas is vital. As the creation of sandboxes and, eventually, new regulation should open doors for untapped opportunities and for testing and embedding new products influenced by new technology, we should be able to look forward to lower banking costs and the creation of more convenient services with enhanced accessibility. However, banks are not only looking out for new ideas. Initiatives such as technology labs, investing in prototypes, and idea pitching channels for employees are coming to life in banks in the Baltics as well. Moreover, successful measures to get employees into that entrepreneurial mindset and promote innovation culture might become instrumental in competing among the interface-holders. Recognizing the need for quality development rather than physical expansion, some financial institutions are putting a cap on the number of employees, and some are reducing the number of branches they have, encouraging customers to use online and mobile banking.

“To compete globally, Europe’s innovative companies need access to capital, space to experiment and scale to grow. This is the premise for our FinTech Action Plan. An EU crowdfunding license would help crowdfunding platforms scale up (…) and match investors and companies from all over the EU, giving more opportunities for firms and entrepreneurs to pitch their ideas to a wider base of funders.”

– Valdis DombrovskisVice-President of the EC (Brussels, March 8th, 2018) 

In his speech during the “Future of Financial Technology in the Baltics and the EU” event, Valdis Dombrovskis noted that, according to the World Economic Forum, Latvia, Lithuania and Estonia are all in the top 7 in Europe for entrepreneurship and innovation.

All eyes are on blockchain

But which one of the many new technologies will be the one to cause a snowball effect and win it all? Many of the hopes are concentrated on blockchain. Last year, Accenture Consulting calculated and published potential cost savings for a so-called High Performance Investment Bank Model, which would fully embrace and integrate blockchain technology (Banking on Blockchain. A value analysis for investment banks.). The report claims that, on average, estimated potential savings will be around 30% annually, and adds that “at this stage, these estimates could prove conservative.” “Blockchain is challenging industry players to fundamentally reimagine their data-sharing processes. There is no turning back,” state the authors. The technology, they predict, will influence all areas — from business operations to compliance, financial reporting and centralized operations like onboarding. Another analysis looking at investments in FinTech (The Pulse of FinTech Q2 published in 2017 by KPMG) also documents a growing interest in blockchain, stating that it “remains a catalytic force in FinTech innovation.” Both the financial and governmental sectors are increasing their investments and efforts to be on top of the latest blockchain developments, and “the diversity of blockchain prototypes and pilot projects appear to have grown exponentially.” However, there are still many unresolved questions (like how blockchains are going to communicate with each other, what the implications for compliance are, etc.), which results in lack of implemented production systems. “Over the next few quarters, there needs to be a shift from proving the technical capabilities of blockchain prototypes to proving that blockchain can create value by transforming different organizational functions,” the KPMG report concludes.

There are no safe bets

One cannot perfectly predict the future of the financial sector — it is created through hard work, experiments and listening to customers. And if a company strives to grow by embracing new technology, this aspiration demands a high level of dedication and prioritization. “We think nowadays it is imperative that also in banking services one should be able to introduce innovations as fast as in FinTech,” said the Technology Development Director of a Latvia-based bank, having just launched ‘all the bank in one’ app with extended functionality, Face ID and Touch ID for authorisation — which all took just 10 months to develop. “During the course of development we thought and worked not like a bank but as a FinTech company,” he added. And we look forward to more agile thinking and dedication of this kind quickly becoming a new standard in the Baltic financial sector.

– Dmitrijs Latiševs, Member of the Finance Latvia Association Supervisory Board, Chairman of the Board and Executive Committee, CEO at BlueOrange


The rapid development of technologies has fostered changes in the financial industry: from classical institutions banks have evolved into platforms for meeting their clients’ financial needs. Today banks must be safe, fast and flexible; they should be able to offer their services and financial solutions anywhere and any time. Remote authentication and remote services are among the most up-to-date solutions for this issue. For instance, in the spring of 2018 BlueOrange became the first online bank in Latvia to receive permission to perform customer onboarding using a remote or online authentication process — a process which allows us to offer online services to a much broader range of residents of Latvia: individuals anywhere in the world. We believe that, with the technologies being developed, the possibilities offered by banks will become ever wider, which will further promote healthy competition and also positively influence the range of options available to clients.

Story published in Magazine Finance in Latvia Nr 1 (September, 2018)

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