Digital Banking

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What is Banking

A bank is a financial entity which is regulated by the government or central bank that performs various financial transactions. Generally, a bank works by loaning out money to customers from the bank accounts of others. The person with the loan pays interest which is deposited into customer bank accounts for allowing them to borrow money and banks keep part of the interest (the difference). [1]

Types of Banks

Retail/Commercial Bank

The main function of a retail bank is providing products and services to the public. They offer a variety of bank accounts, ATM services, debit/credit cards and mortgages. The retail banks have physical branch locations where they can offer hands-on support to clients but also provide certain services through online platforms.[2]

A commercial bank works similarly to retail banks but are specialized to handle corporate entities and businesses. It is important to note that most retail banks have a commercial banking division as part of their business model. The products and services offered by the commercial bank area are structured towards corporate needs which can include capital loans, cash flow strategies and investment products. [3]

The largest banks in Canada, also known as the “Big Five” are: Royal Bank of Canada, Toronto Dominion Bank, Bank of Nova Scotia, Bank of Montreal and Canadian Imperial Bank of Commerce.[4]

Total Assets[5]
Online Bank
Ally Bank Platform [6]

An online bank gives you the ability to manage your financials completely online using devices such as a mobile phone, tablet and laptop. The underlying products and services that online banks offer is similar to regular retail banks. The major difference involves having no brick-and-motor locations. In order to stay competitive, online banks usually offer higher interest rates, 24/7 customer service lines and lower fees.[7]

Some popular online-only banks include:

Investment Bank

According to Investopedia, an investment bank provides complex financial services and transactions to institutional clients around the world. This includes issuing securities to the public through an initial public offering to raise capital for a company, advising mergers and acquisitions, consulting corporate restructuring and providing debt capital.[8]

Many large banks have incorporated an investment bank division in their business model, such as RBC Capital Markets, while others are run independently. The business model in the advisory division works by billing a fee for services depending on the type of financial transaction. Investment banks also have trading divisions that use complex financial models and algorithms to buy and sell securities for profit.[9]

Current Trends in Banking

The banking industry as a whole is going through a significant transformation due to major technological advancements. It is up to the banks to determine what aspects of their business model they should focus on to remain important in the global changes of consumer behavior and competitive landscape.

Digital Transformation

Multiple industries around the globe are changing their business model to be more customer centric. Industries such as e-commerce are offering quick delivery services and customized solutions to consumers. The technological advancements are changing consumer habits and putting pressure on the financial industry to offer a consumer-focused digital experience for various banking needs.

According to PwC's yearly consumer survey, over 40% of consumers are completely shifting from visiting physical channels to a complete digital experience.[10] The shift from multichannel to omnichannel has been a significant part of banking conversations over the past few years. Omnichannel is a strategy that enables users to access financial services through a variety of channels for a seamless experience. It is a consumer centric strategy that shifts from traditional banking practices of just managing money to understanding the entire picture of a consumer’s situation.[11] The implementation of omnichannel will support banks in using other technologies to create a tailored experience for consumers because of online services. It will be a key factor for banks to respond to the shift by offering services where consumers have the choice of the channel they want to engage with.

  • Opportunity for banks to innovate digital platforms and offer a tailored consumer experience
  • May result in lower operational cost due to transactions being done of out branch
  • Provide new revenue potential due to analytics increasing consumer retention and engagement
  • Physical locations are a marketing channel for banks
  • Regulation requirements for accessing data in multiple channels
  • Technological barriers for complex integration in aging systems

Artificial Intelligence/Machine Learning

Artificial intelligence (AI) is a field of computer science which studies the ability of computer systems to replicate the human thought process. This occurs by feeding the computer and/or machine significant amounts of data in order to make complex decisions, interpret patterns and generate predictions.[12]

The underlying causes of the digital transformation is due to technological advancements and consumer demands. The banking industry is pivoting to a more customer centric industry and AI will play a vital role in supporting this. AI is set to change the way banking works, the types of products and services they offer and the overall user experience. The banking industry has a significant amount of unfiltered consumer data. According to a consumer survey by Accenture, roughly 65% of consumers would allow banks to use more of their financial data in order to generate a better service experience.[13] This will allow banks to offer tailored products and services by leveraging AI's ability to analyze transactional patterns and other consumer data. Another trend in AI is the use of natural language processing, such as chatbots, that are being implemented to their online platforms to aid the digital transformation. [14] This can be a convenience factor for consumers as they will not have to visit local branches for simple inquiries on banking needs.

Machine learning is a branch of artificial intelligence where a system is capable to “learn and improve” without being programmed to do so. In other words, it is the study in the development of computer programs without intervention. This technology is being used to spot transactional patterns that may indicate consumer fraud or other types of illegal activity in accounts.[15] According to an analytical firm in London, implementing machine learning technology for fraud detection could save the industry over $10 billion on an annual basis and deter future threats.[16] Investment banks are leveraging machine learning to help with trading and stock market analysis. This is done by feeding the system vast amounts of historical market data such as prices, economic trends and business documents. Once the data is analyzed, the machine spots patterns in trading and searches for the best outcome in the short/long run. [17] The industry is extremely competitive and financial institutions are constantly researching the most advanced systems to gain a competitive advantage on market predictions.

Predictive system using machine learning[18]
  • Suitable for detecting fraud in bank accounts and cards that employees may not be able to
  • Ability to sift and manage significant amounts of data for business decisions
  • Able to be implemented in various parts of the business model
  • High cost to implement on aging systems in banks
  • Employee knowledge of technology may be minimal and training will need to be provided
  • Ethical concerns regarding consumer data being used for business decisions
  • Potential job loss in certain banking areas


Biometricsis defined as the technology used to capture and analyze a "person’s unique physical and behavioral characteristics" [19]. The use of biometrics plays a significant part of identification and security areas for many industries. Some examples include, but are not limited to: Fingerprints, Iris Scanner, Facial Recognition and Voice Recognition.

The simplest biometric systems contain three main steps in the process of authentication:[20]
Biometric system process[21]

Step 1 involves acquiring the biometric sample. The individual will present the characteristic trait to the system (device) and it will generate a copy of it. The digital copy will be stored in a database which will be used during the verification step.

Step 2 is when some individual needs to be authenticated and will present the characteristic trait onto the device.

Step 3 uses the initial extraction and matches with the contents in the database. It compares the two using specific match points and will grant access or denial.

Security breaches, cyber-attacks and financial fraud are becoming more advanced and customer data protection is at an all-time high for companies. With the large amount of customer data that the banking industry holds, they can be an attractive target for breaches. For this reason, banks are beginning to experiment with biometric systems for customer authentication on certain transactions. Individuals are already using biometric authentication while doing mobile banking and banks have noticed they are becoming less interested in using passwords. Biometrics combines the essential need for security and digital trust along with a better user experience in terms of convenience. [22]

  • Unique identifier allows optimal security measures (two-factor authentication) for banks and consumers
  • Convenience factor for consumers as they do not need to remember multiple pins/passwords
  • Privacy concerns for consumer data as storage breaches are increasing
  • Prone to incorrect readings and false acceptance/rejection of authentication
  • High cost and complexity for integration

Digital Payments

A digital payment is a type of financial transaction that can be made without physical cash or plastic cards. The growth of digital payments is a significant factor in the digital transformation that is currently happening in banking. They are designed to work efficiently through various channels such as a mobile device, apps or online platforms. The technology behind digital payments depends on the type of payment being processed [25]. For example, the most popular payment method among consumers is using a mobile device. The device uses Near Field Communication (NFC) which allows electronic devices to “communicate” with each other and process a transaction.

Growth of Digital Payments[26]

Non-bank providers such as Apple and Google have taken advantage of the digital payment opportunity as they have a large existing customer base. The rise of digital payments aligns with user experience demands changing as they require more than just simplified transactions. According to a 2017 consumer survey by Accenture, over 70% of generation Z consumers use mobile applications and 60% are comfortable with instant payments such as P2P and C2B. Moreover, the survey found that people are shifting towards putting payment methods into a digital wallet for the convenience factor and having the wallet chose the best option for them.[27] The volume of digital payments is becoming increasingly larger and is estimated to reach $800 billion within the next few years in the United States. This is putting an increasing amount of pressure on banks as these new digital payments are forcing banks to become innovative with payment solutions. The payment interaction is a critical process because they serve as an important relationship between its customers.[28] However, this also creates a significant amount of opportunities for banks to leverage their consumer data and innovate payment solutions to stay competitive with non-banking payment providers.

What is FinTech?[29]


FinTech, short for financial technology, is the terminology used to describe innovative solutions that help support financial services for businesses and consumers [1]. FinTech can be described as the underlying revolution of majority of the current trends and technologies in the banking industry. In order to put the impact of FinTech into perspective, it has been reported that global investment over the past several years has reached over $100 billion USD.[2] Banks are currently finding ways to implement FinTech into their business models such as digital payments, security advancements and using AI to increase their customer satisfaction ratings. However, banks are also facing a competitive challenge as FinTech’s are geared towards providing renowned customer experience in specific areas. According to a PwC Global FinTech report, over 60% of bankers can see their clients shifting to a FinTech company for personal finance and other services. This is putting pressure on banks to set aside internal business improvements and focus strictly on user experience.[3] It will be important for banks to figure out how to partner with the right FinTech companies that match their business objectives.

Current Applications

Financial institutions are embracing the disruptive nature of emerging technology to create new opportunities in operational efficiency and innovative customer solutions. Now more than ever, the financial services industry must adapt and integrate cutting-edge technology to succeed in a rapidly changing and competitive landscape.[4]

Artificial Intelligence

Bank of America's Erica[5]

With regards to the financial services industry, one of the most significant advantages of AI lies in its flexibility. From performing simple customer service functions to making complex investment decisions, incumbent banks in the US are already utilizing AI to varying degrees of complexity.

Wells Fargo's Chatbot

One of the simplest applications of AI is the Wells Fargo AI chatbot, which leverages the existing infrastructure of the Facebook Messenger platform to perform simple tasks such as providing client account information or changing passwords.[6] The purpose of the chatbot is to streamline the customer service experience by eliminating the drudgery of navigating through an online FAQ or waiting through an automated telephone system. At its core, it is a simple solution to a relatively simple problem and serves as an example of an AI application for the general masses.

Bank of America's Virtual Assistant

Mobile banking in the US has realized unprecedented growth from 2012 to 2016, nearly doubling from 12 million customers to 22 million.[7] To capitalize on this trend, Bank of America has unveiled Erica, an AI-driven virtual assistant to complement their existing mobile banking application. Erica is accessible 24/7 and performs typical day-to-day banking transactions such as viewing and scheduling payments. Erica may also provide financial guidance through two pieces of enabling technology: predictive analytics and cognitive messaging. Predictive analytics utilizes client banking information such as cash flow, account balances, transaction history, and upcoming bills to forecast a customer’s financial position. Cognitive messaging then leverages the information generated by predictive analytics to anticipate a customer’s unique financial needs and helps set tailored financial goals by providing smart recommendations.[8]

In its present form, Erica's application is very commercial in nature. However, if this technology matures and pivots to focus more on day-to-day budgeting, it may realize significant societal benefits. Currently, America's financial illiteracy rate is about 40%. Over 44% of Americans do not have enough cash on hand to cover a $400 emergency, while 33% of Americans have nothing saved for retirement.[9] An effective and proactive solution is to provide financial education and promote money management as early as possible. With the ubiquity of smartphones in the consumer landscape, future AI-driven solutions like Erica may be a viable solution to a widespread epidemic.

Schwab Intelligent Portfolios

The cutting-edge of AI in financial services is robo-advisors. As a rapidly growing industry, robo-advisors already manage more than US$200 billion in assets worldwide, with the US as the market leader.[10] Robo-advisors leverage AI to aggregate and analyze large amounts of constantly changing and complex information such as asset class performance, market volatility, and market conditions to automate investment decision-making. The largest fully-automated robo-advisor is Schwab Intelligent Portfolios, with a portfolio of over US$20 billion.

Schwab Intelligent Portfolios[11]

Schwab Intelligent Portfolios is a subsidiary of Charles Schwab Bank, one of the largest bank and brokerage firms in the US.[12] With Intelligent Portfolios, clients simply fill out a questionnaire detailing their financial goals, risk tolerance, and timeline, and the robo-advisor will build and maintain a custom portfolio tailored to the client's specific needs. Clients may open an account in a matter of minutes and with as little as US$5,000.[13]

To put Intelligent Portfolio's performance in perspective, it earned a return of 27.7% between 2016 and 2017 [14], which equates to an annual return of appropriately 13%. The S&P 500, which is the most widely used benchmark for the US stock market, posts an average annual return of 9.7%.[15] While this does not serve as a direct comparison and does not necessarily imply that Intelligent Portfolios outperformed the market, it may serve as an indication that robo-advisors do indeed work.

As it stands, both human and AI financial advisors have a place in financial services industry. It is not necessarily a dichotomy and hybrid models may exist for customer who wish to employ the advantages of both.

Advantages of AI Advisors
  • Accessible to novice investors
  • Lower advisory fees compared to human advisors[16]
  • Simple to set up and low barrier to entry
Advantages of Human Advisors[17]
  • Offers more complex services such as estate planning
  • Only source for hedge funds and private equity
  • Holistic perspective of all financial accounts
  • Availability of a dedicated advisor

Digital Payment Platforms

As the FinTech and financial service industries continually innovate, one trend that is becoming increasingly apparent is loss of physicality in everyday payment and banking transactions. Cash is becoming digital and physical bank branches are quickly becoming a relic of the past.[18]

Mobile Banking Applications

The main culprit responsible for the reduction in physical bank branches is the emergence of mobile banking applications. These applications are available from major banking institutions and allow some day-to-day transactions. Each bank has their own application and each application has their own set of features. Currently, there is no unified standard which consequently leads to immense fragmentation in the industry.

Digital Wallets

AliPay and WeChat Pay[19]

In the US, digital wallets are quickly growing in popularity. The biggest advantage of mobile wallets is the elimination of carrying multiple debit cards, credits cards, and customer loyalty cards in day-to-day purchases.[20] As of January 2017, nearly 50% of smartphone users in the US have adopted a mobile wallet.[21] The most popular platforms are PayPal, Apple Pay, Samsung Pay, and Google Play by order of users. The forecast for digital wallet payments in the US is expected to reach US$9.5 billion by 2022.[22]

On the other hand, China leads mobile payments worldwide with a record of US$12.8 trillion in transactions in 2017 alone. In fact, China's cities lead the way in paving a future for a potentially looming "cashless society." Market experts expect 79.3% of China's smartphone users to fully adopt mobile wallets by 2021. By comparison, the US will firmly hold the second position with 23%, with Germany trailing behind with 15%.[23]

Unsurprisingly, the two most dominant mobile wallet platforms in China are held by its biggest e-commerce and social media giants: Alibaba and WeChat. By integrating AliPay and WeChat Pay into their existing online platforms, Alibaba and WeChat were able to leverage their large existing user bases to immediately realize economies of scale and achieve network effects.[24] AliPay current serves 520 million users with a 53% market share in terms of total transactions, while WeChat Pay boasts 768 million users but a smaller 40% market share.[25]

Industry analysts credit China's lack of stringent financial regulations and less developed financial system as opportune moments for the country to quickly and near-unanimously pivot from cash to digital payments.[26] By comparison, it may be unlikely that one will see the rise of products like Snapchat Pay or Facebook Pay to the same extent as those in China, at least in the near future. The US has shown strong resistance in allowing commercial businesses to enter the banking industry, citing significant reliability issues. As an example, Wal-Mart's bid for a bank license was almost unanimously overturned by the US Congress in 2006.[27] However, in the advent of a fiercely competitive and evolving market, overly strict regulations may ultimately stymie innovation in the industry. As this platform begins to mature, both China and the US must carefully balance both regulation and innovation to offer products that are secure and cutting-edge.

Bitcoin and other Cryptocurrencies

As demonstrated by mobile wallets, money is increasingly losing its physical substance. In the same way that paper cash has been slowly replaced by plastic credit cards, credit cards themselves are being replaced by metal and silicon smartphones. As technology moves the concept of money further and further way from its original source, it may not be unreasonable for a day to come where money simply has no physicality.

While in its infancy, Bitcoin and other cryptocurrencies are aiming to disrupt the market and ultimately overturn the physicality of money. The US Congress has gone as far as to say that digital currencies may be the "future of money."[28] Currently, the total value of the cryptocurrency market is US$254 billion, with Bitcoin firmly at the top with a market value of US$104 billion.[29] To put numbers into perspective however, the US dollar, which is the global reserve currency, has a global circulation of US$1.93 trillion.[30] With this in mind, in the absence of a cataclysmic market collapse, conventional currency will likely not go anywhere any time soon; and while cryptocurrency may indeed be the "future of money," the future may be fairly far into the distance.

To briefly discuss the concept of cryptocurrency in a financial setting further, the term itself is a misnomer. The formal definition of currency is legal tender that is formally recognized by governments.[31] At the time of this writing, no cryptocurrency to date has this status.[32] Mainstream adoption is also a work in progress, although the SFU Bookstore is the first post-secondary institution to accept Bitcoin.[33] By nature of using a distributed ledger and proof of work, verifying Bitcoin transactions is a long and arduous process, which leads to immense scalability issues.[34] Arguably, even as the most popular platform, Bitcoin is by no means perfect, with notable legal, logistical, and technological barriers.

The current future of cryptocurrency is largely uncertain, which contributes the turbulent volatility in the market.[35] While cryptocurrencies such as Bitcoin may not ultimately become cash of the future, it is undeniable that it has forced both the financial and technology industries to adopt a new perspective and question the future to come. Whether the current technology succeeds or fails, Bitcoin is an open source project; the underlying technology will remain accessible for all to see, and the idea of digital cash may likely linger in the industry. With the pace that technology evolves, it will be difficult to foresee exactly what cash will become, but it may be prudent to stay well-informed with industry trends and prepare for the possibility of change in the future.


Iris scanner for ATM[36]

Many global banking institutions are implementing biometrics through partnerships with other existing companies. The objective is to allow customers to access the required information with a more convenient and secure authentication which aligns with the current digital transformation.

Lloyds Banking Group

A major financial institution is using Microsoft to enable customers to access banking information through fingerprint and facial recognition. This technology is being integrated through the Windows 10 platform and serves as a two-factor authentication for transactions and access.[37]

The Qatar National Bank

One of the largest banks in the Middle East has partnered with an independent company that specializes in iris recognition for authentication. Customers have the ability to visit a branch and get their iris scanned. A copy of the biometric sample will be stored in a database which is later used for authentication when needed. The current process has been implemented for ATM access in 14 branches.[38]


The underlying technology of FinTech has been the driving force of change and innovation behind the growth of financial services industry in the past several years. Some FinTech firms are positioning themselves to evolve into full-fledged financial institutions, while others look to produce enabling technology for the bigger banks. Likewise, incumbent banks have also responded to this new technology in different ways.

Emerging Competitors

In China, Ant Financial is the largest FinTech company in the world, with a valuation of US$150 billion.[39] It runs AliPay, the world’s largest mobile payment platform, and Sesame Credit, which serves a credit score for all of Alibaba’s products. Sesame Credit analyzes social media interactions and online purchases to offer better loans from Ant Financial or a more credible Alibaba e-commerce profile. Ant Financial also offers traditional banking activities such as wealth management, credit reporting, banking, and online payments.[40]

Ant Financial is the world's most valuable FinTech firm[41]

In the US, Avant is an emerging FinTech firm that also offers traditional banking products. Avant is an online lending platform that uses AI to determine the rate, amount, and length of personal loans. Most importantly, Avant also offers a large portfolio of unsecured loans, which are loans that do not require collateral, and are only supported by a borrower’s creditworthiness. While unsecured loans require a higher interest rate premium, this is to compensate for the higher default risk. Avant's AI must appropriately characterize the terms of the loan or Avant may stand to lose money. By all accounts, it appears Avant has been successful, amassing a loan portfolio of US$3.5 billion in a mere 6 years after its inception.[42]

To compare this number to the biggest bank in the US, JPMorgan has a loan portfolio of US$930 billion.[43] While FinTech is an emerging industry growing at a rapid pace, it may not spell a sensationalized doomsday scenario for the big banks. Incumbent banks have significant amounts of capital, brand recognition, and existing infrastructure that FinTech start-ups will find immense difficulty emulating. On the other hand, while disruption is not imminent, it might be on the horizon, and it would be wise for banks to keep a close eye on upcoming trends.


FinTech Global Investment [44]

FinTech can help play a larger role in filling the technology gap that the financial industry is currently facing. FinTechs are typically start-ups that have the knowledge and technical expertise to execute solutions which target specific customer pain points. While banks have the brand, capital, customer base, and established reputation that many start-ups lack.

Unfortunately, 80% of the top 50 banks in the US have yet to acquire a FinTech start-up, although the finance industry is notorious for being slow to adapt to change due to high levels of regulation.[45] The current trend suggests banks are learning towards in-house innovations, with both Bank of America and JPMorgan making sizable investments in 2016, with US$3 billion and US$9.5 billion respectively.[46] One significant barrier may be the difficulty in finding a one-to-one fit in terms of business strategy and cutting-edge technology. Banks also have a lot of existing infrastructure in place that might not integrate with new technology that external FinTech firms may bring, so it may be more judicious to build from the ground up.

As mentioned previously however, this trend may look to change. In addition to Ant Financial and Avant, there is a large list of other innovative FinTech firms. In the US specifically, Kabbage is the second most funded FinTech firm, with over US$500 million raised.[47] Kabbage specializes in extending business lines of credit to small businesses. Businesses can request a line of credit of up to US$250,000 and qualify within 10 minutes. Loan terms are determined through a sophisticated series of algorithms analyzing multiple data factors, including business volume, time in business, business transaction volume, social media activity, and credit score. Kabbage has provided over US$4 billion in funding to over 130,000 business since its inception in 2008.[48]

Stripe is another highly funded US firm with an invested capital of US$450 million.[49] At its core, Stripe enables individuals and businesses alike to send and receive payments over the Internet and provides the banking and fraud detection infrastructure. Stripe has processed billions of dollars across hundreds of thousands of different businesses, with a client portfolio that includes Facebook, Target, Unicef, SAP, and Salesforce.[50] As of April 2018, Stripe is valuated at over US$9 billion.[51] Currently, the US FinTech market is vibrant, continually innovating, and rapidly growing, with many established names and budding start-ups. Should incumbent banks ever seek partnerships with FinTech firms, the opportunities exist.

Impact on Financial Industry

As with all technological changes, it is important to assess the impacts associated with the related industries. While FinTech introduces a plethora of benefits and fixes to existing issues, they are not without their own consequences. Financial institutions must carefully integrate these new technologies while balancing the costs of implementation, which may relate to compliance, infrastructure, and consumer concerns.


Failure of fiduciary duty[52]

As part of their professional code of conduct, investment advisors have a fiduciary duty to act in the best interest of their clients.[53] Essentially, this means advisors must recommend products and solutions that specifically fit client needs. However, overwhelming evidence seems to illustrate a different picture. CBC’s Go Public, which investigates the consumer marketplace, has found that Canada’s Big 5 Banks have overtly misled or lied to customers to meet aggressive sales targets.[54] Canada's largest banks were also cited to have "insufficient controls" in place to safeguard against tactics that mistreat consumers.[55] In the US, Wells Fargo was charged with a US$4 million fine on June 27, 2018 for using complex investments to confuse its clients.[56]

With AI acting as investment advisors, one avenue of this issue may be addressed. The underlying algorithms and code governing AI behaviour may be regulated to protect consumer interest. With the staggering amount of fraud consistently occurring in the financial sector, governing bodies like the Securities and Exchange Commission may ultimately have to instate more heavy-handed regulation to rebuild and uphold consumer trust, particularly as the industry make the shift from humans to AI.[57] In the future, new jobs where finance professionals audit AI may arise.

Digital Payment Platforms

The most tumultuous impact of mobile banking is the elimination of physical branches and the subsequent reduction in operating costs. With this, banks may be able to pass on the saving to consumers or provide more value-added services. For example, Tangerine, an online bank with very few physical branches, offers a savings account with an annual interest rate of 1.1% (at the time of writing) with no transaction fees and no minimum balance.[58] On the other hand, TD, one of the Big 5 banks in Canada, offers a High Interest Savings Account with an annual interest rate of 0.5% and a minimum balance of $25,000 to avoid monthly fees.[59] The savings that Tangerine is able to realize from reduced physical infrastructure costs enables them to offer highly competitive products that dwarf some of TD's best offerings.

As the trend of money digitization continues, some governments are contemplating the possibility of issuing their own virtual currencies. Russia's central bank, alongside Brazil, China, and India, are in talks of creating a supra-cryptocurrency that could include countries with over 40% of the world's population. In Sweden, where the use of cash is quickly disappearing, its central bank is also investigating a similar idea. With digital currency, governments will have a higher level of direct control on monetary policy. Governments may control the flow of capital in and out of the country, crack down on tax evasion, and regulate money supply through more granular changes in interest rates. Government-backed digital currencies, which will serve as true fiat money, may bring "sweeping changes to the international monetary system."[60]


In general, FinTech is allowing financial institutions to gather and analyze more information than ever before. With this, there are several privacy concerns which require a critical assessment of the benefits and consequences behind this new technology.

An individual's daily spending patterns could potentially reveal a large portion of their personal profile. If payments are conducted on credit with a paper trail, it will be easy to construct a profile of an individual's everyday life, down to the finest details. Unbeknownst to the consumer, firms may learn of their hobbies, eating habits, places of interest, life events, among many other things. While some consumers may not mind, this may stand as a pain point for others. While the value of privacy is a subjective and controversial matter for each individual, it is important to be aware of what caveats technology may bring to everyday life.[61]

To put matters simply, banks are businesses. While in may be in their best interest to entice customers with new products and features, they must do it in a way that is consistent with their bottom line. On the other hand, as well-informed consumers, it is wise to adopt a more critical eye and understand exactly the level and value of privacy one must give up in exchange for these offerings.

Financial Job Market

Industry experts forecast that 40% of jobs in the US financial market could be lost by 2030, while incumbent banks maintain that this new technology will serve as an "augment," rather than a "replacement."[62]

With fewer physical branches and customer service automation, there may be significantly lower levels of entry-level staff. As a result, the financial services industry may become more top-heavy as the job market is dominated by high level executives whose jobs are not yet replaceable by non-human technologies. While the technology may serve as an "augment," it will most likely serve that purpose for advisory teams and partners, and not lower level staff.

Challenges in Digital Banking

There are several challenges directly associated with digital banking. Legislation and regulation ensure the financial industry and overall economy is thriving and growing. The sensitivity of data collected by the financial industry introduce significant security risks and concerns from its users. As mentioned earlier, FinTech is becoming a significant threat to incumbent financial service providers. PwC's Global FinTech Report in 2017 reported that 88% of incumbent financial service providers feel concerned they are losing revenue to innovators.[63]


The financial sector is a highly regulated industry as it plays a major role in the overall economy across all industries and sectors. Government regulation promotes financial stability, consumer protection and maintains healthy competition.[64]


The General Data Protection Regulation (GDPR) is a regulation on data protection and privacy that came into effect on May 25, 2018. The regulation applies to all companies that operate or process data in the European Union. Data subjects are given more control of who has their data, knowledge of what the data is used for, and must give consent for companies to use their data.[65] Companies are limited to hold and process only data necessary to complete their duties. Non-compliance for GDPR could lead to a penalty of twenty million Euro or four percent of the global annual turnover of a company.[65]

Challenges in the Financial Industry

For banks, customer data is an important source of information for personalized offers and marketing. Under GDPR, banks have an opportunity to improve their digitization efforts and show consumers that their data is safe and used in a beneficial way.[66] Digitization can help banks operate more efficiently, resulting in better product offerings and solutions for their customers. Banks can also improve their global brand reputation.[67]

One challenge for GDPR compliance is the implementation of processes to manage security and data protection. GDPR places the burden of proof on the controller of data to show that they are compliant.[68] The level of security and data protection varies across different segments and types of banking. As the focus for GDPR is on natural persons rather than corporations[69], the major impact areas of banking are on private wealth management and retail banking. GDPR compliance requires banks to know where the data is stored, how it is captured, and how it is processed.[70]

Private wealth management involves building a personal relationship with a client, generating a lot of personal unstructured data that the bank needs to store.[67] Retail banking faces similar challenges with personal unstructured data but to a lesser degree than private wealth management. Retail banking involves many more customers, requiring standardized processes to interact with their customers and collect personal data. The standardized processes result in less unstructured data, making it easier to manage from a technological perspective.[67]

GDPR expected impact on various bank segments[67]

Banks that are not part of the EU but process personal data on residents in the EU are also affected. For example, many companies and banks in Switzerland actively interact with customers that are part of the EU.[67]


Timeline for PSD2 Implementation[71]

Revised Payment Service Directive (PSD2) a directive in the European Union that focuses on making payments safer, increasing consumer protection, fostering innovation, and maintaining a strong competitive landscape.[72] Under this directive, banks are legally obligated to provide third-party providers access to their customers’ accounts through open APIs (Application Programming Interface) including raw account data such as balances and transactional data.[72] Banks also must allow third parties to initiate payments on behalf of the customer.[72] This business model is a platform-based business approach called Open Banking.

For example, you can choose any third-party provider to manage your bills, transfer money and analyze your spending while storing your money and data with your current bank account.[72] This directive looks to transform and open the financial landscape to include additional players beyond banks.

PSD2 introduces two categories of third party providers:

  • Account Information Service Providers (AISPs) – Third parties that aggregate account information such as transaction history and balances. AISPs enables new services that can utilize this data, for example, you can aggregate multiple bank accounts into a single platform.[73]
  • Payment Initiation Service Provider (PISPs) – Third parties that initiate a payment on behalf of a user. PISPs help facilitate online banking and payment solutions directly from a user’s bank account, creating the potential for new payment solutions.[73]
Combining Data Protection and Innovation

GDPR and PSD2 work in conjunction to provide an environment to foster innovation while protecting the interests of the consumer. Under GDPR, companies are held accountable to use consumer data in a responsible way. Consumers can choose which companies can store their data and understand how it is used. PSD2 increases competition in the financial landscape by allowing consumers to choose how their bank data is being used, regardless of where the data is stored.[74]

Overall, consumers have better control of their data and can choose a solution that is tailored to their needs. Banks will need to leverage their existing strengths such as trust and customer experience to compete in the financial landscape where they no longer have a monopoly on customer data.

Risks and Security

Security is not only about the technology, but also involve the people, processes, technology and relationships between them. As users embrace the different third-party solutions enabled by PSD2, there is an increased risk for users giving their information away to unauthorized parties.[75] Banks must be more careful in securing their systems as both individuals and businesses request data through APIs.[75]

Cryptocurrency such as Bitcoin made it easy for users to transfer money all around the world. However, this convenience to transfer currency easily may come at the cost of security. Social engineering or Phishing scams are extremely prevalent in today’s society. In December 2017, $64M in cryptocurrency was stolen from NiceHash, a digital currency marketplace for users to sell processing power from their computers in exchange for Bitcoin.[76]

Future of Digital Banking

"Things" as Customers

“Things” or Internet of Things (IoT) devices can become new opportunities for revenue. As technology becomes smarter, we expect these “Things” to be able to negotiate and communicate with other businesses and customers. For example, if an IoT refrigerator breaks down or requires maintenance, the device should negotiate and find a time for a mechanic to service the machine without much effort from the owner.[77]

The technology behind IoT devices can be classified in three stages:

  • Fixed – “Things” can conduct simple actions based on a set of rules.[78] For example, an IoT coffee machine ordering new coffee beans when inventory is low
  • Adaptable – “Things” can choose the best option based on a variety of products.[78] For example, a Robo-advisor taking a survey and generating a customer’s risk profile.
  • Autonomous – “Things” determine customer needs based on the situation.[78] For example, a personal AI assistant that helps with your daily tasks.

Challenges for "Things"

“Things” introduce a new type of relationship that bypasses the traditional vendor-to-customer relationship, creating an economy that involves only IoT devices.[79] This introduces new challenges such as increased competition, fraud, legal and taxation challenges, and operational challenges.[79] For example, recognizing “Things” as legal entities to tax and legal responsibility or fault in situations with failure.[79] "Things" also have the potential to drastically impact the service industry. Globally, the service industry accounts for over three-fifths of the global GDP.[80]

For the financial industry, they will need to determine how to manage the transactions between smart devices. A new economy that involves only IoT devices is an untapped market with immense revenue generating potential.

Open Banking

Open Banking: Essential Elements and Benefits

Open banking is a collaborative model that enables customers and businesses to share banking data with third parties through the use of APIs.[1] Open banking is an opportunity for banks to transform their current business model into a platform for customers and third parties to interact. Banks can provide and supplement their existing service offerings, bank’s customers are offered more unique and tailored services, and third parties can interact and acquire new customers that they previously had no access to.[2]

What are APIs

Application Programming Interface (API) defines the method of communication between software applications.[3] It enables companies to share data and application functionality so that third party developers can use your data to build new applications and services.[4] For example, online news outlets leverage social media APIs to enable sharing of articles to your Twitter or Facebook with the click of a button.

Types of APIs
  • Private or Internal APIs - Used internally within a company to help facilitate integration of applications or systems.[1]
  • Partner APIs - Used by partners to facilitate integration of applications between a partner and a company[1]
  • Open APIs - Used by third parties to access publicly available data or functionality of a company.[1] Companies should be careful in securing what data is released.
Types of APIs[1]

Advantages and Disadvantages of APIs in banking


  • New revenue stream - APIs can become a new direct and indirect revenue stream for companies.[5] For example, charging for an API license, by usage or offering additional value such as exclusive APIs or data visibility beyond a basic license.[2] Financial institutions can also leverage APIs as a tool to drive additional traffic and brand recognition to its existing services.[2] For example, integrating a rewards program with other service providers.
  • User Friendly Solutions - Enables competition from third party developers which result in an end product that is user friendly and effective. Ineffective or out of date solutions will naturally be replaced as new ideas and functionality are introduced.[6]
  • Integration - Enables integration with existing tools or products, which rapidly decreases time required to develop a solution that already exists.[7] For example, integrating with messaging services to provide notifications for a transaction.


  • Cost - Can be expensive to create, maintain and support third parties with documentation. Requires third parties to have the technical knowledge to develop solutions for your products.[6]
  • Security - Concern with security as it opens a connection into your company, which creates an additional area for hackers to target.[6]
  • Lack of control - Third parties may create better and more effective solutions, resulting in less usage of your current products.[8] For example, an online banking website shows marketing product offerings as well as a customer's banking information. A third party mobile application that aggregates a customer's banking information may decrease the amount of traffic on the online banking website.

Impact on Financial Industry

The highly regulated financial industry makes it difficult for new players to enter into the market, essentially creating a monopoly for incumbent banks. As the financial industry saturates, limited competition and size of incumbent banks lead to similar product offerings and lack of innovation. The current financial industry isolates financial information to specific businesses, making it difficult for third parties to access customers in the financial industry, which effectively drives third parties to create innovation for other industries.

Open banking transforms the industry to an omnichannel ecosystem by enabling third parties to participate in the industry.[9]

  • Banks will have to leverage their existing brand and capital to create new revenue streams and remain competitive with the entry of new competitors.[9]
  • Customers will be able to choose from a wide variety of product offerings. Existing services such as social media networks can tap into the financial data of their customers, regardless of what financial institution they are currently using.[9]
  • Third parties have the opportunity to create enhanced product and service offerings through access to a new customer base.[9] Third parties will play a big role in creating an ecosystem where any player can create new applications, products and services for a wide variety of customers.

While open banking is heavily driven by PSD2 in Europe, it is not a new concept in the financial industry. Existing financial institutions can leverage their brand and capital to provide a differentiated product offering for their customers. For example, Capital One introduced APIs for their customers in 2015.

Capital One API Product Offerings[10]


Financial institutions around the world are undergoing a digital transformation to remain competitive within the industry. However, banks are quickly realizing the complexity of the digital transformation journey due to high costs and lack of technical knowledge. Emerging technologies such as AI, digital payment platforms, and new innovations in the FinTech industry have the potential to revolutionize all areas of the financial services industry. On the other hand, while they are able to augment traditional banking activities and improve the product experience for clients, they are not without their own issues. Financial institutions looking to adopt these new technologies must carefully consider the costs associated with infrastructure changes, privacy concerns, data protection, and job market disruptions. In addition to conducting cost-benefit analysis, firms must also ensure that the new technology conforms to their competitive strategy, as well as brings features that clients actually want. This will require a deep examination of current practices and procedures. Moreover, new legislation in GDPR force companies to be accountable with consumer data, and ultimately gives control of data back to hands of the consumer. In Europe, PSD2 looks to break the virtual monopoly that banks have on financial services by creating an ecosystem for third party providers to create solutions for consumers. Individual consumers no longer have their data siloed and constrained to a single bank, allowing innovation to be driven by consumers rather than businesses. Like most industries, technology is fueling the future of banking and it will put significant pressure on banks to understand consumer behavior and the overall digital transformation.


Vinay Panchal Keith Leung William Yang
Beedie School of Business
Simon Fraser University
Burnaby, BC, Canada
Beedie School of Business
Simon Fraser University
Burnaby, BC, Canada
Beedie School of Business
Simon Fraser University
Burnaby, BC, Canada


  1. 1.0 1.1 1.2 1.3 1.4
  2. 2.0 2.1 2.2
  6. 6.0 6.1 6.2
  9. 9.0 9.1 9.2 9.3
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