DIGITAL TRANSFORMATION IN FINANCIAL SERVICE

Digitization currently covers all industries and, through technology, can accelerate processes, increase work models' effectiveness, and facilitate business strategies. Your investment can influence a 14% increase in company profits and a drop of up to 13% in operating costs, according to a study by the digital firm Avanade.

One of the clearest signs of how the technological revolution drives all productive sectors is the birth of Fintech (from the contraction of the English words finance and technology ), a current that encompasses various companies that want to participate in the financial sector and that use technologies to create innovative, practical and strategically designed products with the customer at the center (CX), understanding their behavior.

Fintech has created better contact points and services for banking customers, including other forms of payment and even currencies, which increase the transition from the physical to the digital world, democratizing money and benefiting the global economy.

A digital trend is related to the high degree of assimilation of mobile technologies that society is having. For example:

In Latin America, in 2016, there were close to 400 million Smartphones. It is expected that by 2022, 80% of the population will be connected to at least a 3G network, according to the Ericcson Mobility Report.
Online banking has registered exponential growth in Chile over the last ten years. In the period 2005-2015, it grew by 500%, according to data from the Association of Banks and Financial Institutions (Abif).
84% of Chilean consumers would be willing to use digitized financial services. According to the Accenture Consumer Study, they would also choose them because they are faster (46%) and less expensive (29%).

Digital Transformation in the financial sector is an exciting trend that will continue to define the coming years and decades.

Currently, the process involves increasing security, practicality, and agility and reducing typical problems in the sector, such as bureaucracy and service fees, which are essential for the coronavirus pandemic.

But what has changed, and what is expected for the future? What will be the mandatory trends and technologies to accompany this growing digitization?

Impacts of Digital Transformation on the Financial Sector

It is not news that the Digital Transformation in the financial sector, as in other sectors, was mainly driven by the coronavirus pandemic. During social isolation, many financial institutions had to reinvent themselves and turn to digital to continue operations that could not be stopped even in delicate moments. At the same time, consumers were educated to accept technology as part of their routine, and thus it was not necessary to go to the bank many times; it was only enough to click.

We can say that the "pandemic effect" has changed how companies and customers act and think, revolutionizing finance and impacting the sector as a whole.

Digital and personalized service during the coronavirus pandemic and news about large banks' closure of physical branches were standard. This massive shutdown is justified by the way consumers have come to use banking services. With the support of more intuitive applications and platforms, it became unnecessary to go to branches to carry out banking operations. At the same time, getting used to technology has made consumers increasingly demand quality, efficiency, and a unique and unforgettable experience.

Given this scenario, digital service has become more critical, and many companies have begun to invest in modern and intelligent technologies focused on the Consumer Experience (CX) that provide a humanized and personalized service within the digital environment.

Reduction of bureaucratic processes
By going less to brick-and-mortar banks, many financial institutions began to cut red tape. Today, according to the institution, sending documents and proof of residence is no longer necessary to open a digital account.
All contact between these institutions and their consumers is drastically eliminated from the bureaucracy that has characterized banking services.
Development of new technologies
One of the pillars of digital transformation in the financial market is the use of technology to serve customers. As more companies adopt these resources, the next differentiator becomes the development of new technologies that allow them to meet the new demands of the consumer market.
Here we are talking about digital banks, but innovations in the sector are not limited to them. The means of payment, obtaining credit, and investments are also transformed by technology.
Process transparency
A few years ago, it was common to see customers complain about the fees charged by banks without understanding what services they were paying for.
With access to accounts through apps, customers began to monitor transactions, check the balance daily, and all fees charged. Thus, traditional banks had to adapt to the new consumption format, be more transparent, and offer fairer prices to win more customers in the digital age, especially the youngest.

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Benefits of banking digitization

Among the advantages that technology brings to the financial industry, we find.

Fast and less expensive transfers: using digital currencies facilitates payments in time and cost. At the same time, the creation of online payment companies also does business between people and institutions from countries with different currencies faster and more straightforward, assimilating values and simplifying procedures reliably.
Power eCommerce: digital payments and the increase in the security of transfers facilitate online sales, which, in turn, opens the market to industries that previously could only refer to local commerce. Thus, international consultancies are accessible to companies of various sizes, and import and export payments can be immediate, facilitating business.

Money and new forms of digital payment

Online banking became widespread in the 2000s, and today new technologies are a daily part of companies and consumers. Furthermore, new tools are constantly being developed to boost the Fintech industry, from established banks, StartUps, and even technology organizations embarking on a new path in this area.

Among the most used advances currently are.

Mobile payments: it is estimated that in 2017 about 450,000 mobile devices in Chile could make mobile payments, according to figures from the company Worldline Chile. While Apple Pay and Samsung Pay are expected to arrive, local financial institutions have implemented similar tools. One of them is BBVA Wallet, chosen as the most innovative banking product in the country by Global Banking and Finance Review. This consists of a "contactless" credit card in the form of a sticker attached to the Smartphone, which must be synchronized with the user's bank details and can carry out electronic payments without the need for a password for small amounts.
Digital Currencies: This medium of exchange allows for instant transactions and property transfer without borders. They are used to buying certain physical goods and services and are currently on the rise internationally, thanks to their decentralization, where no central point controls the money supply. Currently, Bitcoin is the best example since it has reached its highest value since its creation in 2009, costing around US$1,700 per unit. Likewise, this currency is so valued that Japan and Russia are contemplating legalizing it as a means of payment in their territories in 2018.
Online accounts and financing: today, it is possible to create a checking account 100% online without having to present paperwork at the physical offices of financial institutions, such as the case of BCI, which, thanks to its digital experience, has won first place in Large Banks ProCalidad 2014 National Customer Satisfaction Award and IZO First Award in Customer Experience for the third consecutive year (2013, 2014 and 2015). On the other hand, more companies are created daily that offer online financing options, from credit quotes, through documents and digital scores (such as Destácame ), to crowdfunding (such as Cumplo).
Banking has shown an accelerated adaptation process within the digital and technological transformation, leading and revolutionizing the industry. Markets have been opened, and the improvement in intrinsic financial methods streamlines business in other areas, which drives and reinforces the trend. Thus, the physical limits of analog processes and paper money are broken to transfer transactions at all levels to the online world.

Main trends of Digital Transformation in the financial sector

Bank transactions by applications
One of the main trends of Digital Transformation in the financial sector is the increase in banking transactions through applications.
As people began to use technology to carry out essential daily tasks during social isolation, the comfort and convenience of digital gained popularity. They proved that "online" is here to stay, even in today's world. Financial sector. It is estimated that the volume of cashless transactions in Latin America will increase by 52% by 2025 and 48% by 2030.
The study of the consultant Ernst Young justifies the previous data. According to the study, 55% of customers already carry out digital transactions and rarely go to a physical bank in countries like Brazil, Mexico, and Colombia. These values are expected to be even higher in the rest of the world.
Fintech growth
With the digital transformation in the financial sector, the trend of Fintech -startups that use technology and innovation to develop fully digital financial products, in Latin America is significant. The region is considered one of the most fertile for fintech innovation.
According to the Inter-American Development Bank, Fintech grew by more than 50% in two years in Latin America in 2019. The region is home to more than 2,300 fintech, serving a market of more than 650 million people in 33 countries.
Considered a threat to physical banks until recently, Fintech is now part of the supply chain of many financial institutions, receiving more investment every year. They are considered a disruptive force that uses innovation to reduce the risk of large institutions in their businesses.
The experts explain that many factors, especially the adoption of Open Banking (Open Bank), justify the growing interest in Fintech in the Latin American region and its good acceptance by consumers. Other reasons would be fee waiver, faster delivery, red tape removal, security, scalability, and the availability of some free services.
Also, according to these professionals, it should be noted that Fintech has mainly attracted the new generation that masters digital technologies and moves money through their cell phones. They assure that, with strategies like these, the new financial entities are conquering clients and are already beginning to grow in the market.
Open finance and the expansion of Open Banking
Another significant consequence of Digital Transformation in the financial sector is the expansion of Open Banking to accompany the strong growth of the so-called open or digital economy ( Open Finance ).
Open Banking is nothing more than an open financial system. The system enables users of financial products and services to move their bank accounts from multiple platforms and applications and share their information with other institutions recognized by the Central Bank.
Recent studies by the World Bank reveal that a high proportion of the Latin American population still needs access to banking services. In some countries, this number exceeds 50%. The worldwide goals of Open Banking include closing this gap through advancing financial inclusion and providing users with better goods and services, such as through the creation of financial APIs.
With the consolidation of Open Banking, a more transparent flow of information between institutions will likely favor the definition of better credit policies and offer more appropriate services to the different customer profiles and segments of society. It is also expected that the innovations that emerge will facilitate the comparison of products and services offered by the different participating institutions and the financial planning of individuals. For experts, the expansion of digital banks will mainly be due to the consolidation of Fintech.
Development of financial APIs
As in-app payments intensify, it will become increasingly necessary for the developers behind major apps like WhatsApp to make APIs available.
The acronym API (Application Programming Interface), in free translation "Application Programming Interface," means a set of standardized information in the form of programming code to interconnect systems. This interface technology allows internal and external systems to communicate. In other words, through it, the end user uses an application, software, or even a simple spreadsheet, consulting, modifying, and storing data from different systems without the user having to access them directly.
In the financial industry, the API helps an employee who needs to issue invoices to fulfill a customer's order. In this case, the API connects the company's management system with the bank's bank receipt generation system and the city council's invoice issuance system. Therefore, the employee only needs to enter the data once and finish the process with a few clicks.
In the current business model, financial institutions are moving from working in satellite services to "core" services. In other words, they are opening their APIs so that Fintech, or financial companies, can develop new services they can offer to the market.
According to experts, this new model based on open APIs would facilitate the entry of new players and serve as an opportunity for financial institutions to streamline the offer of new products and services.
Blockchain and cryptocurrencies
Surely you have heard of cryptocurrencies or even invested in them. Although still involved in many controversies about how they will be used, how they should be regulated, and their advantages, the so-called "digital currencies" have conquered their place in the financial sector. For the next few years, digital banks, Fintech, and other financial institutions are expected to allow their customers to transact using cryptocurrencies. Therefore, blockchain systems have gained more fans due to the level of security they can offer.
As its name indicates, blockchain is a block record authentication structure, to reinforce the protection of systems and prevent attacks and cybercrimes.
In it, each block is connected to the previous one through an encrypted code. Therefore, it is almost impossible to change any information in the chain, since it requires changing all the blocks in sequence. In the financial sector, it is interesting to see how blockchain will contribute to digital security in electronic transactions, as is already the case with cryptocurrencies. In addition, it is worth mentioning that each transaction will always be registered in the chain to guarantee visibility.
Recent studies indicate that around 90% of the central Australian, European, and North American banks are already experimenting with technology in their operations as an opportunity to reduce problems and costs.
In Latin America, blockchain and cryptocurrencies have constantly been increasing. According to the Latin American Private Equity Investment Association (LAVCA) 2021 report, investments in cryptocurrency and blockchain companies in the region reached US$653 million in 2021, nearly ten times more than the 2020 total. The above data shows us that the trend for the coming years is for Latin American investments in blockchain and cryptocurrencies to continue to increase.
More significant investments in security and Compliance
To mitigate the risks of sensitive data leakage and digital threats, companies must meet regulatory requirements for data storage and security, especially those in the financial sector. We must also remember that with the European GDPR (General Data Protection Regulation) inspiring more and more countries, protecting customer data becomes even more essential.
As of May 25, 2018, the GDPR outlines the rights that citizens of the European Union have concerning their data and the steps that organizations must follow to store and process this data legitimately and securely. Up to 20 million euros in fines, or 4% of a company's annual global turnover, can be imposed for breaking the rule. Brazil and Mexico have already shown themselves to be experts on data security and protection laws in Latin America.
In Brazil, regulations, such as Resolution No. 4,658, of April 26, 2018, of the Central Bank, refer to the cyber security policy and requirements for contracting data processing and storage services and cloud computing. . The LGPD, the Brazilian adaptation to the GDPR, in turn, has been in force since September 2020. In Mexico, the Law to Regulate Financial Technology Institutions offers greater legal security to users of financial services through digital platforms, since March 2018. Today, in a globalized, digital, and highly competitive world, customers know how valuable their information is for companies. Therefore, they must understand how to use this information best to promote a great experience.
Given the new scenario, the trend is that investments in efficient and disruptive technologies and tools focused on security and Compliance are increasing, not only in Latin America but throughout the world. For this year, the estimate is that global spending on cybersecurity will grow by 69%.
IoT technology
The Internet of Things (or IoT) is another consequence of the digital transformation, driven mainly by the coronavirus pandemic, which promises to transform the financial sector, even impacting the services of banks and institutions.
It is a network that connects the most diverse objects, such as phones and smartwatches, to the Internet. In other words, the IoT is an expansion of connectivity observed from a refrigerator that notifies what products are missing to adjust the temperature according to the day's weather.
The combination of devices, control systems, and a communication network make up the triad that makes the Internet of Things work. In practice, the goal is to collect information from users in real time to analyze, process, and provide personalized solutions to consumers. In the financial market, this resource gains space when, for example, we can pay bills using smartphones or smart bracelets, eliminating the need to use the card.
Due to social isolation and disease prevention regulations during the pandemic, many businesses have allowed contactless payment methods. The convenience of bringing a smartphone or watch closer to the payment machine to carry out the transaction has increasingly won consumers' taste. It promises to be a trend in the coming years.
Digital identity and electronic signature
Some of the most active Latin American countries in terms of participation in Open Banking and regulatory development, such as Brazil, Mexico, and Colombia, have plans to adopt digital identity regulations influenced by international standards, such as the European eIDAS Regulation.
The goal is to simplify digital services for multiple delivery channels, including mobile devices, and create a trusted digital government.
As part of this plan, the government will issue a universal digital identity over time to increase the security of digital services. The plan outlines three stages to implement its universal digital identity, including establishing best practices around privacy and acceptance by the public and private institutions.
Electronic signatures in Latin America are also growing, particularly in countries with a legal framework that allows electronic and digital signatures. This includes Mexico, Brazil, Colombia, and Chile.
However, there are still several challenges regarding the regulatory issue. Many Latin American countries require handwritten signatures for contractual transactions and processes, such as credit and loan approvals.
That being said, some Latin American countries have already enacted electronic communications laws requiring electronic signatures in the last year, particularly in response to the coronavirus pandemic.
In summary, the laws establish that electronic signatures are legally certified. Companies, such as financial institutions that offer remote electronic signature services, must optimize specific management and security measures to protect the client better and confirm the legality of the signatures following the EU eIDAS regulations, the model law of UNCITRAL on Electronic Signatures, and the UNCITRAL Model Law on Electronic Commerce.

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Technologies that will be mandatory in the financial industry

Artificial intelligence
One of the main trends of Digital Transformation in the financial Not surprisingly, the Digital Transformation in the financial sector has been sustained, among other factors, by the advancement of Artificial Intelligence. With intelligent solutions emerging daily, studies show that AI will be mandatory to keep up with the digitization of the industry.
Global studies from the University of Cambridge reinforce that AI is a clear trend in the sector. According to the study, 85% of financial institutions use AI. According to senior executives, the technology is expected to be of high or very high commercial importance by 2023.
Such a prediction is justified by the fact that Artificial Intelligence is an excellent resource that helps chatbots and other service solutions to have a more humane and personalized approach. In addition, AI allows institutions to be more agile and efficient in contact with their clients, leaving the need for personal attention only for more complex situations.
It should be remembered that the coronavirus pandemic also promoted Digital Transformation in the financial sector, making banks and customers optimize their time by replacing offline with smart technologies. This reality is seen in the most advanced financial projects, in which the world's largest banks have already begun to test various cases, such as loan approval, asset management, and risk assessment through digital applications.
In turn, many of these changes are due to the decrease in the frequency with which customers go to branches, for example. The total economic impact of Artificial Intelligence in financial services is expected to reach $1 billion by 2030, leading to an estimated cost reduction of around 22%.
Intelligent automation
According to 2019 studies, almost a third of companies obtained 32% of their revenue through digital channels. It is anticipated that the number will increase by 48% this year.
If we stop to think about companies in Latin America, these numbers must be even higher when considering the ability of companies to adopt trends and innovations. Today, we see in the media that various financial sector institutions continue to grow in the region, in addition to standing out worldwide and
To be a benchmark in terms of operational efficiency and quality of service provided to the client. Much of this success is due to financial institutions transforming their work models through innovative automated solutions, investing in solutions like RPA and chatbots, for example, focusing on process efficiencies and reducing operating costs by almost 50%
Recent studies show that 21% of Latin American financial institutions use automated virtual assistants and chatbots based on artificial intelligence (AI) techniques. With Digital Transformation consolidating increasingly in the financial sector, the trend is for the number of institutions that invest in intelligent resources to grow in the coming years.
Big data
Digital Transformation and easy access to information have meant that, in recent years, companies have begun handling an ever-increasing data volume. In the financial sector, it was no different.
With the vast volume of data, many companies in the industry were extracting little or no value. Until then, the data was tied only to transactional information, significantly limiting the potential. With the help of Big Data, banks and other companies in the sector detect valuable insights to make more effective decisions based on customer demographics and behavior patterns. In this scenario, banks use the data to calculate the risks better when granting credit and improve the digital consumer experience.
RPA
Reducing costs, preventing risks, and improving the performance of operations will be increasingly expected by financial companies. Therefore, the best way to apply these resources will be through intelligent resources such as RPA (robot automation).
With the constant emergence of new technologies, intelligent RPA tools are increasingly accessible in the market, in addition to incorporating basic functionalities for effective, personalized, and humanized customer service.
Machine Learning and Deep Learning
The evolution of Machine Learning and Deep Learning will also be significant for companies in the financial sector.
Machine Learning is the entire practice of using algorithms to understand data. On the other hand, deep learning is the discipline of doing this without the intervention of any human agent and simply utilizing algorithms. With the insights gained from these two intelligent technologies, financial companies can better segment offers, predict customer problems, anticipate default, improve credit analysis, predict fraud, optimize dark analytics, and more.
Optical Character Recognition (OCR)
Optical Character Recognition (OCR) is a technology capable of reading different documents, recognizing their characters, and, from there, converting them into digital documents.
OCR technology facilitates, for example, the reading of physical documents to open accounts through applications and other necessary processes. In addition, it generates reliability, agility, and precision in identifying documents for authentication and reinforcing security when necessary.
Computer vision
The technology behind OCR is computer vision. The resource aims to train algorithms with images to detect and understand them by their internal standards.
Multi-Cloud
While SaaS is increasingly replacing legacy systems, the financial sector is increasingly using the cloud for processes such as payments and credit information. It will be mandatory in a few years due to the growth of its safety and reliability in the processes.
In Latin America, studies reveal that most financial firms are interested in the benefits and flexibility of moving their operations to the cloud. Industry experts are already actively analyzing related risk issues and regulatory constraints.
However, we must clarify that with the evolution of cloud-based systems, we are not just talking about public or private clouds. The landscape is now multi-cloud, amplifying CIOs' cost, security, performance, automation, and migration visibility challenges.
Biometric Identification
Using biometrics is familiar for those with bank accounts and ATMs. However, this technology will be mandatory to increase security in access to banking information, especially concerning digital applications already used by many banks and Fintech.
Facial recognition
Like digital biometrics, facial recognition is crucial to preventing fraud and digital threats. Many banks and Fintech in the market already use the resource to avoid fraud when opening accounts through applications.

Conclusion

In the financial sector, new technologies are blockchain and cashless payments. The first is not only cryptocurrencies, which many do not trust but also the most powerful means of protecting any monetary transactions. In parallel, digital transformation is taking place in areas such as.

Mobile banking
Online shopping
Remote payment and work

Many banks already allow their customers to perform most transactions remotely, without visiting a branch.

Digital transformation is also gaining momentum in the financial sector. New technologies, in particular, offer enormous efficiency potential for the future. Knowledge and old inventory systems need to be improved during implementation. Enormous savings potential can be realized with highly manual processes through simple measures.

While technologies such as RPA are already being used today, future technologies such as blockchain, AI, or big data still need some time to be fully adapted. In the long term, however, these technologies will present an entire industry with fundamental changes.

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