Banking-as-a-service, or BaaS, is the new reality (and no, it's not a new kind of phish). Digital banking is growing fast, and by 2021 it is expected that three billion users will access financial services from a smartphone, tablet, PC or smartwatch. In today's technological world, financial services – be it loans, deposits, e-commerce, and things we haven't thought of yet – can be provided in a digital, user-centric, and operationally efficient way.
A number of significant technological trends are impacting the financial industry and propelling the digitalization of banking. The first is the digital consumer. Today's consumer expects frictionless digital services in all aspects of life, including banking. In fact, Bank of America's client-facing technology CIO, Hari Gopalkrishnan, said that "customers don't benchmark us against banks, they benchmark us against Uber and Amazon." Consumers today are creating huge demand for digital services, and this is resonating with financial institutions too—if you ask any financial services CEO what is at the top of her agenda, she'll tell you it is making the bank a technology company.
The second market force is FinTech; startup companies across the globe that are stretching the limits of digital banking. Innovating in areas of crowd-sourcing/funding, peer-to-peer lending, blockchains, and much more. And if you consider our banking CEO, FinTechs represent significant competitive pressure on her business to innovate and provide the same level of digital service.
The third trend is regulation, and specifically, those around open banking such as the EU's Payment Services Directive II (PSD2). Think again about our banking CEO, not only is the consumer demanding digital service and FinTechs creating competition by providing said services, but now the regulator is forcing financial institutions to provide those FinTechs with access to the bank accounts. The pressure she is under to become digital is only increasing.
But it's not all bad for financial institutions. They still have a largely captive audience of tens of thousands, if not millions of customers. And that is where the opportunity lies for them: move fast, embrace digital and develop a strong ecosystem of digital services—offered directly and via third parties. It'll be the breadth and depth of this ecosystem that will define their competitive advantage.
So how does this impact financial fraud?
Gazing into the future, we can already start seeing the expansion in channels and services financial institutions are offering their customers. This expansion, in turn, will generate a significant growth in transaction volumes. Why? Well, we've seen it in the past: the more convenient the service/channel, the more we transact. When we moved from branch-based, physical banking to tele-banking we transacted more; and when we moved from tele-banking to web and mobile banking we transacted even more. With a BaaS model, volumes will skyrocket as we offer more digital services (e.g., more convenient access points) to our customers.
This will create two significant challenges, the first being trust: who is the digital entity that is transacting with us, and can we trust it (when pondering this question, consider IoT devices and how they will be interacting with financial accounts without the human being present)? The second is more operationally oriented: If transaction volumes are predicted to grow, then fraud cases (in real numbers) will grow too. So, how do we manage this overhead?
The answer to the first challenge: Realize that identity authentication on its own is not enough to create trust in the digital world. But together with deep, holistic insight into entity's behaviors (read: what is this entity doing across all channels and services, and is what it's doing now good/bad?), we can bridge the gap.
The second challenge will require financial institutions to deploy more autonomous, machine-driven efficiencies that will allow the dwindling fraud team to cope with the growing caseloads.
Tune into the BankInfo Security podcast, "Open Banking: Fighting against a Fraud Surge" for a full discussion on how digital banking will pose new opportunities for fraudsters – and more challenges for banks.