Tech Trends That Will Disrupt Finance Industry in 2021
Technology, in any form, has always been a disruptor and a driver of change, and this has never been truer than in current uncertain times. Never before have consumers relied so heavily on their smart tech – to connect with each other, perform daily tasks, and interact with businesses. And never before have companies, across industries, faced such an urgent need to adapt. Research by McKinsey suggests that the COVID-19 pandemic has accelerated business’ adoption of new technologies by up to seven years. But what does this acceleration look like, and what is still to come? How can your business keep pace? To answer these questions, we take a look at how technology will continue to make an impact throughout 2021 in several key sectors: insurance, investment, capital markets, and FinTech.
1. Insurance Trends for 2021
Let’s start with insurance, one of the more conservative industries that has traditionally been wary of tech trends. The COVID-19 pandemic has changed the insurance landscape in many ways, and 2021 will bring an unprecedented amount of investment into the industry. But together with new investment comes a renewed focus on cost optimization, and these factors, when taken together, are creating momentum for Insurtech startups – those companies leveraging technology over purely human operations. According to a report by CB Insights, Insurtech funding increased by 52% from Q2 to Q3 2020.
The growth in Insurtech’s funding and reach will prevail in 2021, in large part because of the rising demand for digital insurance services from both businesses and consumers – as demonstrated in a report from ACORD that shows the percentage of consumers interacting with their insurers via digital channels has doubled worldwide since 2015. And J.D. Power's Claims Digital Experience Study states that P&C policyholders’ use of digital claims channels is up 18% since 2017.
Even after the threat of the pandemic has subsided, consumers will continue to use digital channels as they are simply more convenient, and businesses will have become reliant on more efficient and cost-effective technologies. Because of this, we will see more digitization in underwriting, policy administration, and claims processing in the next year. We will also see more usage-based insurance for both personal and commercial business lines, in line with increasing expectations for customization.
But it is not just customer-facing services that are in need of a revamp. Internal process optimization can save costs too, and this will be an internal focus for insurance companies moving forward. Novarica states that “between 15-25% of insurers, depending on the segment, are increasing investments in big data technology, AI, ML, unstructured text analytics, sensors, and drones.” Many have decided to move to the cloud, and more will do so, as cloud-based processes provide access to the latest technologies while also lowering costs.
2. Investment Management Trends for 2021
The epidemic has hurt the economy and fueled volatility in financial markets, all around the world, and because of this funding in new investment management technologies will probably be uneven in 2021. People are increasingly risk-averse, and this will have a knock-on effect on the industry as a whole. Some firms will be looking to minimize their IT costs as a way to save money, while others will up their tech investment in order to position themselves for success post-pandemic.
Those firms that do invest in technology are likely to explore several key areas, including next-generation data management, AI-driven search analytics, and platform development and APIs. Let’s look at each in more detail.
By the start of 2020, most investment managers were already using the cloud in some form, but not many were taking full advantage of cloud capabilities. In 2021, this is expected to change, as many organizations will begin Snowflake, Amazon Redshift, or Azure DataExplorer migration. These new platforms exploit every aspect of the cloud’s scalability and data sharing capacities. This migration will also increase interest in cloud-native ETL products, such as Matillion. The days of superficial adoption of cloud-based capabilities are over, as companies will seek to optimize wherever they can.
Another emerging trend is in search analytics. In 2020, everyone is used to using the ubiquitous search engine Google to find answers to every conceivable question. However, basic Google searches cannot find a corporate report you did on a company last quarter. But fortunately for corporate users, new products can help aggregate and navigate enterprise-specific data. Leading this charge are natural language search engines, such as ThoughtSpot and Coveo. In 2021, we expect increasing adoption of these and related technologies and rising interest in products that provide a single point of access for all enterprise data. Again, this has far-reaching ramifications for worker efficiency.
Lastly, there is the issue of legacy infrastructure. At the time of writing, most investment managers still have ad hoc infrastructures, created organically over many years and often via mergers and acquisitions. Within larger companies, this often results in duplication of functionality and a massive increase in IT and compliance costs. Complex application infrastructure is also inconvenient for corporate users, as they need to jump from one app to another to accomplish their tasks. We expect to see continued interest throughout 2021 in platform development and harmonization, aided by innovative platform building products such as OpenFin and Beacon. This will be the biggest and possibly most significant step towards cost-effectiveness and efficiency that investment managers can take in 2021.
3. Capital Markets Trends for 2021
Businesses in the highly competitive capital markets industry are often among the first to embrace emerging technologies in order to outmaneuver their competitors, but they face quite a bit of difficulty thanks to constant interaction with older systems. So, the push for improvement has in the past been patchy, with mixed results across the industry as a whole. But 2021 will see a doubling-down in technological investment as companies struggle to remain relevant and push the sector into the 21st century. In particular, there will be a focus on: transition to cloud platforms, an increased focus on simplicity and modularity, and investment in automation. Let’s look at each in more detail.
Transition to the Cloud
Everyone is on the cloud these days, but serious trading still requires colocation with an exchange. In addition, market data products have not fully moved to the cloud yet. We expect this to start changing in 2021, as stock exchanges and market data providers begin the transition towards cloud-based services and low latency access from the cloud. This transition will also involve moving away from proprietary technologies and towards newer systems, like Snowflake, that are slowly becoming the standard for data management on the cloud.
Simplicity and Modularity
Many popular trading applications are dated and require extensive rework to simplify the end-user experience. Larger trading technology providers are looking to make trading interfaces more modular, and therefore more flexible for end-users looking to mix and match their favorite components and build an ideal trading workstation as they see fit. Both simplicity and modularity are within reach but require investment in modern front-end stacks, UX teams, micro frontends, and helpful platforms such as Openfin.
Lastly, established capital markets participants are going to continue their investment in automation throughout 2021. Manual data entry processes and disconnected application infrastructures have to go, and the move to open platforms and standardized APIs is ongoing. Extensive investment in RPA will also continue in 2021.
4. FinTech Trends for 2021
To no one's surprise, the FinTech sector has continued to see rapid growth and innovation during 2020. To a large extent, this has been a continuation of trends in place for at least the last five years. A younger generation of customers has continued to bypass or abandon traditional financial institutions in favor of fully-digital banks and embedded financial services. In response, traditional financial institutions have attempted to compete by increasing their pace of innovation and digitalization in several ways, which will extend into 2021.
As in many other industries, the COVID-19 crisis has added fuel to the FinTech digitization fire. Before the crisis, the greatest digitalization need for established financial institutions was in transforming customer experience to enhance long-term customer retention. But when the crisis began, companies were suddenly faced with the immediate need to transform their operations and adapt to working in a remote environment, where customer support and back-office operations had to move from branches and customer service centers to bedrooms and living rooms. This transformation made it clear to even the most conservative of executives that their organizations could no longer afford to dither in transforming their technology capabilities, and as a result, there are now enormous opportunities across the entire FinTech ecosystem.
We also expect a renewed push by established financial institutions in 2021 to transform and modernize their business models and operations. To do this, they will have to either bypass their existing core systems in favor of modern platforms built from the ground up or surround their core platforms with a host of customer-facing and enterprise-facing FinTech solutions. Many financial organizations are so far behind in their technological transformation that they will be forced to partner with the newer generation of financial services players who can offer them front-to-back white label solutions. We have already seen this happening in some cases, where banks have partnered with various digital lending start-ups to offer digital banking solutions to their customers.
AI & ML
Lastly, financial institutions will continue to invest heavily in modern data platforms and AI/ML technologies that are crucial to enabling modern customer experiences, such as chatbots and personalization. Digitalization of customer interaction will also require financial institutions to increase their focus on cybersecurity, KYC, and fraud detection, where data and AI/ML technologies play a major role.
A Growing Data Threat
Despite all these efforts, banks and other financial institutions will continue to face major challenges. As well as highly competitive FinTech start-ups, there is also a threat from large social media and retail players, such as Facebook, Google, Apple, and Amazon, who are continuing to expand into the financial services arena. By sitting on a mountain of customer data, including demographics, interests, preferences, and payments, these social media companies have a significant informational advantage over financial institutions, who will have to meet these challenges through cooperation with each other, as well as through partnership with FinTech players who can help financial institutions overcome this informational asymmetry.
5. Payment Technology Trends for 2021
Payment technology is an unseen but vital part of our modern world, and its use will continue to grow and expand through 2021. Long after the pandemic is over, consumers will continue to use the convenient mobile and online payment methods that they are now becoming comfortable with, and so this industry has enormous potential. There are several key areas where its development will focus in 2021.
Using AI/ML for Better Security
Fraud rates are still surprisingly high, and this is in part because of the sudden boom in online transactions. Research from Experian shows that fraud increased by 33% during the recent lockdown as companies scrambled to move their operations online to accommodate customers. Many did so without putting proper security precautions in place, and hackers benefitted. So, a renewed focus on security is absolutely expected in 2021, and these days the best security relies on AI. AI systems are intelligent, adaptive, and have the ability to both detect and then block possible security breaches as well as adjust responses in real-time. And by using ML, payment companies can sift through more data than ever before, faster and in more depth, to identify emerging fraud trends. Combined, these tools provide the level of reliability that consumers and businesses demand for their e-commerce transactions.
Many companies are already transitioning to the cloud, but there are still plenty of banks and financial firms with outdated legacy systems, who are just now realizing the urgency to migrate. Consumers already prioritize payment systems they can use on their phones, and that work coherently with EFTPOS systems (enabling integration with Google Pay, Alipay, Apple Pay, and so on), and this simply is not possible without the cloud. In addition, the added security benefits of cloud use are enough to gain approval from regulators, making it a win for compliance teams everywhere.
The transparent and inviolable nature of blockchain has made it integral to the payment industry. This low-cost, secure method has long since expanded beyond its original purpose of supporting Bitcoin, and its potential is unlimited. 2021 expects to see development in two primary areas of blockchain activity: international payment processing services (involving bank-to-bank transfers), and trade finance applications. These fields currently rely on old, slow, expensive systems that penalize both consumers and businesses and so have huge room for advancement.
Lastly, APIs will perform an important function in transforming interactions: between different aspects of the same organization, between different organizations, and between industries. The payments industry has in the past exerted extreme control over end-to-end delivery, but the proliferation of smart devices, when married with regulatory pressure to unlock markets to third party providers, has threatened their standard approach. Financial providers must find a way to be more agile, and the key to this is open APIs. Open banking is a worldwide phenomenon, expected to expand even more in 2021, and without open APIs, payment processors will find themselves left out of the all-encompassing trend.
2021 Will Be a Year of Rapid Change
It is easy to see some commonalities in tech trends across industries, and it is similarly easy to see why. The pandemic has focused attention on digitization, security, efficiency, and integration, across platforms and across industries, and those failing to update their processes, infrastructure, and software in 2021 to meet these needs will surely suffer. Forget about competitiveness – without basic improvements in accessibility and cost optimization, companies will struggle to survive.
If you have legacy systems, inefficient processes, costly infrastructure, or are struggling to adapt to 2021’s needs, contact DataArt. We can help with all aspects of your technological improvements, in a way that marries seamlessly with your company’s ongoing concerns.