Digital innovation and the future of financial services

• Financial services are undergoing a ‘Blockbuster-to-Netflix’ moment. As digitalisation accelerates, financial institutions are able to offer better, faster and more bespoke services. Customers are also looking for the same kind of real-time interaction and breadth of choice they enjoy from their streaming platforms.
• Data-intensive technologies enable new products and services and reduce the cost of delivery. The industry is at an ‘inflection point’, where financial institutions have an opportunity to rethink the ways they approach their operations and interact with their clients.
• Financial institutions are increasingly viewing data as an asset. Technology creates value by allowing large data sets to be analysed in real time, improving risk management and providing insights that can be monetized.
• HSBC is already gaining operational benefits from the use of distributed ledger technology (DLT) in some parts of its business. AI and Web3 technologies are also particularly relevant for financial institutions.

The financial services industry is embracing digital innovation as a foundation of its future growth. Emerging technologies promise to remove friction, boost transparency, tighten security and enhance risk management – all as a result of the ongoing digitalisation of financial data.

Individual innovations, such as artificial intelligence (AI) or distributed ledger technology (DLT), are already seen as game-changers for speed and efficiency. The digital revolution, however, is also challenging banks to rethink their approach to customers.

“There’s been a few technological inflection points that have allowed us to do more powerful things, or do more of them,” said Dr Ash Booth, Head of AI Intelligence, HSBC Markets & Securities Services, speaking at HSBC’s flagship Global Emerging Markets Forum. “And I think we're on the cusp of another one.”

AI, DLT, Web3 and other digital innovations represent a shift from highly manual processes to a frictionless, flexible and more secure financial system.

It’s what Mark Williamson, Managing Director, GFX eRisk, HSBC Markets & Securities Services, described as a “Blockbuster-to-Netflix moment” for financial services.

Just as video streaming technology brought about the end of renting clunky videotapes from a store to transform the customer experience, the digitalisation of financial data opens new possibilities for financial institutions to offer richer, more bespoke services to their clients.

“We're using and experimenting with blockchain, or distributed ledger technology as a safe, immutable transport layer for streaming financial services and products to our clients,” said Williamson.

Managing data in any large organisation has always been a challenge. But digital technology can streamline and consolidate data, transforming it from something that needs to be managed into something that delivers value.

When everything's digital, everything's in one place, explained Dr Booth. Even if data volumes and complexity increase, which they will, there’s a huge opportunity for faster transactions and settlements, deeper insights and better risk management.

On top of that, he emphasised, user interfaces with financial services could also take on a Netflix-like experience.

Consumers have come to expect real-time, highly bespoke services from their streaming platform.

“You expect the platform to know what you're interested in, what you like, to show you relevant things at relevant times, and maybe even a hyper-personalised interface just for you based on how you've interacted with it in the past,” he said.

Jeff Wertheimer, Global Co-Head of eSales at HSBC, highlighted the potential for technology to deliver more tailored products and services, such as helping clients to react to changes in asset prices or news events that may affect their portfolio.

“We can do a whole lot more with our data today than we could do before,” said Wertheimer. “It’s creating huge opportunities, and we’re still at an early stage of figuring out how we can harness that potential.”

HSBC has been using DLT within its foreign exchange business since early 2018.

“We use that for our post-trade, foreign exchange trade, confirm and pay, using netting and PvP [Payment versus Payment], across 18 different balance sheets, across 13 different currencies,” said Williamson, also speaking at HSBC’s GEMS forum.

“It's not a twinkle in the eye. It's something that is part of our infrastructure.”

DLT is perhaps best known as the technology behind cryptocurrencies, but its applications go far beyond that. It creates capacity to “tokenise” financial products or physical assets, such as bonds or gold bars, deepening liquidity and broadening access to financial investments in a secure setting.

Using a decentralised ledger or blockchain to track assets and ownership removes operational costs, improves transparency, reduces workflow errors and speeds audit trails. The efficiencies and rapid settlement HSBC has proven in FX markets could translate directly to other asset classes.

“When you have shorter settlement cycles, you have reduced counterparty risk – that's fairly obvious. But you also have increased capital efficiency,” said Asif Sherani, Managing Director, Head of Debt Capital Markets Syndicate, EMEA and Head of SSA DCM at HSBC.

“We could achieve atomic settlement [immediate exchange of two assets] that would allow us to settle instantaneously, so T-plus-zero settlement cycles could become the norm.”

For banks, that would mean no longer setting capital aside for days while settlement processes complete, allowing funds to be redeployed more efficiently.

“This is really game-changing,” said Sherani. “One of the benefits [of tokenisation] is that you can scale your operations. But you can also fractionalise assets, and that allows for better distribution of the risks.”

The growth of Web3 technologies also offers new opportunities, as the internet evolves from read-only pages to more interactive and immersive experiences.

“Web1 is traditional data. Web2 added social [interaction] as data. And in Web3, everything is data,” said Dr Booth.

In Web3, that data has real value to its users, and underlying blockchain technology allows it to be transferred and monetised easily. The most recognisable example may be buying digital ‘land’ in the metaverse. Transactions that take weeks in the real world can be completed in seconds and recorded on a secure, immutable blockchain.

“How we connect the metaverse to the real-verse is going to be where banks will play a role,” said Mr Williamson.

The digitalisation of financial services will create virtual mountains of new and complex data, generated from disparate sources and stored in different locations.

Yet when everything's digital, that kind of volume and complexity becomes manageable. From Dr Booth’s point of view, AI is the connective digital tissue holding everything together.

“You type on your keyboard, you interact with any app on your phone, and technology from AI is driving that experience,” explained Dr Booth. “It's just powering those interactions.”

When it comes to financial interactions with price predictions, real-time monitoring of asset values or risk management, AI will be there too, underpinning, connecting, and taking us from a manual world to a digitally streaming one.