Accenture: What to expect from Fintech - Edwin van der Ouderaa
As customers have grown to expect synchronicity of access to their banks through all their devices, pressure has grown in the fintech sector to deliver innovative new solutions to support the exponential demand in this area. Future Banking talks to Edwin van der Ouderaa, managing director for financial services, digital and analytics at Accenture, about how advances in machine learning may bridge the gap between technological expectations and reality.
Collette is one of Accenture's premier mortgage advisers. Every working day, she deals with customers eager to know about the best way in which to pursue one of the most important purchases of their lives. Despite the large volume of respondents she has to deal with on a daily basis, Collette is diligent in her work, able and willing to cycle through the nuances of the application process. Her commitment to the role is total. In fact, since she started the job, Collette has never felt the need to eat or sleep.
Both phenomena would, admittedly, be viewed as odd characteristics for a chatbot to develop; then again, to think that complex mortgage applications could be shepherded in part by an artificial intelligence was, until recently, also widely considered to be a strange prospect. Powered by a machine learning algorithm that builds on existing language recognition software from IBM, Collette is the latest example of the lengths to which the financial services industry is willing to go in order to enhance front-end services and streamline back-end support networks. Drawing upon a lengthy corpus of intellectual knowledge about mortgages, the chatbot can articulate its own thoughts, understand the intentions and emotions of the customer, and, if necessary, decide to refer the client to a human assistant.
Ultimately, explains Edwin van der Ouderaa, Collette will be able to replace flesh-and-blood advisers almost entirely.
"She's just the tip of the iceberg in terms of the work that we're doing," explains Van der Ouderaa, Accenture's managing director for financial services, digital and analytics. "We're dedicated to helping our clients at speed to get from a situation where they're working from 9:00am to 5:00pm with back offices full of paper and legacy systems to a place where they can get mortgages approved on Sunday mornings."
Regulation action stations
The key to the appeal of chatbot technology like Collette is that, unlike a human mortgage adviser, it never forgets. Typically, the flesh-and-blood counterparts of Collette have to be briefed in hundreds of pages of government regulations designed to guard against mis-selling and fraud, a burden of knowledge that will inevitably result in mistakes being made. "These AIs will have studied tens of thousands of conversations, and not only know the 800 pages of regulations laid down by the likes of the Financial Conduct Authority (FCA), but many, many other books and courses too," adds Van der Ouderaa. "And this is why the FCA and other regulators across the world are so keen on this technology. The reason is compliance: they can track everything a robot adviser can do."
This enthusiasm on the part of regulators touches upon a wider theme pertinent to the continuing evolution of fintech across the globe over the past few years: the willingness of governments and other local authorities to provide start-ups with a safe environment within which their experiments in platform and code can be trialled and, if necessary, fail, provided it adds at least something to the growing milieu of digital banking products. Some places are, of course, better than others in providing these sandboxes for developers. "If you want to see fintech start-ups succeed, you need to provide a safe and realistic environment for experimentation," says Van der Ouderaa. "More than that, there must be a logical end point where you know that what you are proposing, if successfully trialled, will obtain the necessary regulatory authorisation and support for implementation in the wider marketplace. That's the crucial thing."
From Van der Ouderaa's point of view, it's especially lucky that regulators are becoming increasingly open-minded in this area. Recent technical developments in machine learning - not only in the provision of mortgage advice, but also in personal financial management and the coordination of investments - seem to ordain a blurring of the lines between providing an overview of one's assets and debts, and giving financial advice. Fintech start-ups have to tread a fine line in creating services that cater to either need since, under existing rules, the two cannot co-exist along the same continuum.
"The lines are certainly blurring," says Van der Ouderaa. "And it's very important for fintech's to know what they can do and what they cannot do, and for which type of customer. A lot of rules in this area still need to be defined, and that's where it's very important to have a regulator that's really working on this issue in a pragmatic way."
One key example in this area is the development of new 'robot advisers' that can be integrated with ebrokerages. "The adviser can help me define my portfolio, and I can then just tell it how much money I intend to invest," explains Van der Ouderaa. "Let's say that's $500,000. I can send that money to my ebrokers account, and everything will be executed automatically. In the future, it's not hard to envision the adviser obtaining that sum with my permission from my savings account at the bank. They start to become, in that case, a financial agent on my behalf."
Do it in real time
Another example lies in the development of real-time mortgage applications. This type of software is already making an impact - RocketMortgage, for example, is already a fixture on the podcast advertising circuit and recently showcased its services in a spot during the Super Bowl - but still treads that line between expediting the bureaucracy associated with loan applications of this type and financial advice. "There's an interesting tension there between the information and the scoring that a fintech app can provide versus what the bank can do," says Van der Ouderaa.
There's also one in the range of services either will be able to provide in the future, too. "How many fintech banks or insurers do you know of?" Van der Ouderaa asks. "Almost none. If you see a new digital bank, it's because it's literally a digital bank and not really a fintech start-up. And it's bizarre. Most of them are concentrating on front-end services and leaving the regulated banking operations to the banks."
The reason is capital. Conventional fintech start-ups lie on the upper end of the risk scale for investors, and therefore tend to raise money through private equity and venture capital. These investors will, in turn, expect an annual compound growth rate of 35-50%. Supporting banking services, meanwhile, demands a different kind of investment, of a kind referred to as 'Tier-1 capital', and a much lower level of risk to safeguard customer deposits and the wider banking sector if the individual institution happens to fail.
Van der Ouderaa has seen fintech start-ups begin to adopt a hybrid model, extending loans to certain customers and obtaining Tier-1 capital in the process. However, as they've sought to expand their loan portfolio, venture capitalists and private equity tend to be put off. After all, a bank - intended to be a low-risk institution - is not going to offer as high a return as a conventional start-up. "As a result, they either need to concentrate on services and distribution therein," says Van der Ouderaa. "Basically, this means commissions from banks and insurance companies."
Conversely, Van der Ouderaa predicts that banks will eventually subsume many of the services produced by fintechs on their front end. The danger, however, is that this will effectively transform these financial institutions into utilities. "You might end up with a model of an invisible balance sheet being managed by the bank at the back end and the fintech basically commanding the margins," says Van der Ouderaa. "That will result in the slimmest possible margin on your interest rates to cover your cost of capital."
And then there's the psychological aspect to all of these breakthroughs. Hitherto, the conversation surrounding new innovations in fintech has been overwhelmingly centred on its potential to streamline banking. Certainly, the prospect of instantaneous financial management is an exciting one. Nevertheless, therein lies an important psychological component to fintech's use that Van der Ouderaa and Accenture have not forgotten, least of all with technology like Collette.
"What we have seen since the adoption of the technology is that people are okay, in general, to talk to the bot for the simple conversations but still want to talk to a human, and look them in the eye for the really complicated questions and final decisions," says Van der Ouderaa. "I need a person to reassure me. Colette's not going to do that yet. But I'm convinced that, in ten years from now, it's going to be the other way around. Collette can listen in to thousands of existing conversations and learn from them. She is going to get very smart. People will want to rely on her in the future."
The same goes for mortgages. In an ideal world, Van der Ouderaa says, buying a new house could prove to be as simple as filling out a short application form on one's mobile device, possibly as soon as just after the viewing. And there are applications out there such as RocketMortgage from Quicken Loans that do promise that kind of quick and easy access to credit. Nevertheless, what cannot be overlooked is the customer's appreciation of the risk inherent in this process, however secure it may well prove in reality. Filling out a densely worded mortgage application in hard copy carries with it a certain reassurance, the time taken to apply a fitting reminder of the gravity of the purchase. A similar feature has also been observed in the payment of taxes. In Estonia, the annual payment is made digitally and takes roughly five minutes. It used to be over in even less time, until the government engineers realised that seemed to make citizens nervous. A two-click tax filing system, it seemed, felt too good to be true.
Van der Ouderaa may fairly be described as an evangelist of all things fintech, but fully understands that appreciation of innovation has to be balanced with a consideration of customers' own readiness to adopt new technology. "All society is becoming digital in its thinking, but at different speeds," he says. "Obviously, millennials are far ahead in this respect, but even people of a senior age are becoming digital too, and everybody in between as well. Nevertheless, no bank should go faster than its customer group when it comes to new applications. You can pull them along, but you have to be careful not to pull too hard and too fast, because then they disconnect."