The Fourth Industrial Revolution & the Impact on Banking & Finance (Challenges & Opportunities)

By Amanda Greenwood, Myriad Associates 

As with all industrial revolutions, the fourth industrial revolution is set to change everything: from the way we live and work to the way we communicate and relate to each other.

The first mechanised production with water and steam. The second created mass production with electricity. The third automated production with IT and electronics, and the current, fourth one is set to increase production productivity with smart technology.

And, with Finance 4.0 (a subset of the fourth industrial revolution) expected to grow emerging economies by 6% by 2025, this article will look at how the fourth industrial revolution will affect the finance sector, specifically.

But, before we delve into it, let’s first quickly establish:

What is the fourth industrial revolution & where did it come from?

Officially christened the “fourth industrial revolution” back in 2016 by Klaus Schwab (founder of the World Economic Forum), Industry 4.0 (as it’s also known) is characterised by technological innovation. Powered by the internet, software consulting services, and software development, the fourth industrial revolution enables us to do things like order taxis, book hotels, buy clothes, listen to music, and turn lights on and off with either a voice command or a click of a button.

The fourth industrial revolution is becoming known as “the transition from a time when people worked with computers to a time when computers work without humans” and is digitally transforming industries through the power of digital automation.

Take digital fabrication technology for instance. CAD (computer-aided design) data drives the manufacturing equipment to cut shapes out of material. Or look at the companies who are starting to explore the possibility of using drones as a cost-effective distribution channel.

Computers working without humans is in full swing!

What impact is the fourth industrial revolution having on the finance sector?

“The process of digitalization in the banking sector is, besides the great advantages for banks and their clients, also bringing with it certain challenges that banks need to take care of.” – ResearchGate

The finance sector is divided when it comes to the fourth industrial revolution. Some say that “technological innovations will be at the heart and blood of the banking industry for many years to come” (Brett King) and others fear that “the big banks that are using big tech will use their lobbying muscle to avoid regulation and play by different rules.” (The Guardian).

So, which is it?

This section will look at the good, the bad and the ugly sides of the fourth industrial revolution to determine what challenges and opportunities it’s handing to companies within the world of banking and finance.

3 major challenges the fourth industrial revolution is bringing to banking & finance

From online payments and digital loans to cryptocurrency and online forex trading, the fourth industrial revolution promises to revolutionise the way the banking and finance sector operates.

But, with that comes several challenges…

Fourth industrial revolution challenge #1: Security risks and cyber-crime

“Cyber risk refers to the threat of financial losses, disruption and/or reputational damage from a malicious breach of an entity’s information systems.” – RBA

If concerns over cyber-crime is a red-hot topic in most (if not every) industry, it’s a white-hot burning one in banking and finance.

Cyber-threats are getting more and more sophisticated, with terrifying tales of ransomware, phishing, information leaks and data breaches in the news every day. And, with the fourth industrial revolution bringing an increased use of technology into the banking and finance industry, the risk of companies suffering from a cyber-attack is growing.

For instance, 34% of financial businesses are affected by insider threats every year and phishing attacks account for 14% of all data breaches. A cyber-attack is not only financially crippling for an organisation, with the average cost of a cyber-attack approximately $18.3m (£12.9m), it can also cause irreparable damage to its reputation.

Remember what happened with Equifax? The consumer credit reporting agency was targeted by cyber-criminals and, as a result, 15.2 million customer records were exposed, 10,000 credit card numbers accessed and over 15,000 customers had their usernames, passwords, security questions, phone numbers, and email addresses hacked.

As soon as the news broke, the share values of the company dropped by 14%.

Fourth industrial revolution challenge #2: Building trust & rapport

Trust in banking is imperative: 95% of customers say that trusting a company increases their loyalty to it. But trust is hard-earned. It takes time, effort and a human touch to build rapport, earn trust and build strong, long-lasting relationships.

“Businesses have historically won trust by signalling strength and reliability with their physical presence.” – Salesforce

But, with the fourth industrial revolution and the move towards a world where everything is digitalized and nothing will involve human contact, building that trust will start to become more and more difficult. Computers and connected technology can’t offer customers much emotion, creativity, imagination, empathy or intuition.

Banks will have to find new and innovative ways to bring a human element and a personal touch into their online offering. Chatbots based on artificial intelligence could be the new normal.

Fourth industrial revolution challenge #3: Increased competition

“Banks are at risk of loss which can be almost a third of their profit. The next, even more, rigorous phase of digital transformation will further reduce the banks’ profit in the upcoming years, which will be a consequence of even greater competition and the continuation of the decline in banks’ margins.” – ResearchGate

The fourth industrial revolution and the accelerated progress in digital technologies have inevitably led to an increase in competition in the finance sector. It’s forced banks and financial organisations to re-examine the way they operate. They’re having to step up and compete with innovative digital services, connected online offerings and mobile-friendly systems etc… Customers are expecting better experiences, seamless transactions, on-demand assistance and completely connected digital offerings from their banks and financial services. And, if they can get more, they will.

Organisations within the finance sector will need to transform themselves from traditional financial institutions into dynamic digital-focused platforms which offer competitive products and services and a seamless user experience, based on customer data analysis.

3 fantastic opportunities the fourth industrial revolution is bringing to banking & finance

Despite the major challenges the fourth industrial revolution is bringing to banking and finance, it isn’t all doom and gloom. The opportunities it presents are equally as game-changing.

Fourth industrial revolution opportunity #1: Enhanced customer experiences

Technology is making it possible for companies to enhance their customers experience tenfold. It’s making it possible for them to offer intuitive, personal and connected experiences. With big data, companies have more access to in-depth insights into how their customers behave, what they like, what they don’t like, and what they want than ever before. And the huge advances in AI have given them the ability to tailor their customer’s experiences, reach them at crucial touchpoints and change their products and services accordingly, without much effort.

It’s worth noting that when choosing a banking or finance company, 70% of customers see connected processes as a key requirement and 59% see tailored and contextualised engagement based on previous interactions as key.

Fourth industrial revolution opportunity #2: Increased security and efficiency 

Digital money (or cryptocurrency) is an inevitable consequence of the fourth industrial revolution, and one of the biggest trends to come out of it is Blockchain.

“Blockchain is a secure, decentralized, and transparent way of recording and sharing data, with no need to rely on third-party intermediaries.” – Salesforce

Just like the internet changed communications forever, Blockchain will change banking forever. Blockchain technologies record all transactions in a transparent and safe way: It allows people to send money (almost) immediately, to anywhere in the world, at a low cost. And because it doesn’t use any third parties, and each transaction is cryptographically protected, it drastically minimizes the risk of hacking.

“While there is no system that cannot be hacked, blockchain comes very close.” – WeForum

Fourth industrial revolution opportunity #3: Added flexibility

Thanks to the fourth industrial revolution, organisations across all industries are under more and more pressure to respond to customers and situations instantly, 24/7. As the banking sector is constantly evolving, this means that banks and financial organisations need to be as flexible and as agile as possible. A tricky concept to pull off if you’re a large, cumbersome financial corporation.

They need to be able to address problems and change direction quickly.

“High performing banks have discovered that the most cost-effective way of achieving this is through an enterprise-wide hybrid cloud.” – Wowsome

The Hybrid cloud is an IT infrastructure that connects the public cloud to private cloud spaces to create a single, flexible cloud environment. It not only gives organizations the benefit of having both a public and a private cloud space, but it also addresses issues surrounding data security, governance, and compliance, along with the ability to organize resources in minutes.

To conclude

Like with its predecessors, the fourth industrial revolution is improving industry practices and processes with Research & Development and innovation. The banking and finance sector especially is thriving with new digital innovations and technologies which are improving customer experiences, increasing security and allowing them to become more agile. But, if organizations within the sector want to stay afloat, they must pay attention to and deal with security threats, increased competition and maintaining their customers trust and loyalty.