Technology has transformed the way we pay bills, buy insurance and stocks, and source financing.Today’s consumers buy products with a tweet and transfer money through Facebook or a text message.1Users leverage their social networks to crowd-source a buying decision the instant before purchase.2 Banks monitor their online footprint, by following social media commentary in scores of languages, in search of data that could undermine security or reputation.3 Entrepreneurs crowd fund investments from online supporters—to the tune of almost $600 million last year from the two largest sites alone.4 What new trends will emerge, how will financial service providers leverage the networked world, and what new risks does the industry face?
Financial services firms have no choice but to innovate—but how?
Established financial service firms are competing with new startups free from the hurdles of legacy technology that can slow down development time. Cloud development tools will provide cheaper and faster solutions, but to innovate, financial service providers will need to acquire companies in this space or create independent, risk tolerant development teams. French bank Crédit Agricole opened up its data to external developers who created 19 new apps in six months, compared to the two years it took the bank to create an in-house banking app. This brought in more than 100,000 customers to the bank’s app store, without any advertising. But bringing in outsiders also raises substantial issues like data breaches (at least one national retailer made the news recently), ownership of intellectual property, waiver of trade secrets, and indemnification from third-party intellectual property rights. While it’s clear that firms must innovate, how firms decide to structure innovation will require nearly as much consideration.
Future technology will make financial services easier and more secure—for consumers.
Future communication devices will do more than process payments and deposit checks—they will serve as identification and currency. A mobile digital wallet that can replace long-lived irrevocable tokens—such as social security and credit card numbers—with merchant specific surrogates will limit the scope and value of stolen data. Crowd-funding will continue to grow—one report estimates $93 billion annually by 2025— and will include more equity investors.5 Financial service providers will push technology into new growth areas such as wealth management and retirement planning, and will continue to invest in security, such as biometric solutions for fighting fraud. The best innovations, however, will make customers’ financial lives simpler by helping them make better decisions. But with these advances, the financial services industry will find itself deeper and deeper in the “high-tech” industry, and exposed to all of the risks that come with it.
Despite the risks, financial services companies have an opportunity to use technology to connect with—and analyze—their customers better than ever before
More than 90% of online adults use social media regularly. Twitter has 240 million active users with over 500 million Tweets per day. More than half of active Twitter users follow companies, brands, or products on social networks, and share the experiences they have with banks, insurers, and brokers. Personal referrals will always be a factor in financial decision making; today these conversations are happening among millions of online users. Their collective voice can either take away a market or generate new opportunities. Financial service providers can engage users through specialized generational messages and tailored products, but it’s a two-way street. They must also listen and learn from their customers. The socially networked banks and insurers of tomorrow will build risk pools based not only on credit rating or claims history, but on cues from a user’s social media associations and online activity.
 Dwolla processes $1 million per day in payments and also extends credit to online shoppers.
 As example is Meniga’s “to buy or not to buy” module.
 Digital Shadows offers its services to some of the world’s largest banks.
 The two largest firms are Kickstarter and Indiegogo.
 New SEC proposals aim to bring in a broader base of individual equity investors.
The opinions expressed are those of the authors on the date noted above and do not necessarily reflect the views of Fish & Richardson P.C., any other of its lawyers, its clients, or any of its or their respective affiliates. This post is for general information purposes only and is not intended to be and should not be taken as legal advice. No attorney-client relationship is formed.