The future of

the financial
sector

11 MARCH

Hochschule fur Wirtschaft und recht, Berlin.

Business Information Systems and Data Analytics
WiSe-2023
Edgardo Cabañas

1
Content

Introduction............................................................................................................. 3
Artificial Intelligence ................................................................................................ 3
Artificial Intelligence in Banking ........................................................................... 4
Economic Challenges of AI Implementation ......................................................... 5
Blockchain Applications ........................................................................................... 5
Potential of FinTech to Change the Traditional Banking Paradigm ........................... 7
Banks as Platforms................................................................................................... 8
Summary ................................................................................................................. 9
References ............................................................................................................. 10

2
Introduction
The pace of transformation in the financial market has been steadily increasing with the
introduction of new technologies, and the banking sector is no exception. Historically,
the traditional banking sector has been highly resistant to change due to the stability of
a highly regulated market and high barriers to entry, maintaining a traditional structure
of intermediaries and information brokers (Murinde et al., 2022a). However, new
technologies that have emerged in recent times, such as Blockchain (BC) and Artificial
Intelligence (AI), offer very interesting features to generate value through the
construction of efficiencies and process optimization. These advantages are not without
challenges that must be overcome in order not to be left behind in the wave of change.
It is always difficult to predict the future, especially at a time in history like the one we
are living in, and for an industry as important as banking. Not even the most adventurous
prediction made in the past decade could have foreseen the series of events that have
led us to the current situation. The pandemic and geopolitical instability that we have
experienced in recent years have meant that any long-term plan must incorporate new
and strong assumptions. Therefore, as the best approach that can be obtained, this paper
will review the literature related to the future of banking with new technologies to see
the current trends and make an assumption, with the best available information, of how
the future is approaching for the banking industry, what are the opportunities and what
are the necessary points to work on in order to take advantage of the change.

Artificial Intelligence
In a survey conducted by PwC, it was found that 62% of executives surveyed believe that
AI is an important or very important innovation with a high potential to become even
more important in the next five years, but only 9% believe that their companies are very
well prepared to adopt AI technologies (Berns et al., 2020)
While we have known about artificial intelligence technology for a relatively short time,
it has spread rapidly worldwide. Traditional banking has adopted the technology to a
limited extent, so there is still a lot of room to grow in this segment. Currently, banks are
using Generative Artificial Intelligence mainly to (1) generate consumer engagement:
assisting consumers looking for a mortgage to fill out the tedious paperwork or assisting
workers by generating the necessary documents to hire a product. (2) synthesizing
content: increasing worker productivity by mediating the processing and summarization
of large amounts of information for report generation, credit analysis, or regulatory
3
compliance. (3) content generation: generating highly personalized instant messages for
marketing and sales use, and (4) coding and software: helping programmers by
generating code from natural language and facilitating the change of code from one
language to another (Kamalnath et al., 2023).
Companies are reluctant to adopt this type of technology due to the lack of information
they have about how it works. Normally, neural networks are a black box for non-tech
companies and that generates a lot of uncertainty. Most companies do not have the
qualified personnel to implement and maintain this type of technology, so
implementation often involves a large investment in short-term training and, considering
the uncertainty of the results, it is a risky investment (Berns et al., 2020)
The challenge for implementing AI in traditional banking is to successfully scale it across
the organization as a whole. Banks that adopt a strategic and proactive approach can
leverage the power of Generative AI to generate sustainable value and create a more
innovative and efficient future.
This requires careful planning and execution in the seven key dimensions that Kamalnath
et al. (2023) argue in their work:
1. Strategic roadmap: Clear vision of the role of Gen AI in the business, with
committed senior leadership and a roadmap for scaling.
2. Talent: Invest in executive education, create high-impact lighthouses, address
automation concerns, and develop the necessary skills and capabilities.
3. Operating model: Cross-functional and scalable model that aligns responsibilities
between development and business teams.
4. Technology: Evaluate "build versus buy versus partner" options, make strategic
decisions about capabilities, and develop an integrated architecture.
5. Data: Prioritize data quality and availability, invest in data management, and
create a culture around data.
6. Risk: Implement a comprehensive risk management framework that
encompasses safety, ethics, and accountability.
7. Governance: Establish a strong governance framework that oversees the
implementation and use of Gen AI.

Artificial Intelligence in Banking

The application of artificial intelligence is expected to benefit banking not only in the
areas where it is already being used but also in solving more complex problems, such as
generating long-term strategies for companies. By having the ability to analyze large
amounts of information, artificial intelligence could consider more factors and project
4
scenarios to assess the best way to run the company in the future.There are already
examples of AI development for mapping unstructured media and social networks to
generate a "political climate" report (Zafarani et al., 2014) In this way, AI can help predict
how the political environment can influence the future of banking.AI has also been
documented to predict economic cycles and potential defaults of companies (Shen et al.,
2016) It can also be used to process large amounts of financial data and generate
investment portfolios by predicting the returns of their stocks (Avramov et al., 2019)). AI
has enormous potential for the work of strategists and the effective and efficient
execution of strategic processes. It is likely that in the coming years we will see a rapid
adoption of machine learning (ML) algorithms that will radically change the way banking
strategizes (Krogh et al., 2021)

Economic Challenges of AI Implementation

While new technologies have the potential to generate endless benefits for the economy,
they can also lead to the destruction of many economic structures, resulting in job losses
and significant pressure on governments. Creative destruction is not only necessary but
also desirable for societies to develop and achieve progress, as it stimulates innovation,
increases productivity, and fosters competition. However, it can also mean a great loss
for those who enjoyed the fruits of the systems that are destroyed. In general, countries
that are not prepared for these changes will strongly oppose their implementation. These
countries or institutions are characterized by having extractive political institutions
(extracting value from society instead of generating it), inefficient economic institutions,
and a lack of access to education and technology (Acemoglu, 2013)
A study by McKinsey shows that the automation potential of current jobs is around 70%
thanks to new technologies that are being perfected (Kamalnath et al., 2023) This could
mean that a large number of workers will need to be trained to perform other functions
within the labor market, which would put a great deal of pressure on the entire system.

Blockchain Applications
Blockchain is generally known for the famous cryptocurrencies such as Bitcoin and
Ethereum, which have received a lot of media coverage mainly for being used as an
investment asset. However, the technology behind Blockchain goes far beyond that.
Blockchain is a special type of database, also called a decentralized digital ledger, that is
maintained by multiple computers distributed around the world, each of which acts as a
node and database. The problems associated with current transactions are the

5
limitations of the trust system that must evaluate each transaction, which limits the
number to the capacity of the trustee and increases the costs of transactions due to the
increased costs of mediation. On the other hand, there is an inherent limitation in
generating non-reversible transactions for the provision of non-reversible services (with
the possibility of reversibility, risks increase). Blockchain data is organized into
chronologically arranged blocks protected by cryptography with the characteristics of
immutability (written once, read only), decentralization, and a shared database that
records all transactions within the system (Nakamoto, 2008)
This structure can help solve many of the current problems of trust and traceability in
data verification and transactions in the banking industry. The major potential uses of BC
in the financial industry include international payments, stock trading and stock exchange
transactions, ID verification, efficiency and transparency in syndicated loans, and
standardization in accounting and auditing processes (Tripathi et al., 2023)
Blockchain technology, with its distributed registry system, guarantees the immutability
and transparency of transactions. Each transaction is recorded in a secure and tamper-
proof ledger, accessible to all participants in the network, making fraudulent activities
virtually impossible as it would require deceiving a large number of nodes that verify the
transaction. Even so, each computer, in case of doubt about the veracity of the
information, keeps a copy of both data chains. The data chain that continues to grow is,
by definition, the correct chain. This transparency also increases trust and accountability
within the financial system.
Traditional cross-border payments are often slow and expensive due to the involvement
of multiple intermediaries that must verify a large amount of data before accepting the
transaction. Blockchain can eliminate the need for data confirmation, facilitating faster
and cheaper international transactions.
Blockchain can empower people in developing countries or with limited access to
traditional banking infrastructure. By reducing transaction costs of operations by scaling
BC technology, it allows people who previously could not participate in the traditional
financial market to do so (Nakamoto, 2008)
Blockchain is the ideal platform to offer a simple, secure, and reliable user identification
and verification solution that improves user experience and regulatory compliance. For
users outside the BC, the technology can be used to create a general KYC solution that
replaces the current manual process (Thommandru & Chakka, 2023)
One of the biggest limitations for BC implementation, as with AI, is resource scalability.
Cryptocurrencies like Bitcoin and Ethereum have a limited transaction per second (tps)
capacity compared to systems like Visa. Bitcoin can handle between 3 and 7 tps, while
6
Ethereum reaches 15 tps. Visa, on the other hand, processes around 1736 tps, with a
potential of over 24,000 tps according to 2010 tests. This low scalability causes delays for
users and businesses. To avoid this, Bitcoin Cash (BCH) quadrupled the size of its
blockchain to 32 Mb in 2018. There are other techniques to improve scalability, such as
Lightning Network, sharding, or off-chain solutions. However, the scalability problem in
cryptocurrencies still does not have a definitive solution (Tripathi et al., 2023)
Another drawback of BC is energy consumption. To find the correct value of an element
called a nonce, miners solve complex mathematical problems and are rewarded in return.
This process, which is constantly repeated, is what keeps block mining running. The
mining process requires large amounts of energy, even more on average than the energy
used for metal mining or more energy than that consumed by some countries (Krause &
Tolaymat, 2018)
Despite its reputation for being impossible to hack, BC has suffered some vulnerabilities
in recent years. Due to the large amounts of money involved in the technology, there are
constant attempts at attacks that have resulted in hundreds of millions of dollars in
losses. These facts make it more difficult for large banking institutions to adopt the
technology, in addition to the integration with their technological systems, the lack of a
single global regulation for this system, and the cost of adoption, which makes it very
difficult for medium or small-sized banks to implement it (Tripathi et al., 2023)

Potential of FinTech to Change the Traditional Banking Paradigm

The word "FinTech" comes from the abbreviation of "Financial Technology" and is mainly
used to refer to startups and entrepreneurs that provide innovative financial services
(Murinde et al., 2022). The FinTech industry is experiencing significant growth worldwide,
introducing new products, business models, and players to the scene. However, its
diffusion is still not widespread due to its early stage of development. In the future, we
can expect it to continue growing and start competing with traditional banking in some
businesses that were exclusive to traditional banking a few years ago. The question would
be in which areas FinTech could replace traditional banking and how to regulate it
(Navaretti et al., 2017)
The Financial Stability Board (2017) organizes FinTech activities into five broad
categories: (i) payments, clearing, and settlement; (ii) deposits, lending, and capital
raising; (iii) insurance; (iv) investment management; and (v) market support. These five
business areas encompass all the services provided by traditional financial institutions,
thus representing potential competition for their activities. The world is in a great deal of
7
uncertainty regarding technology and consumer preferences, and in this situation,
FinTech companies represent a great challenge for the traditional banking sector
(Bofondi & Gobbi, 2017)
FinTech companies increase competition in financial markets by offering services that
traditional financial institutions provide less efficiently or not at all. Therefore, this
competition benefits end consumers. However, the premise is that FinTech will not
replace banks in most activities. Although FinTech provides a more efficient way of doing
things, banks are also innovating and adapting to the new technologies that are taking
over financial markets (Navaretti et al., 2017)
One of the main obstacles for FinTech to advance in the field of traditional banking, and
at the same time one of its greatest advantages, is the lack of regulation of many of its
services. This takes away the support of traditional regulators and restricts access to
essential information for the growth of its customer base (credit records). However, at
the same time, this lack of regulation allows them to innovate and be more flexible to
offer other types of products without the obstacles produced by banking bureaucracy.
The main challenge for regulators on this issue is to find an optimal balance between
maximizing the benefits that FinTech can bring through innovation and protecting the
financial system and its consumers (Appaya & Gradstein, 2020).

Banks as Platforms
One of the possible solutions to this fierce competition is for banks to become interactive
platforms for providers and users. In these platforms, different actors with multiple
financial needs could join a network implemented, supported, and managed by banks. In
this way, buyers and sellers of a product or service would find their counterpart under
the umbrella of a larger and more reliable institution that guarantees the trust of
transactions and the identity of the participants (Murinde et al., 2022b)
By combining the potential of both markets, both consumers and participants would
benefit, increasing the total market benefit thanks to this dynamic. On the side of the
Banks, they can provide stability, financial solvency, a wide variety of products and
services, financial expertise, and the structure that allows direct relationships with their
large customer base. On the other hand, FinTech would contribute with its ability to
process large amounts of data, its technological expertise, improve the user experience,
and create innovative platforms with user-friendly interfaces (Najaf, 2021)

8
Summary
In this work I tried to examinate the new technologies that are transforming the banking
sector. Artificial intelligence (AI) and Blockchain (BC) are the technologies that are
revolutionizing the way we thought of banking, generating brand new opportunities but
also presenting significant challenges. The rise of FinTech companies further disrupts
traditional banking models, forcing established institutions to adapt.
AI has the potential to revolutionize banking by automating tasks, improving efficiency,
and generating valuable insights from vast amounts of data. However, implementing AI
requires careful planning and investment in training to overcome the lack of skilled
personnel. Additionally, robust risk management frameworks are crucial to mitigate
potential job losses and ensure responsible AI development.
Blockchain technology offers a secure and transparent way to record transactions,
potentially boosting trust and traceability within the financial system. Benefits include
faster and cheaper cross-border payments, financial inclusion for previously underserved
populations, and enhanced security against fraud. However, limitations in scalability, high
energy consumption, and security vulnerabilities pose hurdles to widespread adoption of
Blockchain.
FinTech companies are emerging as strong competitors to traditional banks by offering
innovative financial services. FinTech often provides greater efficiency and flexibility
compared to traditional banking models. However, the lack of regulation surrounding
FinTech presents challenges. The future of banking might involve collaboration between
traditional banks and FinTech companies. Banks can leverage FinTech's agility and
technological expertise, while FinTech can benefit from banks' established customer base
and financial stability.
In conclusion, the financial sector is in a way of significant change driven by new
technologies. How these technologies are adopted and integrated will determine the
future landscape of banking.

9
References
▪ Acemoglu, D. (2013). Why Nations Fail?: The origins of power, prosperity, and
poverty.
▪ Appaya, M. S., & Gradstein, H. L. (2020). How Regulators Respond to Fintech
Evaluating the Different Approaches-Sandboxes and Beyond.
▪ Avramov, D., Cheng, S., & Metzker, L. (2019). Machine Learning versus Economic
Restrictions: Evidence from Stock Return Predictability * Machine Learning versus
Economic Restrictions: Evidence from Stock Return Predictability.
▪ Bank for International Settlements (BIS) and Financial Stability Board (FSB). (2017).
FinTech
▪ credit. Market structure, business models and financial stability implications.
▪ Berns, M., Hauke, S., Unkel, J., Westernmann, C., & Strebel, S. (2020). How mature
is AI adoption in financial services? www.pwc.de
▪ Bofondi, M., & Gobbi, G. (2017). The big promise of Fintech. In , 2. European
Economy - Banks, Regulation and the Real Sector. http://european-economy.
eu/wp-content/uploads/2018/01/EE_2.2017-2.pdf#page=109.
▪ Kamalnath, V., Lerner, L., Moon, J., Sari, G., Sohoni, V., & Zhang, S. (2023).
Capturing the full value of generative AI in banking.
▪ Krause, M. J., & Tolaymat, T. (2018). Quantification of energy and carbon costs for
mining cryptocurrencies. Nature Sustainability, 1(11), 711–718.
https://doi.org/10.1038/s41893-018-0152-7
▪ Krogh, G. von, Ben-Menahem, S. M., & Shrestha, Y. R. (2021). Artificial Intelligence
in Strategizing: Prospects and Challenges. In Strategic Management (pp. 625–646).
Oxford University Press. https://doi.org/10.1093/oso/9780190090883.003.0035
▪ Murinde, V., Rizopoulos, E., & Zachariadis, M. (2022a). The impact of the FinTech
revolution on the future of banking: Opportunities and risks. International Review
of Financial Analysis, 81. https://doi.org/10.1016/j.irfa.2022.102103
▪ Murinde, V., Rizopoulos, E., & Zachariadis, M. (2022b). The impact of the FinTech
revolution on the future of banking: Opportunities and risks. International Review
of Financial Analysis, 81. https://doi.org/10.1016/j.irfa.2022.102103
▪ Najaf, K. , M. M. I. , & N. R. (2021). Fintech firms and banks sustainability: Why
cybersecurity risk matters? International Journal of Financial Engineering.
▪ Nakamoto, S. (2008). Bitcoin: A Peer-to-Peer Electronic Cash System.
www.bitcoin.org

10
▪ Navaretti, G. B., Calzolari, G., & Franco, A. (2017). FinTech and Banks: Friends or
Foes?
▪ OpenAI. (2024, March 09). Translation assistance using ChatGPT, Retrieved March
09, 2024, from https://chat.openai.com/.
▪ Shen, C.-H., Wu, M.-W., Chen, T.-H., & Fang, H. (2016). To engage or not to engage
in corporate social responsibility: Empirical evidence from global banking sector.
Economic Modelling, 55, 207–225. https://doi.org/10.1016/j.econmod.2016.02.007
▪ Thommandru, A., & Chakka, D. B. (2023). Recalibrating the Banking Sector with
Blockchain Technology for Effective Anti-Money Laundering Compliances by Banks.
Sustainable Futures, 5. https://doi.org/10.1016/j.sftr.2023.100107
▪ Tripathi, G., Ahad, M. A., & Casalino, G. (2023). A comprehensive review of
blockchain technology: Underlying principles and historical background with future
challenges. In Decision Analytics Journal (Vol. 9). Elsevier Inc.
https://doi.org/10.1016/j.dajour.2023.100344
▪ Zafarani, R., Abbasi, M. A., & Liu, H. (2014). Social Media Mining: An Introduction.
Cambridge University Press.

11