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Digital transformation continues to hit the banking industry

During 2015, the big UK banks continued to invest in modernising their infrastructure as well as focus on delivering services through digital channels. See also: what is Blockchain?

But the competitive landscape has intensified as they continue to fight on a number of fronts, and the wave of fintech startups, digital challengers and tech giants present a threat that is unlikely to go away soon. See also: 12 best uses of IoT in the enterprise.

At the same time, a wave of innovation in the sector offers a number of opportunities for those that are able to move quickly. Blockchain has certainly been the clearest example this year.

So what will set the banking technology agenda in 2016?

Banks will come under increased pressure from tech giants

It is no secret that a major concern for the big banks is having their lunch eaten by the likes of Apple, Google, Facebook and Amazon. And we can expect these internet behemoths to build on their consumer relationships and make further inroads into payments next year.

Apple launched its Apple Pay mobile payments service this year, and others such as Samsung are set to move into the market with similar offerings too. While Barclays has its own wallet, Pingit, it will be interesting to see if other banks attempt to stake a claim in this market too, or leave it to the big tech firms.

“A concern that the banks have is the arrival of big ecosystems that will replace them, so Google, Facebook, Apple, etc," says Alessandro Hatami, former digital payments and innovation director at UK bank Lloyds.

"These are customer-based. The customers are already users of these environments. If they start pushing financial services to their own customer bases, these ecosystems can potentially take customers away from the banks.” 

Philippe Gelis, CEO of P2P currency exchange Kantox adds: “These tech giants are unlikely to ever become banks, but they are best placed to build user friendly front-end tech solutions that answer to consumer demands for seamless payments and financial services."

Digital challenger banks will ramp up competition on incumbent UK lenders

It may appear unlikely that one of the new challenger banks that have emerged this year will spell the end for the big UK banks, especially when considering the slow uptake of the account switching service launched in 2013.

But by building their offerings around digital services from the get-go, the likes of Starling, Mondo, Atom and – more recently – Tandem, offer an intriguing alternative that could reshape the banking landscape.

2016 will shed some light on whether these upstart challengers can steal a move on some of the incumbents as they continue to focus on improving legacy infrastructure.

Read next: Is this the ‘Uber-moment’ for retail banks? Mondo CEO Tom Blomfield shows how to build a next-generation digital lender

Read next: ‘Banking is broken and we must start from scratch', says Starling CEO Anne Boden

Emergence of blockchain and bitcoin ‘unicorns’

Blockchain - the distributed ledger technology underpinning bitcoin cryptocurrencies – generated huge interest in 2015 and it is likely to continue in 2016 as adoption broadens.

Many banks are already investigating how they can utilise blockchain applications within their business, while IT vendors such as Microsoft are helping them create real use cases. At the same time, a growing ecosystem of startups are pushing the technology, which many believe has uses outside finance too.

According to Jeremy Millar, partner at Magister Advisors, M&A advisors to the technology industry, next year will see the emergence of at least five bitcoin and blockchain businesses with a valuation of more than $1 billion.

“These valuations will be built on the opportunity of selling products and services into the largest and most profitable industry in the world, not on subsidising consumer services to drive adoption or building audiences to monetise with advertising. 

“These new companies will have real lasting value; they’re not creatures from a fairy tale that will fade away when their valuations, which are based, appropriately enough, on leaps of the imagination, drop."

Read next: Why banks are betting on the blockchain - not bitcoin - to transform the financial sector

Read next: Bitcoin and beyond: Which banks are investing in the blockchain?

Finance sector will reap benefits of the internet of things   

Financial services may not be the first sector which springs to mind when discussing the internet of things. But as this Deloitte report points out, the explosion of internet connected devices will provide better data for decision making.  

Auto insurance telematics and ‘smart’ commercial real estate building-management systems offer some of the more obvious examples. But using sensors monitoring the activity of agricultural or manufacturing industries could help inform investing or lending decisions.

Mike Laven, CEO of Currency Cloud, says this will provide opportunity for new players in the market.

“When IoT crosses with finance, we suddenly get an explosion of data. It starts to get interesting when it comes to figuring out how to use that to great effect – and more specifically how to monetise the use of that data is something new fintech entrepreneurs will be looking to figure out in the New Year."

Banks will push wearables apps

While some banks had tested out wearbles apps on smartwatches before, the launch of the Apple Watch convinced more to get on board.

Nevertheless, applications remain limited. Balazs Vinnai, general manager, Digital Channels, Misys, says that it is not a lack of consumer interest that is holding banks back from further investments in this area. “Banks continue to face challenges with their digital strategies so it is no surprise only a small percentage currently support wearables.”

A recent report from the fintech firm claimed that while 96 percent of banking professionals polled believe that wearable tech will impact their industry, only 15 percent are currently rolling out their own. However, the majority expect to have done so within the next two to three years.

“It is critical for banks to consider new digital channels as part of an integrated strategy and evolve from first to second generation digital banking: switching digital from a supporting role, to the primary sales and communication channel for banks,” says Vinnai. “Reengineering processes around the customer is not easy, but banks must embrace digital banking to remain competitive and relevant.”

Read next: Banking on wearables: Time for finance sector to take smart devices seriously?