Digital transformation in the financial industry

The financial services industry is changing. And, unlike other sectors, it is changing fast and has been for quite sometime (decades). The shift has been dramatic.

Look back 40 years to ‘bank 1.0’. In this era, the location-sensitive, physical branch was king. And, the financial industry as a whole was based on relationships and human interactions. Consumers would go into a branch to get all of their services and needs catered for. ATMs, as a ‘channel’, did not emerge until the 1980s.

‘Bank 2.0’ was ushered in with the arrival of the internet. The tool we all take for granted today lead to a great transformation within the financial services industry, as it did for many others. The internet created multiple channels for consumers to engage with their banks and the financial industry. In this environment, consumers could get the same services that they did in the branch, but on the go and on multiple devices. However, the intelligence of that experience didn’t improve between ‘bank 1.0’ and ‘bank 2.0’.

Enter ‘bank 3.0’. The number of channels has increased, but the physicality of them is disappearing. Branches, as we’ve seen this year with Santander, are disappearing in their droves. While physical locations slip into the ether, there are many more devices emerging, which are holding consumer data. The difference? This data is being turned into intelligence and recommendation engines for consumers to pick their next banking choice or experience — this is the retail side.

Looking at the capital markets, the industry is seeing big technological changes. For example, there is automation between the different work flows that service the divisions within the capital markets and infrastructure. In general, automation, robotics, data and data analytics are being used to make intelligent decisions that the consumer can use, for example, for wealth management decisions or for businesses in optimising lending practices.

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Open for business

In the financial industry, “the key difference is that we’re moving from a very closed system to an open architecture,” said Mitesh Soni, senior director — innovation and fintech at Finastra, a global fintech offering the broadest set of financial software solutions available on the market.

“In the past, banks were very protective of their assets and their IP, and they built walls rather than bridges. That’s come tumbling down and accelerated by regulation like PSD2, which has forced banks to open up their data to third parties. This has created a whole bunch of FinTechs that are now experimenting with new business models and new customer experiences.”

Mitesh Soni believes aspects such as big data, AI, platform-as-a-service, open APIs and cloud are transforming the financial industry.
Mitesh Soni believes aspects such as big data, AI, platform-as-a-service, open APIs and cloud are transforming the financial industry.

So, how has the banking industry, or the financial services sector (whatever you want to call it), changed? Well, it is moving from a closed to open environment, which uses intelligent analytics and other emerging technologies that are removing inefficiencies and increasing the customer experience.

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Digital transformation in the financial industry

Digital transformation in the financial industry is spurred by two main factors: changing consumer demands and the growing threat from disruptive challenger banks.

Back in the days of ‘bank 1.0’, the industry was very product-driven and the systems created were very product-driven. Today, consumers — who are used to engaging with evolving technologies — are much more used to frictionless and very convenient access to their services, either on the mobile or through other channels. These experiences, enabled by fast moving technologies, have been a big driver for the digital transformation in the financial industry.

Some of the big tech firms introducing consumer IT experiences and consumers expecting that level of interaction has driven the transformation of financial services

“The banking crisis of 2008 was a big full stop for many of the banks to recapitalise and not spend on digital initiatives. So, even though there was appetite the majority of spend was being reallocated to mandatory initiatives. So it’s arguable that if that didn’t happen, we might see even more digital initiatives than are in place today,” said Soni.

“Over the last decade, the largest banks have recapitalised themselves, but an opportunity has sprung up for challenger banks, who can move much more swiftly in adopting these emerging technologies in a standard fashion.

The challenge is that these disruptive banks will get to a point where they can service very niche markets, while being able to scale globally, without running into the same problems that some of the international banks have done in the past.”

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Responding to the challenge

The financial services industry is not afraid to embrace change, because there is so much money involved and it is a ruthlessly competitive environment. But, the challenge remains: How can larger, more traditional, legacy-based institutions best embrace a digital mindset and practice?

Well. It’s a combination of culture, talent and mindset, as well as technology.

If you go to any of the financial institutions today, you look into their IT divisions, they have very talented engineers who have built robust technologies that can scale and have serviced those institutions very well

“What’s evolved over the last five to six years is this move to the cloud, micro-services, open architectures and agile,” said Soni.

“Now, organisations need to move at speed and pace, while still balancing security. But, this doesn’t happen overnight. When you’ve built something that’s robust, that is interconnected into your architecture, the shift of information does take time to happen. It’s mixture of mindsets, skill sets and toolsets coming together and converging in order to embrace these new future technologies.”

The financial industry, importantly, is not afraid to experiment. Many of the banks are launching innovation labs that produce unexpected and creative solutions, which catalyses digital transformation.

There’s a wide range of initiatives that can be employed by larger institutions to become digital-first organisations. These include; being open to innovation, being collaborative and embracing fintech. Building bridges (and not walls — not a political comment) to third party solutions, that traditionally banks might have considered as competition, is crucial in this new world of ecosystems; all in the name of producing the optimal user experience.

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Below, Soni points to the technologies that the financial industry is adopting.

A is for artificial intelligence. AI is intelligence that’s applied to the data that makes meaningful insights, in order to create predictions without any human intervention. So, it’s the automation that AI brings; data is the fuel and AI is the intelligence that then allows intelligent insights.

B is for blockchain or distributed ledger. As we’re moving much more to open architecture systems, blockchain has been discussed in detail, but there aren’t that many implementations that are real in practice. Blockchain and distributed ledger will probably mature and provide an autonomous way for transactions to complete. As we become more and more automated and digitised in the back and frontend, it will be important to trace these transactions in a self-autonomous way.

C is for customer experience and cloud. Cloud is becoming the default model, where companies can realise very meaningful efficiencies by moving their workloads into the cloud. The cost differential is very high; data centres that are managed by financial institutions are very expensive, not only to implement, but also to maintain.

For customer experience, those organisations that can combine these technologies to create communities and ecosystems where the customer genuinely enjoys being part of that ecosystem will be the ones that the customers flock to.

Many big tech vendors now include micro-services, which give organisations access to AI, blockchain technologies and many of these are becoming commoditised

D is the data. Data, without doubt, is one of the differentiating capabilities that will redefine the way banks operate in the future. How do you use the customer’s data in order to either predict their lifestyle requirements for finance on the retail side or on the B2B side? Can you use the data patterns to detect fraud and crime, for example?

Three buckets

The banking sector can be separated, or categorised into three buckets.

1. Challenger banks are innovating at speed. And there’s a number of good reasons for that. They don’t have any legacy, they don’t have any prior customers, and they are servicing niche products and niche markets. Essentially, they’re providing a similar service as the traditional banks, but with a more modern look, feel and experience.

“If you take any of the challenger banks, they’re not doing anything that is remarkably different to some of the more established players. But, they’re getting there first,” said Soni.

2. Responding to this trend, the larger banks have begun to partner with challenger banks or platforms, such as Metro and Zopa.

3. The usual suspects — HSBC, First Direct, Barclays for example — are fast followers, in terms of implementing the digital strategies of challenger banks.

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Nick Ismail

Nick Ismail is a former editor for Information Age (from 2018 to 2022) before moving on to become Global Head of Brand Journalism at HCLTech. He has a particular interest in smart technologies, AI and...

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