Chapter 1
Technology transformation is a strategic imperative
How financial services firms seek competitive advantage.
Summit participants noted that the maturity and sophistication of digital capabilities will increasingly differentiate financial institutions from competitors, replacing the traditional drivers of profitability, scale, history, and brand recognition.
Customer expectations drive technology investments
The pandemic has accelerated adoption of digital interactions. The surge in demand caused by the pandemic has underscored incumbents’ long-standing need to improve their capabilities or risk losing customers to competitors, including new entrants and technology companies. Customers no longer tolerate inferior products or poor digital experiences.
Personalization is imperative. A FinTech CEO said, “As I think about what the world may look like for financial services 10 years from now, all of this is gravitating towards hyper-personalization.” To meet that expectation, financial institutions must improve how they manage data.
Firms that were further along the technology transformation journey fared better in the pandemic. According to Forbes, “Almost overnight, the COVID-19 crisis widened a performance gap – between those organizations that invested in technology innovation at scale before the pandemic and those that did not – into a chasm.”1
The unbundling of financial services
Incumbent banks and insurers have traditionally looked for technologies to increase efficiency and lower costs. FinTechs, by contrast, start with a customer problem, identifying ways to address it with digital tools and building new business models around digital solutions.
Participants see how banks might have to choose between being product manufacturers or distributors. One participant observed, “There’s consolidation on the manufacturing side – fewer banks want to be manufacturing products, but we see a huge expansion on the distribution side.”
Financial institutions are also weighing the potential to partner with leading companies in other sectors, although this comes with the price of losing the primary interface with customers. Attendees expect unbundling to be a top consumer trend, as young people use a host of applications to manage their financial services needs.
The threat from tech companies may be approaching a tipping point
FinTechs, InsurTechs, and big tech companies continue to expand their financial services offerings and gain market share as emerging models may represent more growth opportunities.
New threats from big tech and challengers
The unbundling of financial services and embedded finance offer opportunities for big tech firms. However, questions remain about their appetite to enter the market, given heavy regulation. Of course, technology companies do not have to offer financial services of their own; they already embed offerings from insurers, banks, and challengers via apps and platforms, offering convenience for customers.
Customers are warming to big tech in financial services, as confirmed by research:
- Policyholders’ willingness to purchase insurance from big techs has increased from 17% in 2016 to 36% in January 2020 to 44% in April 2020.2
- 24% of US consumers are very or extremely likely to make Amazon, Apple, or Google their primary financial services provider if doing so made money management easier.3
- Google’s recently relaunched Google Pay platform includes an Insights offering that allows users to connect to their bank accounts for a searchable overview of their finances.
- In 2021, Google will partner directly with several banks and credit unions to offer online checking and savings accounts.4
FinTechs and InsurTechs continue to challenge incumbent financial institutions. Banks may be more vulnerable than insurers. Although underwriting and distribution are susceptible to disruption, participants view InsurTechs as still being in the early stages of development compared with FinTechs in banking. One participant noted, “There are very few parts of the insurance spectrum that have been lost to challengers, whereas in banking you can already spot places where FinTechs have won.”
But the pandemic has created a shakeout among the challengers. A flurry of FinTech acquisitions in the early months of the pandemic illuminates their potential struggles.5 In September, one report suggested that the FinTech sector faced an “existential threat” from pandemic-induced adverse economic conditions and insufficient available funding.6
Chapter 2
Ways of addressing critical technology needs are evolving
Adoption presents both opportunities and risks.
Changes in the financial services ecosystem, developments in technology, and the current sense of urgency have changed how firms consider addressing technology needs.
The potential and challenges of intelligent automation
The pandemic has accelerated the adoption of artificial intelligence (AI) and machine learning. Insurers are deploying AI to assess risk in new ways, carry out underwriting, and process claims. Banks are using AI for fraud control, lending, and customer interactions.
One bank with more than 2,000 software bots operating across the business created six new chatbots in just three days to assist client advisers in handling huge flows of COVID-related loan requests.7 Similarly, a large life insurer launched an AI-based “digital agent” to help customers access claims information via natural-language queries. The project, which would previously have taken months to deploy, was implemented in just three weeks.8
The wave of digital challengers leveraging AI is also pushing incumbents to improve their AI offerings. One InsurTech that was valued at over US$1.6 billion when it went public in July 2020 uses AI to quickly underwrite and pay claims through a popular app.9
Customers are also becoming more comfortable with AI bots. The conversational banking bot developed by a top US bank had been downloaded by 10 million users just two years after its launch. The crisis resulted in an explosion in demand, with the bank adding one million users per month in the earliest stages of the pandemic lockdown.10
Expanding cloud migration
Top banks are striking major deals with large cloud providers.11 The Financial Times noted, “After years of foot-dragging, many (banks) have been abandoning their cautious approach to cloud-based services and signing up with gusto.”12 According to an EY report, “The crisis has highlighted the serious threats to resilience posed by insurers’ operational complexity and inflexible systems. Thus, it underscored the need for simple, agile and modernized systems and will accelerate the trend toward disposal of legacy businesses.”13
Participants discussed the state of cloud adoption in financial institutions:
- Benefits for early adopters: Firms that invested heavily in the cloud prior to the pandemic were better positioned to respond. As one industry commentator stated, “COVID-19 has helped settle a debate on how and when to adopt cloud technologies. Cloud-based systems proved their mettle when banks needed to pivot to remote working, quickly upgrade customer-facing software, and snuff out fraud.”14
- Varying approaches to strategy: Financial institutions use a range of public, private, and hybrid cloud solutions. To address the unique needs of financial institutions, Goldman Sachs floated the idea of creating an external cloud system specifically for financial services institutions.15 Boards should discuss cloud strategy with management.
- Persistent questions: Some leaders are still raising questions. Detractors cite a lack of regulation and concentration risks, given the small number of significant cloud service providers. Some worry that providers could even become competitors. One participant observed, “It feels like everyone has convinced themselves there are no risks. My job is to be skeptical.”
Core systems modernization
While financial institutions have focused on improving the customer interface, modernizing core systems is vital to enabling personalization and developing new products. Updated core systems can free up technology budgets, given that 70% of IT spending goes toward maintenance. Financial institutions are exploring a range of approaches.
- Layering over the core: Many firms are using APIs to enhance the core with upgraded capabilities. Using wrappers can seem attractive, but it requires rethinking the entire infrastructure at some point.
- Launching new initiatives as testing grounds: Some firms are experimenting with “greenfield” approaches, creating entirely new platforms outside of traditional business lines. The greenfield approach is appealing to many firms, given the need to control experimentation in a highly regulated market and the opportunity to set up entirely new brands and businesses.
- Replacing the core in a “big bang”: Wholesale changes can holistically address core systems infrastructure. Some participants see an evolution away from the view that such efforts are too complex, too risky, or offer too little ROI.
Technology to enable new models
Participants discussed how adopting new business models requires stronger technology.
- Embedding finance: In the future, credit, insurance, or investment services may be offered primarily at the point of customer need and integrated into nonfinancial apps or websites.16 The CEO of a leading FinTech commented, “The pace of nonfinancial institutions providing financial products is accelerating. Embedded finance is very real. It all comes down to who has mind share with customers.”
- Becoming a platform: To maintain the customer interface, some institutions are attempting to build their own platforms. They aim to compete by offering all the products and services that customers need through a single portal. Such an approach could unlock growth opportunities.
Strategic partnerships
Financial institutions are increasingly turning to partnerships and acquisitions to access or expand their capabilities. Though InsurTechs and FinTechs are often framed as potential challengers to incumbent financial institutions, many are more likely to be partners than competitors.
Some firms are making opportunistic acquisitions, given that the pandemic led to a shakeout among FinTechs. Some valuations remain high, but other companies have become attractive acquisition targets. Partnerships may be the preferred path. One participant put it this way, “The crisis has opened a lot of eyes about creating a good ecosystem. Picking good technology partners actually enables you to move very quickly.”
The pandemic made firms acutely aware of their reliance on outside parties. As incumbents look to partnerships to accelerate transformation, it will be increasingly important to monitor third- and fourth-party risks.
Chapter 3
The changing nature of work has implications for talent and culture
Remote working has altered the way organizations do business, likely for good.
Financial institution leaders are considering the future of work beyond the pandemic and the necessary talent to support technology transformation.
The new working world
Business leaders are excited about the speed at which their organizations have adapted to a difficult new environment, and many do not expect a return to previous ways of operating. In November, one large UK bank announced a plan to move many of its 85,000 employees to “permanent flexible working” and offer smaller, near-home offices for those that would like to use them. Employees will also have more flexibility in terms of working hours.17 The CEO said, “COVID-19 was an eye-opener. The old work conventions of banking – you are working only when you go into a specific building and sit at a desk – were out of date.”18
But some participants shared concerns. One cited the difficulty in importing existing cultures into a remote world. Another worried about the loss of innovation as remote working models eliminate direct collaboration and ideation. The decision may be driven by employee preference. A recent survey found that only 3% of finance professionals want to work entirely from the office post-COVID-19.19
Empowering transformation culture under remote working models
If technology is the main driver of competitiveness for financial institutions, internal culture and priorities need to be adjusted to reflect that. There is an inherent contradiction in attempting to empower the fast-paced, innovative culture associated with technology companies, while also trying to maintain the necessary risk profile of a regulated entity. One participant worried about the loss of innovation, as remote working models eliminate the ability to come together and generate new ideas. Financial services firms will need to strike the right balance in this new working environment.
Chapter 4
Evolving risks and opportunities require effective governance
Strong oversight mitigates future challenges.
The strategic importance of technology to competitive advantage and the scale of transformation efforts require significant board attention and oversight. Boards must ensure technology transformation receives sufficient investment and that risks are managed effectively. They must also remain abreast of rapidly changing possibilities. Some participants stressed the importance of good governance, especially since most CIOs do not stay longer than 18 months.
Boards will face difficult decisions regarding capital allocations, as they attempt to balance long-term transformation with immediate needs. As one participant noted, “Making actual impact across the company while keeping your budgets is really hard.”
Boards should hold management accountable for project objectives, costs, and timelines, focusing on important milestones from the outset of large programs. Boards can help spur management to continue looking ahead. Some attendees suggested that the fact that financial services’ lagging position in digital transformation is caused by risk aversion. “You have to make sure change is a priority,” commented one participant.
Others recognized the need to move quickly, but also urged caution; development is often ahead of safety, and the price of getting things wrong is so high that some would rather be slower to market than having the higher speed and risk, but an uncertain product.
Summary
Financial services leaders acknowledge that the pace and scale of transformation have only increased due to the effects of the COVID-19 pandemic. New expectations for rich and personalized customer experience, the need for innovation, and new market entrants to the space are driving the transformation imperative.
