7 minute read 19 Apr 2021
EY - Woman using tablet

How leading FIs are investing for long-term digital success

Authors
Muqtadar Ahmed

EY-Parthenon Senior Director, Strategy & Transactions, Financial Services, Ernst & Young LLP

Innovative leader and problem solver focused on financial services and emerging FinTech ecosystems. Dedicated to increasing value for all client stakeholders through organic and inorganic strategies.

Peter Ulrich

EY-Parthenon Principal, Digital Strategy and Transactions, Ernst & Young LLP

Digital Innovation in Strategy and Transactions. Knowledge in industrials, automotive, machinery, construction, infrastructure, mobility, and logistics.

Aaron Byrne

EY-Parthenon Financial Services Leader

Focused on advancing the client's capital strategies and future vision. Adept in building enterprise strategy determining strategic options and establishing inorganic strategy approaches.

7 minute read 19 Apr 2021

The EY Digital Investment Index shows agility, talent and strategic alignment can be an important driver of financial institutions’ investment success.

In brief
  • FIs that have clear digital strategies and can execute on them can often generate higher returns on digital investments (RODIs) and revenue growth than peers.
  • While investments in areas such as blockchain, cloud and AI capabilities have gained momentum, many initiatives stall due to lack of funding or talent.
  • Digital M&A and partnerships are more likely to exceed return expectations than digital capabilities built in-house.

The COVID-19 pandemic has accelerated a digital transformation that was already in progress, challenging financial institutions (FIs) to invest with agility in emerging technologies to enhance user experiences and power growth. Many FIs are wrestling with fundamental questions: How can digital investments best support our corporate strategies? Do we buy, build or partner to access needed capabilities? Do we have the digital talent to assess and execute investment opportunities? Can we measure the effectiveness of digital investments? Getting the answers right could be a difference-maker in the battle for future growth and profitability.

The EY Digital Investment Index (the Index) — a survey of 1,001 global C-suite executives, 111 of them from financial services — highlights practices employed by some of the industry’s top performers. It also provides insights into which investment strategies and tactics appear to be most effective for FIs. 

The results indicate that most FIs understand the challenges of the digital transformation but often lack the strategies, skill sets and tools required to get the most out of digital investments.

Digital transformation

62%

of the executives surveyed agree that their FIs must radically transform their operations over the next two years to remain competitive.

As rapid digitalization changes customer expectations, the financial services space is being reframed. To compete, FIs may need to pivot their strategies to deliver hyper-personalized experiences, bundling products and services in ways that reflect a holistic, data-driven understanding of customers’ lives.

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1

Chapter #1

Digital investment practices of leading FIs

How digital leaders responded

To better understand the practices and characteristics that lead to stronger results, we broke out the responses from institutions that reported RODIs of greater than 5% and view themselves as digital leaders. Key attributes of that group include:

Agility

Most leaders (57%) have recently shifted the focus of their digital investments from in-house development to acquiring digital capabilities through M&A.

The same percentage have embraced initiatives that provide immediate cash returns and discontinued initiatives when they became unproductive. 

A strategic vision

Leaders are 12% more likely to have clearly defined digital strategies, which can lead to more-targeted investments and, eventually, better outcomes.

Strategic vision

93%

of leaders have accelerated investments in new digital products, services and business models or plan to do so — 18% higher than the entire sample.

An investment mentality

The leading FIs spent 15% more than the average FI on digital investments during the last two years. They also were twice as likely to spend on operational efficiency, new products and services and new business models.

Digital investments

61%

of all FIs cited funding as the top reason for stalled digital initiatives.

Investment in talent and skills

Most leaders (68%) have either hired digitally skilled employees or invested in retraining programs, compared with 49% for the entire group. Having the right information technology and data analytics skills is considered crucial to getting the most out of digital investments. Sixty percent report that a lack of talent is an important contributor to stalled projects.

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Chapter #2

How to increase value from digital investments

Strategies to optimize digital investment

As the digital investment landscape evolves, FIs are learning more about how to achieve success. Key insights from the Index include:

Match investments with strategy

FIs can develop and prioritize sustainable digital investment strategies that have C-suite sponsorship and are aligned with broader corporate objectives — a combination that is challenging to achieve. More than 60% of institutions said they do not have clearly defined digital strategies.

Today’s strategies are focused largely on adding digital capabilities to differentiate customer experiences and enhance resiliency and efficiency. The Index reveals that blockchain (58%), internet of things (57%), cloud computing (51%) and artificial intelligence (AI) (49%) were FIs’ top investment priorities over the last two years.

The Index reveals that blockchain (58%), internet of things (57%), cloud computing (51%) and artificial intelligence (AI) (49%) were FIs’ top investment priorities over the last two years.

To create compelling value propositions, FIs can establish frameworks to identify product deficiencies and operational inefficiencies, and then prioritize those initiatives that can scale quickly and offer the greatest return potential. Leveraging digital investments to fuel growth and profitability should likely be the priority.

Strengthen M&A and partnership capabilities

Buying or partnering with FinTech firms to add capabilities can be faster and less capital-intensive than building them in-house and is becoming more popular. Leveraging third-party relationships also produces better returns. Digital M&A exceeded return expectations 52% of the time, the most of any investment vehicle. Partnerships exceeded expectations 45% of the time, while in-house initiatives did so in 39% of the cases and corporate venture capital models in just 31%. Regardless of the investment vehicle, there are opportunities to improve returns from digital initiatives.

Digital M&A exceeded return expectations 52% of the time, the most of any investment vehicle. Partnerships exceeded expectations 45% of the time, while in-house initiatives did so in 39% of the cases and corporate venture capital models in just 31%.

To make digital investments more effective, FIs may need to identify opportunities to differentiate value chains and leverage ecosystem business models in support of broader corporate strategies. Developing internal capabilities, such as institutionalized metrics or centers of excellence to streamline digital M&A integration and assist operating units with partnership management, can also help drive success.

Choosing whether to build, buy or partner can be done on a case-by-case basis, driven by such considerations as development costs and strategic fit. Deals today are more likely to be strategic and transformative than incremental — for example, acquisitions to enter new digital markets or partnerships to fill vital product or technical gaps. FIs that effectively leverage the capabilities and knowledge of others to drive their own growth may be able to deliver faster, better solutions for customers and other stakeholders.

Seek out and retain the right talent

The struggle to attract, retain and nurture digital talent is ongoing.

Digital talent

60%

nearly 60% of FIs say digital initiatives have stalled due to lack of talent.

While 40% of FIs invest in training to improve existing employees’ digital skills, 63% of institutions rely more on hiring new employees. That puts them into competition with FinTech and Big Tech firms that often offer more attractive working environments.

To succeed, FIs should create the workplace environments to make their institutions attractive landing spots for digital talent. For example, when Goldman Sachs launched its Marcus digital offering, it created a separate business unit, with different dress codes and work policies, to attract the skilled workers needed to drive success. Similarly, Spain’s CaixaBank maintains a subsidiary that focuses on digital talent and resources and has leveraged it to aid its launch of a lifestyle platform (i.e., imagin) for digitally savvy customers. Only 53% of FIs indicated that they have embraced flexible work policies to attract skilled talent.

Measure results accurately

Payoffs from digital investments usually aren’t immediate and often are spread across the FI, making it complex to quantify the benefits. Determining success remains subjective — often it is based on internal return expectations for a given digital initiative.

Relevant KPIs

34%

of FIs utilize ROI as a relevant key performance indicator (KPI), and their thinking on how best to measure it continues to evolve.

Other KPIs, including financial metrics like revenue growth, are more common and are used by 62% of FIs. About half of FIs say they use metrics around customer acquisition and experiences, such as net promoter scores.

Quantifying success requires a clear strategic vision, strong governance and data analytics capabilities, and adaptability. Since digital investments are often transformational, returns can be measured, in part, on their ability to help achieve long-term strategic objectives.

It’s important to craft measurements that can provide nuanced insights on investment effectiveness. For example, one large insurance company is seeking to leverage an objective and key returns framework to measure nonfinancial benefits of digital investments.

Determining actionable RODIs for digital investments remains work in progress. It will likely take several years for the industry to establish consistent, systematic measures.

Pivot core capabilities toward digital

The end game for FIs is to infuse the value of digital investments into the broader organization and digitize core capabilities. This is where the growth potential, efficiencies and additional returns lie — the real reasons for investing in digital initiatives.

Yet most institutions surveyed have yet to see significant progress on moving digital to the front lines. For example, 30% of efforts to digitize core processes are in the minimum viable product stage, while 28% are in the development/build phase of development. Just 3% of initiatives have realized their full benefit.

Embracing operating models that support innovation may require assessing legacy models for digital fit. Some FIs have found success by driving needed organizational change with a top-down approach to transformation that embraces digital innovation at the senior management and board levels.

For example, one FI locates the leadership team of an important digital acquisition near the executive suite to better integrate innovative thinking into corporate decision-making. Efforts to identify and acquire digital capabilities can focus on those that hold the best potential to scale and advance the transformation of the legacy business model.

The authors would like to thank Erin Bierbusse for her contribution in developing this article.

Summary

As FIs build out their digital capabilities, the results of the EY Digital Investment Index illustrate the challenges and the opportunities ahead. To succeed, FIs can make digital investments a part of a clear, flexible approach that is aligned with corporate strategy, can adapt to changing market conditions and is supported by skilled talent and relevant measurement. In today’s environment, digital investment agility appears to be a must-have capability.

About this article

Authors
Muqtadar Ahmed

EY-Parthenon Senior Director, Strategy & Transactions, Financial Services, Ernst & Young LLP

Innovative leader and problem solver focused on financial services and emerging FinTech ecosystems. Dedicated to increasing value for all client stakeholders through organic and inorganic strategies.

Peter Ulrich

EY-Parthenon Principal, Digital Strategy and Transactions, Ernst & Young LLP

Digital Innovation in Strategy and Transactions. Knowledge in industrials, automotive, machinery, construction, infrastructure, mobility, and logistics.

Aaron Byrne

EY-Parthenon Financial Services Leader

Focused on advancing the client's capital strategies and future vision. Adept in building enterprise strategy determining strategic options and establishing inorganic strategy approaches.