As a result, financial services companies worry more about their IT infrastructure’s capacity to integrate advanced technologies than those in other industries: The majority (61 percent) cite their IT system as “fair or poor,” compared to 31 percent of all organizations. Only 39 percent say it’s “excellent” or “very good” (vs. 63 percent of all organizations).
Nearly one fifth (17 percent) of financial services executives say that investing in innovative digital capabilities for anticipated business needs is a top digital priority. Among these include the internet of things (IoT), artificial intelligence (AI), and blockchain, in addition to the advanced technologies they’re already deploying (i.e., cloud computing, advanced analytics, and automation).
Internet of Things (IoT)
The Internet of Things (IoT) has significant implications for financial services institutions. While IoT devices are often more commonly associated with consumer products, the benefits of having real-time data about clients’ physical assets are invaluable to financial services companies looking to improve their current products and services, capitalize on customer purchasing behavior, and create more personalized user experiences.
Common financial services IoT applications today range from providing usage-based insurance to analyzing biometrics data to improve the credit underwriting process. However, many more will emerge. Within an organization, IoT devices, such as smart sensors, can help improve workforce dynamics by tracking employees’ movements and working habits, and reduce building management and utility costs.
Artificial Intelligence (AI)
Advancements in AI have transformed every aspect of the financial services industry. Companies, by using AI to identify transaction anomalies, can better mitigate fraud and money laundering risk. Capital market firms can make faster, smarter trade decisions based on sophisticated analyses of past market performance data. Organizations can conduct customer sentiment and mood analyses and personalize customer experiences based on individual customer profiles—such as suggesting customized portfolio solutions based on each individual’s risk appetite.
Nevertheless, while financial services companies see AI and machine learning-based solutions as opportunities for growth, many are still worried about AI’s younger sibling: automation. Thirtynine percent cite commoditization and automation as their biggest digital threat, higher than 23 percent of all organizations. While robo-advisors, chatbots, and other automated processes can greatly increase operational efficiencies, it could be that job security fears—or the possibility of being replaced—remain.
Blockchain
The industry may still be in its early stages of adopting blockchain and distributed ledger technology, but few companies doubt its huge potential. While cryptocurrency may be the most widely known application to date, blockchain technology could also ensure more secure and automatic payments via the use of smart contracts; strengthen supply chains, trading systems, and claims processing; streamline back office operations; and mitigate fraud risk, among others, by removing friction from processes.
One example of a blockchain solution that’s beginning to revolutionize the industry is blockchain payment systems. Whereas many financial messaging services today take days to facilitate global payments and money transfers (and are often limited to business hours), blockchain-powered systems take a matter of seconds and run 24/7. While it may take some time for them to reachthe same level of participation as current payment systems, it won’t be long until they catch up.
Blockchain’s significant promise has a third of all financial services organizations considering its deployment over the next year—a percentage expected to increase in the future. By 2024, the blockchain market is expected to be worth more than $16 billion, according to Global Market Insights, with applications related to identity management anticipated to be the most lucrative, with a greater than 90 percent compound annual growth rate (CAGR) from 2018-2024.
5. Cultivating a strong “employee experience” is critical.
Improving customer experience may be top of mind for most financial services institutions, but equally important is cultivating a strong employee culture. Digital transformation is less about revolutionary technology than it is about changing the way companies work. It’s a mindset shift that hinges not on digital capabilities but on the adoption of those digital capabilities by the end users—employees and customers—and business enablement.
Cultivating this shift—and inspiring organizational behavioral change—starts with tone at the top. The senior-most leaders of a company need to convincingly evangelize the vision and get their employees to understand why they need to leave the status quo behind, believe in the strategy, and engage in the process. They must also strive to cultivate a corporate culture that embraces constant experimentation and learning—one in which short-term mistakes and failures are expected and accepted in the pursuit of long-term innovation and value creation. This can be especially challenging for financial institutions that existed in the pre-digital age.
But getting stakeholder buy-in isn’t enough. Nearly three-fourths of financial services executives (73 percent) cite a lack of skills or insufficient training as the biggest challenge to moving forward with a new digital initiative—significantly higher than the 54 percent average for all organizations. While an injection of new talent can help improve overall digital competency, organizations also need to provide current employees with the resources, training, and development they need to be effective as their roles evolve. Companies should consider a formal digital upskilling program—ideally with personalized training modules based on preferred ways of learning—to future-proof their workforce.
6. Strong governance remains a challenge.
Good governance—encompassing everything from planning and forecasting to implementation and execution—is critical to any company-wide initiative, but isn’t easy. Establishing the right metrics to measure progress is financial services’ biggest challenge to moving forward with a new digital initiative (39 percent, compared to 27 percent for all organizations). This percentage rises to 46 percent among lower middle market companies that may not have as much experience managing initiatives of this scale.
Meanwhile, over half (53 percent) of financial services organizations cite poor communication and project management as a top barrier to successful digital implementation, once underway. A lack of leadership or vision by senior management is another big issue for a fourth of participants, especially for lower middle market organizations (33 percent).
The good news is that the challenges of making the business case to internal stakeholders and employee pushback are lower than the average for all industries—indicating that most financial services companies are aware that digital transformation is a must.
To make digital transformation effective, financial services companies should develop a distinct function within their organization to drive digital efforts—a crossdisciplinary “Digital Dream Team” of individuals to be their champions in the field. Fortunately, more than three-fourths (77 percent) of financial services executives have already established a digital innovation steering committee (compared to 58 percent of all organizations), and 60 percent have hired board members or senior management with relevant oversight skills (vs. 49 percent of all organizations).
THE RISE OF REGTECH: DIGITALIZING GOVERNANCE & REGULATION
If there’s one factor that all financial institutions can agree on, it’s that the number and complexity of rules, regulations, and compliance demands they’re subject to is endless. Not only has the number of regulations increased over the past decade, but so has the number of federal governing groups keeping watch and the costs of compliance (and non-compliance). Regardless of whether it’s the Financial Crimes Enforcement Network, the Financial Industry Regulatory Authority (FINRA), the Office of the Comptroller of Currency (OCC), or another entity, financial institutions can’t afford to let down their guard, even once.
To navigate this intricate network of demands, financial institutions have no choice but to turn to technology solutions for assistance. One notable field that has emerged as a result is regulation technology, or RegTech, designed to help organizations manage their financial compliance demands efficiently and inexpensively. By leveraging cloud computing, data analytics, AI, and other technologies to comb through their mountains of data, RegTech can help shine light on a financial institution’s more granular operations and spot potential areas of risk for non-compliance before the guillotine falls. By not relying on humans alone, RegTech allows institutions to make decisions faster and more accurately, with substantial cost savings to boot.
Again, it’s important to note that technology implementation alone isn’t digital transformation, but a part of the journey. As middle market financial services companies continue to develop and refine their digital strategy and goals, RegTech could be a critical part in helping them manage the day-to-day, so they can spend more time and resources on R&D and innovation.
Data privacy and cybersecurity will remain a serious problem for decades to come, as attackers use increasingly sophisticated methods and enter through a greater number of entry points due to the proliferation of technology platforms and IoT devices. Financial services companies, with their treasure trove of sensitive client and third-party information, are particularly susceptible to these attacks. Those that experience a breach will face serious consequences, including the loss of money and reputation, as well as legal claims and sanctions.
Unfortunately, many financial services companies are overconfident in their ability to withstand an attack, or are ignorant of the potential causes of their own security failure. Less than a fourth (24 percent) of survey participants cite cyberattacks or privacy breaches as their top digital threat—lower than the average for all organizations (33 percent). The percentage citing cyber concerns as their biggest challenge in moving forward with a new digital initiative is also less than average (15 percent vs. 25 percent).
This is troubling, especially considering the numerous widescale cyberattacks in recent years (i.e. Equifax, WannaCry, NotPetya, etc.). To avoid a similar fate as the victims of these attacks, financial services companies must focus more on detection and response (including real-time defense), shore up internal controls, and implement awareness training for all employees. This starts with defining and documenting potential threats and making that a part of their existing risk management framework. Internal controls, especially related to payment functions, should be in place to keep employees from going around the four-eyes principle and the separation of duties.