Digital Transformation strategy for Financial services

Current Challenges to the Finance industry

Tradition

Financial services have traditionally been slow changing services. Customers of financial services/banks etc. have been traditionally more loyal, slow to adopt change and have been used to more personal connect than technological connect with the bank.

Proliferation of smart access

With the advent of online banking and mobile banking services, the personal connect with the bank has already started reducing over the last few years. In addition to that, with the proliferation of mobile internet and smartphones across all age groups and all strata of the populace, means that it is becoming more and more simple for people to use mobile based banking rather than the traditional way of banking and other financial services

Change in demography

More and more millennials and other tech savvy consumers are increasing in the market. Due to the deep penetration of the smartphone and internet, more people are now becoming technological competent and are trusting it more than earlier. Also, these tech savvy consumers do not now show any kind of loyalty to the bank just because it’s their bank. They look for quick results, quick solutions and are more than willing to move to a competitor if they’re getting quicker financial services from them. This means banks and financial institutions now need to start becoming more agile and responsive to the customers’ needs

Unbundling of financial sector

Regulations in financial sector are changing in multiple ways. On the one hand the regulations are opening up the traditional value chain of the of the industry, thus disintegrating the traditional monolithic way of working into modularized value chain where the competition can happen at multiple and concentrated areas. At the same time, some regulations are making the core banking business tougher, thus in a way reducing the number of players in it but at the same time increasing the security safety of the financial sector. Eg. The GDPR, PSD2, etc.

Technology explosion

Technological changes and improvements have been happening in exponential manner over the years. The storage space, computational power, proliferation of smartphone, communication technology has improved leaps and bounds over the past so many years and continues to change every day. Newer and better and more innovative technology is constantly being invented and its growth is happening at mindboggling speed because of the internet. This means that there’s always some new technology to look at before we are even fully conversant with the earlier one. We have blockchain, big data analytics, microservices, APIs, etc. which are flooding the market and it’s up to us to make the most use of it all.

Innovations and disruptions

With this ever-connected world, more innovative and disruptive ideas are finding their way into our life. These innovations are not just improvements on existing way of doing business, but they change the entire business model. For e.g. Uber completely changed the taxi business. Social media platforms like facebook, twitter etc. have become a way of communicating with each other like never before. Mobile wallets, bitcoins, various aggregators connecting multiple banks’ loan processes to a single front end, etc. as newer and quicker innovations that make it easier for consumers to use financial services without bothering about the complexities underneath. The unbundling of the financial value chain has made it easier to do these innovations at the top customer facing layer and many players have started bringing in newer products for the customers.

Ride the wave

Traditional financial services need to gear up or shut down. They cannot sustain this onslaught of innovation and technological and demographic changes unless they ride these changes and come out triumphant. One major change needed is the mindset of innovating and continuously improving. Without this traditional financial services company will die a painful but quick death.

Digital Transformation strategy

Digital transformation strategy for financial services companies needs to be multi-pronged

1. Consolidate the core
2. Platformize & open up the core
3.  Innovate the offerings
4. Coopetition
5. Continuous improvement

Let’s take these strategic initiatives one by one

Consolidate the core

For a traditional financial services company that has probably been around for years, the core business is the financial service itself. Banking for example. Such banks have a vast amount of expertise in the core banking and are very well regulated. This is their strength. It will do well for them to consolidate their core business by ensuring that it is a very comprehensive and compact unit. All duplicate processes need to be reorganized and org structure and functions revalidated and compacted. This way, the core business becomes more efficient and productive.

Changing regulations are then easier to manage in this core unit and newer companies are less likely to compete in this domain despite money power, due to the sheer complexity and depth of knowledge. Banks will always have the upper hand and will be ahead of the curve in this area.

Platformize and open up the core

The core business should be platformized. Meaning, the core business systems should be fully integrated and various functionalities of the business should be exposed to be used in various ways. The services can be exposed in multiple ways but the most suitable way technologically today is through using the APIs. These APIs are business functionality exposed through technical interface for anyone to use. The platform needs to support various business models in this case where the functionality could be atomic or contextual depending on the business model. That way, the platform can be exposed to be used by partners or customers irrespective of their business relationship with us. Saxo bank and Danske bank are good examples of this

Innovate the offerings

Using the APIs exposed, financial services can be then provided to the customers using innovative ways on various platforms. Customer portals over the internet are just one of the ways. More and more, mobile app based innovative service offerings is the key and the banks should expose all its services in simple but innovative ways to the end users. By making the platform available openly to other developers to develop their innovations, the core can be monetized and at the same time, more innovative products enter the market for the customers. The more customers use these, the more the bank’s core gets monetized. In addition to that, these innovative products can then either be replicated or partnered with to increase revenue from the front ending services of the bank itself.

Coopetition

Banks should understand that no matter how intelligent their own people are, innovations can come from any source. Instead of fighting for bringing in the next innovation themselves, they should enter into a coopetitive mode with the others in the industry and use their expertise where possible and partner with them rather than fight them on every occasion. These innovative companies can sometimes be taken over but sometimes just partnering is more useful and cheaper. This way the bank can always have the best of the innovations and innovators working with them rather than against them. The faster the banks do this, the better advantage they have in the market.

Continuous improvement

Technology changes. Fast. If one thing is an innovation today, it is a passé tomorrow and something new comes up. This change is constant. The banks should build a culture of innovation and ensure that everyone understands that the only way to be in the game and keep winning is to keep improving on all fronts. Various moonshot competitions, design thinking, fail-fast attitude and other cultural changes should be given a high priority in the company.

                Two speed IT that eventually evolves into an “all speed IT” is needed for ensuring that the core platform keeps getting consolidated and more robust while the innovations keep coming. This needs a change in the mindset of the entire organization.

                Hackathons and such events where the banks can get the best of the innovators and ideas into a single room and eventually partnering or financing the best of ideas can help in being ahead in the innovation trajectory and enjoying the leader position for a longer time rather than losing out to the other competitors. An example is the Barclay’s bank’s hackathon that provided them more than 500 innovative ideas and thousands of hours of prototyping within just 2 days.

Digital transformation is multi paced, multi-pronged and multi-faceted. However, with the right attitude and supportive and understanding management, this can be achieved. The mantra always is, to improve and keep improving. Always.