During the last few years, consumers became familiar with new financial services providers disrupting the marketplace. A digital revolution occurred, driven by innovations in Financial Technology (FinTech) in P2P payment, money transfers, digital banking, and money lending. These innovators have been able to provide a better customer experience and better level of services; typically, at much lower fees than traditional players. Digital operators have been successful in unbundling the traditional retail banking industry and became our first choice for select specific services. TransferWise for sending money abroad, Venmo for P2P transfers, and PayPal for digital payments have become household names. This transformation has put traditional banks under tremendous pressure to keep their clients and has required them to adapt their approach very quickly.
These digital disruptors brought to life the DNA of FinTech 1.0, characterized by a fully digital consumer experience, and now a second wave of disruptors is gestating and will be under the spotlights in 2018. We will witness emerging new digital financial services operating in areas like investment banking and wholesale payments. SEI has engaged with clients to help streamline product development processes in a digitalized world. In addition, the tremendous effort that traditional banks have been made in the last couple of years to acquire tech firms, which provide innovations in Artificial Intelligence, Cybersecurity, and Blockchain, might start to pay-off and make digital transformations a reality. In 2017, more than 40% of the investments in FinTech originated from traditional bank venture capital arms based on an analysis by CB Insights.
Banks and other financial services firms must continue to adapt by dealing with regulatory challenges, managing shareholders’ expectations, providing a smooth transition to customers, deploying the right change management activities into their organizations, and transforming the way they interact with suppliers and partners; as well as updating technology capabilities. This presents a very complex equation, which will require a structured approach to achieve transformation. SEI consultants have aided organizations on such transformations by developing new organizational and target operating models, expanding the global footprint, improving workflow and reporting effectiveness across strategic business unit activities, reshaping corporate culture to embrace change, and enabling investments in talent and technology infrastructure required to streamline processes. In this new ecosystem, FinTech 2.0, financial institutions may consider the following to be successful in their transition to the new digital era:
- The Return on Investment (RoI) should be the main driver to decide on integration of a change which impacts the whole organization. Return could be estimated as a compound of incremental revenue and the efficiencies and cost savings generated by the new project. In addition to that, many parameters should be weighted even if not directly tangible like customer or employee satisfaction, position against competitors or shareholders expectations. All those parameters should be analyzed in a right Return on Investment calculation.
- An Enterprise Architecture roadmap will have to be designed to frame the digital transformation journey. Organizations will have to prioritize and articulate the change by implementing quick wins or interim solutions to sustain the different waves of changes. We might see the emergence of new capabilities leveraging best practices from other industries like Product Lifecycle Management (PLM).
- Risks must be managed adequately (Operational, Reputational, and Financial). In a fast-moving competitive environment where the notion of risk by itself is evolving substantially, most of the technological improvements come through cloud-based applications where controls are decentralized. Cybersecurity is a top priority to manage this new architecture.
- Shareholder value is driven by revenue and profit growth and sustainability. Entities will have to be equipped to compete more aggressively against digital players to generate incremental revenue streams and strengthen current position.
- Integration with the existing IT landscape and current state Operating Model will require an important cultural change to adopt an Internet of Things (IoT –Large number of devices connected altogether) approach. IoT, BaaS (Backend as a Solution), and no-code applications provide a much leaner architecture and allows for much more flexibility and data traceability.
- Leading with the Human Factor in order to transform to a digital model, organizations will have to deal with two tremendous challenges. First, they must be to attract qualified talent, which is scarce in the industry and second, cognitive technologies like AI can be perceived as replacing to human beings, so organizations must focus on empowering their employees.
Traditional Financial Services firms need to digitally transform operations to provide both a digital experience to their customers and to realize the transformation in their operations. This will allow FinTech 2.0 to provide innovative capabilities and technologies to solve business issues which have been consuming large amounts of resources. The digital world is moving extremely quickly and priorities are changing rapidly, requiring entities to always be ahead of the trends. Blockchain may fill newspaper headlines everyday but AI, IoT, Open Source, and no-code also have the opportunity to trigger a cultural change in financial institutions and eventually in their regulators. The competitive landscape requires organizations to permanently adapt to new market trends and find ways to cultivate the same “freshness” as the new players who they are competing with.