Forging the future: How financial institutions are embracing FINTECH to evolve and grow
The financial services industry is undergoing a paradigm shift. Emerging technologies like artificial intelligence (AI), machine learning, the Internet of Things (IoT), and blockchain, combined with ever-changing customer expectations and preferences, are redefining how financial institutions deliver services. Remaining competitive in this constantly changing environment is an enormous task. Banks, insurers and asset management companies are undertaking major transformation efforts — from transforming complex legacy technology environments into more agile operations, to creating more efficient compliance processes that fully satisfy evolving global and jurisdictional regulations. Financial institutions see startup financial technology firms — or fintechs — as a major part of the digital future. As evidence of this, financial institutions have invested more than US$27 billion in fintech and digital innovation since 2015.1 However, corporate investment is only part of the landscape.
To understand how different organizations are approaching the strategic opportunities presented by FINTECHs, we conducted a survey of more than 160 financial institutions from 36 countries. We also held in-depth interviews with executives from leading financial institutions and our own financial services partners from around the world. Our research shows that while financial institutions recognize that fintech is a substantial disruptor, no single path has emerged to define how companies should approach FINTECH. Leading financial institutions are pursuing many different avenues — including partnering, buying, sourcing and investment strategies. One key best practice across leading financial institutions is strategy: having a clear FINTECH strategy that aligns to organization objectives, considers current assets and capabilities, and includes an execution plan for addressing gaps and managing a transformation that may never have a defined end point as FINTECH will continue to evolve. There is no clear winner when it comes to FINTECH today. Every organization has the opportunity to forge a new FINTECH future and win against their competition. We hope this report will provide a useful resource for understanding how different financial institutions are approaching FINTECH, and factors to consider as you define your own path forward.
The FINTECH imperative
FINTECH is the biggest disruptor of our time for financial institutions, even ahead of growing global regulatory complexity and new business models. Whether it’s providing new ways to enhance the customer experience, responding to regulatory change (such as open banking), underpinning new payments or digital delivery models, making service delivery faster and more cost effective, or improving the efficiency of back-office functions — the myriad FINTECH solutions now available or in development are helping to rapidly reinvent the entire value chain of financial services.
The swift evolution of FINTECH has forced traditional financial institutions — banks, insurers and asset management companies, to face a new reality. Products, services and business models that have worked for decades are no longer an option in the digital world. Legacy infrastructure must be replaced or augmented by newer, more efficient technologies.
To thrive, organizations recognize that they need to reinvent what they do and how they do it. Competitors are evolving too, and it’s not just FINTECHs knocking on the market door — large tech giants, retailers and other global companies are looking for ways to provide the financial services customers want.
Consumers expect more from their financial services providers
Over the past 5 to 10 years, there has been a rapid shift in how consumers view financial services companies. Many consumers want financial institutions that are able to respond quickly to their needs with products tailor-made to them. We are seeing this across all industries, in our 2017 Top of Mind Survey2, 29 percent of respondents expected increasing demand for personalization to be the most disruptive consumer behavior trend over the next 2 years. In an era where retail products can be ordered and delivered in the same day, it’s no surprise that people want their financial transactions to also occur in real time — and for decisions related to their mortgages, insurance coverage or other financial needs to be made in moments rather than days or even weeks. Consumers also want transparency, and complex financial matters explained to them in clear, relevant terms that make sense within their day-to-day lives and which align with their overall financial goals. “It’s not just FINTECH causing a shift in consumer expectations. A lot of the change we’re seeing in customer experience expectations is driven outside of financial services,” says Enzo Russo, CEO and founder of FORFIRM. “Large tech players have done very well in the context
Santander UK has licensed the Kabbage platform to power automated lending to small and mid-sized businesses throughout the UK. The platform enables Santander to accelerate the underwriting process for businesses looking for loans up to 100,000 British pounds (GBP) online — reducing the amount of time required to process requests from 2–12 to as little as 24 hours.3
of applying data analytics, AI, and cognitive thinking to personalize the customer experience and take friction out of business processes. When companies like Uber and Netflix can do it, consumers expect all companies should be able to.”
The challenge of competing priorities
Financial institutions have long felt the pressure to both modernize their infrastructure and respond to changing customer demands and expectations. The obstacle for many is that they already face a complex array of urgent issues that constantly vie for management attention and investment.
For example, financial institutions around the world continue to spend a lot of time and resources to ensure they remain in compliance with changing industry regulations, such as the Payment Services Directive 2 (PSD2) in Europe and participating in the rollout of new infrastructure, such as the New Payments Platform in Australia. Legacy infrastructure is also a major stumbling block for financial institutions, some of which have been using the same mainframe systems for decades. Executives face frequent decisions about whether to allocate capital to keeping the lights on in the existing infrastructure, or allocate it to digital development.
Concerns about maintaining dayto-day operations can significantly hamper the ability of organizations to focus on innovation. Institutions with complex systems can also find themselves hindered when asked to incorporate new financial technologies as the ability to integrate their existing systems with new, agile FINTECH offerings is often costly or unfeasible.
A constantly evolving set of ‘burning platform’ priorities make it difficult for financial institutions to give FINTECH the attention and resources needed to drive better business value. This has led many organizations to simply focus on resolving one issue at a time — usually the issue with the most pressing timeframe for action, rather than the one that will lead to the most enduring value.
“Financial institutions too often deal with FINTECH in a very inefficient, fragmented, and tactical manner. The companies that succeed have undertaken careful architecting of their transformation strategy, including the integration of FINTECH within their organization.”
Even among financial institutions that have moved forward with FINTECH initiatives, it has not been clear sailing. There has been friction within companies that have tried to integrate and scale FINTECH. The integration of old and new technologies, not to mention traditional and startup corporate cultures, is not an easy task to undertake, and there is no straightforward solution to ensure success.
The increasing pressure from both customers and organizational stakeholders, combined with a proliferation of technology options and competition from maturing FINTECHs, has moved FINTECH to the top of the growth agenda for leading financial institutions. Executives at these organizations now realize that sticking to the status quo is likely the greatest risk to the future success of their business.
Building the right foundation
Achieving business success typically starts by developing a focused and clear business strategy. What financial institutions have learned is that getting the most value from FINTECH requires the same degree of focus and attention. It’s very difficult to make the most of fintech opportunities organization-wide without clearly assessing where a financial institution is today and where it wants to be in the future.
Moving beyond individual experiments
Almost 90 percent of our survey respondents either have a FINTECH strategy in place or are currently in the process of developing one. Having a strategy for FINTECH, however, does not necessarily mean it is the right strategy for an organization. In fact, less than half of those organizations with a FINTECH strategy believe that their strategy is well aligned to current FINTECH challenges and disruptions. Also, it’s important to remember that a full strategy is significantly more involved than having a VC fund or a list of FINTECHs the team has met. Given the fact that many financial institutions are still relatively early on in their FINTECH journeys, we expect a large proportion of them have yet to form a fully developed strategy for FINTECH.
The challenge typically lies in what comes first. Technology is the source of innovation for many financial institutions, but it is easy to get wrapped up in the excitement of a new technology and forget about making sure it can be used to benefit customers and organizations. It’s not unusual to find new technologies being championed within a financial institution because they are interesting and compelling. People will try to find problems for the technology to solve, rather than starting with a problem and looking for a viable solution. Over the long-term, these cart-beforethe-horse technology initiatives can create roadblocks for organizationwide initiatives. For example, fintech solutions implemented in different business units may not be fully integrated, leading to the need to bridge gaps or roll-back solutions in order to address organization-wide future needs. Any misalignment of initiatives can be costly, both from a resource perspective and from a roll-out perspective. Fintech must be considered from a holistic business viewpoint. An ad hoc adoption strategy leads to expensive mistakes that companies can avoid. Banking is considered to be the most mature of the financial services subsectors when it comes to embracing fintech opportunities. This may reflect why companies in the sector are more focused on delivering cost efficiencies than the others; many banks have already spent years on initiatives aimed at enhancing the customer experience and are now turning their attention to other objectives. At the same time, insurance and asset management are making strong inroads. For example, in asset management, we’re seeing companies shift from being passive players in terms of expecting business to come to them to a more proactive position focused on attracting business and understanding customer needs.
Leading practices for developing a FINTECH strategy
There is no shortage of opportunity for financial institutions to pursue fintech. But selecting the right opportunities is what will determine their success.
To make sure fintech opportunities are well defined and fully aligned to their overarching business strategy, leading companies have established specific fintech strategies that consider their business objectives, customer expectations, market position, organizational structure and culture, the geographies in which they operate, and the fintech opportunities and solutions available to them. Key elements of a strong fintech strategy include:
Knowledge of current business operations to fix issues and capitalize on opportunities
Conducting a current state assessment of existing operations is a key starting point for financial institutions in order to identify opportunities for change, as well as specific operational challenges, inefficiencies, and potential roadblocks. The current state assessment is often the driving force behind the development of a FINTECH strategy, as the ability of FINTECH to help ‘bridge the gap’ is a key measure of long-term success.
Awareness of signals of change
The scope of FINTECH is expansive — from data analytics and artificial intelligence to innovative technology platforms and alternative business models. Leading companies stay on top of the signals of change in the market, monitoring FINTECH activities being conducted by companies both upstream and downstream in the value chain, by competitors, and by major technology giants like Google, Microsoft, Amazon and Alibaba. They inform their priorities by assessing the certainty of a change, its potential implications, and the likely timing. Early identification of signals of change can help companies respond more proactively to potential FINTECH innovations rather than being forced to be reactive.
Long-term vision Rather than focus on individual FINTECH objectives, leading financial institutions have a big-picture vision of where they want to be in 3 or 5 or 10 years — from the way they work with their customers to the efficiency of their operations. To help achieve their vision, companies can define and work to cultivate the organizational characteristics most important to differentiating themselves in the future to ensure long-term sustainability.
Readiness for change within an organization
The ability to gain buy-in from employees who will be affected by specific changes can make or break the success of a FINTECH strategy. As we highlight in our 2017 US Customer Experience Excellence Analysis report, companies must align both the employee experience and the customer experience — what we call the “spine” of the organization. Culture is the invisible shaping hand or organizational change. It has the power to accelerate or subvert change initiatives. One of the most powerful questions an executive team can ask is: “Does our culture support of inhibit our strategy?” Large-scale transformation initiatives often fail because the people within an organization are simply not ready for change. Assessing the readiness for change of both employees and the leadership team provides impetus for a change strategy. Companies can understand what cultural barriers exist to change and tailor their FINTECH strategy and execution in order to help ameliorate cultural challenges and encourage buy in over time.
Targeted FINTECH strategy aligned with business strategy
Deciding where to play and how to win with FINTECH begins with a comprehensive understanding of where a company is today, where it wants to be in the future, an understanding of the signals of change and an understanding of internal change readiness. Leading companies use these basic building blocks to help develop a targeted fintech strategy that is fully aligned with their business strategy, and which includes key metrics and measures that will help the company assess the impact of initiatives over time.
A continuum of FINTECH innovation activities
FINTECH is constantly evolving, presenting financial institutions with new challenges almost every day. To deal with the nebulous nature of FINTECH, leading companies look at their innovation activities on a spectrum rather than focusing in on individual initiatives to the exclusion of the bigger picture. On the one end of the spectrum are FINTECH activities focused on making incremental improvements in order to make constant progress, while at the other end would be transformative step changes meant to leap a company forward. Both types of evolution are often required in cases where there is such a radical change occurring in an industry. Failure to consider innovations at both ends of the spectrum can lead to companies implementing incremental changes that do not align well with longer term transformative change. A flexible spectrum-based approach can help ensure progress is made against specific metrics (e.g. customer satisfaction, employee satisfaction) even while contributing to longer-term efforts.
Prioritization of initiatives
Financial institutions can’t take on every FINTECH opportunity at the same time. Prioritization is critical for companies that want to get the most value out of their investments and activities. Prioritization might include evaluating a range of factors, including the predictability of the development, the potential size of the impact, current organizational capabilities and assets and their alignment with specific initiatives, and areas that might not be big today but have the potential to significantly cause change in the future.
This is why leadership is so critical. When leaders understand and buy in to FINTECH initiatives, they will ensure the right resources are dedicated to managing, monitoring, measuring and reporting on FINTECH innovation activities. Without the right leadership, it can be very difficult for companies to foster the long-term view necessary to truly redefine a financial institution’s activities.