December 18, 2017
[This blog is an extract of the report published by Ovum - FIS Executive Roundtable: Winning in Financial Services through Innovation in the Digital World]
Leaders from institutions across banking, insurance and investment management agree: Financial services firms need to innovate for the digital age.
Executives are thinking radically here by looking to focus on core differentiating services – either buying or outsourcing low value-adding activities and working together, rather than competing with fintech to increase the pace of innovation within their organizations. They are also looking to take advantage of emerging technologies, such as machine learning and artificial intelligence (AI). But, the value of AI is greatest when used in conjunction with humans. So, firms need to recruit and train, as well as retrain and supplement their workforce with new skills, also ensuring support for legacy systems.
The central question today is: Will financial services firms embrace digital disruption, or will they be disrupted – and potentially derailed – by the forces reshaping the industry?
Digital disruption requires a new approach
We all feel it: The rate of change in our world is faster than ever before. The change brought on by digital technologies is one that is still very much in progress rather than complete, and the pace of change will continue to accelerate.
Financial institutions need to embrace digital transformation and ensure that they adopt the same innovation-based thinking as seen by newer fintech rivals and start-ups in other industries.
There is no time for fear of the future. Most institutions are highly reticent to drive innovation where it could have a damaging impact on existing business – based on existing ideas. An example is the home movie industry, in which the major incumbent had the chance to purchase a firm specializing in home delivery, but chose not to primarily due to the concern that the home delivery business would undercut its core retail-store business model (with late fees on DVDs providing attractive margins). We all know how that ended. While the concern here that the business model would be disruptive was a genuine one, firms will find that if they aren’t willing to cannibalize their business model, another firm or new entrant will.
Readiness for growth and innovation is related to performance
FIS’ recent research, published in the FIS Readiness Report: The Hunt for Growth, looks at financial services firms’ readiness for meeting strategic growth objectives across the buy- and sell-side sectors. Based on a survey of leaders in over 1,000 institutions, the results found that the majority of financial services executives are not confident that their current technology capabilities or operations functions are strong enough to capture growth opportunities.
FIS has done additional analysis of the industry by comparing the performance of institutions obtaining top 20 percent index scores against the rest of the market. These “Readiness Leaders” have tended to outperform the rest of industry: 40 percent of these leaders have grown their revenue by more than 5 percent while only 22 percent of other institutions have done the same. We see a significant correlation between operational excellence, innovation and achieving growth.
Digital transformation is still a work in progress
Ovum’s recent ICT Enterprise Insights study of senior technology executives at over 7,000 enterprises across the world provides insight into the industry’s progress toward digital transformation. Part of the study looked at the progress that institutions feel they have made on the path to digital transformation, based on an evaluation of their maturity across several business and technology level areas important for development.
The majority of firms have started to transform themselves for the digital world; however, the majority for most areas sees the industry either in progress or at the early stages of transformation. For most areas, only 10-15 percent see themselves as complete.
Digital innovation requires a rethink of technology and talent
There is a broad consensus among financial services executives that the need for innovation and digital transformation is no longer the question. The question is about how to leverage digital innovations to successfully rise to the future.
Given the increasing cost of technology, firms should seek to either buy or be the platform. While firms should look to drive innovation, the fintech ecosystem has been evolving toward more of partnership-style, rather than purely disruptive, relationships with incumbent financial institutions.
With many financial firms starting their journey with emerging technologies, do they have the talent they need to rise in a digital-first world? The best application of AI is when it is used with humans rather than as a replacement. But, financial services executives face the challenge of getting the right talent to work with these new technologies and to properly prepare for a new normal. This lies partly in challenges of retraining the existing employees to deal with different expectations and requirements of a digital world, and partly in challenges around hiring – and then retaining – new talent.
Are you doing enough to embrace digital transformation?
The need for innovation to deal with digital disruption is a key imperative, and most financial services firms have already started to move; but, the work needs to accelerate.
The bottom line? There is no time to wait to innovate for the future.