Digital transformation in the financial services sector
April 2019 | TALKINGPOINT | BANKING & FINANCE
Financier Worldwide Magazine
April 2019 Issue
FW moderates a discussion on digital transformation in the financial services sector between Kevin Pleiter, Ilieva Ageenko, Joseph Pulicano, RK Madan and David G Royle at Grant Thornton.
FW: To what extent do you see digital transformation reshaping operations within financial services (FS)? What kinds of opportunities do new technologies offer to FS companies?
Pleiter: Digital transformation is built up from the core ingredient, which is data. Today’s legacy operational processes, controls and business capabilities are a function of the availability, periodicity and quality of data. Many processes have been built to compensate for the siloed nature of much of this data, with controls put in place to ensure quality and consistency as it becomes enriched through the business workflow. This rethinking is centred on ‘shifting left’, by putting automation at the source of data to ensure quality, governance and lineage controls that become the bedrock for radically transformed downstream processes that are unburdened by onerous and unnecessary controls, because these issues have been caught at source.
Ageenko: Every day, virtual agents empowered with artificial intelligence (AI) are interacting with customers using Big Data insights providing personalised service and transforming the digital customer experience (CX). Digital transformation is a business strategy that has the ultimate goal of providing a differentiated CX and driving engagement. At the same time, enabling a full digital transformation strategy requires that innovation percolates all levels of the organisation, including back end operations. The digital transformation of operations starts with changing the operating model and driving digital change from the inside out – from the back office all the way to CX. There are still many legacy processes across the enterprise that work in silos. New technologies, such as robotic process automation (RPA), natural language processing (NLP), Cloud-based systems and AI, will play a significant role in replacing manual functions and disjoined systems with intelligent automation (IA) and interoperability.
Pulicano: Digital transformation will reshape both the CX and the operations within financial services (FS). Digital means that customers are able to interact with the FS company through multiple channels such as mobile, web and call centre, without being obliged to go to a branch, and perform multiple operations through enhanced self-service capabilities. These front end capabilities can be further enhanced by leveraging automation capabilities, chatbot or web chat. Operations are also deeply transformed. Front office operations are replaced by multi-channel digital capabilities. Middle and back office operations are fundamentally transformed by paperless processes, document and workflow management solutions coupled with e-signature, which allow streamlining of all operational processes. Automation technologies – such as RPA and IA – can also further increase the level of operational efficiency.
Royle: Within FS, digital transformation is the single most influential force of change, and technology disruption is the new normal, not least driven by the ever rising levels of CX expected of financial service providers. Along with supporting large strides in CX, new digital tools and technological advances give firms the opportunity to achieve greater internal efficiencies with more straight-through processing, automation, AI and machine learning (ML) techniques. In a climate where FS firms are feeling pressure to reduce their operating costs, such efficiencies can prove invaluable. This digital disruption forces traditional FS firms to evolve their business models and challenge their approach to technology-led change.
Madan: Many banks and FS institutions are still cautious of widespread transformation. However, they have begun to realise that a broader transformational change is required to keep up with, and leverage, the success of the disruption that is currently taking shape in the marketplace. The steps to simply renew and replace systems are just not enough to realise the opportunities that the market presents. New technologies such as blockchain, ML and AI are opening up new doors in areas such as business intelligence supported by Big Data and analytics, automated wealth management, real-time customer insights to improve customer engagement and experience, and enhancements in mobility solutions, such as mobile pay, mobile banking and new mobile apps for new service offerings. By reshaping business processes to cater to the new digital customer and incorporating a visionary digital transformation programme, institutions are looking into the future of customer engagement and experience.
FW: What benefits can FS firms derive from a successful digital transformation process? Conversely, what are the biggest risks along this path?
Pleiter: Benefits include massive efficiencies of scale, radically simplified and more understandable processes with a transition from individual to corporate knowledge driving lower cost, higher value and more profitable streams of revenue. On the risk side, incremental thinking drives piecemeal efforts that fail to have meaningful business outcomes. Also, lacking the right skills to understand and enable the transformation, and a lack of adoption because of a strategy that does not include cultural transformation as part of the journey, are further risks.
Ageenko: Higher customer acquisition, brand recognition, customer satisfaction as well as operating efficiencies, productivity increase and speed to market are direct results of a successful digital transformation process. Technological advances can boost process efficiency, which translates into new products and services, faster responses to customer needs and a seamless cross-channel experience. Digital transformation requires applications across the enterprise to interact seamless with full interoperability. Open source application program interfaces (APIs), cloud computing, mobility and blockchain are the fundamental components of digitalising back end operations. Yet, while digital interactions provide new business opportunity, the speed of innovation also yields new challenges, such as stress on back office operations. As organisations broaden their digital footprint, their risk profiles change through more transactions, customer data and points of potential vulnerability, and this brings increased operational risk, particularly in the areas of data privacy, protecting customers’ information and cyber security.
Pulicano: Over 60 percent of digital transformations are company-wide in focus and over 33 percent of enterprises are evolving their business models as part of their digital transformation, according to Forrester. A successful digital transformation will therefore help banks increase their revenues by capturing a higher proportion of the younger generation wallet share used to interact through digital channels and developing new services and monetising their data. It will also help banks increase their operational efficiency by reducing their brick and mortar infrastructure and streamlining and automating most of their middle and back office processes. Each digital transformation comes with a number of technological and cultural challenges. However, in a very competitive environment, the major risk that FS organisations face is actually not to embrace digital and not to transform quickly enough. Banks have no choice but to adapt, or become less relevant to ever-more-discriminating customers.
Royle: The potential benefits of successful digital transformation are only limited by the extent to which FS firms embrace new technology and capabilities into the core of their business models. A clear benefit is costs savings – which can be significant when coupled with the rapid return on investment (ROI) many new digital technologies can deliver. Additionally, our research consistently shows that CX and customer loyalty have a strong correlation, and the firms to benefit most from this are those which leverage digital technologies to make ongoing improvements to the CX. Key risks for firms to be conscious of include the avoidance of vanity projects, and succumbing to the ‘hype’ of new technologies; do not succumb to a solution looking for a problem.
Madan: With the adoption of RPA, intelligent business process management (iBPM), ML and AI technologies, and access to large amounts of data, there are numerous opportunities moving forward with new waves of innovation likely to develop worldwide, such as real time analytics, data driven decision making, better insights and automated responses to customer requirements. Adoption of blockchain can lead to more secure and trusted transactions for mobile pay, mobile banking, identity management, cryptocurrency, paperless transactions, and so on. Conversely though, large FS institutions, by taking too aggressive an approach to digital transformation, may expose themselves to the risks associated with cyber threats, and also expose themselves to non-compliance with regulatory burdens. The approach to various initiatives should be articulated well to avoid inadvertent risk exposure. Organisation cultural change is by far the greatest hurdle in most companies, and inadequate effort put into awareness, training and communication is a significant risk.
FW: Given the complex nature of the digital world, what practical strategies can FS firms deploy to help them initiate and plan for digital transformation across their operations?
Pleiter: The digital world is not the complexity – these technologies are well known, mature and the foundation for many large companies born on the Cloud today, such as Google and Amazon. The complexity lies in the transition from existing ‘analogue’ people, processes and technology to a ‘digital’ target operating model. The key is that there needs to be a holistic strategy for the firm – you cannot outsource this change and you cannot do it in a corner of the business. You must build an enterprise strategy and then execute in bite sizes that slowly build you toward your end state vision.
Ageenko: A digital transformation strategy does not start with technology, it starts with putting customers first by creating mindful customer journeys for each interaction, and then building processes and systems that enable seamless operations. This process will require FS firms to embrace an iterative approach and a culture that is open to trial and errors and collaboration across line of business (LOB) which is challenging because LOB tend to work and design products in silos. Digital transformation is a journey rather than one time project, and it is important to take small steps, deliver tangible results and continue to iterate and innovate. Digitalisation should produce sustainable results rather than glamorous pilots that are not sustainable in the long run.
Pulicano: Numerous disruptions in the banking industry specifically drive the need to evaluate both digital and standard banking operations. These include traditional vs. digital customer channels, front end and back end technology, customer segments, operating models, and culture. In our experience, a set of pragmatic themes cuts through the hype and helps to drive operational focus. First, determine strategic focus and align the mindset of the organisation. Second, embrace an ‘operate to innovate’ philosophy. Third, reintroduce yourself to your customers of today and tomorrow. Fourth, develop the prioritisation and sequencing roadmap. Finally, maintain momentum and sustainability ‘muscle’, since transformation is a journey.
Royle: A key challenge for FS firms in an age of such rapid and voluminous change is how to deal with the complexity and speed required to keep up. The adoption of agile methods – where appropriate – can go some way to speed up the change process itself, however we would recommend the adoption of an innovation mindset to suitably explore and deliver these solutions. First, unlock great ideas and use an agile experimental approach to allow weaker ideas and solutions to ‘fail fast’, then scale the successful solutions to adapt the organisation. Further, it is key for FS firms to have a strategically focused target operating model (TOM) to set the direction and combine the key elements of the transformation journey.
Madan: The core steps are clear awareness of the organisation’s current capabilities, market trends, and knowing what the desired future state of the enterprise should look like to cater to the long-term vision while also achieving near-term goals. Decision making should be informed, with clear buy-in from various stakeholders and a common goal. Successful digital transformation initiatives are those which have a comprehensive strategy and plan and have been executed quickly and precisely. Slow programme execution over long project time frames leads to imperfect and inadequate success in realising the benefits that were originally set out to accomplish. Digital transformation is a journey and the successful programmes keep the long-term vision in perspective but achieve the transformation in clear and concise projects and programmes that realise the value and returns in interim steps. Good planning is key in envisioning a single view of the customer.
FW: In your experience, to what extent are FS firms prepared to undertake the culture change required, along with the digital change necessary, to drive adoption and realise the operational efficiencies and benefits that a business case projects?
Pleiter: The biggest element behind cultural change is the skills and ability of people to take you on your journey. The skills gap is the source of many cultural barriers. For many, you are moving to an unknown, new environment, and individuals and groups look to protect their role, built over decades, that is now perceived as being eroded. Many people embrace change, sometimes expectantly, while others try to protect their franchise to the detriment of themselves and the organisation. All of these are normal human reactions to change. The reality is that not many leaders have been through transformations of this scale and complexity before. Others, who have successfully offshored, executing location strategies and the like to successfully navigate a business for many years on the right trajectory, are not equipped to pull the new lever of ‘digitalisation’, as it profoundly changes the target operating model.
Ageenko: Successful digital transformation programmes require a culture that is conducive to collaboration and learning, and provides a platform to integrate both customer and employee feedback in the design of new services. This culture change requires planning, getting the support from senior leaders, necessary investment and empowering change agents who can lead teams through change. Cultural changes are not easy and many FS firms are not well prepared to undertake this journey, because they focus on the implementation of a new technology and overlook the culture aspect. A culture that is risk averse will not be conducive to innovation – instead, FS firms should embrace a culture of proactive risk management that enables the business to have a ‘fail fast’ mindset, to test new ideas and break silos. Conducting ongoing employee education and training is pivotal, while transforming the way they collaborate, work and design new product and services.
Pulicano: All banks agree that digital is a high priority, but they are moving at different speeds due to a variable ability to drive change and adapt. Throughout the digital transformation journey, as new digital capabilities come on line, the focus is often on the processes and technologies. Banks should not lose sight of the designed target operating model change that was built into the design requirements, and ensure that operational change control is robust. Sustainability will also come from mutually supportive front, middle and back office orchestration, and from keeping the ‘human’ element in mind during the digital journey.
Royle: From our experience, the majority of FS firms are both willing and enthusiastic to pursue digital change, and are aware that culture change is a necessary part of that. This is demonstrated in the significant investment many firms are making into cultural and digital change within their firms. Senior sponsorship is evident at the highest levels of the organisation. There is also recognition that firms often need help and support to achieve both the cultural and digital change required.
Madan: Many studies show that waiting for a banking or financial institution’s culture to change organically is not a fast enough process in the digital age. Cultural change seems to be the hardest part for these institutions due to inherent traditional, risk averse and siloed departmental goals. Our experience suggests this trend is now changing, with new leadership at the helm of organisations. Establishing the institution as ‘digital’ requires a seismic change in the activities employees perform, as well as how they interact with others inside and outside the organisation. There is a significant perception gap between senior leaders and employees when it comes to the existence of organisational digital culture. 2019 is seeing more progress by the CEOs and CIOs of financial institutions in promoting the paradigm shift in culture that is required for successful transformations.
FW: Could you provide any examples of digital projects that have significantly transformed FS operations? What lessons can we draw from how digital strategies were rolled out to effect change?
Ageenko: Many of the largest FS institutions see themselves as technology companies. Moreover, FS is filled with examples of digital projects that have significantly transformed the back operations of the whole industry. Digital check processing, online statements and online banking have generated tremendous operational efficiencies while at the same time creating a substantial improvement in CX and levels of satisfaction. Digital transformational programmes are a multi-year effort that require cultural change which promotes innovation and removes resistance to change, a strong business case, a higher level of project management orchestration and a phase implementation approach, with gradual enhancements and sustainable results. Senior leaders and shareholders will need to understand that digitalisation does not happen overnight, and it could take years to see transformational behavioural changes, and to get a substantial ROI from digital strategies.
Pulicano: We can draw a couple of major lessons from the implementation of a full digital asset tracking platform designed to offer paperless processes, customer self-service functionalities and value-added services. First, the number of people able to create the vision of the future and design the supporting processes, organisation and technology are very limited. Second, during design, development and testing phases, the users will tend to refer to existing processes and will struggle to project themselves into the future.
Royle: One project involved a major UK FS regulator deliver a prototype of machine executable regulation, using ML to extract data automatically from the financial institution without manual submission or offline report. Another involved a video banking solution for a large UK building society, transforming its mortgage distribution model and delivering cost reductions of over 60 percent and a 62 percent uplift in sales for in-scope products. In addition, large FS firms are designing data innovation labs, and producing high value digital and advanced data analytics initiatives by harnessing cutting edge data science. These have realised enormous ROI and shaped their future digital transformation across the business.
Madan: As one example, a banking organisation in Canada embarked on a multi-billion dollar digital transformation initiative and established a clear six-year strategy and roadmap, effectively creating an incredible template for realising digital transformation success. The key tenets of this digital strategy are based on a few points. First, massive amounts of data access, knowledge of the customer and franchise scale, all at the same time. Second, moving to a partnership model to build out a different CX by creating value chains, and creating the necessary understanding. And third, harnessing the core technologies that enable the models, such as ML, AI, blockchain and analytics. These require different skills in the organisation and different thinking to move in that direction.
FW: Are there any legal and regulatory considerations FS firms should make as they undertake a digital transformation process? What are the main compliance issues they need to be aware of, for example?
Pleiter: Many of the Big Data and data science technologies enhance legal and regulatory responsibilities as they enable complex, large data sets to be much more quickly and easily transformed into meaningful reports for detailed inspection. On the other hand, AI brings into the organisation a host of new models, many of them black box, and it can be difficult to ‘explain’ to regulators and auditors how they work.
Ageenko: Over the last two years alone, 90 percent of the data in the world was generated. According to Gartner research, the digital era calls for analytics to be infused in every role, business process, decision and action. With the explosion of structured and unstructured customer data being stored across the enterprise, data protection is one of the most important legal and regulatory considerations during a digital transformation process. In addition, the use of ML algorithms carries a new type of ethical risk. These algorithms need a vast amount of data, and while there is more data available across different business functions surrounding customer behaviours and transactions than ever before, internal data sources are often incomplete or contain unintentionally biased information.
Pulicano: As an example, the main challenge related to introducing an e-signature solution in a highly regulated banking environment, in addition to launching a series of mobile apps, was actually not the use of the latest technology but the time it took the corporate and in-country legal, credit and compliance functions to get comfortable with digital documents and related e-signatures. FS firms should not underestimate the effort needed to convert legal and compliance foundations to a new and often unproven digital framework.
Royle: For UK FS firms, regulatory considerations are a critical element of any digital transformation process. The recent EU General Data Protection Regulation (GDPR) is a significant area of focus, particularly as digital transformation almost always involves an element of data change and data use, and the regulation places data ownership more into the hands of the customer. This means firms’ data protection and governance functions and procedures need to be involved closely with digital transformation projects to ensure consistent compliance and avoid the significant legal and reputational consequences of data breaches. There are also key ethical considerations to take into account, and senior managers need to consider the ethical boundaries of any Big Data, AI or ML focused innovations and all potential consequences for customers. Transparency in programming techniques when deploying new technologies is also key, to ensure accurate monitoring and compliance recording can be maintained.
Madan: There is no ‘one set of regulations’ that the FS sector should be considering, but rather the entire range of existing regulations and also any potential new ones that could be legislated for ensuring compliance. After the 2008 financial crisis, financial institutions have been inundated with massive amounts of regulation, and in 2019 most organisations believe they are ‘over regulated’. Some of the areas of regulation that burden the FS sector include cyber war, cyber crime, security, asset protection, protection of privacy and society, cross-national and cross-boundary technology regulations, consumer protection laws, digital single market enablement laws, and more. Greater regulation of the market is being sought by many digital players. Overall, the complexity of regulatory requirements will grow significantly. Regulating the financial sector has been the biggest challenge so far, but regulating the digital universe is an even greater challenge. The global digital economy requires new thought processes that transcend borders.
FW: What essential advice would you offer to FS firms on identifying and implementing strategies to manage the risks they are likely face during a digital transformation process?
Ageenko: The speed of transformation in FS and technology adoption requires a very different approach to risk management capable of supporting new business models in real time that can anticipate and respond to customer needs in a digital world. Our joint survey with MIT’s Golub Center for Finance and Policy revealed that risk management plays a paramount role in the ability of FS firms to create sustainable results from digital transformation. Many respondents expect to adopt new technologies to increase efficiency and performance via more digitalisation of the risk function. Risk management should focus on the identification of new and emerging risk and work closely with the business to design real time risk identification and monitoring processes. In addition, ongoing and clear communication about changes and the risk mitigation plan is integral to a successful digital transformation, to promote employee engagement and reduce internal resistance to change.
Pulicano: Banks should not slow down their ongoing digital transformation. A successful digital transformation process will require a clear vision of the future, shared at all levels of the organisation, and led by clearly identified digital change leaders.
Royle: Firstly, strong senior sponsorship of any digital transformation programme is important, to ensure the necessary level of oversight and support from across the organisation is embedded within the programme, and to help make key decisions. Additionally, digital transformation that involves AI or ML elements can involve an oversight and governance challenge, so both senior management and the second line of defence need to have a sufficient level of understanding of the models being used. Another strategy that FS firms should consider to mitigate risk is focusing on operational resilience, because as complexity of the technologies used increases, it becomes more difficult to manage operational risks across an organisation. Identifying, avoiding and managing operational risks by being aware of the interconnectedness of the vast array of dependencies is key to this operational resilience.
Madan: The pace of technological change is so rapid that disruptive innovation is becoming the norm rather than the exception. In this new digital world, new ideas demand new strategies to identify and realise visions and require a paradigm shift in thinking. The number of use cases where technology has enabled new areas of business is fast outpacing the traditional decision-making process and transforming business. The traditional palette of risks involved in business is fast morphing into new risks associated with a digital organisation. By transitioning to a digital era, risk executives will be able to derive benefits from a ‘central command’ for real time insights through new AI-enabled self-learning models, and recalculate and dynamically set and reset limits to risk thresholds and evaluate emerging risks. Regulators also will be able to perform real time analytics and provide swifter guidance on systemic risks and mitigation.
FW: Looking ahead, do you expect to see greater demand for digital transformation among FS firms throughout 2019 and beyond? What are the potential consequences for firms that lag behind?
Pleiter: 2019 is about the execution of digital strategies. The fast followers are already following and the laggards must now move quickly to keep up or risk becoming irrelevant. So, frankly, it is transform digitally or die. Think Netflix vs. Blockbuster. Who will you be?
Ageenko: The demand for digital transformation among FS firms is going to increase. Staying relevant in today’s competitive environment will demand personalisation of the digital experience based on contextual insight and interconnected back end operations that will deliver simplified services. Today, customers demand more options, more creative solutions, greater flexibility and faster responses from financial institutions. The new generation is loyal to Amazon, Facebook and Instagram and do not always see the advantages of using traditional FS. For financial institutions, surviving in this new world requires them to operate intelligently with speed and agility, to keep up with evolving customer preferences and technologies. Otherwise they will fail to attract the new generation of consumers and become obsolete. With the entrance of FinTech companies, FS firms have been forced to rethink their core business models, and how systems and applications are designed and built.
Pulicano: We should continue to see a high demand for digital transformation among FS firms throughout 2019 and beyond. This demand will be fuelled by a few key factors. First generation digital FS firms will move to second generation solutions, such as AI, RPA, augmented reality, chatbots and the Internet of Things (IoT). Small- to mid-size banks will implement first wave digital transformation, such as paperless solutions, e-signature, mobile apps, and so on. In addition, FinTechs will introduce disruptive solutions that banks will have to compete or partner with.
Royle: FS as an industry is just at the beginning of its overall digital transformation journey, so one can expect to see continued and increased demand for it. As disruptors move to become genuine challengers to traditional FS firms, these firms must broaden their interpretation of digital transformation to consider whether their strategies and business models are sufficiently mature and agile to seize new digital opportunities. Firms that fail to do this risk losing their competitive position and some of their customer base, damage to their brand or industry image – known as ‘behind -the-curve’ – and potentially most critically, loss of key talent within their business to challenger institutions.
Madan: FS organisations realise that attracting more customers requires providing digital services to the connected customer. The only way to enable growth of the customer base is to ensure that there are no ‘middle men’ between the institution and its customers. In 2019, organisations are starting to execute on the strategy and roadmaps they diligently put together in 2018. FinTech startups are now investing in new technology initiatives as they are nimble and agile. Those firms that take too much time to morph toward the new needs of the consumer will find themselves outperformed by either large institutions or by tech-enabled startups, and will end up seeing diminishing market share and customer base. Fortunately, technology offers many openings for organisations of various sizes to enable new services, and it is only a matter of changing culture and enabling strategies to realise the required change.
Kevin Pleiter has more than 25 years of financial services experience, with the majority spent advising global financial services firms across investment banking, asset management, wealth management and custody businesses in the US, Europe and Asia Pacific. He has experience leading large and complex strategy and delivery programmes and is most recognised for his deep industry knowledge, coupled with an understanding of how technology can solve business challenges and the reality of technology delivery. He can be contacted on +1 (203) 327 8278 or by email: email@example.com.
Ilieva Ageenko is a managing director in the Financial Services practice and advises clients in the areas of modelling, advanced analytics and FinTech. She has a PhD in artificial intelligence and more than 20 years of senior leadership industry experience. In that time, she has used emerging technologies to design large-scale customer facing and multichannel services and used advanced analytics, digital marketing and mobile payments applications to drive innovation and digital transformation. She can be contacted on +1 (704) 632 6820 or by email: firstname.lastname@example.org.
Joseph Pulicano is a director in Grant Thornton LLP’s Strategy Practice and specialises in digital transformation, growth strategies and operating models transformation. He has over 30 years of business and digital transformation experience, including implementing a series of programmes aimed at reinventing the customer journey, redefining the business and operating model and building digital driven organisations. He can be contacted on +1 (720) 369 6435 or by email: email@example.com.
RK Madan is the director for Technology Strategy & Architecture for Grant Thornton LLP and has served at senior management levels with extensive experience in various large digital transformation initiatives across Canada and the US. He is also experienced in enterprise architecture, cyber security, IoT and smart devices, smart innovation, artificial intelligence, product research & development and strategic planning. He can be contacted on +1 (674) 616 2983 or by email: firstname.lastname@example.org.
David G Royle is a partner within the UK Financial Services Business Consulting practice and leads the digital transformation proposition. He has led innovative transformation programmes for the last 20 years and founded his own FinTech business. He is a member of Grant Thornton’s FinTech sector team and his work has been recognised by the British Banking Authority and the Management Consultancy Association, for digital innovation and customer engagement. He can be contacted on +44 (0)207 865 2834 or by email: email@example.com.
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