• Jason Bell, Regional Sales Director, FS&I at ServiceNow


• 15.10.2018 01:15 pm
financial services

For the financial services industry, digital transformation is almost simply natural evolution; the logical next phase in its development. In many ways it is already a virtual industry by definition of the services it offers. Innovation has characterised its history.

Through the creation of ideas such as credit, paper currency and capital markets, the financial industry has been driven by a  particular philosophy. This says that physical things can be decoupled from their value. As a result, trading in whatever the physical things may be is easy, fast and efficient. This was all in place before technology. Now, through the fusion of symbolic means of exchange and virtual technologies to accelerate transactions, financial services is taking on a new face for a new age.

Can you feel the heat?

The development of digital technology, and the expansion in data volumes and ways of handling them, have made the industry more productive and profitable for incumbents. Or at least this should be the case. Although the speed and volume of transactions have grown, digital technology has not yet drastically changed the fundamental structures of Financial Services. What makes the industry such an exciting one to work in and is that we are now at the very defining moment of change. Things are hotting up.

Responding to new business models

One of the core functions of the Financial Services industry has always been that of trusted intermediary for value transfers between parties. With universal consumer adoption of digital communication, and technologies such as Blockchain removing the need for a trusted intermediary, the role of the financial institution is in flux.

An example is Bitcoin, and similar technologies launched in recent years. These new currencies seem to herald the shape of things to come, but their levels of volatility  hamper their development as  reliable forms of payment or stores of value. The risk is that they are becoming nothing more than instruments of pure speculation.

Barely a week goes by without a new crypto currency launching, but most disappear without trace leaving early adopters out of pocket and further tarnishing the perceived reliability of such means of exchange. A lack of transparency into the workings of the system exposes it to fraud and manipulation; and the very decentralisation that gives crypto currencies their advantage over traditional counterparts also signals a disadvantage, which is the anonymity of the counter-party in a transaction.

How will established Financial Services providers adapt to incorporate such shifts into their business models?

The money make-over

Some providers are starting to develop their own services around Bitcoin and other crypto currencies, including trading services, Bitcoin denominated bank accounts and exchange facilities. Some are developing their own decentralised solutions;  effectively, their own currencies, enabling them to create a entire value ecosystems, offering value-added services as a means to generate revenues and build customer loyalty.

Blockchain and similar decentralised payment models are still in early stages of development. Widespread adoption is restrained by a shortage of appropriately  qualified talent. Nonetheless, this development,  these new ways of conducting, tracking and verifying transactions in the digital space, could be fundamentally and hugely transformative for the Financial Services industry.  

The streamlined operation

Over the past few decades, many Financial Services businesses have become accustomed to outsourcing (or 'externalising') "non-core" business functions such as HR.  Focused and specialised providers have brought new efficiencies and operational excellence to the tasks, leaving the core business to focus on development and growth.

This trend is gaining popularity as an increasing number of processes considered "core"  or business critical are also being handed off to third parties. Cloud computing, advanced analytics, natural language processing and a range of technology and business innovations are enabling service providers to externalise, consolidate and commoditise numerous processes.  Activities traditionally  handled in-house are being shunted out; transaction monitoring, regulatory compliance and risk management, to name a few.

This is a fundamental change in the terms on which Financial Services companies compete. With the "commoditisation" of previously core competencies, financial institutions will shift focus away from process execution as a competitive marker, and onto more overtly customer-focussed differentiators, such as personal service and creative problem solving.

This increasingly cloud-based business model will also enable small and medium-sized organisations to compete more successfully with large incumbents, by providing them access to top-tier processes that were once unreachable due to lack of scale.

The net result will be that, with lower barriers to entry and an increased focus across the board on high-value service differentiation, customers will be the ultimate winners.

Machines make it personal

Although the most imminent effects of digital disruption will be felt in the banking sector, the greatest impact is likely to be in the insurance sector, where the underwriting model is changing substantially due to the surge of connected devices and the Internet of Things.

From telematics "black boxes" and connected cars, to wearable technology and connected homes, consumers will be able to take advantage of increasingly personalised insurance products, based on their actual behaviours rather than a notional type that may or may not be accurate.

Insurers will be able to track, analyse, understand and continuously refine individual risk profiles for more accurate underwriting of individual and organisational risk. For consumers, this will mean better products and lower premiums. For insurers, it will open up new product and service opportunities, based particularly on more frequent and meaningful customer interactions.

The ongoing revolution

Digital transformation  presents continuous pressure to innovate; shaping and responding to customer behaviours, business models and the long-term structure of the Financial Services industry. Decentralisation, externalisation and connectivity are among the many forces at work on the industry, presenting opportunities and threats in equal measure, for established incumbents and challengers alike.