The pressure to digitise financial products and services and, therefore, on the institutions that provide them, is both relentless and urgent. According to americansecuritytoday.com, four of the ten top retail banks will be displaced by digital disruption in the next three years.¹ McKinsey research indicates that digital laggards will see up to 35% of their net profit eroded. By contrast, institutions that embrace digital may realise a profit upside of some 40%.²
However, only 27% of banks are taking proactive steps to survive the digital revolution by disrupting themselves.¹
Why the lethargy?
The business case for digital is clear. How to digitise is less so, with funding a significant stumbling block. NTT research finds that 35% of banks’ IT budgets is spent on simply maintaining their legacy core deposit systems.³ There’s not much left for the move to digital.
Perhaps more significantly, and as the real nub of the problem, some 75% of bankers feel that their processes cannot adapt quickly enough to change.³ These processes are not purely technical. The financial services industry may in fact be mired in a thousand-year legacy system, rather than just a three-decade technology bind.
From their primitive origins to their sleek modern incarnations, banks and insurance institutions have held the relationship of trust with the broader public. They have been the visible institutions handling and managing peoples’ and organisations’ wealth. Over time, various intermediaries have been added to the traditional financial services ecosystem but their position as secondary or opaque players has never changed. People and companies continue to entrust their money to the large financial services brands. Even in times of economic crisis, such as the one we saw triggered by banks themselves in 2008, there has been no large-scale public rejection of the established brands.
This implied trust must, therefore, be exploited for sustainability in the digital era.
Can trust be democratic?
After thousands of years of always behaving and functioning in the same, often autocratic or dictatorial way, many financial institutions are now seeing themselves being confronted by a cultural challenge.
Bitcoin and its underlying system, blockchain, have proved that the time-consuming, efficiency-retarding complexity of conventional operations and the regulatory systems that compound them can be replaced by a simple and secure digital distributed ledger.
Initially, critics predicted that Bitcoin and other digital currencies like it would be security sinkholes. In fact, using a distributed, shared services platform like blockchain now appears to be more secure than the centrally-held data repositories that have been the norm in conventional financial services.
It also appears that people are willing to be democratic about trust. The peer-to-peer exchange of security inherent to blockchain doesn’t really require the participation of an established bank in order to have credibility with users.
In the same vein, a Kenyan fintech start-up using the cloud and a very smart app is providing international money transfer services – in seconds and for no charge. In a matter of months, it has demonstrated to thousands of delighted and trusting users that the costly, time-consuming processes of conventional money transfer systems is pointless.
Using a cloud-based, pay-per-use model, a Canadian fintech has reduced a single block trade allocation instruction from 18 hours of manual effort to 23 seconds. It is saving some of Canada’s largest financial institutions millions of dollars. Time was when such institutions wouldn’t have trusted the cloud. Now it’s their differentiator.
Is the mandate right?
For most established financial services organisations, the current mandate is to drive out incumbent costs, in terms of people, systems, and processes, in order to compete with fintech startups.
These things are indeed essential to address the fact that the digitising landscape and its exponents are very rapidly tearing down the ramparts of traditional financial services operations and service delivery.
They’re not enough, however. While fintechs are developing an aura of trust, simply by virtue of their ability to meet people’s needs more relevantly and cost-effectively than conventional industry players, banks are still managing most of the money generated by human activity.
This gives the established industry an automatic and firm foothold in the distributed, collaborative, democratic, living services, Internet of Things-based system of economic exchange now evolving. This new system is the antithesis of the ring-fenced, inward-looking, standards and process, brick and mortar-based one that is all society has ever known.
However, the Bitcoins and blockchains of this world don’t yet have universal or, indeed, official credibility. Also, for now, FinTechs are only filling digital gaps in the conventional financial services landscape. Cumulatively, yes, over time, they will resculpt the entire industry. In the meantime, they must mature and integrate in order to build trust with other business partners and the public at large.
So, right now, there is a window of opportunity for traditional institutions to put to work the broad public trust they already own in order to make the transition to the kind of digital offerings that can compete with the FinTechs. But speed and agility are of the essence – and this is where the cloud comes into its own.
The cloud enables better shared processing, business agility, and rapid scaling – using as-a-service delivery models. It provides the kind of business flexibility needed to respond faster, more relevantly, and more cost-effectively to market shifts. It facilitates swift but secure building of collaborative relationships with third parties. This, in turn, provides the means to build and own a seamless ecosystem that will generate revenue streams capable of replacing those lost to the financial services paradigm now vanishing.
The Salesforce financial services cloud, in which more than 20 partners are contributing to its wealth management ecosystem, is a good example of the way in which best of breed partnering consolidates the public trust held by the originating brand.
Be willing to trust, yourself
While there’s urgency, the move to digital doesn’t have to be risky.
Digital is inherently collaborative and evolutionary. No single organisation can possibly encompass or deliver all its potential. So, one of the new skills traditional financial services institutions need to master is the building of synergistic relationships not only with other financial services organisations but with pure-play technology providers that have appropriate insight into and experience of digital transitions.
A study by Skyhigh Networks shows that the average financial services firm already uses more than 1,000 cloud services and that the average employee uses 31 separate cloud apps. Progressively, this trend will give rise to financial services institutions entrusting managed services providers with their infrastructure, security, network, and mobility requirements.
In essence, digital in the financial services sector amounts to the proactive creation and maintenance of a trust continuum. Technology is the tool, but it’s not the point. Credibility is.
For more information please go to accelerateintodigital.com.
By Steve van den Heever, Dimension Data Group Sales Director, Financial Services