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By Dr Joerg Ruetschi is value-creation, transformational technology and turnaround specialist, and author of new book Transforming Financial Institutions (Wiley)

Digital innovation has accelerated since the second half of the 20th century and became transformative with the broader establishment of the internet in the mid 1990s. Over the last 25 years technology not only drove the way we communicate but shaped commercial models, operating platforms and the broader customer engagement. The pandemic triggered another leap forward in which social distancing created unexpectedly the requirement for a virtual world. There seems no way back from these new ways of working, social interactions and living. Many believe that soon, within the next ten to 20 years, we reach the point of singularity, at which technological growth becomes exponential and irreversible, resulting in unforeseeable transformation to the entire human civilization. This leads to challenges but also immense opportunities for businesses and entrepreneurship. The following article aims to answer the question how value can be created and protected during these ways of transformation. It uses the developments in the financial industry as a baseline with the objective to derive broader conclusions for strategic decision making.

Value creation   

Value creation is a management philosophy with the goal to drive an institution’s growth and performance agenda. It is defined by the concept of intrinsic value. It measures the financial impact of specific strategic and operational initiatives. Value creation and protection are natural stages of corporate development during the life cycle of a business. It can be applied to growth and transformational situations. Technology innovation adds a specific lens to value creation.

In the financial industry, technology management has become a critical success factor. It had a shadow existence in many financial institutions for a long time. After the Global Financial Crisis, established commercial and operating models with their profitability thresholds were challenged by the incoming regulatory agenda. Previously profitable areas struggled to adapt with cost-income ratios increasing dramatically. At the same time, emerging technologies, often subsumed under the term “FinTech”, created unseen momentum in innovation over the last 15 years. FinTech is the shortened version of the phrase financial technology and became a synonym for the initiatives of a dedicated start-up and growth community. These emerging technologies became the core of the industry’s transformation agenda.

Emerging technologies

Emerging technologies have fundamentally transformed operating platforms, infrastructure and decision-making frameworks. This digital transformation agenda has the potential to re-innovate the financial industry and put it back on a growth path. Open Finance with its collaborative architecture models allow incumbent financial institutions to specialise in their core competence and to integrate best-in-class services with the objective to provide customers a comprehensive experience through core platform offerings. Decentralised finance (DeFi) has become a broadly used term for experimental forms of finance that utilise smart contracts on distributed ledgers to perform financial services functions. It revolves around decentralized blockchain applications that provide similar traditional financial services but do not rely on a traditional intermediary model. Large parts of today’s value chain will be replaced by efficient technology solutions. 

The three pillars of digital transformation

The digital transformation built on a number of key technologies. They can be classified in three building blocks that define the pillars’ of the financial industry’s change agenda. 

Operational efficiency

Advanced software solutions such as application programme interfaces (API), cloud computing (CC) and smart desktops (interoperability) shape today’s open architecture models. Open architecture has substantially improved operational efficiency through automation and collaboration as the first pillar of transformation agenda. 

API is a software and web development concept that represents a set of clearly defined methods of communication among various components. By connecting software, API connect businesses with other businesses, businesses with their products, services with products, or products directly with other products. CC is the on-demand network access and system resources availability to many different users over the internet. It is applied especially to data storage and computing power, and has added completely new features to technology infrastructure and software applications. The technology enables financial institutions to dynamically scale their data storage, computational power and bandwidth. It leads to a huge advantage compared to previous solutions around data centre and servers. CC relies on the pooling and sharing of configurable computing resources to achieve economies of scale and coherence. When multiple users access the same virtual resources in the cloud such as software, storage or virtual machines, those resources know multiple tenants. Virtual applications can be installed with their own operating systems and different set of applications. Different service models emerged such as software as a service (SaaS), platform as a service (PaaS) or banking as a service (BaaS).

Smart desktops brings different software solutions and applications together through one unified customer experience. Smart desktops create intelligent workflows with customized workspaces. This concept of interoperability offers a full-service platform solution which includes container support, basic exchange between web and web but also native support for other application types and advanced window management. It allows cross-application data sharing in an instant and eliminates manual re-entry and error rates. This optimisation of workflows leads to substantial gains in effectiveness and efficiency in an open architecture framework.

Augmented decision making

The second building block is artificial intelligence (AI) with focus on big data and advanced analytics. Augments decision making represents the second pillar of the transformation agenda. AI seeks to build autonomous machines that can carry out complete tasks without human intervention. There are many and varied definitions of AI and the term is often interchangeably used with machine learning (ML). ML is a key field of study of AI that uses mathematical procedures, algorithms, for the analysis, manipulation, pattern recognition and prediction of data. ML allows to process large data with mathematical accuracy and objectivity which leads to unbiased results, substantial efficiency gains and new insights. Most financial data such as accounting statements or transaction records are structured. Unstructured data, on the other hand, have no predefined organisation form. They can be found in emails, reports, news, social media, or any other form of written and oral communication. Unstructured data can be captured and processed by natural language processing (NLP).

NLP is a branch of ML that facilitates the interactions between computers and human natural languages. It applies the principles of linguistic structure and breaks down sentences into their elemental pieces to identify semantic relationships among them. The algorithms detect the polarity of sentences within a range of positive, neutral, and negative on a respective target entity. News and social-media blogs can be analysed accordingly and establish a view on the sentiment of the statements in the text. Alternative data sets are established through which specific insights are gained during the decision-making process.

Through a probabilistic ML methods, such as Bayesian inference, these processed forms of unstructured data (or alternative data) are brought in the structured context of traditional quantitative analysis. Bayesian probability theory allows the modelling of uncertainty in a sensible way. It measures unfamiliarity and enables appropriate subsequent decisions to be made under the respective circumstances assessed by the model through an underlying hypothesis. The probability for this hypothesis can be updated as more data become available during the process. This enables the simultaneous assessment of risk and uncertainty. The implementation of the overarching ML algorithms then optimises the decision analytics. This allows more comprehensive, objective and accurate decision making through predicting specific political, macroeconomic and/or corporate events. The methods can be applied to identify risks early (such as a pandemic and an unexpected war) and extrapolate certain trends.

Digital financial innovation

The third emerging technology is blockchain. Distributed ledger technology (DLT) is the parent technology behind blockchain that has found a broad application in financial institutions. It facilitates identity management, value storage, and back‐office operations such as settlement. However, it is mainly known for financial innovation and speculation through cryptocurrencies such as Bitcoin and Ether. Both cryptocurrencies follow the same blockchain principles but have different characteristics in their implementations. 

Blockchain is to be understood as a bunch of protocols (rules) that define and characterise its functioning. These protocols can best be articulated in a computer code which in turn can be compiled into a software that enacts those rules and makes them operate. This is how ownership is represented and recorded, what constitutes a valid transaction, and how participants can operate on the respective blockchain network. Blockchain transactions apply a mathematical mechanism that is known as cryptography. Its most wellknown use is the encrypted data exchange that defines the process of encoding an information in a format that only authorised parties can access it. Mining is the process of validating by adding transactions to the existing blockchain ledger

Tokens represent a unit recorded on a blockchain, and is often used in reference to all digital assets. There are so-called native coins that are tracked on the cryptocurrencies’ respective blockchains. They have an intrinsic value by themselves and are not backed by an issuer or asset. Then there are asset-backed tokens that are tracked within smart contracts on any blockchain. These are well known as non-fungible token (NFT). Smart contracts are computer protocols intended to digitally facilitate, verify, or enforce the negotiation or performance of a contract without thirdparty involvement. Several blockchains have implemented types of smart contracts. In a smart contract, many kinds of contractual clauses are partially or fully selfexecuting, selfenforcing, or both, which makes it very attractive in the use of financial instruments with specific cash flow and settlement specifications.

Blockchain is in the process of reshaping the financial industry in a series of a broader infrastructure application that started a new chapter for (digital) financial innovation. Smart-contract facilitate the synthetic trading of assets, historically represented by derivatives contracts either traded at regulated exchanges or over the counter. Stablecoins are crypto‐based assets that are linked to and redeemable in fiat money (a currency such as the USD), commodities (precious metals such as gold), and any other underlying assets. The coins are usually issued by an independent third party. An initial coin offering (ICO) is the cryptocurrency equivalent to an initial public offering (IPO). Investors receive a blockchain equivalent to a share which is a cryptocurrency token. Blockchain has further been implemented for settlement of securities transaction. The objective is to remove settlement and counterparty risk to increase speed and reduce financial, operational, and frictional costs.

Operating platforms

The financial industry’s ongoing transformation agenda led to the dedicated discipline of technology replatforming. It replaces old with new systems while integrating the emerging technologies in the design of operating platforms. In this new world, technology-enabled service components allow financial institutions to differentiate and gain a competitive market positioning. An open architecture model decomposes the value chain and separates the core platform from the service offering. It enables the access to large data pools, internal and external resources as well as regulatory compliant infrastructure, and allow the integration of best-in-class services from third-party providers. This form of open finance allows financial institutions to focus on their core capabilities. There is inherent value in specialised finance capabilities such as dedicated lending, trading, and related risk transfer across specific client segments and product portfolios. Today already specialty finance businesses operate at a much lower cost-income ratio and higher return-on-equity targets than large-scale, aggregated financial businesses.

The response framework

The developments in the financial industry illustrate how transformative emerging technologies have become. The speed of the digital disruption has constantly accelerated and former disrupters such as Netflix, Facebook and Twitter are now getting disrupted. Corporate organisations with decision makers are in a continuous demand and challenge to identify these technologies and adapt accordingly. Organisational silos and political interests are often slowing down adaptability.

The uncertainty that businesses face in a very short period need to be managed accordingly. Decision makers need to establish a structured response framework to protect the value of their businesses. It can be organised across a number of core steps. To start with, digital trends that impact the business and its competitive positioning need to be identified, monitored and analysed. Secondly, the impact of technology development and the impact on commercial and operational requirements of a business have to be thoroughly understood and validated. Finally, the organisational implications need to be socialised. An open feedback loop integrate the technology components in an continuous (re-)design of commercial models and operating platforms. The response framework is led by a dedicated group of specialists and generalists that implement these steps and execute the change programme. This group needs to consist of a diverse skill set from commercial, product and engineering representatives.

Value creation as a management concept was formally established in the 1990s to articulate financial performance for shareholders. 30 years after, it is fundamentally driven by technology innovation as the social and corporate context is in the process of digitising. Business decision makers need to evaluate these impacts and translate them in opportunities of growth and financial performance. There is no choice than embrace the underlying technology trends with their components, and adapt their organisations accordingly.


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