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The future of fintech: Forging ahead with digital transformation

By Andrew Warren, Head of Banking and Financial Services, UK and Ireland, Cognizant

As we all begin to look beyond the COVID-19 pandemic and towards what we hope will be a full economic recovery, the Banking and Financial Services (BFS) sector in the UK and Ireland has reason to be cautiously optimistic about its immediate future.

Even before the pandemic, the BFS industry was already experiencing significant transformation, led by changing customer expectations, increased regulation, increased competition from new entrants, and significant advancements to technology.

The events of 2020 forced banks and financial institutions to accelerate their digital transformation projects, leaving many to struggle with developing and executing a coherent transformation strategy. New approaches have been key in maintaining operational resilience and reaching customers. For example, we have seen banks use digital tools and processes to fill the void of branches, offices, and call centres created by restrictions associated with the COVID-19 pandemic. Contactless payments have also dramatically increased as consumers limit contact in stores and shift towards online shopping.

Meanwhile, hundreds of thousands of BFS professionals transformed their ways of working by adopting new virtual work practices—literally overnight—which may ultimately trigger a fundamental rethink in how banks use brick-and-mortar sites and offices from now on.

This is all just the start. What is clear is that there is no going back—instead we expect to see these trends develop further. Here’s a taste of how:

From cloud to multi-cloud

The days of banks lumbering on legacy systems are long gone. A significant majority of financial institutions have already integrated cloud solutions. However, they are now realising that cloud migration alone does not necessarily solve all problems.

One common issue is that financial institutions are selecting one cloud provider and sticking with it. As a result, they are inevitably experiencing limitations—the dependency on a single provider often means a lack of agility, high cost, and sub-par performance, along with risk and compliance challenges. To counter this, many BFS businesses are now looking to adopt a multi-cloud strategy.

For many BFS businesses, cloud retains enormous potential to transform and underpin the sector, but this is only possible through a multi-cloud approach. Multi-cloud allows banks to operate in a mixed economy—taking the best parts of various cloud offerings to suit their needs. This approach requires skills in strategic deployment and governance of cloud systems.

Too often, the extraction risk from legacy platforms is making it either financially crippling or operationally unfeasible to take the desired course of action. One positive approach would be to introduce an interoperability standard, where the way in which a cloud platform is set up does not then preclude switching providers at a later stage.

Staying secure

As tech usage increases in a sensitive data-heavy sector, the everlasting issue of risk and fincrime exposure for financial institutions remains. In some ways, this directly links to cloud deployment, as security measures need to be the starting point of any cloud modernisation projects and must not be viewed as something that gets layered on top. In fact, the UK’s Financial Conduct Authority recently issued a letter to retail banks’ CEOs in support of a stronger focus on implementing technology change, including cloud transformation and the growing use of AI and analytics.

For banks to secure their operations, multi-cloud can be one solution—ensuring they are using the very best technology available from all their providers. But it is crucial that multi-cloud is prioritised as early as possible and integrated properly.

Banks can also improve their general approach to security. When their customers are exploited, they absorb the cost and compensate them, which is a positive on the surface but also means the root cause of fincrime often is not fully investigated or resolved—something the regulator might start to look at, demanding more proactivity in preventing threats. This is a where a ‘utility banking’ solution could add huge value. As banks spend more on developing their own ‘monoline’ defences, the case for an industry utility becomes more compelling. For example, fraud monitoring would aggregate data at an industry level and enable shared infrastructure costs to help institutions remain one step ahead of fraudsters, both in detection and prevention along the chain.

The next step towards making this a reality is that banks need to prioritise using the vast amount of data available to them to identify fraud pattern—and even predict them. Through analytics, they can more accurately identify when financial crime is happening in real-time, understand the patterns so that it can be prevented, and customers can be better protected.

Technology companies flex their muscles

The popular narrative over the last decade has surrounded the threat fintech poses to the traditional major players in the BFS sector, and how these agile and innovative newcomers—the most prominent being the likes of Revolut, Monzo, and Starling—will disrupt the status quo. While these companies have made strides, they have carved out their own place within the banking ecosystem rather than supplanting the big banks.

Instead, global technology companies are well positioned to challenge the sector due to their ability to combine open banking with new payment guidelines coming across the UK and Europe, ultimately giving them the opportunity to redefine how consumers pay for things. They already have global customer bases and do not need the major banks’ infrastructure or capital, eliminating the competitive edge the banks currently have over the smaller fintech upstarts.

Alongside the competition from large technology companies is the concern that peer-to-peer payments will accelerate the advance they have made, allowing everyone to send money via smartphones to a known contact without even leaving a messaging app or logging into our banks. Because tech is driving and enabling these advances, it stands to reason that powerful technology companies, rather than banks, are likely to be best placed to benefit. The expectation is that a payments war is looming —and the global reach and power of Big Tech poses a serious challenge to the sector.

The industry is therefore watching anxiously for technology companies to make their next move, and this year could see this sector at something of a crossroads, as it has been with fintech: forced to decide whether to ignore the threat or partner with it, as acquisition is not an option given the value and clout that some technology companies bring.

Data and trust

Customers expect banks to be doing better than they currently are at predicting and responding to their needs. The challenge banks face revolves around their inadequacy using their existing data to their advantage. For example, analytics can now do far more in defining problems and underwriting loans, foreseeing sectors where disruption may occur and understanding why—and, crucially, which products or services customers require next.

However, a fundamental user experience issue occurs when people feel like their bank does not really know them. This is not helped by clumsy approaches from banks such as trying to push services a customer has already signed up for, or asking for basic information long-standing customers have already supplied. This in turn makes them less likely to share more personal data and insights, which prevents banks from making improvements; it is also the reason challenger banks and apps, with more demonstrable benefits for the customer in how data is used, engender greater engagement and acceptance.

On the surface, trust would not necessarily be an area where banks should be as a disadvantage when compared to Big Tech, for example. However, the major tech players offer such a convenient and intuitive service that people do not question the data they agree to share. Their platforms have been designed to prioritise the customer experience, not their own needs, which is the opposite way round for many BFS institutions.

Banks need to adopt a similar approach to providing a convenient, essential service. They need to use existing data better to evolve their products to be more personalised and user-friendly. In doing so, they will create an experience that makes those users more comfortable sharing more data, in turn improving the overall product.

The return of outsourcing

An ongoing frustration within the BFS sector is its inability to deploy the latest technology and fully utilise the wealth of data it has at its disposal, whether to improve payments, personalise customer experience, or just simplify internal processes.

For many companies, the solution is in finding the right talent. Over the last few years banks have sought the expertise of data scientists to join their teams, but unfortunately in many cases have been unable to have significant impact: either personnel are not good enough or they are poorly resourced and working with limited and badly organised datasets.

Moving forward, we expect to see banks adopting a smarter approach to outsourcing, especially in their endeavours to maximise the use of AI and data analytics, and a different approach to extracting value from talent. This may include co-sourcing specialist staff, which can help banks to spread some of the risk and investment cost while benefiting from improved external training. It may also provide a more attractive proposition for the top AI talent who may usually be hesitant to join a single in-house team when they are in demand across all sectors.

However, the regulator is scrutinising these arrangements closely. Banks are the regulated entity, not the service provider, and tough measures are being applied for failures by service providers that cause breaches. Co-sourcing, rather than outsourcing altogether, may prove to be a good way to mitigate some of these concerns. Consultancies, as well as collaborations, will therefore become more attractive, and in turn will help banks to access better skills in the crucial digital battleground of data and AI.

The after-effects of a year of such upheaval will be felt for years to come, but the BFS sector can in many regards approach its future with optimism, having been spurred into quick improvements it might otherwise have waited longer to make.

Nevertheless, more can still be done to improve digital operations across the industry. Most encouraging of all, these solutions are already available and beginning to be deployed, positive effects both internally and by customers. Now is the time to continue these improvements and ensure the sector stays ahead of any future challenges.

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