New technology is having a huge impact on business models, processes and customer services across the financial sector, but adapting to this shifting landscape is a major challenge. The big question is, what strategies do banks and other financial services companies need to put in place to ensure they are not left behind in the race for digitisation?
Our research findings show that new digital technologies, increased competition, and evolving customer expectations are driving 61% of financial services and insurance companies (FS&Is) to shift away from their traditional, vertically-integrated business models, in which they only offer customers products from their own portfolios.
At the same time, established banks cannot simply rip up and replace their legacy technology infrastructures in order to adapt to this rapidly shifting landscape. So what should they do?
The threat landscape
Many banks were slow to recognise the impact that digital technologies are having on their businesses. Indeed, our research from 2016 suggested that many leaders in the industry did not see digitisation as a key threat. That picture has now shifted almost 360 degrees, as evidenced by our most recent research in 2019.
53% of the FS&I leaders we surveyed last year agreed that they need to better leverage new technologies such as artificial intelligence, blockchain and the IoT, and that failure to do so would pose a major threat to their business.
At the same time, 44% of FS&Is are concerned about shifting customer behaviours. Fewer and fewer customers are going to bank branches. Instead, they want to interact with financial services providers in the same way they do with other businesses: via the internet and, increasingly, using smartphones.
These two trends can be seen together in the rising influence of the global technology giants. According to our research, 84% of firms report that industries outside of financial services and insurance are providing a significant influence on the direction of the market, and 83% believe new entrants, such as Amazon, Apple and Facebook, could become major competitors in offering financial products.
These market forces are propelling (or dragging) the FS&I industry into the digital future. Indeed, fully nine in ten global FS&Is now recognise the need for transformational digital change.
The power of digital business platforms
In order to address these market forces, 85% of respondents in our research indicated that they are exploring the potential of Digital Business Platforms (DBP).
DBPs are a business framework that allows multiple business models to be built and supported on a single technical framework. So, for example, a banking DBP might include unifying core systems, a digital front-end and a data and analytics back-end, leveraged by cloud. It would be supported by an open marketplace of fintech and insurtech partners that make up the company’s ecosystem. This open structure allows the bank to be far more flexible about what it can offer and also paves the way for innovation through greater pooling of data – all of which will ultimately add value for consumers.
This approach mirrors that of the technology titans. However, while 83% of FS&Is agreed that integration of legacy core systems into a DBP is important for their competitive position in the next three to five years, only 23% said their company currently has a DBP that is working and providing benefits. There’s clearly a lot of work still to be done.
Banks reach an inflection point
The industry recognises it is at an inflection point for fundamental digital change. The results of our survey suggest a powerful opportunity for FS&Is to improve their business strategy in the face of intensifying competition and ever-increasing customer expectations.