5 External Financial Services Digital Transformation Challenges

Firas Ghunaim
November 17, 2021
5 External Financial Services Digital Transformation Challenges

Disruptive factors continue to impact the future of financial services, from value chain disintermediation and a shifting competitive environment to developing technologies, open data, ecosystem partnerships and alliances, and fast regulatory change.

Add to it the demand from retail and institutional clients, who increasingly seek personalised goods and experiences driven by their interactions in other industries like retail and technology.

In response to these altering market dynamics, many financial institutions (FIs) are turning to digital innovation-enabled business transformation.

They appear to recognize the need to speed client acquisition by providing a distinctive experience rather than a plain product. And, powered by the deployment of responsible, data-driven insights, many financial institutions are beginning to modify their value offerings in order to reap the benefits of digital transformation.

But, what does success in digital transformation look like in financial services? It can be difficult to measure since techniques and definitions in terms of scope, leadership, size, and time differ greatly between businesses.

Read on to learn about the 5 most common external challenges impacting digital transformation in the financial services industry:

1. Investor Expectations

Financial institutions' digital transformation initiatives are being hampered by investor expectations.

Investors in established FIs have a lower risk tolerance than investors in start-ups and FinTechs. When it comes to making investment decisions for digital transformation efforts, established FIs generally have a distinct level of expectation.

According to the Chief Innovation and Technology Officer of a large European bank, investors continue to expect banks to provide predictable, consistent, and reliable profits. This may contradict the characteristics often associated with business model change and innovation, such as risk-taking, experimenting, and learning via iterations.

The need for innovative digital product development models such as Sitech's Software Managed Teams approach to continuous delivery of software can help you bridge the gap between the technical requirements of your financial institution and your investor expectation of faster returns.

Learn How Software Managed Teams Can Help You Transform Your Financial Services Faster and Smarter

2. Customer Onboarding

Advancements in digital identification can aid in the creation and deployment of new Know Your Customer (KYC) validation techniques. 

On the other hand, FIs' capacity to implement such efforts is limited, particularly if enterprises are prohibited from exchanging customers' personal information with one other or with public sector organizations.

Such constraints can make it difficult for financial institutions to keep up with consumers' growing demands for immediacy and to reduce the quantity of personal information they must physically submit.

3. Quality of Data Restricting Value Creation

Financial institutions have access to a wealth of consumer and transaction data. 

However, the majority of them still have a lot to repair and learn from internal data before increasing insights from external data. Despite having a large volume of data, many businesses discover that they have not been capturing the appropriate data properties for producing intelligent analyses. 

Regulations governing data security, customer privacy, and ethical data usage, such as the EU's GDPR, are making it more difficult for FIs to exchange data across organizations and borders, create target state data flows, and produce meaningful analyses for the purpose of transformation.

When FIs are thought to be using data incorrectly, even if lawfully, societal norms frequently add additional limits since they tend to focus on the ethicality of data utilization. This is especially true when artificial intelligence is involved.

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4. FinTechs vs Financial Institutions

FinTechs have had a significant influence on the financial services industry, offering novel capabilities and business models such as smooth digital client onboarding, quick loan approvals, and free peer-to-peer payments. 

Many financial institutions claim that collaboration and the development of an ecosystem of alliances and partnerships with FinTechs is critical to the organization's success. And, while these new and creative relationships frequently entail new risks, the firms polled believe that the danger of not engaging is far greater.

Partnerships with FinTechs, on the other hand, can create an additional hurdle in addition to the risks connected with new digital services. That is due to FinTechs' more agile working methods and their use of various I.T. platforms in comparison to larger, more established FIs.

FinTechs may also lack the knowledge and skills required to integrate legacy technology at the enterprise level and work inside the complicated operational processes of more established financial institutions.

Aligning on the business aim and purpose might be critical for a successful enterprise-FinTech collaboration.

5. Restrictive and Outdated Regulations

The fast rate of technological development is putting regulation to the test, especially given the multi-year gestation periods for public policy, legislation, and regulations in most major markets.

Top management and leadership at financial institutions have regularly expressed a wish for regulation to be more fluid and dynamic, supporting the concept of a shift from regulation to supervision. That is, rules that are principle-based and technology-neutral in a way that can be stable and long-lasting, while simultaneously being supplemented by a greater emphasis on oversight and recommendations.

The impact of obsolete regulatory standards can further be worsened by the fact that FIs are subject to a separate set of regulations and supervision than start-ups and FinTechs. FIs are governed using an entity-based approach rather than (or sometimes in addition to) an activity-based set of standards, despite the fact that the financial services value chain is quickly disaggregating and repackaging.

Furthermore, in some situations, the lack of a collaboration towards solutions between major FIs and regulators has led to regulatory silence or even misreading of legislation.

This can lead to the organization's internal risk, legal, and compliance divisions becoming more conservative, preventing them from making longer-term, strategic transformative choices.

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