After two years of supercharged digital transformation, spurred by the coronavirus chaos, there is a clear market shift to simplify tools and services. This recalibration is welcome for consumers, regulators, and financial services organizations themselves.

The global financial crash in 2008 caused consumer trust in financial institutions to plummet. Regulators required operators to improve transparency and imposed more checks and balances to regain customer confidence and loyalty. Seven years later, in 2015, the open banking revolution began, with open-source technology, petabytes of data, and open APIs combining to enable third-party developers to create applications and services around a financial institution.

Unfortunately, some have lost their way in the sprint to lead the market.

“Digitization of financial services is likely to get back to basics, namely, how we combine and aggregate data,” predicts Keith Pearson, Head of Financial Services at ServiceNow, a multinational software company headquartered in California that develops a cloud computing platform to help companies manage digital workflows for enterprise operations. 

Bringing data together

“Data is vital to driving digitization,” he continues. “But in the past, organizations have quite simply lost track of data in silos and stovepipes throughout their business. Essentially, information gets put into specific boxes and stays there, unused. Organizations often try to resolve this by bringing everything together in one place – think data warehouses or lakes. The downside of that approach is that it ends there, sitting in one large pool instead of several smaller, actionable ones. But that’s not simplicity; it’s the exact opposite.”

Pearson argues that consumers are leading the change, closely followed by regulators. The former group desires more frictionless interactions with financial institutions across all physical and virtual touchpoints. And with digital-first challenger banks on the rise, and bricks-and-mortar branches so last century, most operators realize the urgent need to revamp their business models entirely and untangle the mess.

“Customer demands for better experience mean there is now a very real market need to resolve this issue,” says Pearson. “That’s why, in 2022, we’ll see more innovative platforms stepping in to succeed where legacy technology has failed, bringing data together in a meaningful, collaborative way, and allowing technology to extract actionable insights far quicker than any human.”

He points out that tools like the ServiceNow platform are designed to be cohesive and join up fragmented systems, enabling financial service organizations to tease out “real value-add insights and make logical decisions” based on them. “Otherwise, all you’re doing is turning data sets into slightly different data sets.” 

“We’ll see more innovative platforms stepping in to succeed where legacy technology has failed, bringing data together in a meaningful, collaborative way, and allowing technology to extract actionable insights far quicker than any human.”

Keith Pearson, Head of Financial Services, ServiceNow

However, this move to double down on technologies – such as artificial intelligence (AI) and machine learning, plus cloud computing – is essential to progress man and machine. “The benefits don’t just stop at simpler, more actionable data. If technology is left to handle the 1s and 0s, that leaves employees free to focus on far more creative, fulfilling tasks elsewhere that drive real business results,” adds Pearson.

Nodding in agreement with this analysis is Jan Van Vonno, Research Director at Tink, which claims to have built Europe’s most robust open banking platform. He notes that his organization’s research shows bank executives recognize the uncertain market situation and are taking action to mitigate risks. “Over 40% indicate they believe the pandemic will have long-lasting effects on their business, with market credit risk being a particular concern,” Van Vonno says. “Another important concern is an increased urgency for innovation, brought on by a rapid change in customer behavior caused by the pandemic.”

Urgency for digital innovation

Meanwhile, proving shareholder value has become challenging for banks as they are being compared with the valuation of tech titans and the rapidly growing fintechs, he says. “Banks are looking to report profitability while keeping up with the market – and this has called for the rationalization of digital transformation initiatives. In the efforts to prove shareholder value, we believe that banks should be focusing on partnerships that deliver on the low-hanging fruit with proven use cases. Such partnerships also ensure that initiatives do not go down the technology sinkhole of just building and maintaining.”

The interoperability of technologies and ease of communication within a financial service operator’s wide-spanning ecosystem – which should include trusted and proactive technology partners – is central to accelerating innovation. An openness and focus on simplicity will lead institutions to the next frontier of financial services.

Achieving greater cooperation and progress hinges on a mindset change from leaders, who in the banking world tend to be hardwired not to over-share, to put it mildly. But with the march to the cloud and the digitization of processes required to compete in the coming years, first principles have to be adhered to, with customer service top of the list.

“Digital transformation in financial services is being driven by the need for businesses to capture new market opportunities and respond to changing customer demands much faster, as the pace of change in the industry accelerates,” says Prakash Pattni, IBM’s Managing Director of Financial Services Digital Transformation in EMEA. “To do that securely, they need to adopt an agile, digital business model underpinned by modern technologies that include a hybrid cloud IT architecture and AI.”

There are other reasons why a shift to simplification is a business imperative for financial service operators in 2022. “The challenge for financial services institutions is that adopting technologies like the cloud is more complex than it is in other sectors, due to more stringent regulatory requirements,” Pattni continues. 

“Financial services businesses are looking to simplify their digital transformations to balance the dual needs for rapid innovation and regulatory compliance.”

Prakash Pattni, Managing Director of Financial Services Digital Transformation in EMEA, IBM

In late January 2022, the UK banking regulator, the Financial Conduct Authority, indicated it would increase scrutiny of cloud use in banking amid concerns about vendor concentration and security. Further, banks have to ensure compliance and security across their entire digital supply chain, which may include multiple cloud services providers deployed across on-premise and public cloud environments, as well as third- and fourth-party technology vendors.

“The complicated and diverse nature of the supply chain creates more opportunities to exploit cyber vulnerabilities because each participant uses different security software on different systems and does not adhere to a common controls framework,” says Pattni.  

“Financial services businesses are looking to simplify their digital transformations to balance the dual needs for rapid innovation and regulatory compliance, and to defend their IT systems and data against increasingly potent cyber threats.”

Indicating the direction of travel for the industry, Pattni adds: “When banks, fintechs, and technology providers are all using the same specialized platform with a common set of controls and standards, it not only speeds up transactions between them, spurring innovation, but it also de-risks the industry supply chain by reducing its complexity.”

Granted, this sounds easy in theory and is much harder in practice. But simplification is certainly the future for financial institutions.