The anatomy of digital transformation in finance: from disruption to transformation

Explore the relevance of disruption and transformation in finance to understand how the industry’s digitization brings value.

The financial industry was profoundly impacted by the rocky events of 2020. But one thing has become certain: a shift to digital strategies and functions to transform and modernize financial business became essential to the survival of every single organization.

The ubiquitous term “disruptive” has been in the business lexicon for a while and suggests dramatic changes throughout every industry. Skipping the theoretical point about disruptive innovation, we primarily mean that the ever-accelerating technological advances and the impact of digital technology, with its speed and complexity, cause opportunities to abound. Recent events have proved that technology is uniquely positioned to lead and support the digital transformation of the financial services industry. Though the possibilities opened by tech are immense, some consider it a one-time act.

However, digitizing paper analog balance sheets or introducing a chatbot to augment financial consultancy is not a transformation. Within the delivery of financial services, it’s not a question of dispute or competition, but rather about the collaboration strategies of financial institutions, fintech, big tech companies, along with third-party service providers and regulators, all to speed up and optimize tech applications. Digital transformation is multi-dimensional. It encompasses transforming business processes, business models, domains, and the culture/organization.

Digital transformation is the application of forward-thinking to solve business-related issues and streamline processes alongside adopting digital technologies and strategies being implemented to succeed, for instance, reexamining the operational models, reimagining data processes and recovery plans for the business’ resilience, and reassessing engagement with 3d party tech providers, along with updating compliance, security strategies, data privacy controls, as well as the use of regtech. All of this will enable finance functions to tackle market challenges.

A concise overview of financial service industry

The financial sector within every type of service (i.e., corporate, personal, consumer)  comprises a wide range of offerings by the financial industry, from money/wealth management and investment to banking, insurance, real estate brokerage, and on to digital finance.  Since finance is an academic topic, we will touch upon the notion related to digital transformation: it’s digital finance.

What is digital financial services (DFS)?

Digital financial services (DFS) involve the delivery and access of the core and additional financial services (e.g., payments, remittances, lendings) that apply innovative tech through digital channels like mobile, internet, and POS terminals. Digital financial services are provided via already habitual instruments (e.g., debit/credit cards) offered by banks, alongside new FinTech solutions, like mobile payments, peer-to-peer (P2P) applications, crypto assets built utilizing cloud computing, digital platforms, and distributed ledger technologies (DLT).

Digital financial services (DFS) display viable benefits for service providers, enabling them to capitalize on the offerings by:

• Expanding the delivery of financial services to more significant customer segments /markets
• Implementation of financial inclusion
• Accelerating tech-enabled products/services release
• Increasing efficiency and quality of service delivery
• Optimizing transactional and operational costs
• Allowing for social distancing at times like pandemics

The abovementioned aspects are crucial for boosting capitalization. Digitization brings many advantages and is expected to get even more, with traditional financial institutions further recognizing its value.

The state of digital transformation in financial services and uncovering what is needed

While the finance field is gaining new dynamics and nearly every financial organization is actively applying or experimenting with new technologies, many firms are working on executing a systematic digital transformation strategy. Financial service providers use different approaches to create the best value through their digital business. Some go with optimization strategies improving existing business models, processes, offerings, and the customer experience bit by bit. At the same time, others choose digital business transformation in radically new ways by employing all the emerging tech and market-dictated capabilities, organizational changes, and revamped processes and interactions.

Though digital transformation looks like a coherent solution for the financial services sector, it is a strenuous process requiring a precise balance between looking ahead and keeping a current steady business course while employing tech, innovating business models, and introducing new ecosystems.

Financial services industry players need to be more mindful of delivering on the investment of a long-term ROI while generating value for customers in the short term.

Ultimately, digital transformation in financial services is associated with trends resulting from technology applications.

1. A connected world calls for connected services

Today’s sharing economy and environment have dramatically changed financial services consumers ‘and providers‘ relationships. A connected and exuberant consumer demands a seamless real-time customer experience across every channel and financial service or product backed by data-driven intelligence. They also expect personalized offers from financial service providers addressing their preferences, with competitive pricing, robust connected platforms, and additional support.

This drives a profound trend – integrated financial business services and the connectivity approach. Every solution is expected to become simple to use by default, so financial services are supposed to be robust microservice organizations playing in tune with the digital customer’s hopes. These are the aspects technology brings to connected finance:

• Shifting towards an ecosystem by engaging in innovative tech to create an integrated digital experience for the customer.
• Data and analytic capabilities enable risk mitigation, product innovation, and interoperability dynamics.
• Redefined customer relations and the identification of new allied services by multiple 3d party enablers.
• Advancement towards long-term trusted collaborative relationships.
• Regulatory, security, and compliance management by applying RegTech (Regulatory Technology).
• Modernization of legacy software, apps, and systems for comprehensive market relevance.

The proliferation of the connective experience has created a market for digital experience platforms, like hybrid cloud solutions giving consumers privacy and personalization. Sophisticated cloud solutions are winning consumers and businesses over by freeing them from the complexity and costs of legacy IT infrastructures, enabling extreme flexibility, giving them control over their data, and providing on-demand global connectivity. In addition, the need for today’s sharing economy translates into a new kind of finance innovator known as open banking. This new standard for financial institutions enables third-party providers to connect applications and services through open application programming interfaces (APIs).

According to the survey offered by Finastra, 48% of financial institutions regard open finance as a must-have technology. Besides, 85% of respondents agree that the phenomenon makes financial services more collaborative. Predicted to change every aspect of financial business models, open banking will include transparent, strategically aligned customer-centric ecosystems with banks playing the role of platform providers covering every part of their financial interactions.

Another aspect of connected finance is mobility solutions. Mobile is synonymous with simplicity, personalization, control, and comfort within financial interactions. Mobility is becoming an instrument for on-demand banking, voice payments, micro-insurance, mobile wallets, and ad-hoc digital assistants.

Rethinking financial functions and leveraging the right technology lies at the core of the connected finance concept. Technologies like AI and IoT facilitate customer retention based on a data variable analysis (i.e., operations context, lifestyle, geolocation, values, and intelligent devices) and enable the most effective personalized offerings possible. Blockchain is the foundation for new payment models, сross-border transactions, smart contracts processing, credit reporting, and digital identity verification due to information transparency and excellent accuracy and accessibility for all parties. Cloud Computing, with its cost efficiency, speed, and flexibility, gives financial service providers the needed instruments to deliver innovative products and services, manage risks, and interact with customers and partners in an agile, connected way.

So, tech can become a competitive differentiator for the entire BFSI (banking, financial services, insurance) sector and enable connectivity to respond to digital-savvy customers’ needs while gaining market relevance.

2. Agile financial services with customer Intelligence at its heart for revenue growth and profitability

Technology is now perceived as a consumable item for customers and users, from social media and apps to mobile phones, up to data-based personalization and timely targeted approaches. Of the significant reaction to the 2022-2023 global situation, one of the critical trends of the financial industry is the ability to effectively and quickly respond to a disruptive environment, that is, to adopt agility. To incorporate the fundamental value proposition in every feature of financial offerings, financial service organizations seek to understand the dynamic consumer landscape and hidden market demands, and support continuous innovation, all of which are the basics of being agile. A relevant user experience starts with uncovering the customer’s real needs within the context of the current market environment.

Technology ecosystems and well-defined tools have created new opportunities for digital financial services, the most data-intensive sector, to implement agility which makes continuous lifecycles, builds new capabilities, and delivers quality services/products that respond to customer expectations. By including data strategies backed by Artificial Intelligence (AI) and Machine Learning (ML) into a competency matrix, financial institutions gain fast and reliable access to a growing amount of data backed up by tailored analytics, so they get the bigger picture.

The agile business approach is built on smart strategy, informed business decisions, customer intelligence, and advanced analytics that reflect data and analytics as key revenue sources for financial institutions to stay relevant and competitive. Financial planning and analysis (FP&A) experts can gain precise analytics of the business environment and customer behaviors, alongside employee productivity metrics, by putting data into action. This enables an ultimate response to the changes and, consequently, better servicing and generating more profits.

Another attribute of data analytics for business agility is its ability to identify value drivers and growth opportunities and monitor financial/non-financial key performance indicators (KPIs) against those. In addition, it allows for analyzing the correlation between investments and profitability across multiple dimensions of the financial organization (products, customers, services, and channels) to further strategize on valuation or growth optimization.

3. Increased collaboration driven by fintech and big tech to win transformative ecosystems

Another prominent trend imposed by technology proliferation in finance functions is the transformation of traditional financial business models with new and established services integrated. The introduction of technology into the finance function gave rise not only to FinTechs, unburdened with a siloed data haul with the ability to target specific service areas, but also BigTechs, like Apple, Alibaba, Amazon, Google, and Facebook, who are heavily getting involved in the financial services market with their hefty capitalization, massive customer data pools and established networks.

FinTech, abridged for Financial Technology, operates on the intersection of financial services and technology. Despite the common perception, FinTech is applied only across startups but is used even more commonly by technology companies or legacy software providers. Banking, loans, venture capital, wealth management, personal finance, electronic payments, and the insurance–financial services sector are already using some form of tech.

BigTech, the established companies dominating the information technology industry, also fiercely challenges traditional financial service providers. Those platform companies are entering the area of finance with a pre-existing client reach and scale, significant data customer insights, and Internet banking licenses. Hence, they use financial services to enhance their client reach.

Industry leaders strive to embed an actual digital financial experience, which is about a complete pack of services from personal finance and automated wealth management to on-demand insurance advisory, all in real-time at the customer’s fingertips. To offer all of the above, financial organizations must work with the correct, timely data, gather actionable analytical insights, generate real-time predictive reports, and build scalable, flexible platforms with increasingly integrated digital ecosystems. But, it’s a hefty investment with fierce competition for the financial sector players. Understanding that technology implementation alone isn’t digital transformation but a part of the strategic journey is vital.

This report shows that 82% of financial organizations plan to increase FinTech collaboration. More and more financial service firms are turning to collaboration over the competition with technology vendors as they recognize that ecosystems are a significant opportunity for business in today’s world. The companies are now expanding their partner pool while engaging system integrators and vendors to leverage the potential of innovations and technology to increase operational efficiency and deliver enterprise solutions at scale.

One more driver of collaboration within the financial services industry is intense regulation, rules, and growing compliance demands. As a result, financial institutions are turning to technology solutions for assistance with the increasing regulations network, governing groups inspecting, and the skyrocketing costs of compliance or non-compliance. RegTech, or regulation technology, was designed to help manage day-to-day financial compliance demands efficiently. To help businesses streamline nearly every part of the compliance process, RegTech is bringing the power of digital transformation into finance regulatory compliance.

By implementing and integrating the powers of cloud computing, data analytics, ML, Natural Language Processing (NLP), AI, blockchain, and more, RegTech helps streamline the compliance process, process mountains of data, parses and analyzes legal texts, and extracts meaningful insights, minimize human errors, connects once siloed people and procedures, and also improves risk management.

To stay ahead of the competition, the financial service industry leaders tend to engage flexible and agile technology enablers, or they team up with FinTechs to fill their technological gaps, address critical service delivery points and ensure exclusive customer experiences.

4. How personal is personalized?

Experts state that personalization and connectivity are the two strategies driving the financial services evolvement within digital transformation. Customers of every age segment, from the “silver tech generation” to millennials and up to GenZ, expect increasingly personalized financial services solutions. Those include personal management of all their finances on convenient devices to real-time engagement with simplicity, speed, security, and transparency. The stats prove that the age of customer loyalty to a financial services brand per se is over and that the customer experience is becoming a new benchmark for financial institutions.

A personalized approach within the financial services sector is similar to any other industry offering customers quality and value in their interactions. While making the customers’ lives easier, the approach is based on a better understanding their needs and requirements. But there is one more tendency specific to financial services, the financial services connected and exuberant consumer is seeking to receive a packaged digital product; for instance, a personalized financial plan for a young couple. So, financial service firms are focusing on leveraging tech to make the most out of what they have to offer. By digging insights out of historical data and segmentation, market analytics tech is called on to:

• Orchestrate tailored customer experiences through special offers, messaging, and individual pricing recommendations.
• Intensify customer engagement within the key service touchpoints due to consumers’ satisfaction and brand image awareness.
• Enhance up- and cross-selling due to indicated customer value and simplified interactions.

A holistic approach to every customer’s need is fundamental to creating strong engagement. A personalized experience design triggered by big data processing, AI, blockchain, IoT, and machine learning algorithms is gaining positive perception by the consumer. Using cross-channeling like mobile, web, wearables, social media, and AI-enabled tools to surface fact-based insights into a user’s behavior, thus implementing the most appropriate technology methods for proactive engagement with a consumer, all help to identify customer journeys and offer personalized campaigns with timely products or services.

Among the most vivid benefits of tech-supported personalization in financial services are the following:

• More accurate risk assessments and tailored personalized wealth or investment management advice with advanced analytics.
• Consistent business processes and operations across the whole value chain, with AI-powered automation from chatbots for simple requests to error-free intelligent claims or loan processing and blockchain-automated execution of smart contracts.
• Mutually beneficial partnerships between banking and customer-centric tech vendors and open banking platforms due to open infrastructure and the support of APIs.
• Brand image awareness and customer engagement with technology-enabled financial marketing.

As we move deeper into 2023, we see the industries taking on the challenge to recalibrate for resiliency within our modern business environment. Though the future of financial services is far from clear, there have been many recent cases of harnessing technology and human ingenuity to help make the changes work. According to McKinsey, financial services’ high-fliers are exploring new efficiency opportunities, reaching beyond the traditional financial activities, then focusing on data and information (attributed through data visualization, advanced analytics, and debiasing strategies) that flow as pillars for integrated, simplified, and controlled decisions. Finally, finance organizations revisit the operating model and develop new skills and capabilities.

The first stage of finance transformation enables digital channels for financial products and services exchange. Right now, we are experiencing the next step, which optimizes customer support with self-service opportunities and business ecosystem development driven by the API economy. A shift from a project-based to a product-driven mindset is becoming essential to digital transformation within the financial services sector. A financial services firm, be it a bank, investment broker, or insurance provider, is expected to become a high-performance microservices organization offering tangible advisory services about money through an all-inclusive approach.

Leveraging digital transformation in the financial services sector

Moving towards finance transformation is about employing the critical dimensions of digital: from finance process transformation to a business model revisit to domain evolvement to a cultural transformation.

Business process transformation is focused on specific areas of the business. Fast adoption of technology capabilities like data analytics, BI tools, API, and machine learning techniques can help reinvent numerous processes across the financial organization, commercialize new ideas, and quickly create additional value. Mobile banking, such as a switch from boring office desktop tables to intuitive solutions with customer-centric design and elements of gamification, is a vivid example of process transformation in the banking customer experience.

Business model transformation implies the re-architecture and evolvement of business logic essentials, focusing on the value delivered. Its strategy is gaining a competitive advantage through fundamental changes in the core business axis. For example, on-demand or micro-insurance has added value to the core insurance products. Or by moving from a monolithic architecture, banks are becoming microservices organizations offering flexible services 24/7.

Domain transformation can be vividly observed with the initial IT industry giants, like Google or Amazon, by closing finance customer expectation gaps with technology enablement. Take GooglePay and Apple Pay’s digital wallet platforms and online payment systems, or AWS (Amazon Web Services), one of the most trusted cloud infrastructure and services providers for banking, payments, capital markets, and insurance.

Cultural or organizational transformation is transformational initiatives’ most transparent yet complex layer. While moving towards agile workflows, decentralized decision-making, and altering business ecosystems, it is all about changing human mindsets simultaneously from the beginning and as a result of the digital transformation process. Yet, Experian, the consumer and business credit provider, moved to become a technology company by demonstrating the potency of digital through small successful digital projects, promoting agility and innovation skills, and gradually changing the organizational culture mindset towards a company-wide one.

The most complex and vital opportunity for financial services providers is to recognize the transformation opportunities afforded by new technologies, be it financial services portfolio broadening or legacy systems transition to a new software or radical architecture refinements across the whole financial organization, and to understand that they can be captured even by traditional incumbents. With a robust strategy to embody four interdependent attributes backed up by tech components, the financial industry has some clear digital transformation advantages.

How technology maps out finance needs to deliver value in practice

Creating value is a top priority in finance. So naturally, digital transformation and disruption in this industry were measured by its ability to bring more value more efficiently and effectively. The following are the factors within digital transformation that made it happen.

Journey to the cloud financial services

Cloud migration is the hottest and most promising digital transformation trend, which is particularly visible in finance. Though cloud adoption rates are slower than anticipated, financial service players are looking into cloud technology solutions (i.e., applications, data centers, APIs, and storage) and Cloud deployment models (public, private, or hybrid) for the promise of gaining a competitive advantage and long-term benefits via flexibility, speed, scalability, security, enhanced analytics, and a reduced carbon footprint. The global pandemic situation became a proof trigger for not only leveraging the cloud for upscale, speed, and agility but for down-scaling as well.

Cloud computing (SaaS/PaaS/IaaS/BaaS/DaaS/XaaS) offers clear benefits for secure, compliant, and connected financial services delivery, whether banking or capital markets, asset or wealth management, or insurance. Skillfully implemented cloud solutions are winning financial businesses over by synchronizing the organization to build resilient operations, taking away the complexity and costs of legacy IT infrastructures and software, allowing for the introduction of unique types of services, enabling extreme flexibility, giving them control over their data with democratized data collection, and also on-demand global connectivity.

Moreover, as the cloud is becoming a standard for ERP and CRM applications, the financial service processes are becoming exceptionally streamlined and allow for advanced Business Intelligence (BI) on top of those. One more benefit of cloud adoption that is becoming a real value to humanity is that the cloud is about sustainable business practices. For example, cloud infrastructures support environmental protection by utilizing virtual services rather than physical products and hardware. Also, they cut down on paper waste, improve energy efficiency, and (by allowing employee access from anywhere) reduce commuter-related emissions.

Data to power up financial business

Data represents the most significant opportunity for financial services. Though data itself is not the goal of the BFSI industry, it’s an instrument to support panoptic strategies so that the created products and services match customer expectations. Besides being a pure numbers game, embracing digital by the financial industry means shorter and more efficient financial cycles, data-based business intelligence and forecasting, real-time operational and analytical insights, self-service analytics and informed visualization, and much more.

As Cognizant reports, data and analytics are the key triggers of revenue growth and cost optimization within the research. About 64% of surveyed businesses and technology leaders claim they’re getting an average or high ROI related to data management. Data is power, a hidden advantage that financial incumbents have over digital native disruptors. An ultimate success imperative today for both is a tailored data management strategy employing technology to collect, mine, and process big structured and unstructured data and further visualize it transparently and ethically to generate value.

All the new tech applied, either building advanced software and applications, the proliferation of APIs, leveraging AI and analytics, creating IoT solutions, or enhancing customer experiences, are about working on massive complex Lego-resembling data to uncover meaningful insights.

AI to support financial decision-making

Artificial Intelligence (AI) is widely adopted across financial services and has already transformed some aspects of financial services delivery. For example, AI can streamline, and optimize processes, actualize data-based intelligence, and eliminate human errors, contributing to accurate strategic forecasts and, market analytics, actual customer sentiment analysis, which is critical for business continuity and resiliency.

Accordion to IDC, 750 million cloud-native applications will be available by 2025. In addition, the growing need of finance organizations for enhanced interoperability and operational efficiency within new working environments pushed for AI-enabled smart workspace management powered by technology.

The most vivid cases of AI and ML application within financial services are financial risk management, fraud prediction, transparent underwriting, personalized banking and financial management (PFM) advisory, informed unbiased credit decisions, smart quantitation, algorithmic or high-frequency trading, data-enabled investment, and claims management with so much more coming.

Increasing role of automation in finance function

Digital transformation strategies, implemented utilizing AI and ML, are primarily a source of advanced analytics for fact-based decisions but also a massive enabler for financial service companies in terms of automation. In the world of 24/7 accessible online opportunities, growing customer expectations, surging competition, and a pandemic-induced crisis, financial service companies seek to rely on data, augmented analytics, and automated solutions or platforms. Experts claim that 80% of industry leaders either use or plan to implement an automation subset – RPA (robotic process automation) recognizing an enterprise-level opportunity for finance functions.

Automation, advancing into IPA (intelligent process automation), is gaining more traction within the improved customer experience, streamlining processes, freeing up staff, and creating new value opportunities while optimizing back office costs. Starting from automated virtual assistants that respond to basic consumer inquiries to robust integrated digital ecosystems enabled by open banking, to cloud-based ERPs, to touchless transactions backed up by DLT and blockchain, to mature automation cases in financial planning and audit, to automated trading systems (ATS) and capital allocation using machine learning technologies.

Investment in security, data privacy and risk assessment

Customer experience is a priority and critical digital transformation strategy for the financial services domain. So, in the world of cybercrime, data breaches, and advanced hacker attacks, a significant investment is being plunged into consumer protection, data privacy, security, and compliance solutions. Modern consumers are not ready to tolerate unauthorized data sharing and unconsented emails. Those are becoming unique value offers of digital financial services providers of every caliber, from FinTech startups and technology providers to finance incumbents associated with financial stability.

Regulations like the EU’s GDPR, PSD2, and MiFID I/II and similar supervisory requirements focus on risk management practices, aiming for a more secure and transparent financial sector. This calls for thorough data analysis across all the processes enabled by big data analytics, AI and DLTs. These technologies have proved to be working instruments in identifying operational and cyber risks, monitoring risks and improving fraud detection in peer-to-peer operations, measuring financial market risks and volatility, improving client risk profiling, and minimizing credit reporting and scoring bias.

Digital Transformation is about people after all

As technology is on a mission to facilitate humans, it can not function without them. Tech proliferation tunes up talent experiences. With digital transformation being pushed by COVID-19, the entire business operating model shifted. Finance staffing models are also evolving with a critical search focus on data scientists, business analysts, and technical literacy, which support core job requirements to form cross-functional teams.

As financial services adopt a digital working environment, which suggests flexibility, collaboration, and support, agile practices spread across the organization. It happens in everything from attracting and retaining talented customer-oriented staff to delivering differentiated financial service levels. But it requires more than additional skills to build a robust technology ecosystem within a financial organization; instead, shared values and a commitment to the co-development attitude. By augmenting professionals with tech capabilities, investing in automation, and leveraging tools like self-service BI, digital assistants, and predictive modeling, financial service companies better use their time on value-added activities that drive actual business performance.

Finally, sustainable finance

Digital transformation is a vast and multifaceted evolution. It’s far from abolishing dated systems, building a mobile banking app, or digitizing an analog paper archive. Digital transformation is a long strategic process, sometimes arduous, but seen to deliver lasting change. Staying on the right side of change means a clear vision of how technology can support business resilience within new business ecosystems and partnerships.

Though the challenges of regulatory pressures and geo-political tensions, evolving customer expectations, legacy systems modernization, workforce enablement, competitive environments of rising cost pressures, cybersecurity issues, and data privacy concerns are present for every financial services company. Whether an incumbent bank, asset manager, or FinTech startup, questions remain, and the pandemic-hit world sees technology as one of the drivers of value for the business. As allegedly said by Winston Churchill, ‘Never let a good crisis go to waste.’ Our current situation keeps causing a massive impact on finance organizations, but it also opens up breakthrough opportunities to create a more sustainable future.

By scaling digital transformation ambitions, the financial service industry, like no other (except maybe Pharma & Life Sciences), can help make fundamental changes and deliver 360-degree value to all. Technology application within a new inclusive economic context makes it possible for finance teams and financial service providers to accelerate time-to-value along with gearing up operational efficiencies and customer engagement, the ability to scale so that market shares and even shareholder values increase.

Contact us, and our expert teams will help you navigate and support you through every stage of your digital journey so that you are prepared for future challenges and can turn them into opportunities. We can help you adopt agile approaches to bridge your strategic initiatives, develop a product-centric mindset, leverage DevOps practices for on-demand continuous service delivery, make sense of your data capital, and support your innovation.