Digital disruptors have forever changed the financial services industry by offering customers friction-free, easy-to-use, mobile-accessible environments and a previously unimaginable range of goods and services. And institutions are taking action. TFG heard from NTT Data.

These disruptors are anything but the traditional, vertically integrated, full-service banks where products are sold through branch offices. Rather, they are fintechs and tech giants that leverage new technologies, such as artificial intelligence (AI), machine learning, blockchain and the Internet of Things (IoT), to increase agility, which includes the ability to launch new products quickly and provide better service and customization.  The question I have heard some banking leaders ask is “so what?” or “which firm have they put out of business yet?” True, but this belies the undercurrent of change taking place.

The industry is at an inflection point, and nine in 10 global financial services providers say now is the time for transformational digital change, according to NTT DATA’s recent global survey of nearly 500 senior executives in banking, insurance, brokerage, wealth management and cards & payments in the U.S., UK, Germany, Spain, Italy and Japan.

While many traditional financial institutions feel locked into legacy core environments, technology has advanced to where “rip and replace” no longer has to be considered an option. As our research shows, many institutions are exploring partnerships with innovators both inside and outside the industry that will enable them to compete on a digital playing field.

Current market forces — new technologies, new competition and new consumer demands — will continue to propel the industry into the digital future, forever changing the way they operate. 

Market Forces

New technologies

To compete effectively, 53% of respondents in the study indicated they must better leverage new technology. As a result, they are moving past initial trials/pilots and beginning to implement AI, machine learning, blockchain and IoT to enable new business models, lower cost of prediction, drive more data-driven insights and inform a strategy around hyper-customization of products. 

Increasing competition

For a long time, the industry believed tech startups and outside industry players couldn’t challenge traditional financial institutions. However, of the executives surveyed in the research, 83% reported technology giants, such as Amazon, Facebook and Apple, could become major competitors in offering financial products. This represents a major shift in attitude from just a few years ago.

Changing consumer behavior

Another 44% indicated shifting customer behaviors and demands are of paramount importance.  Consumers are on the go more than ever — but executives know they aren’t going to bank branches or brokerage offices. Instead, consumers want to interact with financial services providers in the same way they do business with retailers and other businesses: via the internet and, increasingly, using smartphones.

The Holy Grail

Comfortable or not, the survey demonstrates the financial services industry is beginning to respond to these disruptive forces. More than 60% of respondents say their institution is moving away from the traditional business model of being a full-service provider that serves customers only their own products. This is true whether mandated by regulators with Open Banking or a merely the changing fabric of financial services.  

With the traditional business model, banks own and operate a vertically integrated value chain that includes manufacturing and distribution, as well as sales and service, and holds a fixed cost structure. Fintech firms and tech giants, on the other hand, have brand new business models that avoid the expenses associated with layers of technology infrastructure. This allows them to build financial products and services that cater to mobile-first customers who demand self-service offerings at competitive prices.

How can banks and financial services firms compete effectively in this dynamic market and keep up with rising customer expectations? Enter Digital Business Platforms (DBPs) and partner ecosystems.

For decades, banks have been wedded to complex, outdated legacy core systems. Replacing these systems is not only costly but high-risk for the business, much riskier than simply continued maintenance. That’s why many banks have not even considered wholesale replacement of core systems. 

However, a Digital Business Platform is the holy grail — the solution to leverage core and distribution systems for success in a digital world. DBPs enable financial services providers to keep pace with how customers and partners want to interact, increasing business demand for newer products and services.  

A DBP is a business framework that enables multiple business models to be built and supported on a single technical framework, which allows users to participate in a digital partner ecosystem that includes a set of businesses interacting in a shared market for products and/or services.   

A bank DBP might include unifying core systems, a digital front-end, and a data and analytics, back-end, leveraged by cloud and supported by an open marketplace of fintech partners that make up the company’s ecosystem. 

By creating a DBP and participating in digital partner ecosystems, traditional financial services firms can work with fintechs to incorporate new digital technologies, leverage application programming interfaces (APIs) and share customer data. This will give financial services providers the ability to adapt and launch new products quickly, while also keeping up with customer demand for better service and customization. 

The challenge is you can’t just go “buy one” as I’ve heard a few executives suggest. You have to build it to take into account your own environment and desired customer value proposition.   However, a Digital Business Platforms allows banks and other financial services providers to shift their business models without having to undergo risky, wholesale replacements of their legacy IT systems. Rather they can couple, swap and assemble technology components to support new technologies and even an entirely new business model.

Again, the good news is 82% of survey respondents agreed that integration of a Digital Business Platform is important for their competitive positioning, yet only 23% have a DBP working and providing benefits. As the digital tide continues to rise, the financial services industry needs to take action now or risk being overtaken by the competitive wave.