2020’s events contributed to accelerating the pace of digital transformation. Going digital is today more than ever crucial for business resiliency and competitiveness in the global market. As organizations worldwide get used to the new normal, it’s more important than ever to make sure finance firms are recession-proof. That’s why the BFSI companies are accelerating their adoption of innovative technology.
But what tools could help the finance sector work better? How can FinTech and RegTech enhance efficiency and improve customer experience? Is the positive attitude of regulators toward digital innovation another factor that can help create a better BFSI industry? What is the current state of finance automation? And what approach to technology are your peers adopting?
We've outlined major topics, recent trends, and key takeaways in the financial services industry to help you navigate the evolving landscape.
What’s the digitization level of financial services?
As digital transformation is a business imperative across all industries, most financial services are embarking on their modernization process - whether by taking some first experimental steps or developing a strategic roadmap. A recent survey revealed that 68% of finance companies have developed a digital transformation strategy to achieve their business goals. Most of them have realized the importance of having a function within the organization tasked with guiding its digital efforts. To that end, more than 3/4 of financial firms have already established a digital innovation steering committee, 54% are relying on external advisors, and 60% are hiring new staff with the necessary expertise to drive these processes.
Common challenges in the digitization projects
Besides having common digitization needs, financial firms also face the same obstacles when it comes to innovation projects. Among these, establishing the right metrics to measure progress is the greatest issue. Decision-makers' lack of vision is another significant problem for most organizations that denounced barriers stemming from under-prioritization (61%), along with poor communication and project management (53%).
It is the leadership's responsibility to build a corporate culture inclined to digitization, engage the employees in the company mission, and make them an integral part of the business strategy. And this is even more crucial when we notice that 73% of organizations cite a lack of skills or insufficient training as the biggest challenge to moving forward with a new digital initiative. While hiring new talent can help raise the overall digital competency, companies also need to ensure current staff is provided with the necessary training and resources to stay effective as their roles change with the company's digital transformation.
How financial firms are planning to tackle these issues
To address the challenges emerging both during the planning phase and in the initial implementation stage of the digitization projects, most financial firms’ leaders acknowledge they must drive a culture of innovation at all corporate levels, with a focus on employee engagement and upskilling. Digital transformation means exploiting technologies to modify existing business processes (or create new ones) and involves not only the way the work is done but also the culture and the business model. As the adoption of new technologies needs company-wide involvement, 81% of companies are starting training programs for their current workforce, and 75% are equipping the office with the necessary tools for the transition from manual, paper processes to digital workflows.
Financial companies’ agility compared to their industry peers
Another critical factor in comparing the state of affairs in the financial sector concerns digital agility. The term refers to the ease and speed at which an organization can adapt its processes, integrate new technologies, and achieve successful digital transformations. A company's digital nimbleness is the basis for its ability to undertake and sustain continuous innovation in measured steps, over time, and as resources allow.
When asked how they viewed their company's digital capabilities compared to competitors in their industry, only 23% of financial firms interviewed said they consider themselves ahead of their peers, and only 10% defined their current agility level as excellent.
This means that most companies are rather aware that there is still much room for improvement. 52% of respondents admitted that they need some upgrades to succeed in the digitization journey.
A use case: client onboarding in the BFSI industry
Credit institutions, banks, insurance companies, investment firms, auditors, accountants, and in general, all organizations offering financial services are included among the legal entities obliged to comply with AML laws. Consequently, they must ensure KYC requirements are met when onboarding new clients.
The KYC process can be identified as the epitome of analog inefficiencies for firms in the BFSI sector. Suffice it to say that banks’ employees spend more than 1.5 days doing onboarding-related activities in a typical week, which equals 27% of their time. This is the real cost of a dysfunctional process: employees wasting time while swamped in paperwork and customers turning to competitors. The clients’ dissatisfaction results, indeed, in loss of business and revenue. It gets worse when considering compliance issues. The lack of a standardized approach to identity verification, the absence of process automation, the risks of human errors, and manual slip-ups affect the company’s ability to accurately meet KYC requirements. Banks and financial organizations realize that it’s time to take heed of the evolution going on in the market and the end user's expectations.
Proof of this acknowledgment is that the global spending for digital services related to eKYC is expected to grow from € 1.88 billion in 2020 to € 3.84 billion by 2025, at a CAGR of 15.6% during the forecast period.
1/3 of BFSI entities have already started using a centralized digital solution to collect KYC information. The majority of financial institutions primarily mention digital transaction management tools, digital signatures, and KYC utilities in listing the new technologies they expect to become part of the onboarding process.
EU lawmakers look favorably upon digitization in finance
The main and most recent legislative interventions affecting finance professionals’ activities demonstrate the EU’s positive attitude towards innovative technology. Such regulatory news focused on four primary areas:
Creating a better integrated internal market for electronic payments:
The Payments Services Directive, that required businesses to equip themselves with the technological or operational support necessary to meet the so-called Strong Customer Authentication (SCA).
The European Payments Initiative, launched by 16 European banks and welcomed by the European Central Bank (ECB) for the creation of a unified payment solution for consumers and businesses across Europe.
The Cyber Information and Intelligence Sharing Initiative (CIISI EU), launched by the ECB as well, to promote the use of an automated platform for cooperation and information sharing among the largest pan-European financial infrastructures, in liaison with Europol and the EU Agency for Cyber Security.
Promoting eKYC to uphold Anti-Money Laundering efforts
The Markets in Financial Instruments Directive, that recommended the exploitation of new technology solutions to collect and process KYC data and enable more transparent and successful protection of the PII involved.
The 6th Anti-Money Laundering Directive, promoting the use of e-signatures and digital identification means as standardized by the eIDAS Regulation to carry out the verification of the customer’s identity.
Demanding stronger privacy and safer data protection mechanisms
The framework enforced by the GDPR, that required financial institutions to map in detail the KYC data collected to be able to retrieve, share, or erase all the information they hold on a specific user, should the need arise.
The most recent Guidelines (06/2020) on the interplay of the PSD2 and the GDPR, adopted by the European Data Protection Board, provided further clarification on the relation and interaction between the two sets of rules, specifically related to consent, data retention, transparency, and security.
Enabling and incentivizing cross-border electronic transactions
The eIDAS EU Regulation, that removed the need for physical devices such as chips or chip-readers, enabling individuals and organizations to access the needed services remotely and perform identification, contract signing, electronic invoicing, and client onboarding in compliance with AML laws.
The Digital Services Act initiative launched by the European Commission (after almost seven years from the launch of the Digital Single Market initiative), aimed at “re-shaping Europe’s digital future”.
The growth in turnover following digital investments hits C-suites’ targets
Recent McKinsey research has shown that executives across industries share consistent goals in their digitization strategy. Boosting business growth and speeding up the time to market are the top priorities mentioned by financial companies’ CEOs when asked about their digital competitiveness plans. And it’s a common thread playing out across every industry.
In this context, an organization’s ability to respond to market shifts is becoming a core differentiator; as a matter of fact, 71% of respondents pointed to agility in reacting to changing customer needs as a prime concern. Therefore, most firms are prioritizing growth and speed of innovation over cost.
This strategy appears to be successful when looking at the impact of digital investments on companies’ turnover. Three in four financial firms revealed a 1-9% growth in revenue and profitability in one year and expect an increase of more than 10% in the next 18-36 months.
The other senior technology leaders feel the pressure of expediting revenue as well and are focusing on infrastructure modernization to improve performance, competitiveness, and IT security. CIOs and CTOs are increasingly migrating their infrastructure spending to the cloud. The companies surveyed currently have around 50% of all workloads running on cloud platforms and expect that share to rise to 75% by 2022 (with roughly 2/3 of their workload housed in platforms within data centers built out by the major cloud-service providers).
Financial firms’ investment plans for 2021: digitization as a major area for a budget increase
Considering the benefits achievable with digital tools, BFSI organizations are planning to make significant digital investments. 65% intend to increase spending for digital solutions by 10 % or more in the next year, with the main goals of optimizing operational efficiency, automating business processes, sharpening the company security profile (focusing on cybersecurity, cloud storage, and data privacy), and improving customer experience.
Replacing legacy IT systems (88%) is the top short-term priority for financial institutions, as a prerequisite to pursuing their main long-term objective: enhancing customer experience (83%), a goal made more critical by the pressure by tech-savvy consumers and the threat posed by big tech companies.
Competition in the financial industry has ramped up rapidly, and one of the trends pushing in the digital direction is the shift toward millennials, the demographic group that is the most focused on finding products and services digitally. One-third of this group believes they do not need banks at all, while 73% are more interested in financial services from Apple, Amazon, and Google.
According to an Insider Intelligence report, big tech companies could grab up to 40% of financial services revenue from incumbent banks. 54% of respondents to a Bain study indicated that they trust at least one tech company more than their own bank. It follows that 80% of financial companies cited the introduction of new products and services as one of their top long-term goals – acknowledging the need for improving their traditional offering to meet clients’ needs. Tailing this goal requires the deployment of digital tools or even the development of new partnerships, collaborations, and joint ventures with software providers.
What digital tools can improve financial companies’ activities?
The findings illustrated so far point towards three main priorities that should be taken into account in financial companies' digital transition:
Document management: from collection to sharing and signing, up to safe storage
Companies operating in the financial industry carry with them a hard-to-forsake inheritance of traditional manual practices based on the copious use of paper documents. However, going paperless leads to countless benefits, the first of which is better security. The transition from physical to digital files guarantees the priceless comfort that no company or customer information can be lost. Even in the event of a cyber incident, all the documents in the system would be safely stored offsite “in-the-cloud” and in multiple locations. This is why these tools are so widely trusted in all industries.
Besides the security advancement, further upsides accrue from the adoption of such software. Digital transaction management provides faster, easier, and more efficient ways of handling documents. A comprehensive DTM solution improves document access, navigation, retrievement, information sharing, and project collaboration. This convenience lifts when the chosen software includes built-in signing capabilities, as the possibility of digitally signing is now almost taken for granted by customers. It represents a must-have for every company to compete in the market since it enables remote transactions, saves time and money, and demonstrates CSR commitment.
eKYC as the new normal: when efficiency meets compliance
A typical workflow financial firms perform on a daily basis is identity verification – and it’s a process particularly cut out for digital conversion. Thanks to this digital suitability, customer due diligence duties can be performed online – removing the need for the physical presence of the person to be identified and without prejudice for security and privacy.
Client onboarding can be streamlined while ensuring compliance with AML Regulations. The required steps can be automated so that the software asks for and receives the sensitive documentation in a highly safe manner, verifies the social security numbers (or similar data), and securely archives the information received while preserving its confidentiality. Know-Your-Customer digitization increases the reliability and quality of the data collected and helps avoid duplication and inconsistencies – with all the benefits that follow in terms of greater staff productivity and improved time-cost efficiency.
Business process automation: the one-way road for financial firms
Workflows automation goes a long way in easing and relieving repetitive manual routines and appears highly beneficial in improving document routing and oversight. By setting up user-defined rules and actions, you can build a conditional workflow that triggers the necessary steps for your documents. This accelerates how tasks get done by routing information to the right person at the right time.
Smoother processes and automatic reminders let you keep track of the projects’ progress status. By scheduling a due date for the documents to be sent out or giving participants a notification, you’ll never miss a deadline.
Automation can unburden and transform long and slow flows into just a few clear and easy steps – reducing the time needed from weeks or days to just a few hours. And the time can be allocated to more value-adding activities requiring professional judgment, analysis, and insight, such as consultancy and advisory services.
What to look for when choosing the best digital solution
Common mistakes can be made when choosing new software - like preferring a brand name that might not fit your organization's specific need or neglecting the company’s long-term objectives. Times have changed, and the price is no longer the focal point for corporate buyers when choosing new technologies to adopt in the organization. Other requirements have taken over, and they mainly pertain to cybersecurity and reliability, integrations and compatibility, user-friendliness, and customer experience.
Security first: choose a solution you can rely on
With the Covid-19 crisis and all companies forced to work from home, it’s no surprise that cybersecurity climbed up as the first priority requirement. When acquiring a new digital solution, the selected tool must be able to respond to remote work needs, like access to documents and data from any location and device. This can only be done by relying on a cloud-based system to streamline IT and infrastructure costs and ensure all data is safely backed up offsite-online.
Encryption capabilities are just as critical as they offer an additional security layer and protect content integrity and data confidentiality, preventing alteration and leaks. Equal weight must be attributed to the suitability of the software to meet your industry’s specific compliance requirements. Last but not least, it’s essential to gain confidence and control over the way your documents and data are handled by the software provider and make sure that state-of-the-art privacy protection measures are in place, under international standards.
Integrations are key for your company’s digital agility
As business processes often interlink and interact with one another, it’s essential for the digital tools supporting them to be harmoniously integrated. With e-signature and KYC capabilities, for instance, you can use the same digital system to handle the whole customer flow, from onboarding to signing, and have easy access and full control of the related documents. The chosen software needs to be easy to integrate with your existing solutions and partners. Some digital solutions allow for effortless integrations with other programs via API. This enables you to work across multiple platforms and massively reduce the amount of time spent on data entry.
Good integration capabilities also translate into better scalability performances: an open and dynamic digital solution can address shifting business needs, changing regulatory requirements, and accommodate exigencies rising from the business growth and market expansion.
A customer-centric strategy starts with the ease of use and accessibility
Attention to user-friendliness remains among the top 3 requirements for choosing a new digital tool. After all, improving customer experience is the main driver for technological deployment. In the finance industry, as well as in all the other fields, customer satisfaction is the common denominator for a business. Getting the needed service via the Internet is a must for modern customers. The same applies to the possibility of accessing via mobile anytime and from anywhere - after all, more than half of all web traffic is generated from mobile. The chosen software should provide a frictionless and convenient user experience with an easy-to-use interface to enhance the service quality.
Alongside the priorities just mentioned, there are a few more features to watch out for when selecting the best software for your company. The following capabilities are just as critical:
Progress overview: to track and monitor the progress status of your workflows and trace documents being sent, opened, completed (or signed).
Automatic reminders: to be always in control of your tasks, schedule a due date for the next steps of the procedure or give participants a notification.
Collaboration: to create and arrange teams to share documents with and distribute files to internal or external collaborators.
Accuracy and accountability: to improve thoroughness, precision, overall process quality, and the efficiency of the entire flow.
En route towards innovation: design a tech-forward business strategy
Digital transformation is about the journey, not the destination. Going digital is not a project with a start and end date, nor is it a one-time process. As technologies are constantly evolving, companies need to adopt an ongoing approach of learning, rethinking, and leveraging new tools.
Enterprise-wide digitization in banking and financial services isn’t hurdle-less. But in the long run, it will drive growth, innovation, and turnover. By embarking on the digital transformation journey, you’re investing in making your business nimbler, your employees more engaged, your customers more satisfied – and, ultimately, future-proofing your organization for tomorrow’s financial world.
Penneo helps companies in the finance industry automate processes across different business areas: personal banking, business banking, insurance, leasing, debt collection, pension, and more. Hundreds of financial institutions already trust us to automate their processes, from client onboarding to secure signing and document management.
Check out our latest guide Digitization in the Finance Industry: From 2020 trends to digital strategies for 2021 to read more insights or get a free trial of Penneo.