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CAUGHT BETWEEN GLOBAL ECONOMIC TRENDS AND TECHNOLOGICAL CHANGE – THE STATE OF THE FINANCIAL INDUSTRY

29/05/2019

More than 10 years after the outbreak of the global financial crisis, the financial services industry is still reeling. Some of the big players continue to find themselves under intense scrutiny and old ailments, like non-performing loans and liquidity issues, are harmful in the context of macroeconomic trends. 

The financial services industry has been, and still is, in a process of transformation. Fintechs are bringing new competition to the sector at the same time as costs are rising – largely driven by regulation. Technology is also shifting the goal-posts. Banks now have new tools like artificial intelligence, machine learning, predictive analytics, robotic process automation and blockchain to work with.

But regulators are not making it easy to exploit these new technologies. While they offer the potential for huge cost savings, their ability to manage risks has not been sufficiently proven. Regulators view new technology with suspicion. Unchecked, it can create new risks of service outages or information security incidents. In addition, regulators need the assurance that the data used to calculate risks is reliable; if not, it could lead to false decisions. It’s a double-edged sword; big data sets can detect suspicious patterns, which can help financial institutions fight financial crime. But this increased automation, for example in online based services, can also open the door to those who are able to exploit weaknesses in the system. 

With tech comes data

From both a regulatory and a business point of view, data plays a key role in the financial industry. However, it also brings fresh attention to the question of data governance. The processing capability of many IT departments still cannot match the potential of big data. A recent study by Reply shows that companies are still reluctant to invest in quality data governance systems, even though there are well established technologies on the market. Nonetheless, external bodies are intensifying the pressure to conduct proper data governance audits. Regulations such as GDPR, IFRS 17 and BCBS 239 demand considerably more insight into the company’s own data landscape than existed before.

Smart data governance can only be truly beneficial when used in conjunction with other data management tools. Companies must focus on both the proper analysis and management of data, which produces better compliance and more reliable and faster decision-making processes. It will also minimise risks associated with incorrect or incomplete data sets. As such, prioritising data governance solutions is an investment worth making.

Blockchain

Of course, we can’t ignore blockchain. The Reply study predicts a further integration of blockchain across the financial sector. In addition, it forecasts that blockchain will gain further significance in the context of asset tokenization, the division of assets, such as real estate, into tokens stored in a blockchain which facilitates more efficient trade on a secondary market. In connection with Know Your Customer/Anti-Money Laundering (KYC/AML) protection, blockchain provides more security through improved identification management. Costs can also be kept low through Blockchain-as-a-Service (BaaS) offerings which should further increase acceptance of the new technology.

Skills Gap as a fundamental risk

The Reply study has uncovered many potential opportunities in the financial sector, each with their own potential risks. However, one of the major challenges faced by financial institutions is the looming skills gap. The modernisation of the IT landscape will act as a basis for more innovation and agility as well as the development of new Cloud services, which requires a skilled workforce. Skills and innovation go together and in a competitive landscape, known as “Digital Darwinism”, enterprises need to make sure that innovation is part of their DNA. Innovation is needed both in employees and in the processes that empower change towards a more customer-centric and efficient organisation.

In the context of this multidimensional risk landscape, the Reply Financial Services Outlook 2019 gives a 360° overview from Risk Management to Digital Transformation. This can aid decision makers seeking to prepare for the integration of new technology driven concepts such as AI, Big Data or Blockchain while keeping macroeconomic and geopolitical currents that will impact the journey ahead in mind.

The full whitepaper is available for download here: https://www.reply.com/avantage-reply/en/financial-services-outlook-2019 

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Finance Derivative is a global financial and business analysis magazine, published by FM.Publishing. It is a yearly print and online magazine providing broad coverage and analysis of the financial industry, international business and the global economy.