Angus Panton, Director of Banking and Financial Services, Expleo
Digital operational resilience – the ability to build, ensure and test the technological operational integrity of an organisation – has been a key factor in the success of businesses over the past 18 months.
As the world navigates its way back to a more regular cadence of activity, complacency around digital resilience and digital transformation represents a genuine threat to enterprises across a wide range of industries, especially within the financial services sector.
As we move into 2022, the financial sector needs to think smart when it comes to utilising tech innovations to ensure that they are well equipped to tackle today’s challenges and tomorrow’s opportunities head-on.
We have identified five historical contributing factors to failed banking digital operations, to demonstrate how banks can learn from these mistakes and keep their digital resilience strategies in line with today’s demanding environment.
The struggle to keep up with evolving consumer trends
With consumer trends constantly changing, it can be tough for internal innovation to keep up. Recently, some traditional banks have been unable to adapt fast enough to reflect their consumers evolving tastes, particularly regarding the accessibility, speed, and convenience of mobile banking.
Contrary to popular belief, banking has not traditionally been a consumer-facing business. Activity has always revolved around what banks wanted consumers to do – like take out a loan or open a new account, for example.
However, consumers today are in a more powerful position to question the digital resilience of banks, with the expectation that they should be providing a superior customer experience. For example, a recent report by the OECD found that FinTech lenders process mortgage applications 20% faster than other lenders and refinances of mortgages is 7% to 10% more likely to originate from FinTech firms compared with traditional banks.
Forced to face this new reality, banks need to adopt a more consumer-friendly orientation. Thinking like a consumer services company will help put the consumer at the top of the agenda in a non-traditional way, which has contributed to powering the FinTech surge so far.
Antique banking infrastructure leaves businesses vulnerable to attack
Traditional banks’ current technology is structured in a way that makes it difficult to implement newer, more innovative solutions. The prospect of overhauling legacy systems and possibly disrupting service delivery can be daunting for any business, let alone large and complex financial institutions. Changing to an API-based infrastructure presents a number of unsightly, potentially costly challenges.
However, an inflexible software architecture can burden and impair a bank’s digital resilience, leaving it vulnerable to cybersecurity attacks, data breaches, and DDoS (Distributed Denial of Service) attacks.
According to Boston Consulting Group, cyberattacks hit financial services firms 300 times more frequently than other companies. This higher attack susceptibility can be catastrophic from a reputational perspective and can badly undercut an institution’s bottom line – with the average cost of a data breach on the sector standing at US$5.85 million, compared to US$3.86 million across other sectors. When put into perspective, this makes the initial cost of digital transformation worth the investment in the long run.
Legacy banking mindset and internal silos
External market conditions outside of banks’ control are usually the go-to excuse when institutions fail. In some instances, this is true. For example, the global pandemic has altered business strategy across the world drastically: forcing companies to endure intermittent periods of closure, scale back operations, or even shut down completely.
However, a lack of synergy between the technology departments and the information security department will always hinder digital resilience, even when putting unavoidable shocks aside. Strong cross-departmental engagement is key – and an agile growth strategy should allow businesses to run smoothly on all cylinders and pivot when required.
There are also signs that bolder, more decisive frames of mind are being heard over the legacy mindset in boardrooms. Our Spotlight on Financial Services report found that 64% of respondents feel their company is now more likely to approve new IT strategies and innovations because of the pandemic. A renewed focus on digital resilience and big-picture thinking for banks will mean heightened investment in digital infrastructure and services geared towards future-proofing service offerings.
Under-prepared for regulatory shifts
Banks are now operating within the confines of a much stricter regulatory environment than they were in the past, required to meet certain standards to retain their banking licences.
In today’s regulatory minefield, not adopting a robust compliance culture can be a death sentence to any financial institution, particularly the SME banks with narrow bandwidth and limited resources. With a deeper pool of resources to draw from, established market leaders will be in a stronger position to confront the myriad of regulatory challenges, but SME banks that kick the compliance can down the road, or choose not to enlist the services of prospective partner consultancies, will be at a marked disadvantage.
However, SMEs now have the opportunity to navigate the regulatory journey with a greater sense of confidence and conviction — by forming relationships with partners who have the depth of scale, demonstrable expertise and the industry-leading intellectual property tailored for compliance and digital resilience.
Working with the wrong third-party platform providers
Finally, banking leaders need to be on the lookout for partner organisations with the technical acumen, stellar track record helping players in their market, and repertoire of tools to enable fast-tracked, regulatory-compliant digital transformation.
Large swathes of banks and financial institutions leverage the services of third-party vendors to enhance their overall service offering, but often neglect vetting the partners for vulnerabilities – and properly gauging the security and rigour of these vendors is essential when it comes to executing a firm digital resilience strategy.
Institutions that absorb the key learnings outlined above will be in a strong position to thrive in an increasingly competitive landscape and be more attuned to pivots in consumer demands.
In today’s increasingly competitive landscape, it is essential that institutions chart this new path forward in a manner that mitigates risk on a rolling basis, considers evolving consumer attitudes and ensures rigorous regulatory compliance. Only by adopting a disciplined, data-led decision-making process will organisations be able to execute nimble growth strategies.
Wealth Managers and the Future of Trust: Insights from CFA Institute’s 2022 Investor Trust Study
Author: Rhodri Preece, CFA, Senior Head of Research, CFA Institute
Corporate responsibility is more important than ever. Today, many investors expect more than just profit from their financial decisions; they want easy access to financial products and to be able to express personal values through their investments. Crucial to meeting these new investor expectations is trust in the financial services providers that enable investors to build wealth and realise personal goals. Trust is the bedrock of client relationships and investor confidence.
The 2022 CFA Institute Investor Trust Study – the fifth in a biennial series – found that trust levels in financial services among retail and institutional investors have reached an all-time high. Reflecting the views of 3,588 retail investors and 976 institutional investors across 15 markets globally, the report is a barometer of sentiment and an encouraging indicator of the trust gains in financial services.
Wealth managers may want to know how this trust can be cultivated, and how they can enhance it within their own organisations. I outline three key trends that will shape the future of client trust.
THE RISE OF ESG
ESG metrics have risen to prominence in recent years, as investors increasingly look at environmental, social and governance factors when assessing risks and opportunities. These metrics have an impact on investor confidence and their propensity to invest; we find that among retail investors, 31% expect ESG investing to result in higher risk-adjusted returns, while 44% are primarily motivated to invest in ESG strategies because they want to express personal values or invest in companies that have a positive impact on society or the environment.
The Trust Study shows us that ESG is stimulating confidence more broadly. Of those surveyed, 78% of institutional investors said the growth of ESG strategies had improved their trust in financial services. 100% of this group expressed an interest in ESG investing strategies, as did 77% of retail investors.
There are also different priorities within ESG strategies, and our study found a clear divide between which issues were top of mind for retail investors compared to institutional investors. Retail investors were more focused on investments that tackled climate change and clean energy use, while institutional investors placed a greater focus on data protection and privacy, and sustainable supply chain management.
What is clear is that the rise of ESG investing is building trust and creating opportunities for new products.
TECHNOLOGY MULTIPLIES TRUST
Technology has the power to democratise finance. In financial services, technological developments have lowered costs and increased access to markets, thereby levelling the playing field. Allowing easy monitoring of investments, digital platforms and apps are empowering more people than ever to engage in investing. For wealth managers, these digital advancements mean an opportunity for improved connection and communication with investors, a strategy that also enhances trust.
The study shows us that the benefits of technology are being felt, with 50% of retail investors and 87% of institutional investors expressing that increased use of technology increases trust in their financial advisers and asset managers, respectively. Technology is also leading to enhanced transparency, with the majority of retail and institutional investors believing that their adviser or investment firms are very transparent.
It’s worth acknowledging here that a taste for technology-based investing varies across age groups. More than 70% of millennials expressed a preference for technology tools to help navigate their investment strategy over a human advisor. Of the over-65s surveyed, however, just 30% expressed the same choice.
THE PULL OF PERSONALISATION
How does an investor’s personal connection to their investments manifest? There are two primary ways. The first is to have an adviser who understands you personally, the second is to have investments that achieve your personal objectives and resonate with what you value.
Among retail investors surveyed for the study, 78% expressed a desire for personalised products or services to help them meet their investing needs. Of these, 68% said they’d pay higher fees for this service.
So, what does personalisation actually look like? The study identifies the top three products of interest among retail investors. They are: direct indexing (investment indexes that are tailored to specific needs); impact funds (those that allow investors to pursue strategies designed to achieve specific real-world outcomes); and personalised research (customised for each investor).
When it comes to this last product, it’s worth noting that choosing advisors with shared values is also becoming more significant. Three-quarters of respondents to the survey said having an adviser that shares one’s values is at least somewhat important to them. Another way a personal connection with clients can be established is through a strong brand, and the proportion of retail investors favouring a brand they can trust over individuals they can count on continues to grow; it reached 55% in the 2022 survey, up from 51% in 2020 and 33% in 2016.
TRUST IN THE FUTURE
As the pressure on corporations to demonstrate their trustworthiness increases, investors will also look to financial services to bolster trust. Wealth managers that embrace ESG issues and preferences, enhanced technology tools, and personalisation, can demonstrate their value and build durable client relationships over market cycles.
2022 ESG Investment Trends
Jay Mukhey, Senior Director, ESG at Finastra
Environmental, Social and Governance (ESG) themes have been front and center throughout the pandemic. While the framework has been surging in popularity for several years, COVID-19 served as a period of reflection causing many companies, investors and other individuals to take these factors seriously. It’s something that we can no longer afford to ignore.
We are witnessing drought, adverse weather patterns, hotter climates, and wildfires with more regularity, raising the profile of the climate crisis. Efforts were renewed at COP26 in Glasgow last November to help address the challenge, with the signing of the Glasgow Climate Pact and agreement of the Paris Rulebook. As a result, we are now seeing record net new inflows into ESG investing and impact.
Evaluating ESG criteria
Long gone are the days when ESG issues were at the periphery of a company’s operations. In just a few short years, ESG criteria have become a key metric for investors to evaluate businesses they are considering investing in.
Investor money has poured into funds that consider environmental, social and governance issues. Data from the US SIF Forum for Sustainable and Responsible Investment shows that ESG funds under management have now reached more than $16.6 trillion. It’s not just institutional investors who are embracing ESG, with Bloomberg Intelligence predicting that savers across the world will amass £30.2 trillion in ESG funds by the end of the year.
Due to the multitude of divergent factors that contribute to a company’s success on ESG, it can be tricky to pin down exactly what criteria to measure. Depending on the industry a company operates within, environmental criteria could include everything from energy usage, the disposal of waste and even the treatment of animals.
Social criteria are primarily related to how a company conducts itself in business relationships and with stakeholders. For example, does it treat suppliers fairly? Is the local community considered when the business makes decisions that would impact them? Do they have a statement and policy around modern slavery?
While governance criteria have traditionally been an afterthought, this may be changing. Everything from executive pay to shareholder rights and internal controls are relevant to investors within these criteria.
Tracking ESG for competitive advantage
Many experts within the financial services industry point to the power of ESG as a major competitive advantage, if used correctly. It has been noted that increasingly corporations, from big Fortune 500 companies down to small scale-ups, will communicate on their sustainability metrics to grow their business and to attract talent. However, it’s no longer enough to just pay lip service to ESG issues, with abstract commitments increasingly being seen as insufficient. Companies must now quickly progress to concrete objectives that can be measured and tracked.
A wide range of data providers now offer detailed information and tools that can measure ESG performance and effectiveness. Yet major challenges remain around bringing together what is often extremely fragmented data and transforming it into actionable insights.
Focus areas for 2022
The ESG criteria that investors measure is by no means stagnant. Complex societal challenges regularly emerge that require the attention of companies. Contributors recognize several topics that demand a sophisticated approach, including the COVID pandemic, diversity challenges and powerful social movements.
Companies operating within the financial services sector face several specific challenges related to ESG, with contributors believing that fintech will also continue to play a central role in finding answers to them.
For example, industry experts expect customers to be more demanding of firms in SME lending when it comes to understanding exactly what impact they are having on the climate. For many financial services firms, 2022 will be the year that they will try to reduce the time it takes to bring ESG products and services to market, such as green loans and mortgages, as well as checking accounts with sustainability and carbon tracking capabilities.
When selecting a service provider, customers are increasingly interested in the ESG credentials of their bank or financial institution. Research from PwC finds that 80% of consumers are more likely to buy from a company that stands up for environmental and governance issues. Consumers are one of the main drivers of ESG and many are putting their money where their mouth is. It’s a trend that’s not going away; financial institutions need to start implementing their strategy for ESG now.
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