Rahul Singh, President of Financial Services at HCL
For all the talk of FinTech disruption, it’s interesting that the banking industry still widely uses 60-year-old computer language COBOL. It powers 95 per cent of ATMs and 80 per cent of in-person transactions, with one recent estimate suggesting that there are 220 billion lines of COBOL code currently run across banks. This raises significant questions txhat must be addressed if financial institutions want to keep up with their competitors: can COBOL really drive innovation? Can it target young programmers who are attracted by the prospect of using systems like Python, Java, Erlang and Scala? It is the likes of large corporate organisations such as Google and Apple which allow young talent to play with these programming languages, making this an issue finance professionals cannot afford to ignore.
The reality is that financial institutions must get their tools and techniques right if they are going to compete with FinTechs. You don’t have to look far to see examples of companies offering more to consumers and businesses alike: take Robinhood’s offer of trading without charging a commission, Prosper’s connection between borrowers and investors for unsecured personal loans, and SoFi’s offer of student loan refinancing. Even FinTechs which were once considered upstarts are increasingly dominating the financial services space. Paytm, for instance, didn’t exist until eight years ago, yet manages mobile payments for 300 million registered users. Likewise, Alibaba’s Yuebao is one of the largest money market funds, yet only launched in 2013. One thing is clear: regardless of their time on the scene, FinTechs are driving the future of the financial services industry.
One big advantage FinTechs have, by their very nature, is a lack of legacy technology. The story is very different for the wider industry: a recent survey from HCL Technologies revealed that almost two thirds (60 per cent) of financial institutions cite legacy applications as their biggest barrier to agility, innovation and disruption. Typically, traditional financial services organisations are tasked with managing these burdensome outdated applications, which restrict the adoption of new technology. FinTechs, by contrast, especially the more recently-founded companies like those listed above, have no such problem. Without the weight of obsolete legacy systems on their shoulders, they are better positioned to maximise the potential of new technology. The challenge, then, for traditional players in the financial services game, is simply to stay abreast. When FinTechs already have a head start, the need for financial institutions to up their game and embrace digital transformation becomes even more pivotal. Losing pace with the competition is simply not an option.
Biting the technology bullet
To put the scale at which new technology is being used into perspective, global investments in FinTech were estimated to be $31 billion in 2017. That level of investment has the potential to drive serious change in the world of financial services. This leaves one path for traditional service providers who have the painful task of adapting to the coming challenges: to relentlessly examine trends and identify technologies that can catapult them into the future.
Trends are relatively easy to identify, even though consumer behaviour is rapidly changing; the problem lies in responding to the trends. The world of financial services is bristling with regulatory and compliance restrictions, meaning enforcing change can be painfully slow. Worryingly, even financial institutions in the Fortune 500 are fighting to keep pace. These institutions must recognise that technology is driving change in the finance industry, and that investments in technology will help re-shape processes, products and business models quickly and cost-effectively. In other words, technology will keep financial services organisations agile. Embracing technological innovation is the only solution these institutions can use to respond to changing trends and keep risk under check.
Simple approaches to a complex problem
Identifying the issue, however, is only half the answer. It is crucial for ambitious financial services CIOs to consider which technologies they should be directing their attention towards. In the maze of new technologies dominating the industry, where should the organisation place its bets? The financial space is becoming increasingly dominated by cloud, mobile, automation, big data, analytics, artificial intelligence, natural language processing, cybersecurity and blockchain. Each in itself is a powerful driver of change, making it difficult for a CIO to pilot an organisation around these options.
The first step is to understand the future of financial services and the direction in which an organisation needs to innovate. It then needs to identify the technology (or combination of technologies) that will move it faster in the chosen direction and simultaneously help reach momentum within the industry.
It sounds simple on paper, but how can this change be delivered in practice? There are two strategic aspects to keep in mind:
- A distinct long-term technology roadmap must be developed separately from short term goals. The long-term roadmap should leverage a range of technologies rather than a single overarching one. When combined, these technologies deliver more than the sum of their parts, considerably elevating the quality of the customer’s end experience.
- Relentless experimentation is key. Only by testing out these technologies will financial services institutions be able to understand which must be adopted to improve the pace of innovation and meet business goals. Ideally, these organisations should venture out and partner with smaller boutique firms, too, since partnerships like these often result in unconventional but highly effective solutions. If financial services organisations want to remain on the path to agility and compete with market leaders, they must be willing to branch out beyond their comfort zone and embrace change.
Innovation is key
By ensuring innovation is driven by a sharp strategic focus and powerful technological partnerships, financial services organisations can address the challenges posed by legacy applications. The problem facing these institutions may seem complex, but the solution is surprisingly straightforward. To avoid further domination of the financial services space by increasingly powerful FinTechs, traditional organisations should refrain from putting their eggs in one basket and instead experiment with emerging technologies, all the while creating a diverse and innovative long-term strategy. Only by following these steps can financial services institutions keep up with the competition and stay ahead of the ever-changing game.