By Alex Kwiatkowski, Director of Global Financial Services, SAS.
From shifting market dynamics and mounting geopolitical tensions, to skyrocketing cyber threats and a worsening climate crisis, the world faces risk and uncertainty on many fronts.
But how are these and other prevailing trends reshaping the financial services sector?
A volatile landscape
Describing the past few years as ‘volatile’ could be seen as a slight understatement, akin to saying the Titanic had a minor mishap at sea or that Liz Truss’s economic policy was mildly unorthodox. From the COVID-19 pandemic, Russia’s despicable invasion of Ukraine and the increasingly intense impacts of climate change, the resilience of not only businesses but whole nations has been pushed to breaking point.
In many ways, the banking sector has proven remarkably resilient to such challenges and risks. In the face of prolonged disruption, profitability remained higher than many had anticipated. However, the deeper structural challenges, such as digitalisation, the emergence of fintech disruptors, the brouhaha over crypto, and the growing threats associated with cyber attacks, are continuing to gather force as we head into a new year.
A recent Economist Impact survey, sponsored by SAS, found that while banking leaders are conscious of the imminent risks and those on the horizon, many are generally optimistic about how their organisations could be reshaped over the next decade, and beyond. I believe this optimism is well-founded rather than misguided, although pragmatism is required.
Digital transformation
For some years leading up to the COVID-19 pandemic, banks had been wrestling with exactly when and how to digitally transform. Like so many other industries, the chief legacy of the pandemic was to force rapid and wholesale change on a sector not always eager to embrace new ways of operating.
Traditional banks are now on track to be digitally transformed by the end of this decade, with technologies such as cloud computing and AI becoming industry norms. When considering the next three to five years, 57% agreed that digital transformation is among their top strategic priority. Cybersecurity and data protection (55%) are not far behind.
This focus on digital transformation is understandable, given the opportunities it may bring. Respondents from the Asia-Pacific region were the most excited, with 64% selecting it as among the greatest opportunities for their organisation. This was much higher than their counterparts in North America (52%), Latin America (50%) and Europe (50%). In fact, the tech-savviness among Asian consumers has created an opportunity for banks to leap ahead in delivering innovations compared with other regions.
When asked about the role of advanced data analytics in a successful digital transformation, just under half (48%) of executives selected this as the most important digital capability that their organisation must harness. It was the clear overall favourite, followed by blockchain (35%), AI/machine learning (34%), IoT/5G (33%) and robotic process automation (29%).
However, the survey also revealed a number of hurdles that may prevent the full uptake of data analytics, such as the increased risk of cyber attacks and a reliance on legacy technology systems. In addition, functions and departments working in silos was viewed as a potentially significant barrier, with 48% noting this as a “significant barrier” to change.
Purpose-driven banking
Alongside this goal of digital transformation, a growing consensus has emerged among banking leaders that the wellbeing of customers, communities, employees and the environment ought to be at the forefront of strategy.
Termed ‘purpose-driven banking’, this shift often encompasses ESG-related activities as well as a broader commitment to customer relationships over profits.
Purpose-driven banking has broad support among the industry’s leaders, with 82% of executives agreeing that financial services organisations can pursue profit and a better society at the same time. That sentiment is even more common among C-level executives, with 91% in agreement.
Arguably one of the most interesting results of the survey is the fact that 76% of respondents believe that the banking sector has an obligation to engage with and address societal issues. An even larger portion (81%) said that their bank takes responsibility for the social impacts of its activities.
Interestingly, a clear majority felt that the financial services industry is behind other sectors in terms of progress on ESG commitments. About three-quarters (76%) of C-level respondents said this, compared with 61% of all other executives.
Establishing transparent and measurable ESG goals aligned with corporate strategy is one area where leaders feel behind, with just 38% feeling that their organisation had achieved this. Another important aspect of the purpose-driven mindset is recognising how banks are fundamentally linked to other stakeholders in society. When asked which were the “most important groups for financial services organisations to engage with in order to have the most positive impact”, the technology industry, investors and customers were the top three choices. They were followed by consumers and government or policymakers.
Growing pressure from customers, communities and other external stakeholders are likely to influence the extent to which the banking sector embraces ESG practices, however it’s clear that the banking sector looks set to transform over the next decade. And transform it must.
