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Financial services firms are facing criticism from analysts. In a report released by HFS in collaboration with Infosys, it was described as a “cluster****” or a tale of two cities.
The report suggests that partnerships, or “ecosystems,” are the solution. Coalition Greenwich, in its analysis of the technology needs of asset managers, proposes outsourcing as a useful solution. Conducted on behalf of Northern Trust, its title warns that “Only the Fittest Will Thrive.”
HFS discusses the stages that banking and financial services (BFS) firms must go through, referring to them as “Horizons.” The report states that BFS firms face challenges such as aging legacy systems, a lack of talent, and an unwillingness to change, which hinders their ability to benefit from emerging technology.
Coalition Greenwich’s findings revealed that many asset managers expected to achieve organic growth by relying on existing practices, despite changing economics and technology.
For firms that are ready to change, HFS breaks down progress into three horizons. The first horizon focuses on digital optimization, which is necessary for survival. This is followed by end-to-end enterprise optimization. Horizon 1 goals include optimizing existing offerings, automating manual processes, and developing digital channels.
HFS emphasizes that financial firms should go through three horizons in order to progress.
However, Rohan Ranadive, head of third-party risk management at U.S. Bank, believes that many firms are still at Horizon 0 for certain functions.
“Following the Silicon Valley Bank (SVB) and Credit Suisse debacles, banks are hyper-focused on managing liquidity, which will impact their focus on innovation,” Ranadive said.
Horizon 3 involves creating and launching nimble configurable offerings, developing new business models based on cross-industry value and data monetization. But before reaching Horizon 3, firms must navigate Horizon 2, which includes modernization, cloudification, real-time data and decision-making, and personalized engagement.
“There is no skipping Horizon 2,” warns the report. “Those who try risk getting trapped in the Horizons innovation chasm.”
The report concludes that the ecosystem imperative is exciting but unrealistic unless BFS enterprises take measured steps to address enterprise modernization and decades of technological and process debt. Without an organized enterprise, BFS firms will be unable to reach Horizon 3 because they cannot effectively collaborate with partners.
While HFS promotes partnerships, the report also warns that partners can be problematic.
“Too many ineffective partners contribute to the problem…Commercial banks have an imprecise and overly generous approach to strategic partnerships. Useless partners must be removed, or banks risk remaining stuck in Horizon 1,” the report states.
The top concerns identified are talent acquisition and retention, legacy technology, compounded technical debt, and a lack of centralized data governance.
Dennis Gada, Infosys Global Sector Head – Financial Services, emphasized the importance of high-quality data:
“Good quality data that is easily accessible and usable is necessary to effectively use AI capabilities.”
Furthermore, monetization involves using data effectively and gaining insights from it, Gada added.
Legacy technology is seen as a relatively easily solved problem, according to Ben Rayner, head of analytics and process optimization at Citi Enterprise Operations and Technology.
“By definition, legacy technology is depreciated, so the main problems lie in the lack of functionality, the creation of silos, and difficulties in standardizing processes. This can be addressed by implementing machine learning and extracting data from legacy systems. It is much more achievable to create a digital layer on top rather than replacing the entire legacy technology. The key is not to rebuild but to transform quickly,” Rayner explained.
HFS found that BFS firms struggle to fully utilize the value of their data programs. Poor data and limited validation result from the lack of controls in the front, middle, and back office. Inefficient data architecture, combined with numerous legacy IT systems across different lines of business and geographies, creates challenges. The report emphasizes that BFS firms primarily modernize out of necessity rather than desire.
According to HFS, full-services firms are increasingly becoming ecosystem orchestrators.
“A partner’s ability to deliver cost savings is a major factor in determining strategic value. Interestingly, cost is on par with a partner’s ability to deliver co-innovation and collaboration,” the report states.
As HFS delved into changing partnership approaches, it became evident that ecosystem enablement requires significant change that banks cannot drive or supply on their own. The challenges of talent, data, and legacy technology can be addressed with the help of end-to-end partners who offer advice, implementation, and management of evolving technology, processes, and people.
Fintech companies are increasingly valuable resources for BFS firms looking to modernize. They assist in enhancing legacy systems that are not yet ready to be replaced, according to HFS. This report is the first in a four-part series that examines the growing importance of ecosystems in the BFS market.
