Digital Transformation in Financial Services
By The Record on November 8, 2016
Filed under Banking & Capital Markets
As general manager of the worldwide financial services sector at Microsoft, Karen Cone is privy to the major challenges facing financial services organisations today. Here she explains how Microsoft is facilitating a brighter future for the industry.
Achieving success in today’s financial services industry is no easy feat. According to Karen Cone, Microsoft’s general manager of the worldwide financial services sector, today’s financial institutions are grappling with the need to deliver more innovative customer and employee experiences while also complying with increasing regulations and managing legacy systems. “These challenges are exacerbated as more fintech’s enter the market,” she says. “Hundreds of start-ups in the fintech arena are working on various alternatives to traditional financial services. Many financial institutions are struggling to compete.”
Reduced customer loyalty is also presenting a significant challenge. “A recent study by Capgemini found that 15% of interviewed customers were likely to leave their bank in the next six months. What’s alarming is that 50% of Gen Y customers said the same,” Cone notes. “It’s a trend that requires attention and highlights that millennials’ definition of loyalty is somewhat different to that of older generations. What’s most important to millennials is who provided the last best experience.”
Meeting these challenges is proving particularly difficult when you consider that the vast majority of financial institutions are undergoing cost cutting exercises. “A recent Celent study found that on average 70% of IT budgets are spent just keeping the lights on,” Cone says. I was recently in an executive briefing with a CIO of a large European bank and he summed up the current situation by saying: ‘Our costs are too high and our agility is too low – if we don’t change this quickly, we won’t be able to compete’.”
But Cone is certain that there’s a way out of all the doom and gloom. “Financial institutions need to drive growth, manage risk and reduce costs,” she said. “Agility is key to success and this is where Microsoft can help – we’re focusing on helping financial institutions of all shapes and sizes to become nimbler and to transform themselves digitally.”
At the heart of digital transformation technologies is the cloud. “A couple of years ago the clear majority of financial institutions would acknowledge that the cloud is inevitable but argued that they faced regulatory blockers to adoption. With this in mind, Microsoft has focused on addressing regulatory requirements. We listened closely to our customers, including key input from our Financial Services Cloud Advisory Council which includes 16 of the top banks and insurers in the world. Additionally, we meet with global regulators to understand and address the key issues.”
As a result of this, Microsoft has created multiple programmes that enable financial services organisations to access the provisions they need to facilitate change. “Through our Financial Services Compliance Program we provide full transparency into our independent audit reports and give access to important information, such as control frameworks, roadmaps, security incident reviews and threat evaluations,” Cone explains. “We also address specific needs of Global Systemically Important Financial Institutions (G-SIFIs) – those who are ‘too big to fail’ as designated by the Fiscal Stability Board. In the last year, 25 of these top institutions have now signed up to the cloud with us and are deploying business solutions on Microsoft Azure, Office 365 and CRM Online. In fact, 80% of the largest banks today use the Microsoft cloud.”
Cone says that the reason for this fantastic rate of adoption is driven by a combination of factors. “With the clear majority of regulatory blockers cleared away, our customers can address the urgent need for agility with cloud-based Microsoft and partner solutions to enhance customer experience, empower employees, manage risk and rapidly create market-leading products and services. Additionally, our hybrid model is really appealing,” she says. “Financial institutions can operate partly in the cloud and partly on-premise, and can seamlessly operate between the two.”
According to Cone, cloud-based infrastructures and platforms will become more of a utility in the years ahead, marking a positive change for the industry. “This will enable banks and insurers to adapt and change quickly, helping them to offer new products and services without having to worry about updating incumbent systems,” she explains. “In the near future financial institutions will increasingly rely on data analytics and machine learning. As a result, products and services offered to customers will be highly personalised, tailored and customised. Financial institutions will be able to better understand customer needs and create offerings which take into consideration the current market environment and economic situation. We’ll also see an environment where agile fintech’s will partner with more traditional financial services companies and, together, will adapt and grow.”
Cone believes that the changing financial industry landscape will allow for ‘manufacturers’ and ‘distributors’ of financial services, which will enable unprecedented combinations of products and increase the need for intelligent systems to guide and simplify choices. “Additionally, disruptive technologies are changing the landscape,” she says. “For example, blockchain can be used to securely streamline multi-party transactions and remove exchanges and clearing processes. Financial industry leadership remains wary of moving to a such a pure ‘trust less’ model with no 3rd party guaranty. Nonetheless, the industry is still reeling in the aftermath of the recent financial crisis. As a result, market participants are now, more than ever, willing to invest to foster a market fabric built on open standards, standard data taxonomies and messaging within a common, secure transactional framework.
“The bottom line is that digital transformation will challenge the current way that traditional financial institutions operate,” Cone concludes. “But once these disruptive technologies are integrated with transformed business processes, it will give them the freedom to not only compete, but to thrive.”
Want to learn more? Download ‘Microsoft’s Perspective on the Digital Bank‘