The challenge of speed
Speed and quality under pressure: How financial services are different
Every industry must adapt to survive, but financial services are distinct. They are also caught in a net of conflicting demands from consumers, regulators and shareholders. These challenges have become sharper in the wake of the financial crisis, which has damaged customer trust and provoked sharp re- regulation. As technology changes, financial services organisations ought to be ripe for innovation.
However, no doubt because of their strict regulatory requirements, they tend to be more bureaucratic and risk-averse than other sectors. And let’s not forget that change requires investment capital—
something that for many financial services organisations is still scarce.
Change is not slowing down
While 99% of financial services executives have experienced technology-related disruption of their industry in the last three years, more than one in five (22%) expect the next three years to yield zero technology-related disruption. After the business model and process shifts of recent years, and given the pace of innovation in mobile banking, analytics and social media, it is astounding that they should predict no such disruption. Noticeably more than in other industries, financial services executives tend to think that technological change has plateaued. This idea – that change is slowing down – is actually a potentially dangerous one for the financial sector.
AN ECONOMIST INTELLIGENCE UNIT RESEARCH PROGRAMME SPONSORED BY
Economist Intelligence Unit conducted seven
in-depth interviews with corporate leaders or noted academic experts, as well as substantial desk research. This article aims to offer some guidance to managers in financial services hoping to drive greater process speed and harness the potential of changing technologies to better serve their corporate goals.
The report is based on a survey of 461 senior, Europe-based executives. Of these, 72 were from the financial services sector, including retail, corporate and investment banking as well as insurance. More than half (52%) of respondent companies have annual incomes over US$500m.
The survey sample is senior, with 49% C-level or above and a further 23% senior vice presidents, vice presidents or directors. In addition, The
About the research
“Technology transformation is escalating,” says Tony Prestedge, chief operating officer of the UK building society Nationwide. As evidence, he points to the digitisation of money. “Just look at the entry points of PayPal and Google Wallet. Most banking institutions still use a batch system. They process throughout the day and then consolidate and balance the ledgers overnight. Come on, man, it’s a 24-hour world out there. Real-time banking will soon be the norm.” The rise of algorithmic trading and cloud computing makes this as important to investment institutions as it is to traditional lending and financial services organisations. Brokerages have followed exchanges online and customers demand smooth interaction, anywhere and all the time.
It is not only the development of technology that is putting banks under pressure. It is about responding to changing customer demands. “The Internet used to operate on a model of connecting people to a web page,” says Jaroslaw Mastalerz, the COO of mBank, the third-largest retail bank in Poland by number of customers. “That’s how most banks still operate. But when you look at how people use the Internet now, it’s connecting to individuals through Facebook and Skype and the like.
Customers are going to want to interact with individual employees over their mobile phones just as they used to interact with people in branches. And that change requires reworking processes because people interact with people – especially when using mobile phones – quite differently than when they interact with web pages.”
Regulators are also pressuring banks to evolve quickly. “It’s not only the technology and the shift in customer behaviour that is driving change,” says Dr. Peter Leukert, Capco Partner and Head of the Capco Institute, a business and technology consultancy, and the former CIO of NYSE Euronext. “It’s also the regulatory requirements and the huge cost pressure that banks are under. I don’t see the pace of change slowing down in banking.”
Indeed, regulatory compliance and security are of paramount importance for the financial sector, and essential for business and consumer confidence. Moreover, banks need to simultaneously comply with national and EU regulations, which are layered on top of each other. This becomes even more complex for institutions operating in several markets across the continent, as the EU has not yet delivered a unified single market in financial services. Even the Single Rulebook of the European Banking Authority (EBA) will not eliminate local tailoring and regulatory variation. Thus, financial services companies need to ensure not only that their technology processes are integrated, but also that they meet seamlessly with the complicated layers of regulation piled upon them. They still have to move fast to meet customer demands, but they can ill afford any mistakes in the process.
What is holding financial services back?
It is not surprising, then, that financial services executives value the ability to carry out rapid
organisational change. More so than in other industries, financial services executives value agility,
with 58% citing speedy adaptation as important, compared with the respondent’s overall average
of 44%. In particular, they stress the importance of changing quickly to achieve objectives such as
attracting and retaining customers, adopting new technologies and improving regulatory compliance.
“We’re very lucky we have a chief compliance officer who focuses as much on simplification as she does on compliance,” says Nationwide’s Mr Prestedge. “That allows us to comply with regulatory requirements while at the same time removing unnecessary barriers to speed.”
Integrating technology platforms is a common problem. But financial services executives more often cite systemic obstacles to agility:
l bureaucratic mind-sets that impede decision-making l insufficient information access
l risk-averse cultures that stand in the way of unproven initiatives.
In terms of enabling speed, mBank’s Mr Mastalerz points to one solution: change the culture by hiring entrepreneurs, rather than traditional bankers. Speaking about his own organisation, he affirms: “We don’t have an incumbent group of bankers who learned the business in the 1980s and 1990s. It’s very difficult to convince those people to adapt to disruptive change. We focus on selecting people who share strong interests in business and technology, and then create an environment where they can be more flexible than in the average bank. The people we hire don’t see speed as an impossible challenge.
They just do it.”
The financial institutions surveyed are more likely than other sectors to use technology, but they tend to lag behind organisationally. Less than 30% of respondents agree with the statement: “We minimise
Where is adapting to change is most critical: How financial services are different
(%)
Financial services All
Attracting and retaining customers Adopting new technologies
Regulatory compliance
Source: The Economist Intelligence Unit.
16
28
37
44
37
47
internal barriers to rapid action (such as unnecessary approvals and controls)”. This pattern holds for several other practices that could lead to greater speed, such as sharing speed-related best practices, assigning formal responsibility for managing speed, and benchmarking their processes. Financial services executives further cite the issue of “poor governance of change management” more than those in other sectors (43% versus 29%). These are essentially issues of management diligence and process optimisation. Executives need to assign responsibility, track progress and replicate successes once they are identified.
Towards that goal, below are some key takeaways for delivering greater speed:
Address what can be managed
“There is regulatory complexity, where there’s relatively little you can do unless you simplify your business,” says Dr Leukert. “There is complexity around product and services, and there is a lot you can do to simplify that. And there is complexity in legacy technology, and often there is no business case to completely replace that, so you need to manage it, keep it under control, and make sure you retain the ability to change at least the customer-facing parts quickly. Complexity can be managed if you manage it both on the portfolio level and the individual project or initiative level. The key is to have a very clear blueprint and a plan for executing against it.”
Biggest obstacles to agility: How financial services are different
(%)
The complexity of our business
processes The difficulty of
getting employees, business units or functions to adopt a common approach A risk averse
culture Insufficient
access to information Effectively linking
all of our technology
platforms Bureaucratic
decision-making processes
Financial services All
31 47
37 40
28 35
23 29
35 25
31 24
Source: The Economist Intelligence Unit.
Use technology as a support
Mr Prestedge emphasises that you should “articulate a business strategy in a way that allows technology to be a responder to rather than a driver of the organisation’s direction.” Technological change is all around us. But to be effective, its speedy deployment must be in the service of business objectives.
Then refine your operations
Use benchmarking and other process improvements to ensure that speed can coexist with quality.
Identify internal barriers to greater agility and eliminate unnecessary approvals or controls.
Bureaucracy is necessary when it contributes to legitimate risk management or compliance goals. Everything else should be slimmed down so that the business can operate quickly but without mistakes.
Increasing speed while satisfying both customers and regulatory requirements is going to be a serious challenge. But financial services companies are facing an array of new market entrants; many are aiming to overturn traditional business models. If existing companies don’t strive to become faster and more agile, they may simply get left behind.
What financial services does to enable speed - and what other sectors do
(%)
Financial services All
Source: The Economist Intelligence Unit.
Speed is not in our culture We assess or
benchmark processes
for speed We have assigned
formal responsibility for managing
speed to an individual or department We share best
practices related to speed We minimise internal
barriers to rapid action (such as unnecessary approvals
or controls) We use technology
extensively to enable greater
speed
36 40
36 29
33 25
30
21 24 21
8
17
About the sponsor
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