Financial services enterprises are under greater pressure to digitally transform. According to new Telehouse research, more than four out of ten (42%) financial service enterprises need to transform their IT infrastructure or risk becoming less competitive – a figure significantly higher than the 34% average across other sectors.
Pressure is being driven by a combination of factors, including customer demands for more connected, relevant and personalised experiences (46%), the need to simplify business and operating models to increase efficiency (46%), cyber security (44%) and the necessity to deliver new applications and services to customers (44%). The emergence of nimbler challenger banks and ambitious FinTechs has set the challenge for businesses across the sector to step up a gear and reshape their operations.
For many, a shift from a traditional on-premise infrastructure, to a more modern mix of colocation, cloud and ultimately, edge computing is the answer.
Scoping the challenge
Today, financial services firms need to react quickly to regulatory demands and take advantage of market opportunities. However, they often don’t have the right systems in place to manage, or effectively use data to respond as quickly as their ‘digitally native’ peers.
The problem is many are still reliant on inflexible, legacy, on-premise infrastructure. The research revealed that financial services organisations outsource the lowest proportion of IT infrastructure to colocation and the cloud of the enterprise sectors polled. So, it’s not surprising the sector also has the lowest confidence in IT maturity, with just 30% of IT decision-makers describing their organisation’s IT maturity as ‘very advanced’.
Transformation is clearly needed but it is not always an easy task. Historically, financial services firms have struggled to adopt new technologies and meet increasingly high customer expectations quickly, often limited by strict compliance and regulatory requirements, which ratcheted up after the global financial crisis of 2008. Even with the appetite to change, many have struggled to make meaningful progress, held back by legacy IT systems. But with time of the essence and providing personalised, connected and reliable experiences now business-critical, organisations can simply no longer afford to stand still.
Why connectivity is key
As customer demand and internet consumption grows, financial services organisations need to find ways to increase connectivity between offices and countries and improve the user interface on customer-focused technology like apps and websites.
5G will offer many benefits for financial services including reduced latency, which in turn will help decrease transaction and settlement times. It will also facilitate the adoption of AI to enable greater personalisation and improvements to customer experience.
However, as with any new wireless communications technology, the volume of data used will rise significantly, putting more stress on backbone networks. A fifth of financial service enterprises surveyed in the research already say that data volumes have become a serious problem. To succeed, organisations need the ability to quickly ingest and process data and this will be dependent on having a connected, secure, reliable, scalable, flexible, resilient and low latency IT infrastructure.
Ultimately, more connections mean more risks. So, the challenge is how to take advantage of increased connectivity without compromising security or compliance.
Despite lagging behind other sectors in most areas, financial services are leading the way when it comes to edge computing.
The role of colocation
Many are turning to colocation as the answer; providing the extra capacity and bandwidth required, while also enabling fast, secure and direct connections to cloud service providers. According to the Telehouse research, financial services organisations are already outsourcing 38% of IT infrastructure in colocation with adoption set to increase further as the use of big data; 5G and the Internet of Things (IoT) rises.
By hosting their IT infrastructure in a colocation data centre, organisations can control the migration process, keep on top of regulatory demands and keep a lid on costs. The research found that the top drivers of investment in colocation are sustainability, faster data access and improved connectivity, likely driven by the need to improve customer experience and connect disparate hybrid IT structures.
More importantly, by deploying a combination of cloud and colocation strategies, organisations can create a resilient and secure foundation for growth. This will enable them to flex and scale operations when building new services and innovations to meet future demand, while also ensuring they provide their customers with a responsive and high-performing service. And by choosing a colocation facility in close proximity to financial markets and exchanges, organisations can benefit from reduced latency and faster data processing to enable real-time big data analysis.
Moving to the edge
Despite lagging behind other sectors in most areas, financial services are leading the way when it comes to edge computing. 72% of respondents have already implemented a strategy for edge computing, driven by a need to optimise data volumes (36%), digitally transform (34%) and match competitor capabilities (34%). However, over a third say they are challenged by a lack of understanding of edge networks and their purpose as well as uncertainty over which locations to gather and manage data in.
Given that it’s now more important than ever for financial services firms to store, access and analyse and access exponential levels of data at record speeds, it is not surprising that interest in edge computing is soaring. Gartner predicts that by 2025, 85% of infrastructure strategies will integrate on-premises, colocation, cloud and edge delivery options, compared with 20% in 2020.
Demand for edge is also likely to be driven by its convergence with other technologies such as cloud and colocation and is evidenced by the fact that many firms opt for a mix of technologies. Ultimately, the key for success for organisations will be building the right infrastructure foundations and connectivity, and the right data centre partner is critical to achieving this.
Embracing the connected future
Financial service providers have a huge opportunity to provide the seamless, secure and personalised services that today’s consumers crave. But doing so requires digital transformation.
As data volumes and connectivity increase, new developments such as predictive modelling to prepare for ‘what if’ scenarios, automation of front-end sales and customer-facing environments and the enhancement of customer care by self-service functionality will become commonplace. However, success depends on having the right IT infrastructure to enable fast, secure and seamless connections. It will be those that can build a connected, secure, reliable, scalable, flexible, resilient and low latency IT infrastructure that will be winners in the race to the connected future.
If everyone is one step ahead of the competition, how is it possible for anyone to be one step ahead? The FinTech sector is currently facing a complex situation where start-ups are one-upping tech giants, and vice versa, on a daily basis. So how is it possible to maintain an edge in the industry? Finance Monthly hears from Frederic Nze, CEO & Founder of Oakam, on this matter.
The financial services industry has entered the Age of the Customer -- in this era, the singular goal is to delight. With offerings that are faster, better and cheaper, new fintech entrants have the edge over traditional institutions who struggle to keep pace with consumers’ rising expectations around service. Yet this is not the first or last stage in the industry’s evolution. Just as telephone banking was once viewed as peak disruption, so too will today’s innovation eventually become the standard in financial services.
What will become of today’s new entrants as they scale and mature? The answer largely depends on why a particular fintech company is winning with customers today -- a hyper focus on problem-solving.
If customer review site Trustpilot is used as the litmus test for customer satisfaction, then clearly banks and other traditional financial firms are falling short of the mark. Looking at the UK’s Trustpilot rankings in the Money category, not a single bank appears in the top 100, and their ratings range from average to poor. Fintech entrants like Transferwise, Funding Circle and Zopa, on the other hand rank highly in their respective categories.
So how is it that such young companies have elicited such positive responses from consumers, beating out institutions with decades of experience and customer insight?
The advantage fintechs have over banks is that their products are more narrowly focused and are supported by modern infrastructure, new delivery mechanisms and powerful data analytics that drive continuous user-centric improvement and refinement. Still, they’ve had to clear the high barriers of onerous regulatory and capital requirements, and win market share from competitors with entrenched customer bases.
The halo effect of innovation and enthusiasm of early adopters, hopeful for the promise of something better, has buoyed the success of new entrants and spurred the proliferation of new apps aimed at addressing any number of unmet financial needs. This of course cannot continue unabated and we’re already approaching a saturation point that will spark the reintegration or rebundling of digital financial services.
In fact, a finding from a World Economic Forum report, Beyond Fintech: A Pragmatic Assessment Of Disruptive Potential In Financial Services, in August this year stated that: “Platforms that offer the ability to engage with different financial institutions from a single channel will become the dominant model for the delivery of financial services.”
Whether a particular app or digital offering will be rolled up into a bank once again or survive as a standalone in this future world of financial services, will depend on the nature of the product or service they provide. This can be shown by separating businesses into two different groups.
Firstly, you have the optimizers. These nice-to-haves like PFM (personal financial management) apps certainly make life easier for consumers, but don’t have competitive moats wide enough to prevent banks from replicating on their own platforms in fairly short-order.
For the second group, a different fate is in store. These are offerings that are winning either on the basis of extreme cost efficiency (the cheaper-better-fasters) or by solving one incredibly difficult problem. Oakam belongs to this second category: we’re making fair credit accessible to a subset of consumers who historically have been almost virtually excluded from formal financial services
The likely outcome for the cheaper-better-fasters, like Transferwise in the remittances world, is acquisition by an established player. They’ve worked out the kinks and inefficiencies of an existing system and presented their customers with a simpler, cheaper method of performing a specific task. However, their single-solution focus and ease of integration with other platforms make them an obvious target for banks, who lack the technology expertise but have the balance sheets to acquire and fold outside offerings into their own.
Integration into banks is harder to pull off with the problem-solvers because of the complexity of the challenges they are solving for. In Oakam’s case we’re using new data sources and methods of credit scoring that the industry’s existing infrastructure isn’t setup to handle. In other words, how could a bank or another established player integrate our technology, which relies on vastly different decision-making inputs and an entirely new mode of interacting with customers, into their system without practically having to overhaul it?
For businesses who succeed at cracking these difficult problems, the reward is to earn the trust of their customers and the credibility among peers to become the integrators for other offerings. Instead of being rebundled into more traditional financial firms, these companies have the potential to become convenient digital money management platforms, enabling access to a range of products and services outside of their own offering.
Self-described “digital banking alternative,” Revolut was first launched to help consumers with their very specific needs around managing travel spending, but today has offerings ranging from current accounts to cell phone insurance. While some of their products are proprietary, they’ve embraced partnership in other areas, like insurance which it provides via Simplesurance. This sort of collaboration offers an early look at the shape of things to come in finance’s digital future
One might ask how the digital bundling of products and services differs from a traditional bank, with the expectation that the quality and customer experience will diminish as new offerings are added. A key difference is PSD2 and the rise of open banking, which will enable closer collaboration and the ability to benefit from the rapid innovation of others. What this means is that an integrator can remain focused on its own area of expertise, while offering its customers access to other high quality products and services
At Oakam, this future model of integrated digital consumer finance represents a way to unlock financial inclusion on a wide, global scale. Today, we serve as our customers’ first entry, or re-entry, point into formal financial services. The prospect of catering to their other financial needs in a more connected, holistic way is what motivates us to work towards resolving an immediate, yet complicated challenge of unlocking access to fair credit.
