Digital Transformation in Financial Services

New technology, modern services and new habits are turning up the pressure for some industries. Customers are demanding simpler and faster processes, even though the technology was becoming increasingly complex in the background and it is not uncommon for the entire business model to be questioned.

This has happened in other industries like the automotive sector: autonomous driving and new mobility concepts are described as an example of the shift in demand due to new technologies.

The automotive sector isn’t alone when it comes to the scale of digital change. The same could happen to the financial industry. 

Financial services are highly dependent on technology but fall short in terms of capacity to implement digitalisation solutions which have the potential to increase business efficiency. Could looking at other industries provide useful lessons for financial institutions wanting to change?

Digitalising financial services

Incumbent financial institutions are facing the challenge of maintaining growth alongside constantly changing IT infrastructure requirements. Whether caused by customer demand and interested parties, triggered by the modernised services offered by FinTechs, or even the incessant flood of regulations at national and Europe-wide levels, incumbents have had to navigate through a veritable minefield of obstacles to maintain their position within the financial services.

Those responsible in banks, savings banks and insurance companies can often only make use of pragmatic solutions to implement the requirements on time. So-called ‘island solutions’ separated off from the main IT systems, self-developed applications, and the purchase of individual external components over decades in some cases have naturally caused the fragmentation of the entire IT ecosystem, creating systems which are simply not fit for purpose in modern financial services - also known as legacy systems.

This issue is compounded by the market changes brought about by the Covid pandemic. Digital processes have been re-imported and prioritised within financial institutions, mainly because customers have had to rely on digital channels in order to receive and use products and services. Yet while customers and employees have become more and more accustomed to digitalised processes in recent months, front-to-backend processes are often still not optimal. Contingency plans and documentation lag behind. From a management perspective, this may mean adjusting the priorities of the existing IT strategy so as to better facilitate effective digital processes within the institution.

In Germany, BaFin, the Federal Financial Supervisory Authority, is also monitoring the digital transformation of incumbents, commenting on the state of financial services:

"Information technology is the basic infrastructure for all technical, but also all non-technical processes at banks. In a globalized financial world, in which more and more people are paying or transferring money digitally and in which many investors are making their investments online, IT governance and information security have become as important to supervision as equipping institutions with capital and liquidity.”

In the Banking Supervisory Requirement for IT (or BAIT), the supervisory authority explains what it means by adequate technical and organisational equipment of the IT systems, with special consideration of the requirements for information security and an appropriate emergency concept. As financial institutions increasingly procure IT services from third parties as part of a wider context of outsourcing in the industry, §25b KWG will be included in this interpretation, governing financial institutions in terms of outsourcing activities. 

Strategy in financial services 

Shareholders, the supervisory authority, as well as employees of financial institutions expect the management to have a plan - an IT strategy, so to speak – with a time horizon of between 3 and 5 years. This plan may include the timescales anticipated to carry out financial services digitalisation projects, the required budget, content-related topics, the added value and benefits for customers and the company, amongst other considerations. Above all, the future viability of the IT infrastructure and the security and stability as a whole are of interest to a range of stakeholders. Yet putting together such a strategy is sometimes easier said than done. 

How do we approach this challenge? Which solutions should financial institutions rely on? 

Despite the best intentions of financial institutions, the fragmentation of the IT ecosystem remains a sticking point for many and, hence, the necessary modernisation of IT systems continues to possess an unfavourable position on institutions’ lists of priorities. Sometimes because although the needs of market-orientated or customer service-orientated areas are clearly articulated and there is a consensus regarding the implementation strategy, a possible backlog of requirements is left out.

Many digitalised processes used by incumbent institutions, with some having been strengthened in the present context of the coronavirus pandemic, were only intended as a temporary solution and are not necessarily sustainable in the long-term.

From the perspective of management, the temporary nature of these processes is an issue to address. Of course, the budget cannot be changed arbitrarily, the required internal resources cannot be duplicated and not every company is organised in an agile manner, hence making these digitalised processes permanent will be no easy task.

From an IT point of view there are various solutions, but generally you can divide them into three groups: Commercial Off-the-Shelf products, bespoke solutions, and software accelerators. You can read what sets them apart, and find out which of them could work best for you, in this guide by Critical Software.

Digitalisation solutions are out there

Software providers who have gained experience and expertise in other demanding industries bring real assets with them to the financial services market. They can use this experience not only to add to the design and development of solutions but also in terms of generating future-proof strategies for financial institutions to adopt and implement in their day-to-day business.

Let’s take an example from the automotive industry. In 2018, BMW chose Critical Software, a company with experience in developing software to critical systems, to create a joint venture – Critical TechWorks. The aim of this joint venture is to accelerate the digital transformation not only of their cars, but also their production, sales and other processes. 

Companies from different industries can have experience in handling very complex business-critical processes. The demand for a proven quality standard, such as CMMI-5 or ISO27001, is also a must-have in other sectors. 

It is therefore vital that software developers intending to work in the financial services industry are fully equipped to deal with the challenges it brings, with this expertise potentially coming from work in other industries. The service provider must be able to meet the financial industry's demand for economic mobility as well as ensuring project success with agile structures and methods.

The future of financial digital transformation

The initiatives of the financial industry essentially revolve around digital transformation, certification & compliance, process optimisation and system modernisation, companies from other industries are not new to any of these.

In the end, it is about accelerating the transformation in the German financial industry so as to ensure financial institutions remain competitive in a digital world.

Want to explore how the future of digital transformation in financial services will affect your institution? Contact Christian Schultz and discover how Critical Software can guide you through the peaks and troughs of digitalising financial services.

By Rudolf Geyer

Management consultant in the financial industry