Posted: 05 Oct. 2020 5 min.

3 challenges to digital transformations in the financial sector and how to overcome them

Topic: Financial Services

In my latest blog post, I reflected on what the financial sector has learnt from the COVID-19 pandemic. One of my conclusions was that the sector has taken a quantum leap on its digital transformation journey. To me, this quantum leap is equally as impressive as it has been eye-opening.

Impressive, because COVID-19 seems to have enabled organisations in the financial sector to condense transformational progress that has previously taken the sector several years into months if not weeks. This rapid transition has underlined the criticality of being able to conduct businesses digitally and emphasised that digital transformations are paramount to the survival of companies in the financial sector.

Eye-opening, because COVID-19 has exposed a set of deeply rooted obstacles in the financial sector that I believe could explain past difficulties with accelerating digital transformations. Fortunately, the spillover effects from COVID-19 seem to have enabled the financial sector to temporarily overcome these obstacles, making the pandemic the chief transformation officer that the financial sector has been missing for so long.

It’s crucial that the financial sector continues its digital transformation journey at the current accelerated pace. To do so, it’s important that companies in the sector don’t fall back into old habits on the other side of COVID-19. Instead, they need to learn from the past, which will enable them to transform their future.

In this blog post, my intention is therefore to shed light on some of the obstacles to digital transformations that I believe exist in the financial sector and on how we can overcome these obstacles in the future to ensure a fully accelerated digital transformation of the financial sector, benefitting the sector, customers and society.

3 challenges to digital transformations in the financial sector

From my dialogues with executives in the financial sector, I know that digital transformations stand as key enablers for future success and survival to all of them. Despite realising this, most companies in the sector have had a difficult time converting talks and ambitions into tangible actions and transformations. This may, of course, be the result of several things, and I’m aware that different problems apply to banks compared to insurance companies and life and pension, but to me, COVID-19 has highlighted the following three challenges to digital transformations that seem to permeate the financial sector:

1.     Regulations
From my perspective, the first challenge highlighted by COVID-19 is the disagreement between prescriptive/outdated regulations and large-scale digital transformation initiatives. As I see it, the challenge is twofold:

First, the constantly changing technology landscape significantly challenges the regulators to keep pace. If they are not always at the forefront of the technological development, there is a risk that regulations become outdated – especially if they are technology-specific – which will eventually slow down businesses’ ability to accelerate their digital transformations.

Second, the financial sector’s spending on regulatory compliance has skyrocketed as a consequence of the financial crisis and in more recent years the increased costs associated with, for example, GDPR and AML. But the costs are not just monetary. An increasing regulatory demand causes an increase in necessary resources as well as increased attention from top management to ensure compliance. This negatively affects the amount of investments, resources and time that companies in the financial sector can allocate to digital transformational projects and processes.

Needless to say, businesses’ licence to operate depends on their ability to comply with regulations. However, businesses that aren’t successful in their digital transformations will eventually end up going out of business, too. Therefore, we need to make sure that being compliant and observing regulations don’t contradict being able to conduct a digital transformation. Compliance, regulations and digital transformations should have a symbiotic relationship instead of working as independent elements. Ultimately, compliance and regulations should incite companies to adopt digital technology instead of refraining companies from using it.

I know this is not a challenge that the financial sector can overcome itself, but I believe that if we can create a culture of increased collaboration between regulators and companies in the financial sector, I’m sure that we’ll see more agile, dynamic and tech-neutral regulations that will ultimately help solve this problem.

2.     Risk-conscious culture
The second challenge that I’ve noticed is the financial sector’s traditional risk-conscious culture that clashes with an increased risk appetite for pursuing innovation. Especially after the financial crisis in 2008, processes and operating models have been designed to protect companies in the financial sector against a great variety of risks. This reinforced focus on predictability, governance and controls consistency isn’t consistent with uncertainty, experimentation and a fail-fast mindset that foster innovation and accelerate transformational processes.

However, it’s not only internally in the financial sector that a low risk tolerance can be an obstacle. Investors in especially mature companies in the financial sector, for example banks, tend to look for predictable, consistent and stable returns. In many cases, this conflicts with an environment that fosters innovation and business model transformation.

Often, investors tend to expect a positive return on investment after three years, but full-scale digital transformations normally have a timeframe of more than eight years. 

This could discourage companies in the financial sector from investing in these large-scale transformational projects as they fear that the investors will penalise them.

I think that companies in the financial sector can solve at least part of this problem by daring to step outside the comfort zone of operating in traditional processes, developing a transparent and informed road map that clearly outlines where they want to go and what it takes to get there and trusting the process along the way – trusting that the capabilities they’re building will have the transformational impact they’re expecting. There’s no doubt that a successful digital transformation will both future-proof a business and make it more (cost-)competitive at the same time. At the end of the day, investors will be pleased about the positive impact this has, too.

3.     Use of data
Finally, we need to talk about data, which seem to be a challenge for most companies in the financial sector. During COVID-19, we’ve seen how quickly companies in the financial sector have adapted their businesses to be run digitally. This, however, seems to be a result of being forced to change the way the sector operates rather than being an informed decision based on customer and transaction data. Imagine how the sector would be able to transform itself if it could fully understand, analyse and adapt its businesses based on the available data.

Companies in the financial sector have an enormous amount of customer and transaction data, but data inconsistencies are frequent, and most businesses are still in the process of learning to understand and fixing internal data. Only after this, they will be able to expand into utilising insights from external data.

In an ideal world, companies in the financial sector should utilise data to develop meaningful analyses, which will help companies transform their businesses, attract the right customers and develop valuable processes, products and services. But until this is possible, the true transformational power of data in the financial sector will remain to be seen. Getting data right will become crucial for creating the customer-centric organisation that companies in the financial sector need to have, and I’ve no doubt that this will be essential for every company working in the sector going forward.

Transform your business to stay relevant

In my first blog post, I referenced the motivational quote stating that ‘you never really know yourself until you see yourself under pressure’. That quote seems to be a fair depiction of what the financial sector has learnt during COVID-19. This goes for how the sector initially responded to the pandemic, but it also seems true since COVID-19 has helped highlight the abovementioned internal and external challenges that have slowed down digital transformations in the sector for a long time.

With the abovementioned challenges out in the open, my hope is that companies in the financial sector will be more aware of not falling back into old habits but instead utilise the learning from the COVID-19 pandemic to continue the impressive digital transformational pace. This will be absolutely crucial for companies wanting to stay relevant for its customers and not being eradicated from the elimination race that will undoubtably start to intensify in the years to come.

Forfatter spotlight

Alan Saul

Alan Saul


Spørg mig om: Banker, pengeinstitutter, virksomhedstransformationer, IT. Alan har 23 års erfaring som rådgiver og er sammen med Kasper Bruhn Udam intern industrileder for Financial Services-området. Alans hovedfokus er virksomhedstransformationer, herunder bla. digitalisering, innovation og omkostningsrentabilitet.

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