Category: Banking, Financial Services & Insurance

The Rise of Core Life and Annuities Insurance Platforms | Blog

Disruption in the Life and Annuities (L&A) insurance industry has been brewing for some time now, and the COVID-19 crisis has added more fuel to the fire. L&A insurance carriers are facing a host of challenges, including a demand slump, profitability pressures, complex regulatory compliance mandates, and an uncertain macroeconomic environment. At the same time, consumers want more direct channels and are demanding digital experiences and products.

L&A insurers’ ability to satisfy their customers’ emerging and evolving needs has been hampered by a plethora of antiquated core systems built on old technologies. Now, carriers are actively looking to jettison this legacy burden by adopting core, cloud-based platform software solutions that have an open architecture and are readily configurable to deliver modern policyholder experiences. Indeed, they are viewing core system modernization as a strategic mandate to enable digital transformation and drive digitalization across the insurance value chain to offer new experiences and improve service quality. They recognize that taking a cloud-based platform approach to modernization will drive improved operational efficiency, agility, scalability, accelerated business value realization, and better front-to-back customer experiences. They also understand that implementing a platform-first operating model will ensure their business operations are more resilient to future challenges and black swan events such as COVID-19.

The technology vendors’ changing value proposition

Technology vendors are responding to L&A carriers’ new requirements by building digital platform capabilities across the insurance value chain and evolving from being just pure-play product vendors to being SaaS players, with a growing portion of their revenues coming from subscription and support services. They are investing heavily in platform solutions with a high degree of cloud-readiness to enable rapid time-to-value for insurance carriers. They are focusing on building modularized platform solutions with a modern technology architecture that are API-driven and microservices-enabled. Enabling business-friendly, codeless configuration while supporting extensive out-of-the-box functionality is also a key vendor priority. That is because it will help carriers reduce platform implementation costs and time, seamlessly make platform enhancements and upgrades, and effortlessly integrate with other B2B partners to harness the immense potential of the insurance innovation ecosystem.

The partner ecosystem

As the market evolves and expands, there is a greater need to rethink partner strategy to succeed. The right set of partners can greatly enhance the value proposition of any core platform for a carrier. As a result, L&A core platform technology vendors are strategically focusing on expanding their partner network with InsurTechs, implementation and SI partners, and other third parties to create more opportunities for innovation for carriers. Having a multitude of options to seamlessly plug-and-play different kinds of offerings – such as unstructured data sources, analytics applications, and automated claims management portals – is a win-win situation for all the parties involved. Thus, bringing in different pre-built solutions from multiple partners, bundling of offerings from InsurTechs, and the depth of integration expertise of technology and system integration partners, are becoming quintessential to beat the competition, enable sustained growth, and drive differentiation for the core platform technology vendors.  Having a sound partnership strategy allows carriers the flexibility to individually pick and choose added functionality from the ecosystem that they want on top of the core.

Core platform systems are the foundation on which insurance carriers run their business. L&A insurers are increasingly recognizing that to compete in the age of digital insurance, they need a cloud business platform with modern, data-driven capabilities that enables rapid product innovation and delivers speed to implementation, speed to market, and speed to revenue. With customer experience becoming a game-changer for the industry, the need for carriers to drive a modernized core is becoming paramount to drive growth and differentiation in a post-vaccine world. This provides core platform vendors a tremendous opportunity to support insurers on their core modernization journey by providing innovative platform solutions to create digital-first stakeholder experiences and drive strategic impact on insurers’ businesses.

To learn more about the ongoing trends in the L&A insurance core platforms market, please read our recently published report, Life & Annuities (L&A) Insurance Core Platform Software Adoption Trends – Unlocking Efficiency and Growth for L&A Insurers. Or, you can reach out to [email protected], [email protected], or [email protected] to talk in more detail about the trends.

Everest Group is also conducting a market study of leading policy administration platforms in the L&A insurance industry. This is the inaugural edition of this study, and we are excited to invite all the leading platform vendors to participate in our research. Please see the invitation here. You can also contact [email protected], [email protected], or [email protected] to learn more about the participation process.

Access the Invitation for participation in Policy Administration Platforms in the Life and Annuities (L&A) Insurance Industry Market Report.

The Next Multi-Billion Dollar Opportunity for IT Services and Consulting Firms as BFSI Enterprises Embrace ESG Integration | Blog

The number of Environmental, Social, and Governance (ESG) investing-related announcements coming today from banks and financial services firms have gained momentum. Banks are continuously building new ESG products and services like green loans, sustainability-linked loans (SLL), and carbon-neutral banking. Capital markets are embracing “green underwriting” while asset & wealth managers are steadily moving towards ESG investing. Goldman Sachs announced an investment of US$750 billion in sustainable finance over the next decade. Additionally, HSBC launched a new strategic ESG solutions group focusing on the bank’s full range of ESG capabilities. Blackrock and Vanguard have expanded their ESG exchange-traded fund (ETF) offerings due to the high demand.

In our previous blogs, The Importance of Integrating Environmental, Social, and Governance (ESG) Mandates into BFSI Enterprises’ Operations, and Choosing the Right Partners in the Expanding ESG Product Ecosystem we highlighted how BFSI firms are setting up ESG priorities for their organizations due to the regulatory push and to support the clients’ growing ESG needs. We also tried to decode the evolution of ESG vendors’ landscapes, specifically in the data and analytics space. In this blog, we discuss the enormous opportunity (exhibit 1) available for IT service providers, technology vendors, and consulting firms to support BFSI enterprises on their ESG agenda.

Exhibit 1: Endless opportunity for IT service providers and consulting firms in the ESG space

Picture1 3

Tap into the ESG demand theme for growth and differentiation

The IT outsourcing and consulting vendor landscape is always finding ways to differentiate itself in the BFSI industry known for its talent and arbitrage play. The present BFSI clients and prospective targets for many IT service providers have listed ESG as a priority area and are planning to invest heavily in this space. The vendors are hence gearing up to build a differentiation story for sustainability, have boldly laid out their ESG priorities, and are making announcements that will help them stand out in the industry not only for their ESG offerings but also as responsible businesses. This becomes important since the vendors will be an extension of the BFSI firms’ own ESG footprint, which they would like to manage better.

BFSI firms are looking at vendors to embrace best-in-class ESG standards, have diversity in talent base, manage the carbon footprint, invest in local communities, and bring exponential value creating ESG initiatives. We do observe IT service providers and consulting firms already trying to display differentiation around these dimensions. In October 2020, Infosys announced its ESG 2030 vision, which outlines its bold vision to become carbon neutral by 2030. SAP has announced that it aims to achieve carbon neutrality within its operations by 2023. IBM intends to leverage blockchain to ensure responsible sourcing of minerals in conflict regions. Capgemini has used AI/ML to help staff rural healthcare with real-time data sharing and efficient economic resource utilization.

ESG readiness will be a make-or-break criterion for mega outsourcing deals

Our research suggests that ESG reputation of the vendor, appropriate disclosures, and the vendor’s resilience to the impact of ESG related issues will become important drivers for awarding large IT outsourcing contracts. A strong ESG standing of the vendor is moving from a “nice to have” to a “must have” factor for mega IT outsourcing and platform contracts. We have already witnessed cases where differentiating ESG standing is helping vendors win deals. For instance, Finastra has been selected by Climate First Bank as its technology partner for a new, full-service, eco-friendly community bank. The Bank evaluates its vendors through an ESG lens, and Finastra stood out for its clear and tangible commitments to redefining finance for good. TISA, the UK’s cross-industry financial services membership body, appointed Atos to build a blockchain-based digital utility for the asset management that will help ease regulatory reporting for MiFID II and ESG. Atos had to demonstrate enthusiasm to be a part of a sustainability-led project to win this engagement.

Integrating ESG requires transforming the entire ecosystem of financial institutions

We believe that ESG transition goes far beyond just ESG data capture, analysis, and dissemination. The financial institutions will have to follow a “practice what you preach” approach as they start prioritizing sustainable investments. The focus should be on transforming their entire ecosystem to:

  • Revamp business strategy to incorporate ESG
  • Develop new financial products
  • Invest in communication and branding initiatives
  • Review front office operations
  • Build ESG databases, KPIs, and frameworks
  • Update risk and compliance systems
  • Grow in-house talent to support ESG initiatives
  • Improve HR, legal, and governance practices
  • Strengthen data science and visualization capabilities
  • Modernize core IT strategy
  • Decarbonize IT infrastructure

ESG is becoming a board-level priority for BFSI firms with C-suite executives as key stakeholders, creating opportunity for vendors to address new budget centers parked for the entire value-chain. These will be an addition to the CIO or digital budgets that have been traditionally used for such use cases.

Gain a first movers’ advantage in the ESG space through new offerings

ESG investing is a market-driven shift leaving room for a lot of product innovation for the IT outsourcing and consulting landscape. It opens opportunity to launch new offerings like:

  • Supporting the transformation of industries towards sustainable futures
  • Helping reduce the carbon footprint of IT, cloud, and software
  • Designing solutions for green buildings and office spaces
  • Data center energy management
  • Building ESG talent strategy
  • Data and analytics for ESG integration
  • Consulting and advisory – ESG investing and disclosures
  • IT transformation across the BFSI value chain
  • Helping launch new ESG based financial products in the market
  • Helping expand existing offerings with ESG value-add

IT service providers and consulting firms are aiming for a first movers’ advantage and have already introduced ESG offerings into the market. Tata Consultancy Services (TCS) announced that it will develop an investment insights solution, leveraging SAP Business Technology Platform, enabling asset managers to have a 360-degree view of the investments, which includes ESG analysis. IBM and The Climate Service (TCS) formed an alliance to help financial institutions measure, quantify, and price risks associated with climate change facilitating reporting. Avaloq has launched a sophisticated ESG investment solution for banks and wealth managers that allows them to build tailored, personalized ESG-compliant portfolios for clients. Microsoft will be launching an ESG Solutions as a Service in 2021 in collaboration with MSCI.

The path forward – BFSI enterprises and vendors should invest in the right ecosystem of partners

Exhibit 2: A sneak peek into the ESG vendor landscape

Picture2 2 

The ESG integration journey for enterprises is going to result in massive investments towards data and technology. IT service providers and consulting firms need to create an ecosystem of partners that they can collaborate with to build their ESG offerings and take them to market. Investments in R&D to incorporate emerging technologies like Artificial Intelligence (AI), Natural Language Processing (NLP), Blockchain, and Machine Learning (ML) while creating ESG solutions is needed. They should also concentrate on utilizing the ESG benefits in their offerings across dimensions of IT services delivery, talent, infrastructure, and solutions, and create ways to measure and demonstrate the ESG impact of their offerings to drive higher client adoption.

As BFSI firms accelerate their ESG journey, it becomes critical for them to create the right partner ecosystem. Making the right choice will bring out the difference!

If you would like to have a better understanding of the ESG vendor landscape and offerings, reach out to [email protected], or  [email protected].

We also invite ESG data and analytics providers, IT service providers, and consulting firms to reach out to us to get featured in our upcoming research assessing ESG vendors that serve BFSI enterprises. Please refer to our Research Participation Guide to understand the scope, objectives, and participation process of the research.

This is the third blog in a series that explores the ESG space; find more insights on the topic in the first and the second blogs.

Wipro Acquires Capco Creating End-to-End Digital Consulting Services

Since Wipro’s March 4, 2021, announcement to acquire Capco, the London-based global management and technology consultancy that provides digital, consulting, and technology services to financial institutions, for US$1.45 billion, reaction has been mixed as to whether it will deliver the synergies and earnings growth Wipro expects. However, Wipro’s consulting-led offerings matched with Capco’s digital capabilities appear to be poised to deliver a powerful, end-to-end service for clients.

Here’s our take.

What’s in it for Wipro?

Wipro, a leading, India-based global IT, consulting, and business process services company, has acquired numerous companies in the last few years, such as Appirio for cloud services, Opus CMC for the mortgage industry, Designit, Syfte, and Cooper for design thinking and strategy, and International TechneGroup (ITI) for its industrial and engineering services. The Capco deal, which is expected to close at the end of June, stands apart from the other acquisitions not only because it’s Wipro’s largest to date but because it will greatly improve Wipro’s digital offerings in the BFS space, Wipro’s largest business unit. This will narrow the gap between Cognizant, Infosys, and TCS, Wipro’s three biggest competitors in the BFS arena.

Also, in 2020, digital contributed to nearly 40 percent of Wipro’s total revenue, making Capco’s digital capabilities integral in positioning Wipro as one of the market leaders.

The Wipro/Capco acquisition will deliver improved benefits to clients, including:

  • Superior capabilities in consulting and advisory: With this deal, Wipro will join a small group of service providers that bring integrated end-to-end solutions at scale to their customers. Wipro and Capco’s collective capabilities include high-value, upstream activities like consulting and advisory, and design and build, as well as downstream activities such as implement and manage
  • Better access to newer geographies and clients: With more than 40 percent of Capco’s US$700 million revenue coming from Europe, this acquisition will help Wipro strengthen its foothold in that market. In addition to the larger strategic benefits that the deal aims to provide, it will also add 30 new BFS logos to Wipro’s portfolio and could bring in more business from the company’s existing clients
  • Balanced shoring mix: Capco’s high leverage of onshore and nearshore delivery centers nicely complements Wipro’s offshore-heavy delivery footprint, which will give Wipro the opportunity to handle judgment-intensive work for onshore-heavy clients
  • Technology synergies: A blend of Capco’s multiple point solutions and Wipro’s digital investments will help Wipro strengthen its asset management, custody, and prime brokerage offerings, and develop niche, targeted next-gen solutions for its client base
  • Domain depth: Capco will deepen Wipro’s capabilities in digital banking and payments, as well as the asset management, custody, and prime brokerage spaces. This is critical at a time when financial services firms are looking to engage with providers with more domain depth
  • Augmented risk and compliance offerings: Wipro will be able to augment its current risk and regulatory compliance offerings on its Wipro Holmes platform by leveraging Capco’s extensive Finance, Risk, and Compliance (FRC) offerings and solutions portfolio

Large-scale acquisitions are not new to Wipro or the BFS industry; however, success from such high-value acquisitions are not always guaranteed. It is, therefore, no surprise that this announcement was received with mixed reactions and speculation from the market as to whether it will deliver the synergies and earnings growth that Wipro has promised.

Overall, we remain optimistic about the deal and believe this acquisition will equip Wipro to better solve BFS clients’ challenges through Capco’s future-ready digital capabilities. Most importantly, the acquisition is complementary in nature and will help Wipro gain scale, speed, and stature.

How will unities like consulting and digital end-to end services affect the broader BFS market?

Wipro’s consulting-led services, together with Capco’s digital capabilities, will provide more meaningful end-to-end long-term support to clients. It would not be surprising to see similar deals coming up across various segments of BFS with the aim of providing bundled offerings, as products lose their charm when offered on a standalone basis. Complementing service offerings with consulting-led delivery capabilities is being seen across various BFS industries, including mortgage and FCC. These capabilities are being acquired not just through acquisitions but also through partnerships, such as the recent one between Genpact and Deloitte in the financial risk and compliance domain.

Though this trend witnessed a slow start, especially for the Indian IT firms, it looks promising and rewarding in the long run and is only expected to gain momentum. Through end-to-end consulting and digital service offerings, enterprises get access to a compelling combination of digital talent at scale with a consulting-led delivery approach, which helps achieve greater business value and gains.

Success hinges on successfully executing consulting-led digital transformation

Generally, the value addition to enterprises entirely depends on the speed at which service providers can utilize the enhanced breadth and depth of their offerings post-acquisition. Having said this, the key to achieving significant value addition for both Wipro and Capco’s clients would eventually lie on smooth integration and flawless execution.

For the returns to outweigh the risks, a superior execution policy needs to be in place. The key to inspiring its BFS clients will be to align consulting, design, build and operate capabilities around solving some of the industry’s biggest challenges. For BFS clients, this is namely modernizing legacy systems, providing innovative product and service offerings, ensuring a delightful customer experience, and effectively managing the ever-evolving regulatory landscape. For Wipro’s enhanced capabilities to be successful, it should help reinvent the client’s journey through a rare combination of consulting-led digital transformation.

We would love to hear your thoughts on this acquisition and or others that are following the same trend, reach out to [email protected].

Choosing the Right Partners in the Expanding Environmental, Social, and Governance (ESG) Product Ecosystem | Blog

The ESG platform/product vendor ecosystem is expanding at an exponential rate, with banks increasingly collaborating with the larger network following the pandemic. Large banks such as Citibank have collaborated with Truvalue Labs to accelerate their ESG research initiatives. Similarly, in the UK, Lloyds Banking Group has partnered with Sancroft to obtain insights and advice on the best ESG practices. US-based specialist asset manager Trillium Asset Management has collaborated with Trucost to conduct a carbon analysis of its sustainable opportunities strategy.

In our previous blog on ESG, we highlighted that – while the ESG ecosystem is evolving within the Banking and Financial Services (BFS) industry – firms fail to recognize its potential to generate long-term risk-adjusted returns. In this blog, we explain the evolution of the ESG product and platform vendor landscape. These products are helping BFS firms think and act on ESG proactively and tap into several opportunities that the ecosystem offers.

Decoding the ESG vendor landscape

In response to the demand for robust ESG integration, vendors are offering various products and services, ranging from raw data and reports across multiple ESG areas to extremely sophisticated analytics platforms. The focus areas for these firms include stock screening, portfolio construction and analysis, competitive benchmarking, risk management, green bond framework evaluation, second party opinions, scenario analysis, controversy analysis, ratings, and rankings.

The ESG vendor landscape itself can be broadly divided into three categories: data and data analytics providers, technology providers, and ESG advisory firms.

Data and data analytics providers use unique ways of sourcing, categorizing, and quantifying ESG data before building an analytics layer over it. Based on coverage, these providers can be further categorized as ESG market data providers, ESG exclusives, and ESG specialists.

  • Global and well-established financial market data providers now offer ESG data as well. Some of them even consider ESG factors when determining financial ratings.
  • ESG exclusives provide comprehensive ESG data solutions covering majority of asset classes. They extract data from multiple public sources and/or company interviews and apply subjective analysis using diverse ESG metrics to create a comprehensive solution.
  • ESG specialists cover specific ESG factors such as gender equality at companies or the company’s impact on climate and the environment.

Consulting and advisory firms assist financial services firms and other enterprises in building data and governance frameworks, integrating ESG, and facilitating their regulatory reporting strategies. In fact, taking note of ESG’s growing importance, firms such as esg.solutions, NEPC, Sancroft, Callan, State Street, Clearbrook, Goby, ASC Advisors, KKS Advisors, Canterbury Consulting, and Mercer have introduced ESG consulting as a separate arm within their consulting practices. We believe that the ability to highlight ESG issues that affect financial performance will be a differentiating factor in this arena.

The exhibit below showcases the vast and expanding ESG vendor landscape today.

Exhibit: Understanding the ESG vendor landscape

ESG Vendor Landscape

With such an expansive and thriving market for ESG services, it may be difficult for leaders to choose the best-fit vendors.

Selecting the right vendors and ecosystem mix will make a difference

Some characteristics that will help financial institutions distinguish among data and analytics vendors are market coverage, quality and quantity of ESG indicators, investments covered, methodology, sources, support to standard frameworks, and company involvement.

Also, market intermediaries such as stock exchanges, rating agencies, reporting and regulatory bodies, index providers, and ETF providers play an equally important role in developing the right ESG ecosystem. Hence, BFSI firms need to collaborate with the right mix of data, regulatory frameworks, and technologies. It is complicated, but ultimately provides a lucrative opportunity to IT service providers to offer innovative ESG products and solutions and provide custom-built solutions on partner products tailored to banks’ specific needs. This will ease the transition and change management process for banks and financial institutions. A few service providers, consulting leaders, and boutique consulting players have already created frameworks and solutions to help banks with their ESG needs.

We are confident that over the next decade, ESG will not be discussed as a standalone or secondary strategy but will be a mainstream financial services proposition, creating sustainable long-term value, not only for investors and BFSI enterprises but for the entire ecosystem.

If you would like to understand how a platform-centric approach can fast-track your ESG journey, reach out to [email protected], [email protected], or  [email protected].

We also invite ESG data and analytics providers, IT service providers, and consulting firms to reach out to us to get featured in our upcoming research assessing ESG vendors that serve BFSI enterprises. Please refer our Research Participation Guide to understand the scope, objectives, and participation process of the research.

This is the second blog in this series that explores the ESG space; read the first and third blogs for further insights.

The Importance of Integrating Environmental, Social, and Governance (ESG) Mandates into BFSI Enterprises’ Operations | Blog

Banking, Financial Services, and Insurance (BFSI) firms are under increasing pressure to operate more sustainably, mindful of their economic, social, and environmental impact. This implies conforming to  Environmental, Social, and Governance (ESG) regulations, which mandate enterprises to be conscious of: their impact on the environment; their relationship with employees, suppliers, clients, and communities; and robust standards on company leadership, risk management, and stakeholder rights. Further, voluntary guidelines such as the Equator Principles, UN Principles for Responsible Investment (PRI), and recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) are forcing banks to incorporate ESG as part of their lending, investment, and financing decisions. We strongly believe that today’s voluntary commitments will soon be replaced by hard regulations, and, hence, organizations that embrace these mandates sooner will be ahead of the game, if that comes to pass.

Three aspects drive ESG integration in BFSI operations today: 1) reputation, marketing, and public relations; 2) growing client demand for ESG-conscious investment practices; and 3) regulatory burden. ESG enhances BFSI firms’ brand perception for all stakeholders, including millennial talent, which is more attracted to brands that take firm actions around ESG mandates. Advances in technology and the use of AI / big data / ML are further helping combat challenges related to ESG measurement.

However, these drivers fail to factor in the significant potential to generate long-term risk-adjusted returns through ESG compliance. Our research suggests that firms that can better navigate environmental and social disruptions, while incorporating good governance practices, will be able to mitigate risks and create long-term value.

The exhibit below highlights the various factors contributing to banks’ increased focus on sustainability or ESG.

Exhibit: Factors driving banks’ increasing emphasis on sustainability

Factors driving banks’ increasing emphasis on sustainability

The push of the pandemic

The COVID-19 pandemic served as the first real proof point that ESG investing can future-proof investments and boost returns even in uncertain times, with sustainable funds outperforming their more conventional counterparts. Consequently, ESG investing solidified its position as a dominant feature across the financial services landscape in 2020, with investments in sustainable funds in the US almost twice the previous year’s total.

Leading credit rating agencies such as S&P and Moody’s have indicated that innovative ESG initiatives will help BFSI firms improve financial performance, in turn providing the monetary resources to further enhance their ESG strategies. Further, large fund management firms such as BlackRock Inc., Vanguard Group, and State Street Global Advisors, are making ESG-focused investments. In February 2021, Vanguard appointed Fong Yee Chan as the firm’s first head of ESG strategy for the UK and Europe.

BFSI firms that can swiftly integrate a comprehensive ESG strategy into their investment plans will be able to capture a greater share of ESG asset flows. Such a comprehensive strategy would comprise five aspects:

  1. Developing the ESG strategy
  2. Engaging with different stakeholders across the ESG landscape
  3. Launching new products for the growing demand for ESG investing
  4. Creating the right ecosystem of data providers, requisite frameworks, and technologies
  5. Switching to responsible practices.

Asset managers should therefore think fast and come up with dedicated strategies to capitalize on the opportunities and gain competitive advantage in the long run.

Partnering with technology vendors to navigate the ESG space

Traditionally, ESG was incorporated through exclusionary screening, in which investments that did not align with an enterprise’s beliefs and values were dropped. Later, practices such as thematic investing (supporting a particular ESG area), impact investing (focusing on creating a positive change rather than only financial returns), and best-in-class selection (selecting investments with positive ESG performance relative to industry peers) emerged. Gradually, we are moving toward a comprehensive ESG integration model, wherein investors are systematically and deliberately including ESG-related factors into their complete financial analyses.

However, the lack of a standard taxonomy to capture ESG performance, low quality ESG reporting by companies, and the deficiency of robust ESG data pose major challenges to this integration. Technology vendors in the BFSI space can help enterprises understand ESG processes, ensure compliance, and generate optimal value. These partnerships are increasingly important at a time when corporate ESG disclosures are dramatically improving – 80% of the world’s largest corporations use Global Reporting Initiative (GRI) standards today. Further, the number of signatories to the PRI has increased from 63 investment companies in 2006 to more than 1,700 signatories with US$81.7 trillion in Assets Under Management (AUM) today. In recent times, the International Integrated Reporting Initiative (IIRC) and Sustainability Accounting Standard Board (SASB) frameworks have also been gaining enterprise attention.

We would like to hear your thoughts on ESG and its increasing importance in the BFSI industry. Please reach out to us with your inputs at [email protected], [email protected], or  [email protected].

This is the first blog in this series that explores the ESG space; read the second and third blogs for more insights.

Technology Synergy Drives M&A Spike in the Banking and Financial Services Industry | Blog

Technology used to be an enabling strategic pillar for banks and financial services (BFS) organizations. Now, it is the core of these firms’ value creation playbooks. Indeed, BFS firms are building digital capability platforms using modern technologies to create what we have named SUPER — or Secure, Ubiquitous, Personalized, Easy, and Responsive — banking experiences and optimized operations.

This move to digital would require BFS firms to invest disproportionately in building these industry platforms at speed and scale. M&As (merger and acquisitions) are helping BFS firms trigger this transformation agenda by siphoning off cost synergies from mergers and investing in technology rationalization, modernization, and innovation.

Bloomberg estimated that more than US$500 billion worth of BFS M&A deals happened in 2020. That magnitude is the second highest since the 2008 financial crisis and only lags 2019 by a razor-thin margin due to the pandemic induced slowdown. Our recent analysis found that eight out of ten of the largest M&As in the BFS industry in 2020 mentioned technology synergy as one of the key drivers for the transaction.

Traditionally, acquisitions served as an opportunity to enter new product lines and/or geographies, gain new capabilities, and achieve cost savings and operational efficiencies via technology modernization and streamlining processes and systems. The recent acquisitions in the BFS space have focused additionally on technology synergy and the ability to weaponize the combined technology estate. Technology synergy is achieved in these M&A transactions by:

  • Acquiring digital capabilities and solutions
  • Achieving scale that makes economic sense to invest in building industry platforms using cloud, APIs, and data & analytics technologies
  • Acquiring digital skills
  • Combining discrete technology components of merged entities to create industry platforms.

As mentioned in the image below, leaders at BFS firms undergoing such M&As stress the importance of digital as a lever for these strategic acquisitions. For instance, in the merger of First Citizens BancShares, Inc. and CIT Group, Ellen R. Alemany – Chairwoman and CEO of CIT, who will assume the role of Vice Chairwoman of the combined entity – highlighted how well-positioned the two firms will be to leverage their product portfolio and technology across the franchises, and make additional investments in technology to enhance the customer experience.

Focus on tech synergy causing a spike in M&A activity in BFS

Expansion of the IT estate to build digital capability platforms has created a paradigm shift in business cases for M&As. The platform-based economy not only enables new businesses and systems but also facilitates rapid integration across merged entities.

A notable example is S&P Global’s bid to buy IHS Markit in December 2020, which serves as an example of a technology-driven merger in the financial information and credit rating space. It has created an opportunity for the two firms with unique and harmonizing assets to create a formidable data and technology offering. IHS is the industry frontrunner in leveraging platforms for underwriting corporate stock and bonds and trade processing. The combined entity will become a data powerhouse for complex financial products, and this will directly funnel exponential growth for S&Ps credit rating service, which comprises 40-50 percent of its revenue.

Skill acquisition is gradually gaining popularity across multiple deals. Aspects like digital identity and security are addressed in Moody’s purchase of Regulatory DataCorp (RDC), a provider of KYC/AML data services, and Mastercard’s acquisition of RiskRecon for cybersecurity services. In the platforms/technology space, Charles Schwab acquired the technology and intellectual property of a fintech, Motif. And customer experience took centerstage in Goldman Sachs’ acquisition of United Capital, with a focus on scaling up its UI/UX products. Talent acquisition is another factor that is gaining ground across some of these mergers.

In November 2020, PNC Financial Services acquired the US Operations of the Spanish lender BBVA. And most recently, Huntington Bancshares acquired TCF Financial. The banks are not only increasing their asset size and market reach but also gearing up to save costs by optimizing their IT estate and branch networks. These cost savings are being funneled to build better digital experiences as more customers are opting for online and mobile services for their banking needs.

Similarly, significant deal activity is expected in the asset management space. For example, Macquarie Group is set to buy Waddell & Reed for US$1.7 billion. This traction in asset management is driven not just by pressure on fees and revenue but also by increased costs attributed to technology and digital spending. Asset management firms with deep pockets are already betting heavily on the success of platform- and data-based niche firms. For instance, BlackRock recently purchased minority stakes in the platform-based alternative wealth management firm iCapital Network and the robo-advisor Envestnet.

Our analysis suggests that the M&A trend will pick up for regional and community banks in a bid to gain scale. This is critical to compete with larger players as customer intimacy and relationships move from physical to digital. They will be better equipped to build new capabilities in robotics, AI/ML, and advanced analytics as banking increasingly digitizes. The combined entities will also have a larger pool of resources wherein better skill-to-talent match can be achieved.

BFS M&As will be a boost to the consulting and IT services industry

M&A’s will entail increased spending in post-merger integration and consulting expenditures in the short term. BFS firms will need partners that can create a modernization roadmap for the combined entity. The merged entities can gain significant cost synergies by rationalizing their vendor portfolio and IT estate, as several applications and platforms will become redundant. Hence, a modernization roadmap will enable value creation in the long run.

Of course, the merged entities must also make rapid changes in their working models, delivery strategies, and sourcing decisions to thrive in the new normal. Investments in some specific technologies/tools will ensure growth and continuity of operations. Digital acquisition is thus becoming a table stake as firms determine the right valuation even before they formulate the integration strategy.

Large BFS firms are looking at targets that help them create a digital service model for the future. We are already seeing increased M&A activity among regional banks, asset management firms, and brokerage houses. As we inch closer – hopefully – to the end of the pandemic, BFS firms will be eyeing M&A opportunities that deliver technology synergy and associated business transformation benefits. Picking the right segment, target, and timing of these initiatives will be crucial.

Discover even more insights in the BFS industry in our recent research and reports:

Or if you would like to understand more about the impact of the increased M&A activity in the BFS industry, please reach out to us at [email protected] and [email protected].

Uncleared Margin Rules (UMR) as a Catalyst for Change – from Spreadsheets to Digital Compliance Driven by Data and Cloud | Blog

In the wake of the 2008 financial crisis, leaders of the G20 summit laid out the Uncleared Margin Rules (UMR) as part of the financial regulatory reform agenda. The goal of these rules was increasing transparency and reducing the credit risk posed by major participants in the Over the Counter (OTC) derivatives market. UMR introduced fully bilateral Initial Margin (IM) rules based on theoretical loss, to protect one party against the other party’s default.

The UMR have been rolled out in phases since 2016, and approximately 60 of the largest firms (by assets under management) currently comply with IM rules. Before the onset of COVID-19, 200+ firms were expected to come under the rules’ purview by September 1, 2020, but regulators pushed the timelines to help pandemic-impacted firms focus their resources on managing risks associated with market volatility.

An estimated 1,100 counterparties are expected to come under the combined purview of Phase 5 and Phase 6, which will be rolled out in September 2021 and September 2022, respectively. It is thus inevitable that the significant increase in Newly In-Scope Counterparties (NISCs) will create overwhelming demand on market resources across participants and service providers. To address this demand rush, significant operational and technology-led solutions must be implemented, and most firms plan to engage with external partners to reduce the burden of the additional contractual agreements that must be put in place.

The new rules involve the following major changes across operational processes and legal agreements:

  • Both swap dealers and funds will be required to exchange IM with one another
  • IM must now rest with third-party custodians

If not done in a timely manner, NISCs will not be able to trade in non-centrally cleared derivatives, limiting their options for both taking on and hedging risks, potentially impacting liquidity in the derivatives markets.

Time for change – fighting the legacy

Firms have historically relied on spreadsheets and siloed legacy technology systems to assess their collateral needs, access valuations, and communicate them to counterparties – a cumbersome method that makes the task of UMR compliance all the more difficult.

Though the rules only apply to new transactions, they may, in fact, create multiple workflows for monitoring both new and legacy transactions. Beyond operational updates, firms will need to negotiate and enter into new legal agreements and modify existing ones. In some cases, they may need to alter their trading strategies and operations to mitigate or steer clear of the rules by using portfolio compression or by simply reducing their use of uncleared products.

Thus, to avoid getting caught in a regulatory bottleneck, firms must act now to:

  1. Determine whether the rules apply to them by calculating the Aggregate Average Notional Amount (AANA) of non-cleared derivatives
  2. Identify their IM requirements
  3. Set up a data infrastructure for enhanced transparency and analysis
  4. Choose service providers in the areas of custody, monitoring, and legal services
  5. Create a modern architecture and digital roadmap for UMR or adopt technologies from third-party technology vendors that can be integrated easily into a wide range of asset classes that require IM calculations

Engineering and system integration complexity is bound to increase with legacy systems (which need to be modernized) and the operational changes needed to meet the regulatory guidelines. Thus, firms need to choose the right set of technology vendors and system integration and consulting partners to support them on their compliance journeys. In fact, even firms that do not cross the US$50 million IM threshold will need systems to monitor their IM thresholds regularly, thereby creating a market for cost-effective technology solutions.

Several technology vendors are increasingly building a strong data and cloud technology infrastructure and value-added digital technologies, such as cognitive technologies and interactive visualization, to help optimize costs and better comply with the rapidly changing regulatory landscape. For example, Finastra and CloudMargin have partnered to deliver an integrated collateral and margin management solution to enterprises of all sizes through a SaaS model, facilitating end-to-end straight-through processing of derivatives transactions and all associated collateral management workflows, from trade booking through settlement.

RegTechs providing a helping hand

UMR Technology and Services Vendor Landscape

AcadiaSoft is leading the way in the regulatory technology market with its UMR Collateral Suite and extensive partnerships with technology and data vendors, such as Bloomberg, Cassini Systems, Capco, Calypso Technology, HazelTree, IHS Markit, Murex, and TriOptima, to support organizations in their UMR compliance journeys. AcadiaSoft and TriOptima have partnered for a Phase 5 soft launch aimed at avoiding a compliance crunch near the deadline. More than 30 firms falling under IM Phase 5 have successfully joined the initiative, while another 25 are scheduled to join before the end of 2020.

IT service providers can tap into such opportunities by collaborating with technology vendors to help create a packaged solution, providing the much-needed implementation and deployment support layered with domain advisory capabilities. A notable case in point is the launch of Wipro’s Standard Initial Margin Method (SIMM) in a box solution in collaboration with Quaternion Risk Management.

Embracing the change

New workflows and requirements are set to be introduced as organizations embark on the journey to become UMR compliant. Rather than considering UMR as an additional regulatory burden, firms should leverage this opportunity to reevaluate and reimagine their existing workstreams and use UMR as a catalyst for change to holistically automate and streamline their collateral management.

If you’d like to share your observations or questions on the fast-evolving technology and services landscape for UMR compliance solutions, please reach out to [email protected], [email protected], and [email protected].

The Future at Lloyd’s Initiative – What It Means for the London Insurance Market | Blog

Lloyd’s of London, as part of its Future at Lloyd’s initiative, released Blueprint Two in November 2020 as a follow-up to its initial strategy of advancing the London market’s efficiency and enhancing stakeholder experience. The initiative clearly outlines the changes to be implemented over the next two years to realize the vision set out in Blueprint One, which was released in September 2019 and which listed the different components that would make up Lloyd’s ecosystem: primarily, a complex risk platform with data-first capabilities; Lloyd’s risk exchange to process relatively non-complex, high-volume, low-value risks; a claims solution to automate simple claims; and a new syndicate-in-a-box concept to encourage innovative and accretive business and talent at Lloyd’s.

Understanding Blueprint Two

Apart from its intent as outlined above, Blueprint Two addresses Lloyd’s market participants’ concerns about the inefficiencies caused by disjointed processes and technologies used in risk placement and claims handling by transforming the processes into a seamless end-to-end experience.

Blueprint Two focuses on two core placement types – the open market and the delegated authority business – which together account for more than 90% of the insurance contracts placed at Lloyd’s. The blueprint keeps the customer at its heart, simplifies the complexity of doing business, accelerates the data value realization process, and fosters trust through open communication and transparency.

Lloyd’s plans to achieve consolidated savings of GBP800 million by adopting digital technologies that enable automation, virtual collaboration, digital contract management, automated data ingestion, electronic First Notice of Loss (eFNOL), intelligent workflow management, and third-party integration. Lloyd’s will spend an estimated GBP200 million over the next two years to support future initiatives and realize the goals laid out in Blueprint Two. As the pandemic has expedited the need to move to a new digital environment, Lloyd’s aims to move its marketplace operations from a predominantly document-based model to a document-plus-data model, ultimately reaching a data-first operating model.

What the transformation offers and what it means for the market

For technology and service providers in the London market, the transformation program presents a host of opportunities to advance their market standing by providing:

  • A virtual collaboration environment: The push to move the interactions between brokers and underwriters toward a more digital environment has created the need for a digital workplace and collaboration solutions
  • Integration with third-party systems: As the marketplace evolves further, it will offer a choice of different risk-placing platforms (such as PPL) and the need for Application Programming Interfaces (APIs) to integrate them to enable seamless data exchange
  • Ancillary or value-added services: To enable this transition, there will be a need for greater risk and regulatory compliance, tax calculation, and fraud and claims investigation services
  • Digital processing capabilities: The future digital marketplace will need solutions to reconcile transactions/contracts and maintain a single ledger as a source of truth for all the parties involved
  • Intelligent workflow management: To automate claims data ingestion, validation, and dynamic routing, an eFNOL portal will be connected to the claims solution. Doing so will drive the adoption of workflow automation and rules-based decisioning for claim-policy matching, claims adjudication, and faster automated payments
  • Platform/solution development: The need to facilitate collaboration between managing agents and coverholders will drive the development of custom solutions, which will help in coverholder onboarding, data flow management, risk placement, and contract management between the parties involved

What will it take for Lloyd’s to transform?

As Lloyd’s looks at pioneering specialty risks coverage and introducing new syndicates as part of its transformation program, it needs to be mindful about how to proceed with talent acquisition and data strategy.

Coverage for newer specialty risks demands a revamped data strategy to combine data from non-traditional sources, mitigate data privacy risks, improve data accessibility for relevant stakeholders, and run analytics to enable innovative risk pricing. At the same time, dedicated effort is needed to acquire talent with relevant technology skills (such as APIs, microservices, and advanced analytics) and expertise in handling complex specialty risks, such as the protection of commercial spacecrafts, satellites or intangible risks such as the voice of a singer.

While Lloyd’s of London aims to expand its market operations globally, its market participants will also need to ramp up their enterprise software capabilities to avoid being too Lloyd’s-centric, which means enabling technology transformation of the wider London insurance market and not only for its market participants.

For technology service providers operating in the London market, this initiative represents an opportunity to develop modern software platforms built with flexibility in mind. Service providers can achieve these benefits by leveraging an ecosystem of specialist technology vendors and insurtechs, and focusing on enhanced virtual collaboration, data and security, intuitive customer experience design, cloud-native architecture, and artificial intelligence.

If you’d like to learn more about the recent developments at Lloyd’s of London and their impact, please reach out to us directly at [email protected] or [email protected].

BigTechs in BFSI: The Pragmatics of Co-existence for Market Expansion | Blog

Google recently announced that it is teaming with eight US banks to offer checking accounts powered by its Google Pay product and built on top of the banks’ existing infrastructures. Google is not the only BigTech firm that is pushing its play in the Banking, Financial Services, and Insurance (BFSI) industry. Facebook recently launched a new unit called Facebook Financial that consolidates all its payment products under David Marcus, the former President of PayPal. In a call with investors in July 2020, Tesla announced that it is planning to launch a major insurance company.

Eyeing the prizes

The transformation of the BFSI industry is powered by the ability to create innovative products and experiences using digital capability platforms and data. The BigTech firms see this as a massive opportunity to use their digital platforms and data processing infrastructures to gain a significant share of this transformational opportunity in the BFSI industry.

Additionally, the emergence of a globally connected ecosystem and ambient technology have led end customers to demand seamless experiences to manage their lifestyles and finances. Realizing yet another opportunity, BigTechs such as Amazon, Ant Financial, Apple, Facebook, Google, and Microsoft entered the BFSI industry to offer complementary financial services to support the BFSI firms’ core businesses. They gradually started providing technical capabilities to enable BFSI firms to enhance their operations, products, and experiences, eventually offering competing products and services. In fact, today, BigTech firms are at the epicenter of accelerating a shift in both demand and supply ecosystems, blurring traditional industry boundaries.

In our recently released report, BigTechs in BFSI Industry: The Theory of Co-existence for Market Expansion, we analyzed BigTech firms’ investments in the BFSI industry to dissect their strategic bets and provide recommendations for BFSI firms.

Building technological capabilities to compete

Traditional BFSI players are understandably concerned about BigTechs’ increasing sphere of influence, but their complex relationship with BigTechs makes it difficult for them to devise a focused strategy – to compete or collaborate – with their new peers. While some BFSI firms are expecting regulatory scrutiny and industry watchdogs to keep BigTechs away from their turf, others are developing technologies in-house and in collaboration with enterprise technology firms such as SAP, Salesforce, and Oracle to shore up their capabilities. For example, the top five banks in the US recently increased their technology budgets by more than 10 percent, with a large proportion focused on building proprietary technologies and platforms, as well as R&D, to better compete with BigTechs and FinTechs. In 2019, Bank of America alone filed 418 technology patents.

Our viewpoint

We believe BFSI firms should find a fine balance of working with BigTechs as fellow ecosystem players to leverage synergies and create a win-win for all stakeholders.  Here’s why.

A look at BigTechs’ scale of technology investments and R&D reveals that they heavily outperform BFSI firms in their technology capabilities. In 2019, AWS obtained 2,400 US patents and IBM obtained 9,262. These numbers indicate that their technology and research prowess position them as strong allies of BFSI firms. BigTechs have further strengthened their foothold in the industry through open banking and asset and data monetization models. FinTechs are already disrupting BFSI incumbents, with BigTechs powering many of them with technology and funding.

Thus, partnerships with BigTechs and other players in the ecosystem can help BFSI firms strengthen their role as orchestrators of customer lifestyle experiences. Armed with large technology investments and R&D budgets and a wide range of technology and IT infrastructure offerings, BigTechs have a lot to offer to traditional players. Cloud computing services such as Amazon AWS, Google Cloud, and Microsoft Azure can help – and are helping – BFSI firms improve their operational efficiencies and reduce costs. For instance, financial institutions in China are leveraging Ant Financial’s ZOLOZ platform for biometric authentication of customers.

Add to this BigTechs’ data and analytics capabilities, and the value they bring to the table increases manifold. BigTechs are not only helping incumbents manage and analyze their own data, but also offering aggregated data from various sources to support BFSI firms and deliver value to their customers.

And that’s not all. BigTechs enjoy a loyal customer base, and BFSI firms can tap into this vast pool. In fact, customers want to see their favorite banks and BigTechs come together to make their lives easier –the launches of Apple Card and Amazon Visa Credit Card are testimony to this fact.

Partnerships can also help banks reach out to the underbanked and underinsured populations. A case in point is Goldman Sachs offering credit to Amazon sellers. Facebook, with its widespread reach, can also act as a liaison between customers in remote areas and financial institutions that do not have brick-and-mortar branches in such areas. Addressing the issue of financial inclusion will not only help BFSI firms and BigTechs increase their market size, but also benefit the lives of those who still do not have access to credit and insurance.

It’s actually an equal partnership

When striking a bargain with BigTechs, BFSI firms must remember that they are equally powerful in the partnership. Traditional BFSI firms command customers’ trust and are better equipped to manage risk and compliance requirements. In contrast, BigTechs are struggling to make a name for themselves in the financial space and are eager to partner with BFSI firms to leverage the trust they enjoy, their access to vast capital reserves, and to bypass some of the regulatory compliance issues.

This situation makes the alliance between BFSI firms and BigTechs an accord between equals, a relationship that is mutually beneficial and sustainable. BFSI firms should confidently partner, co-innovate, and co-exist with BigTechs not only to carve a bigger share for themselves but also to share the benefits with their customers.

If you’d like to learn more about the role of BigTechs in the BFSI industry, please read our recently released report BigTechs in BFSI or reach out to me directly at [email protected].

How Changing Demographics and the Pandemic are Influencing Wealth Management | Blog

Millennials and Gen Xers currently account for a majority of the earning population worldwide. As a result, the largest demographic cohort looking to manage wealth or create retirement income is shifting from baby boomers to these population segments (see the exhibit below), which are generally more involved, aware, and digitally oriented than preceding generations. The new investor generations demand information at their fingertips, anytime, anywhere – something impossible to achieve with traditional wealth management methods.

Exhibit: estimated shift in wealth from baby boomers to Gen X and millennials from 2016 to 2046

estimated shift in wealth from baby boomers to Gen X and millennials from 2016 to 2046

The impact of COVID-19 on wealth management

The COVID-19 outbreak has brought some key challenges in wealth management to the forefront. First, it has highlighted gaps in traditional wealth management methods, accentuating the pressing need for digital transformation. COVID-19-induced restrictions have severely impacted agent availability and as well as customers’ ability to visit advisers. Firms that can leverage digital tools to balance business continuity challenges with customer expectations will be able to differentiate themselves from others in the current climate.

Second, revenue erosion resulting from the COVID-caused recession, combined with an increase in business costs, may drive consolidation in the industry, as smaller firms will find it difficult to stay afloat. We are already seeing a shift in asset classes’ preferences. High Net Worth Individuals (HNWIs) and Ultra HNWIs (UHNWIs) will be impacted, as the wealth managers’ diverse portfolios are impacted. More than half of respondents to a UBS Group AG survey of wealthy investors said they feared not having enough liquidity in the event of another pandemic, and a similar percentage expressed worry about leaving sufficient money to their heirs.

What wealth managers need to do

Wealth managers need to increase their focus on services such as workforce management, operations continuity, customer communications, digital, goal-based planning, and portfolio impact advisory to persist through the current challenging situation. At the same time, they shouldn’t lose sight of the perpetual risks to business, such as cyberattacks, money laundering, and other security threats. Wealth management firms will need to ensure – even in the absence of physical interaction and with limited agents – that leadership maintains the confidence of both customers and employees.

Digital will remain the overarching theme to address these challenges. In recent times, Business-Process-as-a-Service (BPaaS) for back-office operations and robo-advisory have gained traction, though the solutions’ scale and magnitude continue to remain low. While BPaaS helps firms bolster their critical operations,  technology leverage can be increased further via more digital products, automated cybersecurity systems, smart portfolio creation, trade analytics, and trade simulations for efficiency improvements, productivity gains, bandwidth creation, and customer satisfaction in the next normal.

As wealth management firms look to achieve these objectives, they will require support to quickly and efficiently adopt digital, set up the required infrastructure, move workforce interactions to virtual mediums, revamp operations and traditional workflows to minimize human intervention, and hedge location-based risks. They will have to carefully prioritize tasks and implement digital step-by-step, so as not to abruptly overhaul traditional methods and processes. For this, they could opt for off-the-shelf products or customized solutions, or choose an external provider to do it all.

To tide themselves over the crisis and prepare for what’s to come, we recommend that wealth management firms:

  • Instill confidence in their clients and employees and shield themselves against other risks to survive this unprecedented situation. It will also be vital to take additional precautionary measures to maintain investor confidence. Given investor loyalty to certain firms, it would be useful to focus on maintaining the customer base rather than acquiring new customers
  • Align themselves with and adopt emerging digital industry trends, including robo-advisory, automated workflows to close sales, remote due diligence, and subscription-based advice models
  • Ease the pressure on their bottom lines by focusing on reducing cost-to-serve; automating their middle and back offices could serve as a starting point
  • Continually assess their investment philosophies; while COVID-19 is a crisis like no other, firms must draw lessons from previous crises to diversify their assets and maximize their investments in passive funds that make reasonable margins

At present, digital transformation is no longer a strategy to cater to a specific customer segment but the very means to survive. It will help meet customer experience standards and preferences in relationship management, query resolution, and communication. For employees, digital tools will enable more robust decision-making and goal-based planning for portfolios, as well as help monitor them real-time to enable faster turnarounds and higher returns.

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