Banking Industry Archives

Unlocking Enterprise Preparedness for T+1 Settlement: The Crucial Role of IT and Technology Services Providers | Blog

March 19, 2024

By partnering with IT and technology services providers, banks and financial institutions can prepare for the new T+1 settlement. This security trade rule change to shorten the order finalization date by a day is expected to enhance operational efficiencies and reduce risk. Read on to understand how this updated regulation will impact the industry landscape and rapidly transform critical areas. Reach out to discuss the topic with us.

In today’s ever-evolving financial industry, the shift to T+1 settlement aims to enhance market efficiency, reduce counterparty risk, and align North American markets with global standards.

The transition to a T+1 settlement cycle represents a monumental shift for banks and financial institutions that will impact trade management, resource allocation, and risk mitigation.

Scheduled to go into effect this May in the US and Canada, the amended rule would require trades to be settled just one day after the transaction date, marking a significant departure from the current two-day cycle.

Let’s explore its ramifications further.

Impact on investors

Shifting toward instantaneous or faster settlements is a remarkable milestone that will streamline operations, improve risk management, boost liquidity, and provide better counterparty risk management. This will further lead broker-dealers to reduce margins and collateral requirements.

Accelerating settlement cycles will save buyers and sellers time and increase trading volume. The positive impact will vary by the investor type. Large institutional investors like corporations will benefit from more liquidity and reduced margin requirements. Meanwhile, small or retail investors, who contribute significantly to the daily exchange trading volumes, will receive funds or assets post-execution faster. This will bring various operational benefits and improve market risk mitigation.

However, the proposed shift will require significant investor education and resilience to overcome the negative market sentiment caused by affected broker businesses. Investors will grapple with the shorter period for trade settlement, and brokers will need substantial investments to update front-to-back-office systems. Moreover, the higher settlement costs could potentially disappoint investors.

Implications for banks and financial services institutions

The shift to T+1 settlement presents a significant opportunity for the financial industry to enhance operational efficiencies and reduce risk. As Martin Palivec, Head of Securities Services, Canada, Citi, has highlighted, many post-trade processes still rely heavily on manual intervention, indicating a clear need for automation and streamlining. Settlement compression will drive the industry to strengthen and automate these processes, leading to more efficient and reliable operations.

Moreover, improving reporting capabilities is becoming increasingly critical, with clients expecting timeliness and accuracy in trade status updates. This underscores the urgency for organizations to adopt advanced technologies and modernize their post-trade infrastructure.

Role of IT and technology service providers

By partnering with IT and technology services providers, banks and financial institutions can navigate the complexities of T+1 settlement and position themselves for success in the evolving financial landscape.

IT and technology services providers can play a crucial role in assisting banks and financial services institutions in their T+1 journey in the following ways:

System Upgrades and Integration: Technology providers can help firms upgrade their existing systems or integrate new systems to support T+1 settlement. This includes implementing real-time processing capabilities, enhancing data management systems, and ensuring interoperability with other market participants
Automation and Straight-Through Processing: Automation is key to achieving operational efficiency in a T+1 settlement environment. Technology providers can assist firms in automating trade interfaces, matching and affirming trades in real time, and streamlining settlement workflows to minimize the risk of failed settlements
Data Management and Reporting: Accurate and timely data management is critical with the compressed settlement timeline. Technology providers can help firms improve data quality, implement real-time reporting capabilities, and enhance communication with counterparties to reduce the risk of errors and delays
Regulatory Compliance and Risk Management: Technology providers can assist firms in ensuring compliance with T+1-related regulatory requirements, including implementing systems to monitor and report trade status and manage risk factors associated with the new settlement cycle

The move to the T+1 settlement represents a significant advancement in the financial industry, necessitating operational and technological adjustments for banks and financial institutions.

As this transition unfolds, the prospect of T+0 settlement looms, with countries like India already making strides in this direction. The adoption of distributed ledger technology (DLT) is expected to be pivotal in enabling T+0 settlement and offering real-time, secure, and transparent transaction processing.

Organizations preparing for T+1 should also consider the potential shift to T+0 in their strategic planning. By embracing technologies and practices supporting T+1 and T+0 settlement, businesses can streamline operations, enhance efficiency, and stay ahead of the curve in an evolving financial landscape.

To learn more about the impact of T+1 settlements in the financial services industry, contact Abhinav Rathaur, [email protected], Kriti Seth, [email protected], and Pranati Dave, [email protected].

Read the blog, Beyond the Hype: Approaching Gen AI in BFSI Enterprises with the Generative AI-EXCEL Framework, to learn about successful gen AI adoption in the BFSI sector.

Beyond the Hype: Approaching Gen AI in BFSI Enterprises with the Generative AI-EXCEL Framework | Blog

March 19, 2024

To successfully adopt Gen AI in BFSI, enterprises need to consider four fundamental aspects that can lead to responsible and effective deployment. Carefully evaluating each framework component is essential to ensure a positive Gen AI journey. Read on to learn about the Generative AI-EXCEL Framework and the importance of each element, or get in touch.

As there is urgency to embrace Generative Artificial Intelligence (Gen AI) across all industries – the BFSI industry is no exception given its prevalence. However, a thoughtful approach is required to fully reap the benefits of Gen AI.

Before immersing themselves in various use cases and integrating Gen AI into their operating structure, BFSI enterprises should strategically examine four fundamental components along the Gen AI value chain:

Generative AI-EXCEL framework

Enable AI
Execute AI
Champion AI Operations
Lead AI Change Management and Governance

These elements can guide enterprises toward harnessing the full potential of Gen AI in BFSI while ensuring responsible and effective deployment.

Enable AI

Embarking on AI initiatives demands the expertise of AI experts to define a clear vision and strategy. Seeking guidance from Gen AI experts is essential in laying a solid foundation for successful implementation. Assessing organizational readiness through an AI maturity and readiness assessment is recommended as this can provide insights into preparedness levels and potential challenges.

Developing a Gen AI roadmap and conducting a Return on Investment (ROI) analysis further ensures a well-structured approach, allowing organizations to navigate the complexities of integrating Gen AI effectively in their operations. A thoughtful approach is essential for consulting and enabling generative AI across the value chain before delving into specific use cases, relying on AI technology partners, and tool selection advisory services to ensure that organizations secure the right resources for success.

Adequate resources are crucial to ensure scalability, allowing Gen AI systems to manage increasing workloads efficiently. There is a lot of demand for talent, skills, and domain expertise, especially in Gen AI that needs to be plugged.

Moreover, hardware and infrastructure compatibility and version compatibility among different Gen AI models and frameworks are essential for seamless operations. Massive datasets play a pivotal role in training large-scale AI models, demanding significant computational power from specialized hardware such as graphics processing units (GPUs) and tensor processing units (TPUs). Balancing these elements is vital to harness the potential of Generative AI effectively.

Execute AI

When developing AI systems, some essential steps include preparing the data, refining features, utilizing and fine-tuning pre-built models, integrating AI with existing systems, creating custom models as needed, and conducting thorough testing to ensure reliability.

The increasing complexity of Gen AI models has led to the emergence of Machine Learning Operations (MLOps) and Large Language Model Operations (LLMOps) as services. These can play a pivotal role in easing the efficient deployment, orchestration, and monitoring of AI models.

Given the possibility of potential biases introduced by Gen AI, it becomes imperative for BFSI enterprises to ensure fairness. Vigilant model monitoring and drift analysis are some ways to achieve this. In addition, optimized performance can be achieved by incorporating accelerators.

Champion AI Operations

A robust change management strategy is essential for navigating a smooth transition. Leadership communication about AI’s benefits can set a positive tone for adoption. Equipping workforce with the necessary skills through comprehensive training and upskilling is essential. Developing a streamlined process for Gen AI adoption can enhance its acceptance rate. Recognizing and reinforcing Gen AI’s contributions can motivate the workforce, ensuring effective and sustainable AI integration.

Lead AI Change Management and Governance

Strong data governance can help address some of the concerns related to source attribution and confidence levels in data and foster trust in Gen AI outcomes.

Gen AI can generate content that is low in authenticity. Model explainability can help make AI decisions more understandable and traceable, boosting user confidence. Furthermore, enforcing compliance, validation, and auditing mechanisms can reinforce AI solutions’ reliability and ethical deployment.

The Gen AI model can potentially produce biased or dangerous results. Other AI models can be used to test results for risky outputs. Enterprises can also use data loss prevention and other security tools to prevent users from inputting sensitive data into prompts in the first place. Maintaining control over data is essential, and multiple levels of security are required.

In an industry where data security and privacy are paramount, governance becomes a linchpin for safeguarding sensitive information. Beyond regulatory compliance, governance can address critical aspects such as risk management, fairness, transparency, and accountability. With ongoing regulatory uncertainty and evolving laws, it is critically important to exercise caution about data breaches, privacy violations, or biased or discriminatory decisions that can create regulatory liabilities.

By following this Generative AI-EXCEL framework, BFSI enterprises can ensure they have addressed all essential aspects of enabling Gen AI. From identifying the right infrastructure and resources to developing and testing models and ensuring proper change management and governance, thoroughly evaluating each component guarantees a smooth AI transition. This approach will allow BFSI enterprises to harness Gen AI’s power fully.

To discuss Gen AI in BFSI, please reach out to [email protected], [email protected], and [email protected]. Learn more about how we can help your enterprise to leverage Gen AI, or read our report on revolutionizing BFSI workflows with Gen AI.

The Capital One Merger with Discover Potentially Signals a Shift in the US Banking Landscape | Blog

February 26, 2024

Capital One’s planned US$35.3 billion acquisition of Discover Financial Services would combine two of the largest credit card companies, creating the most dominant US credit card firm. This deal holds the potential to significantly impact the banking and financial services (BFS) IT services market and providers. Read on to learn the looming risks and what to pay attention to.

Acquiring Discover would give Capital One access to a credit card network of more than 300 million cardholders. If the Capital One merger clears antitrust regulations, the combined entity would become the sixth-largest US bank by assets and a leading card issuer and network provider for the US payments market.

Let’s explore the following four implications of the Capital One merger on the BFS technology and IT services sectors.

Increased deal activity will help banks sharpen their focus on core operations

Macroeconomic uncertainty and rising interest rates slowed financial services dealmaking in 2023. However, S&P predicts regional and community banks will be interested in mergers of equals this year. In these challenging times, banks want to understand the potential synergies of the merged entities clearly. They also require deeper due diligence than in the past, as exemplified by the failed merger of TD Bank Group and First Horizon.

Traditionally, acquisitions were an opportunity to enter new product lines and geographies, gain new capabilities, and achieve cost savings and operational efficiencies through technology modernization and streamlining processes and systems.

Recent banking sector acquisitions underscore a clear strategic focus on directing resources to targeted areas. Banks are divesting or seeking partners for non-core or insufficiently scaled units that lack a distinct competitive edge and demand substantial investment.

Investments in data and Artificial Intelligence (AI)/Machine Learning (ML) will rise

Our analysis indicates that merger and acquisition (M&A) activity among regional and community banks will increase, driven by the need to achieve greater scale. This strategic move is essential for these financial institutions to compete effectively with larger players, particularly as customer engagement transitions from physical to digital platforms.

By joining forces, these banks will be better positioned to develop new competencies in data management, AI/ML, open application programming interfaces (APIs), and advanced analytics, aligning with the growing digitalization of banking services. The merged entities will benefit from larger resource pools, facilitating improved alignment between skills and talent.

Service provider portfolios will likely reshuffle

Discover and Capital One have traditionally relied heavily on outsourcing to two or three major service providers. In mergers, providers with significant contracts with both entities typically stand to lose revenue because spending by the merged entity will not be as large as it was under the separate relationships unless they gain wallet share from competitors.

Suppliers that solely provide services to Discover are at risk of having their portfolio consolidated and moved to Capital One. However, providers who bring intellectual property or a niche capability may maintain the business through the consolidation.

Discussions about increased regulatory scrutiny are emerging, as even the regional banking market is at the cusp of such transactions. Moreover, this transaction can potentially increase competition for giants Mastercard and Visa.

Banks will require substantial consulting and system integration support

M&As spur increased short-term spending on post-merger integration and consulting services. By rationalizing vendor portfolios and IT infrastructures, merged entities can substantially cut costs by eliminating redundant applications and platforms. BFS firms will need partners to devise modernization roadmaps to create long-term value.

Merged entities must swiftly adapt their operational models, delivery strategies, and sourcing decisions to excel in the evolving landscape. Investing in specific technologies and tools is essential to foster growth and ensure operational continuity. Emphasizing core operations becomes a prerequisite as firms assess the appropriate valuation before crafting their integration strategy.

The road ahead for the Capital One merger

Richard Fairbank, founder, chairman, and CEO of Capital One, has emphasized that the merger with Discover presents a unique opportunity to unite two highly successful companies with complementary strengths and franchises.

The Capital One merger aims to establish a payments network capable of rivaling the industry’s most extensive networks and companies. However, the potential impact of increased market concentration from this combination will face regulatory scrutiny.

Providers should closely monitor system integration opportunities, as Capital One plans to expand its 11-year technology transformation initiative to encompass all of Discover’s operations and network.

The new entity will invest in growth initiatives, including faster time-to-market, innovative products and experiences, and personalized real-time marketing efforts. Operationally, underwriting, efficiency, risk management, and compliance enhancements will drive data and technology investments.

We are closely watching the market and regulatory actions. To discuss the Capital One merger and its impact on the US banking landscape, reach out to Ronak Doshi, [email protected], Kriti Gupta, [email protected], or Pranati Dave, [email protected].

Join this webinar to hear our analysts discuss Global Services Lessons Learned in 2023 and Top Trends to Know for 2024.

How the Recent Seize of First Republic Bank and the UBS Takeover of Credit Suisse Will Impact the BFS IT Services Market | Blog

March 31, 2023

The recent seize of First Republic Bank and UBS’ takeover of longtime rival Credit Suisse in a rushed, deeply discounted deal has reverberations across the banking and financial services (BFS) IT services market and on service providers. Read on to learn the looming risks and what to pay attention to in this blog.

The aftershocks of the collapse of SVB and Signature Bank, followed by the UBS-CS deal, are still being felt by the banking industry. The recent seize of First Republic Bank by JPMorgan with warning bells around PacWest has brought back memories from the 2008 financial crisis of whether this will be a one-off event or end up spreading like a contagion to the banking sector, especially the mid-market banking sector in the US. The stock of First Republic Bank had been steadily losing value in the last few weeks, and the massive deposit outflows put the bank at risk of failure. In a hurried weekend bidding, JP Morgan was the winner, while others like PNC and Citizens were unsuccessful. Right after the rescue by JP Morgan, shares in other mid-market banks started to see a slide. Commercial real estate loans have emerged as one of the main culprits pulling down loans value.

One thing that is becoming abundantly clear from these events is that customer confidence in their bank’s ability to protect their uninsured deposits is waning. It is when quarterly earnings are reported that the full picture is coming up on deposit outflows. While technology advancements have helped the banking industry, digital banking has only shown how fast deposits can be moved, which, coupled with social media panic, can accelerate a bank run. The implications for the overall banking sector, along with the technology and services industry, are multi-fold.

Implications for the BFS IT services market:

The market will see the return of large deals as bank consolidation will see the larger acquiring entity consolidate the supplier portfolios
Higher regulatory scrutiny, especially on mid-market banks, coupled with plummeting stock value, will put a dent in banks’ IT spend in the near-term
Cost-saving measures will be put in place, leading to job cuts and even branch rationalizations in the short term; job openings have already slumped to 6-month lows in the US

Interestingly, it raises the question of whether large banks are becoming too big to fail, leading to an even higher concentration risk for the banking sector. While the takeover of First Republic Bank is expected to bring gains to JP Morgan in the wealth management business, will banking get consolidated in the hands of a few? This will have repercussions on technology spend and the competitive nature of the industry. Already, the US was behind the curve on open banking adoption. The added risk of bank failures may halt these initiatives for some time.

The rescue by UBS of Credit Suisse marks the latest explosion across global financial markets in the ongoing banking troubles sparked by the collapse of Silicon Valley Bank and Signature Bank in the US, as we covered in our last blog.

Let’s take a look at the factors leading up to the Swiss brokered last-minute emergency takeover of Credit Suisse at a 60% discount.

Impact of the UBS-CS transaction

Credit Suisse was already battling concerns when its biggest annual loss since 2008 exacerbated the situation. Falling investor confidence eroded its share price to an all-time low, and top investors refused to give the bank more money citing liquidity concerns and regulatory hurdles.

Because Credit Suisse is considered one of the global systemically important financial institutions (SIFI), concerns about its future existence were particularly troubling. While the deal was made to prevent further meltdowns and stabilize the banking industry, risks of further blight spreading exist.

The merger of the two giants will have ripple effects on the BFS market, including:

Slowed growth in Europe: If the crisis trickles down to other banks and lasts long, revenue growth in the banking, financial service, and insurance (BFSI) segments will be impacted in the near to mid-term. Other related sectors (such as retail and telecom) also can be affected as seen during the Great Financial Crisis of 2008
Hits to other business segments: Areas such as asset and wealth management will be impacted by UBS’ decision to exit its wealth management business in some markets. Also, the move to wipe out the holdings of Credit Suisse bondholders has damaged Switzerland’s global reputation as a stable, predictable international asset manager
IT consolidation: With duplicating technology platforms and applications, the new entity will have to rationalize vendor portfolios and IT estates to realize significant cost synergies. Merging the two banks will require increased short-term spending on integration activities and consulting. Partners that can create modernization roadmaps for the combined entity also will be needed to drive long-term value
Job loss: UBS’s rescue plan for Credit Suisse may result in the loss of thousands of jobs at a time when the Swiss financial sector is already under tremendous stress due to the sudden takeover. The bank has slashed 4,000 positions so far this year
Robust risk controls: Credit Suisse’s risk management practices will need a major revamp given its troubled history of scandals and management controversies (Archegos and Greensill scandals in 2021) that led the Swiss Financial Market Supervisory Authority (FINMA) to order remedial action. The required measures include periodic executive board-level reviews of the most important business relationships for counterparty risks

Additionally, suppliers in UBS and Credit Suisse’s IT portfolio should brace for an impact when these mammoths consolidate.

UBS-CS impact on service providers

Traditionally, UBS and Credit Suisse have been huge outsourcing shops, with two or three major service providers controlling most of the work. Both banks have actively been reducing their outsourcing headcount and shifting their focus to insourcing and building capabilities in-house over recent years. This direction, coupled with the dynamics of the takeover, will lead to a rebalancing in the overall service provider portfolio across both banks. Here’s a look at the current landscape:

Typically in mergers, providers that have big contracts with both entities stand to lose revenue because the spending by the merged entity will not be as large as it was under the separate relationships, unless they gain wallet share from competitors.

Suppliers that only provide services to Credit Suisse are at risk of having their portfolio consolidated and moved to UBS. However, providers who bring intellectual property or a niche capability to the table may be able to maintain the business through the consolidation.

We are closely watching how the events will unfold in the next few weeks. UBS has a stronger balance sheet and is insured against any losses by the Swiss Treasury, which should lead to stability but settling cultural, and IT alignment will take time.

How Credit Suisse’s wealth management business shapes up is another element to consider. Already clients and asset outflows have begun, with competitors trying to take a piece of this pie.

BFS market outlook

The road ahead will be marred by the following challenges:

Banking industry consolidation: While the sudden implosion of SVB delivered a deep blow to a mid-market sector, the Credit Suisse collapse may have further repercussions across continental Europe and lead to further industry consolidation and mergers. This also will impact the technology sector, which is already reeling from layoffs, falling stock prices, and diminishing funding for startups
Business segments and markets reprioritization: Providers will need to reprioritize their efforts and pivot their go-to-market focus on high-growth segments. A critical need exists to align with growth segments across lines of business, marquee clients, and the partner ecosystem
Margin resilience: Our initial hypothesis indicates that service provider contract pricing should remain stable. However, revenue realizations could come under pressure with a lag due to portfolio shifts and the heightened competitive intensity. The US dollar has strengthened in past cycles in relation to the Indian Rupee so the cross-currency impact should be positive for margins

For more insights on the BFS technology and IT services market or to discuss the UBS-CS deal, please reach out to Ronak Doshi, Kriti Gupta, or Pranati Dave.

SVB Aftermath: How Will the Bank Failures Impact the Technology Services Industry? | Blog

March 16, 2023

With the recent banking implosion, the global financial services industry, technology companies, and service providers will be hit in different ways. Let’s explore the reverberations of these concerning banking trends.

The failure of Silicon Valley Bank (SVB) along with Silvergate and Signature Bank raises the question: Are these isolated incidents or signs of greater trouble in the financial services industry signaling a recession in the US? We believe this will start a domino effect impacting banking regulations, profitability, and technology spend.

The recent collapse of the banks will have repercussions across the financial services system and may trigger the following aftermaths:

Opportunities for large banks to capture business from banks with similar concentration sector risks of sectors that are seeing slowdowns (e.g., the start-up and tech concentration for SVB)
Rising mergers and acquisitions (M&As) to counter concentration risks and take advantage of current banking valuations, especially in the mid-market and regional banking segments
Reversing rate hikes by the Federal Reserve could bring about a multi-fold impact, as most organizations have planned their business strategy with the assumption of additional hikes for rates in 2023
Tightening of spend across organizations to manage near-term profitability. This could also cause spending slowdowns this quarter for IT outsourcing suppliers. Discretionary spending also will dry up, and decisions on new large modernization deals will be delayed
Declining revenues and loss of business in the current and following quarters for IT outsourcing suppliers catering to these banks

After the dust settles, these bank collapses can bring about the following two key learnings in the long term:

Data and analytics and Artificial Intelligence (AI) technologies could play a key role in better risk management (e.g., for the SVB asset-liability mismatch issue) to predict similar risk scenarios and prevent future failures
Additional stress test scenarios can help avoid future bank runs on non-SIFI institutions

Banking trends and impact

As the events played out, Moody’s downgraded its view on the US banking system from stable to negative, citing a rapidly deteriorating operating environment. Banks with sector-specific concentration risks, specializing in two or three sectors, have grown deposits in the last couple of years and also have a higher percentage of customers with average deposits exceeding the FDIC-insured limit, putting them at higher risk.

These banks will need to assess their portfolios and provide assurance to their customers. Even with these guarantees, customers still may decide to change their banking partners and seek traditional large banks that have more liquidity, impacting regional and smaller banks’ growth.

Declining customers and subsequent deposits will also affect other banking portfolios, and digital and technology transformation spend may take a hit. Banks’ risk management functions also will be scrutinized again. For example, only one of the seven members of SVB’s Risk Committee had risk management experience.

Implications for the financial services industry

The global financial services industry also could be impacted. Other geographies like Japan and the UK are showing signs of distress with banks of similar portfolios and exposures.

The bank failures could have a lasting impact on the sector as the financial services industry restructures and implements new processes to avoid similar scenarios, including:

Stricter stress testing rules to prevent further risk to the nation’s financial stability
Increased frequency and number of stress testing within banks as they reassess their portfolios and plan for any asset-liability mismatches
Greater focus on banking governance in the US triggered by the questions raised over systemic risk exemptions for SVB and Signature
Layoffs and hiring freezes as the industry becomes more prudent and conservative
Larger banks taking business from banks that have similar risk issues and might struggle
Rising M&As, especially in the mid-market and regional banking segments

Opportunities for providers

Here are our recommendations on how technology and service providers can capitalize on these new banking trends:

Adopt a multi-stakeholder approach with large banks: More than half of the business and financial services (BFS) technology spend comes from Tier 1 banks, and we expect investments by these market giants to remain strong and even expand to address the ripple effects. Providers should adopt a multi-stakeholder approach to target risk and compliance, marketing, operations, technology, and business unit leaders who all might course correct their strategies (in response to potential Federal Reserve reverse rate hikes, products being stress tested, new ones being launched, increased regulatory reporting activity, etc.)
Prioritize accounts for small and mid-size banks and credit unions: Service providers need to re-prioritize their account strategy for these banks as they renew priorities and focus areas. We expect overall spending by small- and mid-size banks to decline, making it critical for providers to identify and pursue the right accounts with the most relevant messages (based on the level of financial health)
Reenergize pre-COVID cost-takeout playbooks with next-gen elements: As banks come under immense margin pressure, some asset takeovers and carve-out opportunities may arise. A solutions mindset will resonate more soundly with clients than a pure talent-led play. Providers should plug gaps by working with technology partners and/or bring in-house technology assets.

We expect an increase in offshoring intensity and a push for captive setup conversations through a build-operate-transfer (BOT) model approach. Service providers should watch the direction of US dollar prices as commercials will need to be revised for the foreign exchange (FX) impact (the double impact of potential rate reversal and wage inflation)

Support clients on product/portfolio diversification strategies (long-term): BFS firms entering and/or expanding their asset and wealth management business as part of their revenue diversification plan will spike. We hold onto our growth forecast in this segment with renewed affirmation from the market
Pivot to growth pockets that will be less impacted: Not all lines of businesses will be equally affected. There’s a glimmer of hope for a revival in investment banking, private equity, treasury, and brokerage spending on technology outsourcing. However, cards and payments will stay flat, and lending might struggle

Looking ahead, BFS firms will cautiously approach technology and outsourcing spending, resulting in another quarter of soft demand. We also expect increased medium-term regulatory actions leading to spending increases across risk and compliance functions for non-SIFIs.

Rippling effects across geographies

The recent bank failures have an underlying mix of bank-specific (micro) and macro-economic factors in play. The macro factors have the potential to increase fear in the markets (and depositors) as government bond yields have shown signs of reversing their course, and the added factors of slower economic recovery, inflation, high-interest rates, and the resulting layoffs in specific sectors add further pressure.

Credit Suisse saw a 20% fall in share price on fears of a liquidity crunch on March 15. This also impacted shares of other European banks, such as BNP Paribas, Societe Generale, Commerzbank, and Deutsche Bank falling between 8% and 10%.

We are closely observing the market and regulatory actions and are available for any questions you or your teams might have about the impact of these latest banking trends. Please reach out to Ronak Doshi, [email protected], Kriti Gupta, [email protected], or Pranati Dave, [email protected].

Learn about key trends and the outlook for the global services market in 2023 in our webinar, Global Services: Lessons from 2022 and Key Trends Shaping 2023.

Outsourcing “Down Under”: The Impact of a Recession in the Australian Market on Banks | Blog

February 23, 2023

With Australia facing a looming recession, outsourcing is emerging as a solution for banks and financial institutions to navigate economic uncertainty, improve efficiency, and find expert talent. Read on to learn more about the impact of an Australian recession on the industry and opportunities for service providers.

The Australian market is not immune to a recession

While the Australian economy has avoided a recession for the past 27 years, it may not be able to withstand the current environment. Its long history of stability can be attributed to relatively stronger population growth than other developed countries, with Australia recording an average 1.37% growth rate between 1992-2017. Clear-eyed decisions by the Reserve Bank of Australia (RBA) on when to follow the US on rates, plus a large reserve and export of minerals and other natural resources, also contributed to Australia ducking a few recessions.

But comparing the Gross Domestic Product (GDP) per capita for the US and Australia from 1970-2021 shows a similar pattern that could signal an economic slump.

Although the American reaction to financial crises seems exaggerated compared to the Australian market, the direction is very similar, with a strong correlation coefficient of around 99% and a coefficient of determination of around 98%.

Correlation doesn’t imply causation, but we can reasonably infer that they tend to move in similar directions or at least are impacted by similar global trends, showing that Australia isn’t as shielded from the global recession as the world wants it to be, at least at a per capita level.

Key drivers for the slump

The Australian recession (at least in per capita terms) is slightly complex. Unlike other countries globally, one key driver isn’t behind the economic downturn. Instead, the following hindrances are impacting its economy to varying degrees:

Higher energy costs – Supply-side energy price inflation has a greater impact on Australia because of its 71% dependency on fossil fuels. The Consumer Price Index (CPI) rose 1.8 rose in the quarter and 7.3% from the prior year
Increasing wages – As the labor market tightens, wages increased 2.9% in the private sector in the third quarter of 2022 and 11% from last September. But the increases won’t compensate for rising goods and services prices
Dropping real estate prices – Even though the number of residential properties rose, the total value fell $359 billion to $9,674 billion this quarter with the average prices falling $36,800 to $889,800

The RBA has been closely observing this situation and is attempting to counter inflation by increasing interest rates, which will lull the economy into a slower state. Interest rates have risen to 3.1% from an almost negligible rate of 0.1% in December 2020. This will greatly hamper consumption and investment spending. Non-discretionary spending increased by 21% in October 2022 from the previous year.

In addition to this, Australian businesses are being marred by the talent crisis, with almost a third (31%) of businesses finding it difficult to find suitable staff and almost half (46%) of businesses experiencing declining operating profits.

Will banks suffer?

In one word: Yes. Financial services have been significantly impacted by the Australian recession. While the Australian banking sector still is dominated by the big four banks (NAB, CBA, Westpac, and ANZ), their share has been declining over recent years with the emergence of tier 2 banks and nonbank financial companies. Operations have been difficult for banks, with almost 20% facing difficulty in finding suitable staff and the cost of doing business rising exponentially.

Rising interest rates also will contribute to lower mortgage originations and refinancing. With consumers having less personal income combined with higher interest costs, residential property investment and mortgage volumes will suffer. Falling property prices also will impact consumer wealth. Apart from originations, financial institutions’ cash inflow will suffer as delinquency rates rise since most loans in the Australian market are variable rate loans.

Also, most transactions now are made using electronic payment methods rather than cash, and checks rarely are used anymore. With the growing trend of using credit cards and increased offerings for buy now, pay later (BNPL), default rates may rise in the future. BNPL also faces challenges under the National Consumer Credit Protection Act, which bans unsolicited credit limit increases and requires background checks for most consumer lending.

Outsourcing as a strategy

Historically, Australia has been an insourced market due to government regulations, job loss concerns, quality issues, and high-profit margins for banks. However, a local talent shortage, high wage inflation, and shrinking profit margins have reversed this trend.

Outsourcing has recently emerged as a popular workforce solution, with 10% of all firms and 22% of large firms considering outsourcing functions in the next three months. This is due to 59% of firms finding applicants’ qualifications insufficient.

Increasing demand for domain-specific expertise, especially in the area of Financial Crime and Compliance (FCC), has made it difficult for firms to find affordable experts. This has led to increased outsourcing interest, even among smaller enterprises. The growing need for technology and expertise in FCC is exemplified by recent cases, such as Westpac’s anti-money laundering (AML) law breaches and the Commonwealth Bank of Australia’s settlement of a $480 million compliance breach case in 2017.

In response to the need for compliance with growing regulations, digital-oriented solutions are in increased demand, and providers are finding success in helping banks improve operations. For example, one bank improved loan origination efficiency by 30% and freed up employee time by transforming its lending operations with the help of Accenture. The National Australia Bank also brought in Accenture to address its financial crimes compliance shortfall and identify high-risk customers.

An effective outsourcing strategy can help banks navigate the current economic recession and achieve cost efficiency with minimal investment and a quick transition time.

How to enter the land down under?

Recognizing that the needs of Australian enterprises differ from those in the US is essential. In this market, digital business process services and digital integration in operations are in growing demand.

However, implementing technology at a surface level will not be effective in Australia, as major banks have previously tried this approach with negative results, making them cautious this time. With stringent regulations, pre-existing products must be modified to meet each financial enterprise’s specific size and sector requirements.

Service providers can utilize their existing global delivery network to gain a foothold in the Australian business process services industry. By offering cutting-edge technology and custom solutions that cater to each client’s unique needs, they can provide more efficient and effective services.

Offshoring can be leveraged for transaction-intensive processes, enhanced with automation and analytics to provide intelligent insights. Modern offerings like business process as a service (BPaaS) can also be utilized, and providers can form partnerships to address gaps in their offerings.

While outsourcing can offer a solution for some functions, critical activities such as payments, mortgage administration, and anti-money laundering (AML), among others, often require complex judgment and technology dependencies and are typically managed by onshore control operations with experience in the Australian market.

To gain additional insights and discuss the impact of the recession on the Australian market and outsourcing’s potential in the Australian banking industry, reach out to [email protected].

Learn about the pricing shifts of outsourcing services caused by the current market in our webinar, Will 2023’s Economic Environment Level Outsourcing Price Increases?

ChatGPT Trends – A Bot’s Perspective on How the Promising Technology will Impact BPS | Blog

February 9, 2023

What better way to find out how ChatGPT will impact the Business Process Services (BPS) market than to ask the trained chatbot itself this question? According to its answers, the future looks promising. But obstacles still need to be overcome. Learn about the latest ChatGPT trends in this second part of our series.

Since OpenAI released ChatGPT for public testing in November 2022, ChatGPT has generated a lot of buzz. Based on initial impressions, the technology holds great promise to enhance and revolutionize many industries, including customer experience, healthcare, logistics, banking, and education, among others.

With all the attention, it’s natural to wonder how ChatGPT will impact the BPS market. And how better than to hear it straight from the bot? So, our analyst logged in on a session with ChatGPT and had a very direct and long conversation. Here’s what we learned:

Figure 1A Snippet from a conversation with ChatGPT

ChatGPT’s potential to enhance customer experience is fairly well known. It has shown the promise to improve current conversational Artificial Intelligence (AI) solutions and make them sound more human-like, which can significantly change how these services are delivered.

It is already capable of understanding natural language with high accuracy, and with enough training, it can start with taking on simple tasks at contact centers. ChatGPT also can track customer preferences and provide real-time insights that can unlock new opportunities for enterprises.

Exploring ChatGPT trends beyond experience

We were interested in understanding its impact beyond customer experience in other major areas such as back-office, content moderation, and finance and accounting, so we asked ChatGPT.

Below is a summarized finding of how ChatGPT can revolutionize six key areas, according to the conversation. (And we have no reason to believe it might have been exaggerating, unlike, say, an analyst writing something similar).

Back-office: Can automate back-end processes such as data entry, record keeping, and reporting, freeing up employees for more value-adding work
Content moderation: Can assist with content moderation by automatically detecting and flagging potentially harmful or inappropriate content, improving efficiency and accuracy compared to manual moderation
Human resources: Can automate repetitive tasks such as candidate screening, resume filtering, and scheduling interviews, freeing up HR staff for more value-adding work. It can provide quick and accurate responses to candidate inquiries, improving the overall candidate experience and making the hiring process more efficient. Another use is virtual interviewing, making it easier for HR to conduct interviews with candidates located in different locations
Financial and accounting: Can automate tasks such as invoice processing, expense reporting, and budget tracking, freeing up finance staff for more value-adding work
Supply chain: Can assist with supply chain management by providing real-time visibility into inventory levels, shipment status, and other supply chain data, enabling companies to make data-driven decisions and optimize their supply chain
Procurement: Can automate procurement tasks such as vendor management, purchase order creation, and invoice processing, helping procurement teams work more efficiently and effectively

The answers show the technology can potentially have positive repercussions across major areas within BPS. With such huge potential, ChatGPT is expected to impact talent as well. While demand may decline for low-skill jobs such as data entry and transactional customer service, ChatGPT will require new skills such as AI and data analysis, creating new job opportunities in areas such as conversational AI design and deployment. As enterprises adopt ChatGPT and other AI technologies, developing new skills and staying up-to-date with industry trends and advancements will become increasingly important for employees.

While the technology is certainly promising, several factors must be considered for successful implementation, including ethical and legal considerations (such as data privacy and algorithmic bias), integration with existing systems, quality of training data, human oversight, and ongoing development and improvement.

ChatGPT has the potential to significantly impact various areas within BPS. While challenges exist, careful planning and considering factors such as data privacy and ethical implications can lead to successful implementation and ongoing improvement. With careful investments, planning, and further technological advancement, ChatGPT can reach its full potential before too long.

For the first part in our series, see ChatGPT – Can BFSI Benefit from an Intelligent Conversation Friend in the Long Term? To discuss ChatGPT trends, please reach out to Sharang Sharma.

The Future of Blockchain in Banking and Financial Services and FinTechs | Blog

February 2, 2023

Blockchain technology promises to transform banking, financial services, and FinTechs by enhancing the digital customer experience while lowering costs and reducing data risks in a secure environment. Service providers investing in blockchain capabilities will win in the long run. Read on to discover the future of blockchain in this blog.

A brief history of blockchain in banking and financial services and FintTechs

Since its introduction in 2008, blockchain has established itself as a key to optimization. The banking industry is redefining itself through emerging technology that is improving products, customer services, and operational efficiencies.

In recent years, blockchain adoption has increased in banking and financial services and the emerging FinTech industry. Legacy banks and nations are now following the wave. Blockchain also is being used through Decentralized Finance (DeFi) and Decentralized Apps (DApps).

Let’s explore what blockchain is, why it’s important for this industry, and how the technology can further improve banking.

What is blockchain?

Blockchain is a distributed ledger that records transactions in an immutable, cryptographically secure way. It has been used to move money between parties without the need for third-party verification or intermediaries.

The technology works by creating a network of computers (or nodes) connected through the internet. Each node on this network stores copies of transaction data that cannot be changed or deleted. It also cannot be falsified, therefore serving as an invaluable tool for verifying authenticity and ensuring security when conducting financial transactions online.

The banking sector has been one of the first industries to realize the potential of distributed ledger technology (DLT), a protocol that enables the secure functioning of a decentralized digital database.

McKinsey estimates blockchain is expected to save around US$4 billion in cross-border payments and US$1 billion in retail bank operating costs and reduce regulatory fines by US$2-$3 billion and annual losses from fraud by US$7-$9 billion.

Benefits of blockchain technology in banking

Blockchain technology has the potential to improve the banking industry in many important aspects as illustrated below:

Key levers	Benefits
Cost reduction	Using blockchain reduces costs by allowing banks to process transactions faster while also eliminating the need for intermediaries that charge fees for their services. This can save money on transaction processing, leading to lower operating costs.
Energy conservation and ESG tracking	Due to the connected and transparent nature of the stored data, blockchain, in conjunction with the internet of things (IoT) technology, can accurately track carbon emissions and help firms track Environmental, Social, and Governance (ESG) mandates for clients and themselves.
Transparency and permissioned blockchain	Blockchain improves transparency by providing real-time records of all transactions occurring within an organization. It does this through a series of blocks chained together, with each block containing information about previous blocks and linking them together. A permissioned blockchain is a distributed ledger whose contents are accessible only to authorized users. The user can only perform the functions they have permission for (granted by the ledger administrator) and are required to identify themselves to ratify such changes.
User experience	User experience is critical for any banking application. The interface needs to be intuitive and easy to use so customers can conduct transactions quickly and without hassle. Since some applications are based around peer-to-peer interaction, blockchain-based-apps such as DApps will deliver a smoother user experience.
Fraud prevention	The distributed ledger uses cryptography to ensure data’s authenticity and integrity. The ledger is transparent and immutable, meaning that it cannot be altered or deleted once it has been recorded on the network. This prevents any single point of failure from being able to alter records or falsify them. When using traditional banking systems without blockchain technology behind them, these intermediaries often commit acts that can lead to the risk of material misstatements because they’ve been given authority over sensitive financial information and may lack proper knowledge about them.
Security benefits	In addition to fraud prevention, blockchain technology makes it easier for banks to keep track of who owns what assets when they move among different financial institutions (such as moving from one investment bank account to another). This enables them to better control access to those assets during transfer and helps prevent fraud by verifying that any changes made are legitimate before allowing them into the new account holder’s possession.

Seven use cases of blockchain in banking and financial services

Here are some examples of how blockchain is being used today:

Recording transactions

Recording and verifying transactions are the most obvious use cases for blockchain in banking. Blockchain allows banks to automate their back-office operations and reduce manual errors, which can result in significant savings for businesses.

Trade finance

Blockchain can help streamline the various paperwork involved in international trade and reduce the risk of fraud. Banks are using blockchain to help manage the documents needed for completing a trade transaction, including contracts, letters of credit, bills of lading, import/export licenses, insurance certificates, and more. By digitizing this paperwork and making it available on a shared ledger, all parties can see what’s happening in real-time and know that the data is secure from tampering or fraud.

Syndicated loans

Blockchain technology has the potential to significantly simplify syndicated loans by creating standard contracts and automating all processes from loan origination to monitoring and repayment. This could be done with smart contracts – self-executing digital code that would automatically execute certain actions when conditions at met.

Global Payments

With blockchain technology, banks can store, access, and update data on a secure digital ledger. This makes it easier for multiple parties to view and share information, eliminating the need for manually matching data across multiple databases.

Blockchain-enabled payments across countries can be completed in minutes rather than days and at a fraction of the cost typically associated with international payments. Additionally, blockchain’s cryptography ensures an additional layer of security compared to traditional payment platforms.

Automating other processes

Blockchain can also help automate certain processes within banks by allowing them to create smart contracts. Smart contracts are self-executing agreements between parties that use blockchains as their source code. This can eliminate the need for middlemen or third parties in business relationships, which can save money for both sides involved in the contract negotiation process.

Smart contracts can be used for multiple purposes, such as automated rebates, payments for services rendered or goods delivered, and licensing of intellectual property (IP) rights/non-fungible token (NFT) minting.

Tracking Assets

In addition to recording transactions, blockchain also can be used to track assets such as gold or real estate through an automated system that verifies ownership rights on a decentralized network of computers rather than through traditional means like paper documents or banks.

Authentication

Blockchain can be used to provide authentication services on documents such as contracts, loans, etc., by checking their authenticity before considering them valid.

Banks and financial institutions using blockchain

Goldman Sachs	Goldman Sachs is backing the initiative of payment firm Circle to become a blockchain-enabled issuer of USDC (a form of stable digital currency)
JP Morgan	JP Morgan’s Liink enables institutions to exchange payment-related information quickly and securely
Al Rajhi Bank	Al Rajhi Bank facilitates its cross-border payments services on the foundation of Ripple’s blockchain capabilities
Swedish Central Bank (SCB)	SCB is experimenting with the possibility of launching e-krona in collaboration with R3
HSBC	HSBC also utilizes R3’s blockchain capabilities to operate Digital Vault services
UBS	UBS launched the first digital bond to be publicly traded and settled on blockchain-based and traditional exchanges

With support for blockchain adoption and investment from banks, more than 20 countries, including India, Australia, Brazil, etc., have taken further steps to pilot central bank digital currency (CBDC), which often utilizes blockchain. These investments have given rise to many groups and consortiums, as shown below:

Notable consortiums

Hyperledger	Enterprise Ethereum Alliance (EEA)	BankChain	B3i	Marco Polo
ChinaLedger	Financial Blockchain Shenzhen Consortium (FISCO)	TradeLens	Contour	we.trade

What are the barriers to adopting blockchain technology in the banking industry?

Lack of understanding and mistrust in blockchain technology and uncertainty about regulations, cost savings, and security are among the main barriers to adoption that will require time for banks to overcome before they can begin implementation.

Another obstacle is the impact blockchain may have on existing systems and processes. Integrating blockchain technology may not be seamless due to a lack of expertise and compatibility issues.

Scalability also is a concern. While the technology has the potential to handle many transactions, banks need to be certain it can scale up to meet their needs. A blockchain platform will not be useful if it cannot handle the traffic.

The need for standardization is another key challenge. Because blockchain technology is still in its early stages, no one-size-fits-all solution exists. Each bank will need to develop its own system, which can be time-consuming and expensive.

What is the future of blockchain?

To stay competitive, banks need to implement process automation and deliver a superior digital experience to their customers. Blockchain offers potential as a transformative technology for banks to implement to improve services and customer experience.

Additionally, blockchain can help banks save money on transaction costs and reduce risk by keeping records updated across multiple systems. The technology also provides a secure environment that reduces the possibility of fraud or data loss due to cyberattacks.

We believe the future of blockchain offers promising opportunities for banks and service providers alike. Service providers will partner with banks and other financial institutions to bridge the gap by providing trust and knowledge, technology infrastructure support, and the right services to innovate and move forward together.

Making the right investment at the right time to take advantage of the growing adoption of blockchain will be the key to riding this growing tide.

To discuss the future of blockchain or banking and financial services trends, please reach out to [email protected], [email protected], and [email protected], and stay updated by accessing our latest research on banking business processes.

ChatGPT – Can BFSI Benefit from an Intelligent Conversation Friend in the Long Term?

February 2, 2023

With the advent of chatbots reaching human-like sentience and mannerisms, and banks being at the forefront of adopting conversational Artificial Intelligence (AI), the question arises whether ChatGPT threatens the likes of Google, other AI platforms, and the non-critical workforce in the technology and services industries. While its promise remains high, will the banking, financial services, and insurance (BFSI) sector unearth ChatGPT’s full potential? Read on to find out.

ChatGPT has taken the internet by storm and has become a trending sensation overnight. This AI-powered innovative chatbot has taken the world for a spin and is generating a big buzz among millions of professional users experimenting with it. Microsoft has also invested billions in the tool.

But what is ChatGPT? Developed by OpenAI, it is a generative language model that has been trained over large volumes of text to generate human-like responses. Like a search engine, it curates answers for queries but is designed to answer in a more conversational flow that goes beyond chat and delivers a richer experience with an intelligent chatbot. The AI engine generates solutions for all sorts of queries, including R, Python, and VBA codes.

Let’s explore ChatGPT’s potential to impact the future of AI and its usage in the technology and services industry, particularly by financial institutions, banks, and insurers.

What makes ChatGPT approachable and different to use?

The amount of data used to train the GPT model
Human-like interaction
Versatility and variety of responses
Low data input requirements
Highly scalable
Adjustable coherence and adaptability

What does it mean for banking and financial services?

Banks can use ChatGPT in several ways to enhance their operations and customer experience. Here are a few examples:

Assistive chatbots: ChatGPT can be used to build natural language-based chatbots that can assist customers with common inquiries, such as account balances, transaction history, and bill payments. The chatbot also can guide customers through more complex processes like applying for a loan or a credit card. It also could help increase agent efficiency by aggregating requests by type to the appropriate departments
Automation of simple and repetitive tasks: ChatGPT, along with other conversational AI models, can be used to automate simple and repetitive tasks, such as customer service interactions, order processing, and data entry. This can increase efficiency and lower costs for service providers and their clients
Customer service: ChatGPT can assist the human agent in answering customer questions, improving efficiency and response time, and providing more accurate and detailed information. This can improve customer service and satisfaction and employee onboarding
Marketing: Banks can use ChatGPT to analyze customer data and build personalized marketing campaigns that target specific customer segments. It also can generate personalized responses to customer inquiries by fine-tuning the model to a specific client, enabling it to generate tailored responses to their needs
Decision Making: With the right database connections and integrations, ChatGPT can be used to analyze data to generate insights that can be used in decision making
Learning and development: ChatGPT can be used as a learning and development tool. It can be trained with a company’s pre-existing data to create learning tools and modules and as an onboarding tool for new employees

Current mapping of ChatGPT to the BFS BPS value chain

Current use cases of ChatGPT in banking and financial services (BFS) and business process services (BPS) operations are limited. Building capabilities around conversational AI and incorporating ChatGPT into offering portfolios can help BFS and BPS firms unlock innovation. Enterprises such as Microsoft, AWS, and Meta are developing their capabilities internally or through partnerships with conversation AI specialists.

Industries leading in innovation investments are becoming early adopters of ChatGPT. Microsoft is reportedly investing US$10 billion in OpenAI and plans to introduce it along with its Azure OpenAI service bundle in the Bing search engine. This furthers Microsoft’s stake in the market, where it already has a working partnership with OneReach.ai, one of the market’s leading conversation AI providers, since 2019.

Current capabilities still have hurdles to overcome

Although ChatGPT appears to have multiple uses and strengths, some limitations include:

Biased and inconsistent output: Content generated by ChatGPT depends on the trained data, making it prone to biases. It is difficult to achieve the same level of consistency in output generated. Cases requiring more context and complexities may lead to biased and inconsistent output. When training for complex operations such as trade reconciliation, exception management, and know your customer (KYC) remediation, the subject matter experts (SMEs) must be well-versed with minute details, which can’t be guaranteed when using ChatGPT
Standardized data requirement: ChatGPT cannot process different file types or extract information from them. A lot of consumer data is often received in varied file types and formats that require intelligent operations to skim through and sort, which is beyond ChatGPT’s current text-based data capabilities
Largely text driven: Its text-based generated content can fall short of expectations for the coming generation of users that desire more visual stimulation. Dashboards and descriptive analytics have become a basic requirement of all transaction-intensive industries that ChatGPT cannot fulfill
Limited ability to handle sensitive customer information: ChatGPT may not have the necessary security and privacy measures to handle sensitive customer information, such as account numbers or personal identification numbers. With the ever-evolving compliance norms varying across industries, it doesn’t yet have the capability or the secure framework to process, analyze, and interpret KYC or transaction data
Outdated information: ChatGPT’s information database is limited to data up until 2021 and can result in outdated opinions and facts. Deals, news, and updates in recent years aren’t recorded. For a constantly-evolving industry like BFS, where new deals and contracts dictate the capital markets, this makes the source of information unreliable
Ethical concerns: As artificial intelligence improves, the lack of proper credit for AI-generated content is becoming more widespread. The distinction between content created by AI and content created by humans is becoming less clear, causing confusion, mistrust, and ethical dilemmas
System Integration issues: Incorporating new technology with outdated systems can be difficult due to potential incompatibilities and differing protocols or data formats. This can decrease efficiency, add complexity, and impair interoperability

Where will the future take ChatGPT?

While ChatGPT’s future looks promising, it is too early to say the product will revolutionize banking and financial services. Before it gets integrated into banking products, it needs to overcome several hurdles, including:

Responding to competition from rising financial technology (FinTech), regulatory technology (RegTechs), and other AI/Machine Learning (ML) service providers
Meeting regulatory, compliance, and cybersecurity requirements
Catering first to front-office requirements for low-critical queries and then for more complex queries and back-office operations that have not yet been explored
Maintaining high operational efficiency, accuracy, and customer satisfaction
Expanding variation in output categories
Overcoming the lack of recent factual data

Though ChatGPT use cases are promising, it is still a machine learning model that needs modifications to be used in real-world applications. The model would have to consume specific industry data to build domain depth and be programmed to manage contextual nuances for various tasks. Its ultimate success would depend on end customers’ user experiences.

While the road is being paved for innovation, ChatGPT still has a long way to go before making strides into banking and financial services.

To further illustrate the nature of results and drill down on the capacity of ChatGPT, below are some screenshots for financial crime and compliance queries (platforms, codes, advisory):

If you have questions about banking and financial services trends or would like to discuss developments in this space, reach out to [email protected], [email protected], and [email protected].

Also, download our Navigating the Regulatory Tightrope via End-to-End Solutions – Financial Crime and Compliance (FCC) State of the Market 2022 report to explore key trends. Stay updated by following the latest research on Banking and Financial Business Process Services.

Five FinTech Trends to Watch for in the New Year | Blog

December 14, 2022

Since every past economic slowdown in this century has led to accelerated innovation and growth for FinTech firms, 2023 should be no different. We expect financial technology players to answer investors’ demands for increased profitability by tweaking business models and product innovation. To learn what FinTech trends will dominate in the coming year, read on.

FinTech firms have a history of responding to tough economic times by adapting and coming up with new business approaches. Looking back at the downturn in 2008, new FinTech trends emerged, including personal finance management (PFM), insurance aggregators and marketplace, robo-advisors, crowdfunding, challenger/neo/digital-only banks, and cryptocurrencies. Following the same pattern for innovation, the pandemic-led slowdown has resulted in buy now pay later (BNPL), metaverse payments, decentralized finance (DeFi), and Web 3.0.

Let’s explore the following FinTech trends on the horizon for 2023:

Investors will push for profitability

Rising interest rates and slow economic growth have pushed FinTech investors to demand profitability improvements. As a result, FinTech firms that were built to drive growth at the expense of profitability to scale and acquire customers are now forced to adapt their business models and investments. We expect FinTechs to find alternative monetization models. One such alternative that FinTechs are exploring is selling/licensing their technology, such as core systems and machine learning models (that they built and trained), to other financial services firms. Accessing already built and trained machine learning models will enable financial services to adopt AI at speed and scale without additional time and expense.

FinTechs will target eliminating operational inefficiencies and data silos in core processes

The last decade has seen FinTechs eat into the front-office surplus of incumbent financial services firms. Now, they are increasingly moving into mid-and-back-office processes to streamline these processes and data systems. We see FinTechs targeting the hard problems that incumbent financial services firms are slow to resolve because of legacy systems, data, and established processes. For example, eight of the top 10 retirement plan providers in the US are struggling with legacy mainframe-based technology and processes. Newer firms such as Retirable, Penelope, Smart, and Silvur have entered the market to provide better retirement experiences. Firms like Alto are bringing innovation from the Web 3.0 space to the retirement market by offering Individual Retirement Account (IRA) platforms. These IRA platforms simplify investing in alternative assets, such as start-ups and cryptocurrencies, by using tax-advantaged retirement funds. Beyond the retirement and pension segment, we see similar activity in the treasury, investment banking, group benefits, and specialty insurance markets

FinTechs will move away from bundling/aggregation to financial ecosystem orchestration

Wallets and super apps are becoming the foundational blocks for enabling ambient banking, which is focused on meeting the business and/or customer at the moment of their need, crossing other industries. Firms like Roostify and Ribbon want to orchestrate the end-to-end home-buying experience. Players such as Nomi Health and PayGround seek to simplify the end-to-end healthcare payments experience. We expect to see more vertically integrated FinTech firms at the intersection of financial services and industry experiences (e.g., car buying, small business invoicing and billing, supply chain, loyalty, and travel). Cloud and APIs are two technology components enabling the technical architecture necessary for embedded banking.

FinTechs will tap into the sustainability opportunity

Environmental, social, and governance (ESG) is a major demand theme that represents a relatively untapped market by FinTechs. We expect areas such as carbon credit marketplaces, ESG data and analytics solutions, and ESG customer transparency solutions to dominate most FinTech activity in 2023. FinTechs that can offer support for ESG reporting and compliance for small- and mid-size financial services firms is a white space that should see significant growth in 2023.

Payments, wealth management, treasury, Web 3.0, and risk and compliance (RegTech) will be the fastest-growing FinTech segments in 2023

We expect a slowdown in lending and BNPL and challenger banking because of profitability challenges, whereas segments such as cryptocurrency will see some slowdown due to the tightening of regulatory controls and the FTX collapse, which led to a crash in prices. Markets such as supply chain finance, crowdfunding, PFM, and robo-advisory are becoming saturated and remain highly competitive for new FinTech entrants. Wealth management is an attractive adjacent market for banks, lenders, Non-Banking Financial Companies (NBFCs), and insurance firms. These new entrants in the wealth management space are working with FinTech firms that are configurable and born in the cloud architecture to assemble their technology stack. Web 3.0 is an emerging space with a broad ambit across industries with possibilities to manage the entire asset lifecycle better. These assets could be physical assets, digital assets, media, identity, equity, bonds, or even virtual assets in the metaverse. Breaking down process complexity and reducing costs of operations across payments, treasury, and RegTech areas will drive the growth of FinTech activity.

The FinTech outlook for 2023

In the upcoming year, we expect to see FinTech firms make deliberate moves to increase their profitability to meet investors’ demands. These actions will include firms selling/licensing their machine learning models, eliminating operational efficiencies through Web 3.0 innovations, focusing on the intersection of financial services and industry experiences, and making sustainability a priority.

If you have questions about FinTech trends or would like to discuss developments in this space, reach out to Ronak Doshi.

Also, watch our webinar, Key Issues for 2023: Rise Above Economic Uncertainty and Succeed, as we explore major concerns, expectations, and key trends expected to amplify in 2023.

Category: Banking Industry