Category: Financial Services Industry

Emerging Risk and Compliance (R&C) Outsourcing Needs | Blog

In the dynamic landscape of banking, financial services, and insurance (BFSI), risk and compliance (R&C) functions have become critical. Read on to explore the growing trend of outsourcing R&C processes, including the strategic advantages, regulatory considerations, and the role of specialized service providers in bolstering operational efficiency and compliance resilience amid evolving industry dynamics. Reach out to us to discuss further.

Risk and compliance (R&C) functions may not directly generate revenue, but they are crucial for the effective execution of business strategies and ongoing operations of banking, financial services, and insurance (BFSI) enterprises. Conventionally, R&C only receive attention when something goes wrong, like regulatory enforcement. It’s time to adopt a proactive and strategic approach.

Recently, there have been rising volumes for processes related to R&C, putting significant pressure on in-house compliance teams of BFSI enterprises, as the cost of failing to meet R&C mandates is extremely high. For example, Binance faced a US$4.3 billion penalty in 2023 due to lapses in anti-money laundering program. Similarly, in 2024 HSBC has been fined £57.4 million for customer deposit protection failings.

So, what’s the solution? While some BFSI enterprises, due to regulatory requirements or other sensitivities, must keep all compliance activities in-house, for others, outsourcing part or all of their compliance functions is a viable alternative. This shift not only addresses immediate pressures but also positions BFSI enterprises for future resilience and competitiveness.

The catch? Regulatory guidance emphasizes that even when compliance activities are outsourced, the company retains accountability for meeting its regulatory obligations. Hence, the need to have a thorough decisioning strategy when it comes to risk and compliance outsourcing.

Traditionally, R&C outsourcing in the BFSI sector has been limited to areas like KYC, AML, credit risk, operational, and third-party risk management, with some audit support services. However, the industry has recently become more open to outsourcing critical processes such as market and liquidity risk, fraud management and chargeback, enterprise risk management, internal audit support, risk consulting, and ESG services.

Risk and compliance

Exhibit 1: Risk and compliance value chain as defined by Everest Group

The rising propensity to outsource R&C processes is driven by a multitude of factors, including:

Current macroeconomic headwinds: The ongoing recessionary pressures are putting cost constraints on BFSI enterprises as they navigate a high-interest environment. Outsourcing R&C promises much-needed cost-effectiveness when compared to maintaining an in-house compliance team.

Rising volumes of R&C requirements: Current geopolitical scenarios, such as the Israel-Palestine and Russia-Ukraine conflicts, along with major global elections, have heightened the need for processes like sanction screening and Politically Exposed People (PEP) monitoring. Additionally, the macroeconomic environment, where many are living paycheck-to-paycheck, has led to an increase in fraud and chargeback instances. Outsourcing to specialist firms can help increase efficiencies due to economies of scale and a clear operational focus.

The increasing complexity of R&C processes: Fraudsters have become tech-savvy, and the global regulations keep on evolving. Outsourcing can provide quicker access to advanced systems, such as compliance analytics and AI-based risk models, that might be costly or time-consuming to develop in-house. By outsourcing compliance tasks, BFSI enterprises can focus on their core capabilities and strategic goals, thereby increasing productivity and competitiveness.

Access to specialized talent: As BFSI enterprises expand their compliance efforts and integrate them within core business operations, the demand for skilled compliance talent has risen. Effective compliance management now requires not only financial, legal, and analytical skills but also strong operational experience, a combination that is in short supply and can be complemented by an R&C specialist outsourcing partner.

Evolving enterprise priorities within risk and compliance

The COVID-19 pandemic forced BFSI enterprises to rapidly adapt their operations. As the pandemic evolved into an economic crisis, it triggered unemployment and social unrest, presenting challenges like business disruption, remote work, data security, cyber threats, and increased risk and compliance monitoring.

Failures of major banks such as Silicon Valley Bank, Credit Suisse, Silvergate Bank, and First Republic Bank highlighted the urgent need for continuous investment in legal, risk, audit, and compliance functions amid rising inflation and asset/liability mismatches.

Enhanced regulatory scrutiny is another key factor, as highlighted below:

  • AI and external data use control: The EU Artificial Intelligence Act, the first comprehensive legal framework for AI, was adopted on March 13, 2024. The new Colorado Division of Insurance regulations require insurers to test AI/data systems for bias
  • Cybersecurity and data safety: The Consumer Financial Protection Bureau (CFPB) proposed rules on consumer-authorized financial data-sharing, and New York’s expanded cybersecurity rule mandates annual reviews of written policies by a governance committee
  • Capital and solvency oversight: The Financial Stability Oversight Council (FSOC) finalized a framework for assessing risks to US financial stability, including non-bank financial companies and payment systems. The CFPB proposed supervision of digital wallet and payment apps, while the National Association of Insurance Commissioners (NAIC) seeks to protect consumers by ensuring the solvency of life insurers through revised risk-based capital requirements

This more stringent supervisory environment pressures banking organizations to accelerate remediation efforts and operate with less room for error.

The road ahead

Outsourcing broader R&C is similar to the early days of IT outsourcing, where companies gradually outsourced processes one or two at a time. BFSI enterprises should strategically decide which compliance activities to outsource, ensuring these processes are already stable and effective in-house, as outsourcing alone won’t fix existing issues.

As the R&C landscape evolves, financial institutions must proactively adapt by assigning clear compliance responsibilities, integrating technology (AI, analytics, automation), and establishing robust risk management frameworks. Service providers will be essential in supporting these compliance efforts.

For more on R&C outsourcing trends and achieving regulatory compliance, contact Dheeraj Maken ([email protected]), Kriti Gupta ([email protected]) and Ritwik Rudra ([email protected]), or download our report, “High Tide of Transformation – Financial Crime and Compliance (FCC) State of the Market 2024.”

Don’t miss our webinar, What’s Next in Financial Services? Driving Transformation Through Sourcing, Technology, and Operations, to learn how BFSI firms are driving business transformation in response to the macroeconomic environment, evolving customer needs, the tightening regulatory landscape, and the rapid adoption of AI and cloud technologies.

Core Banking in the Age of Transformation: A Ride from Legacy to Modernity | Blog

For years, core banking systems have been the backbone of financial institutions. But the landscape is shifting, and customers have high expectations. Nimble FinTech startups with cloud-based solutions are challenging traditional banks. In this dynamic environment, core banking systems are under more scrutiny than ever before. Reach out to discuss with us.

Legacy core systems, while reliable, are monolithic and struggle to meet today’s needs for hyper-personalization and real-time experiences. They’re expensive to maintain, slow to adapt, and can’t deliver the seamless, personalized experiences customers now expect. As the volume of transactions increases, the rise of open banking accelerates, and the need for real-time processing picks up, these limitations become clear.

The winds of change: M&A, strategic partnerships, and modernization

The core banking landscape is shifting. Mergers, acquisitions, and partnerships between technology providers and financial institutions are on the rise. This consolidation sends a clear message: modernization is no longer optional, it’s essential for survival. For instance, Visa’s acquisition of Pismo, a cloud-native core banking platform provider. This move strengthens Visa’s ability to offer banks next-generation solutions, while Pismo gains access to Visa’s vast network and expertise.

Banks across various markets are recognizing the need for modernization and are actively partnering with service providers to upgrade their core systems. These collaborations highlight the growing understanding that modernization is key to staying competitive and meeting evolving customer demands.

Progressive banks are adopting next-generation core banking platforms offered by leading technology providers that are:

  • Cloud-native: Built for scalability and agility in the cloud, enabling banks to adapt quickly
  • API-driven: Open APIs make it easy to integrate with fintech solutions, fostering a more personalized banking experience
  • Microservices-based: This modular design allows for faster innovation because components can be swapped out and updated independently

Blog Exhibit Core Banking in the Age of Transformation A Ride from Legacy to Modernity

 

Demystifying modernization: A roadmap for success

Banks are understandably cautious about core modernization due to its critical role in daily operations. Several approaches are available, each with its own pros and cons:

  • Journey-led progressive modernization: This step-by-step approach prioritizes flexibility by building a digital layer around the core. APIs are exposed for better integration, while legacy parts are gradually replaced with modern microservices. Based on our conversations, this is the most preferred choice (5 out of 10 banks) as it minimizes disruption and allows for incremental changes
  • Big bang replacement: A complete switchover to a new platform, a faster but riskier approach that requires careful planning and execution. Smaller banks with less complex systems often choose this route (2 out of 10 banks)
  • Other approaches: Re-platforming, re-factoring, and leveraging a new tech stack for greenfield banking are other options, each suited to specific needs and risk tolerances

However, these approaches are not without their challenges. Change management and the need to decommission legacy systems can be challenging, while progressive change can result in higher costs and the need to adapt to constant technological shifts. Data migration, the availability of a scalable talent pool, vendor lock-in, and cost overruns are additional hurdles that banks must navigate.

Implications and opportunities for service providers

The core banking transformation journey presents a significant opportunity for SPs. Banks will need increased consulting and implementation support as they navigate this complex transition.

The journey-led progressive modernization approach, the most preferred by banks, is a long process that requires extensive guidance. Banks will seek expertise in areas such as modernization and decommissioning strategy, change management, data migration, talent acquisition, and system integration. This translates into a higher demand for consulting services, where providers can leverage their industry knowledge and technical expertise to guide banks through the transformation journey.

The road ahead: A collaborative future

The future of core banking is a collaborative one. Banks and SPs will need to work together to unlock the full potential of next-generation core banking solutions. By embracing innovation and forging strategic partnerships, banks can stay competitive and deliver the exceptional experiences that customers demand. This transformation goes beyond just a modernized core; it paves the way for a future of hyper-personalized financial experiences.

Currently, technology providers can participate in our Core Banking Technology Top 50™ Report assessment. We will rank technology providers based on their scale of core banking business, client geography mix, and significance within the core banking platforms market (retail and commercial). Submit a request to participate.

To learn more about core banking, contact Ronak Doshi, [email protected], Pranati Dave, [email protected], Kriti Gupta, [email protected], and Laqshay Gupta, [email protected].

Sourcing BFSI leaders can also request to join the exclusive virtual roundtable, Banking, Financial Services, and Insurance Leaders Discuss: 2024’s Top Trends in Tech and Ops Sourcing, to learn about the latest trending issues shaping tech and ops sourcing within the BFSI sector.

Decoding the EU AI Act: What it Means for Financial Services Firms | Blog

How will the EU AI Act impact the financial services sector, and how should enterprises and service providers structure their compliance activities? Read on to learn about what this new legislation means for financial services firms looking to implement AI tools, or get in touch to understand the direct impact on your specific business.

In recent years, the rapid advancements in artificial intelligence — in particular, generative AI — have revolutionized various sectors, including financial services. Technology giants such as Microsoft, Google, Amazon, and Meta have heavily invested in developing AI models and tools. However, this unprecedented growth has also raised concerns about the potential risks associated with the unchecked use of AI, prompting the need for regulations to ensure the responsible development and deployment of these powerful technologies.

Recognizing the urgency of the situation, the European Union has taken a proactive step by introducing the AI Act, a pioneering piece of legislation that aims to establish a comprehensive framework for the development and use of trustworthy AI systems. The Act adopts a risk-based approach, categorizing AI systems into four distinct levels:

  • Unacceptable risk – Systems deemed a serious threat, such as predictive policing, real-time biometric identification systems, and social scoring and ranking are banned
  • High-risk – Systems with potential to harm people or fundamental rights, such as AI-powered credit assessments, require strict adherence to new rules regarding risk management, data training, transparency, cybersecurity, and testing. These systems need to register with a central EU database before distribution
  • Limited risk – Systems posing minimal risk, such as chatbots, need to comply with “limited transparency obligations,” such as labeling AI-generated content
  • Low or minimal risk – While not mandated, the Act encourages providers to follow a code of conduct similar to high-risk systems for market conformity

The AI Act and financial services

The financial services industry heavily relies on AI, from personalized banking experiences to fraud detection. The high-risk applications especially require financial institutions to prioritize the following:

  • Continuous risk management – Focus on health, safety, and rights throughout the AI lifecycle, including regular updates, documentation, and stakeholder engagement
  • Comprehensible documentation – Maintain clear, up-to-date technical documentation for high-risk systems, including characteristics, algorithms, data processes, risk management plans, and automatic event logging
  • Human oversight and transparency – Maintain human oversight throughout the AI lifecycle and ensure clear and understandable explanations of AI decisions
  • Rigorous governance – Implement robust governance practices to prevent discrimination and ensure compliance with data protection laws
  • Fundamental rights impact assessment – Conduct thorough assessments to identify and mitigate potential risks to fundamental rights
  • Data quality and bias detection – Ensure training and testing datasets are representative, accurate, and free of bias to prevent adverse impacts
  • System performance and security – Ensure consistent performance, accuracy, robustness, and cybersecurity throughout the lifecycle of high-risk AI systems

To align with the EU AI Act, enterprises must take a structured approach. First, they should develop a comprehensive compliance framework to manage AI risks, ensure adherence to the Act, and implement risk mitigation strategies. Next, they need to take inventory of existing AI assets like models, tools, and systems, classifying each into the four risk categories outlined by the Act. Crucially, a cross-functional team should be formed to oversee AI risk management, drive compliance efforts, and execute mitigation plans across the organization. By taking these steps, enterprises can future-proof their AI initiatives while upholding the standards set forth by the landmark regulation.

Final Everest Group Decoding the EU AI Act What it means for financial services
Opportunities for service providers

  • AI governance expertise – Service providers can offer expertise in building and implementing AI governance frameworks that comply with the EU AI Act. This includes developing policies, procedures, and tools for responsible AI development and deployment
  • Data management solutions – Service providers can assist financial institutions in managing their data effectively for AI purposes. This includes data cleaning, labeling, and ensuring data quality and compliance
  • Large Language Model operations (LLMops) – As financial institutions explore the use of Large Language Models (LLMs), service providers can provide expertise in LLMOps, which encompasses the processes for deploying, managing, and monitoring LLMs
  • Use case classification & risk management – Service providers can help financial institutions classify their AI use cases according to the EU AI Act’s risk framework, and develop appropriate risk management strategies
  • Quality Management System (QMS) – Implement a robust QMS to ensure the AI systems consistently meet the Act’s requirements and other emerging regulatory standards

The road ahead

As the AI Act progresses through the legislative process, financial institutions and service providers must proactively prepare for the upcoming changes. This includes conducting AI asset inventories, classifying AI systems based on risk levels, assigning responsibility for compliance, and establishing robust frameworks for AI risk management. Service providers will play a crucial role in supporting financial institutions in their compliance efforts.

To learn more about the EU AI Act and how to achieve compliance with the regulations, contact Ronak Doshi, [email protected], Kriti Seth, [email protected] and Laqshay Gupta, [email protected]. Understand how we can assist in managing AI implementation and compliance, or download our report on revolutionizing BFSI workflows using Gen AI.

The Future of the Wealth Management Industry: The S-curve Shift and the Modernization Opportunity | Blog

The wealth management industry has evolved over the years, transitioning from reputation-driven models to technology-led advisory services. Read on to uncover how wealth management firms can develop a digital blueprint to navigate the next digital frontier and better serve their clients in an increasingly hybrid and personalized landscape. Get in touch to discuss further.

In our earlier blog, How Technology Can Help the Wealth Management Industry Navigate Coming Changes in 2023, we discussed how digital disruptions will impact the wealth management industry and the role technology and service providers can play in helping wealth management firms navigate the choppy waters ahead. Continuing with our two-part blog series in the wealth management space, this blog will touch upon how this industry has transitioned through the different eras and how we are now on the cusp of a new digital future. The current question is, what will the digital blueprint be to help wealth management firms be better prepared for this new normal?

Wealth management eras – is the industry undergoing another S-curve shift?

The wealth management industry has witnessed several s-curve shifts in the past and has evolved from being a reputation-driven business to a technology-led advisory model. We are now witnessing the next inflection point, moving from persona- to person-based personalization through the hybrid trust model. The initial journey of the wealth management industry was about family-based offices and reputation-driven businesses. It was all about having the right intimacy with the client, nurturing the exclusivity, and delivering that strong advisory model. It was driven by large systems of records, but experience remained bespoke and in-person.

After this era, the wave of customer expansion hit with the emergence of mass affluent customers. It became less about serving HNIs and UHNIs and more about capturing the mass affluent segment that demanded access to similar asset classes and WM strategies as HNWI and institutional investors, which led to the rise of robo-advisory models to democratize access to these services. Enterprises wanted to serve this new segment better in a cost-effective model that could help them meet their margin targets as well. This led to rapid technological disruption in the wealth management industry and pushed us into the digital advisory model that we are currently in. We saw this in the case of UBS in late 2022 with the launch of WE.UBS, a digital wealth platform for mass affluent clients in China in partnership with technology provider Tencent.

Currently, we can see that enterprises are focusing on developing a hybrid trust model. In this model, they utilize emerging technologies such as AI to transform end-to-end customer journeys and give their clients access to new products such as digital assets, ESG-linked investments, and overall financial wellness services. This could be seen in action a couple of years ago when HSBC introduced HSBC Prism Advisory in Asia, blending face-to-face and digital interactions in private banking. This service leverages BlackRock’s Aladdin Wealth™ technology, combining data analytics with HSBC advisors’ expertise.

Another notable example is when Citi announced its plan last year to utilize AI as a tool to simplify and automate procedures, enabling private bankers to dedicate more time to client service.

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However, the top-of-mind questions are “Are we nearing the end of this era?” and “Is there a new world order coming for the wealth management industry?” This space has already seen a rapid expansion of products to cater to different customer segments, but now enterprises need to provide assistance to customers in navigating the buying experience while creating trust in a model that is now both human and digital. The wealth management industry has multiple siloed channels where the human-assisted channel enables great advice, but as soon as it moves to digital channels, the level of experience starts getting non-uniform and disjointed. Customers often talk about a lack of contextualization as they interact on such channels.

Psychographic segmentation – can it fix what is broken?

Hyperpersonalization has become one of the key focus areas as wealth management firms are trying to drive competitive differentiation in the current macroeconomic landscape. The emerging client segment, comprising of millennials and Gen Z investors, expects tailored services as per their preferences and values seamless experiences across both digital and human advisory channels. In light of these demands, we see the approach towards hyper-personalization shifting from demographic-based to a more psychographic-based segmentation.

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Enterprises are now moving away from utilizing broader aspects such as age, gender, occupation, and location to create different personas and are utilizing individual personality traits such as lifestyle, attitudes, beliefs, interests, and values to create unique experiences for clients. This strategy promises to be especially effective in captivating and retaining young investors, a highly desirable client demographic poised to emerge as a lucrative segment amid the intergenerational transfer of wealth spanning diverse geographic regions. To embark on this journey, HSBC recently partnered with a European consulting firm, Zühlke, to revamp its mobile wealth management services for UK clients. Zühlke’s experts conducted a study on the investment preferences of British customers, providing insights that enabled HSBC to tailor its services to better meet their needs.

To excel in this approach, enterprises must possess the necessary technology to seamlessly monitor, acquire, and leverage customer data in real time, empowering them to dynamically create personalized experiences with agility and scalability. They need to establish trust with their customers so that they feel comfortable in sharing this private personality traits-related data, which can eventually lead to personalization-led value creation and drive customer delight. In late 2023, Morgan Stanley announced plans to roll out a gen AI bot for its HNWI clients that will provide functionalities such as summarizing a meeting, drafting a follow-up email for suggested next steps, updating the bank’s sales database, scheduling a follow-up appointment, and acquiring knowledge to aid advisers in managing clients’ finances, covering aspects like taxes, retirement savings, and inheritances.

Future of wealth – can the roots of a modular core system power the tree of wealth?

As enterprises embark on this experience innovation journey, it is important for them to have the underlying technology stack to support the industrialized delivery of these data-driven experiences at scale. Currently, they are facing challenges in establishing digital workflows as most of them still have the legacy architecture consisting of Excel spreadsheets and siloed data systems, which makes streamlined data management and analysis difficult.

They are increasingly looking at leveraging cloud-based data management systems that can help them optimize their IT infrastructure costs and improve their ability to process structured and unstructured customer data in real time and at scale. We also saw that a few months ago, Northern Trust collaborated with Finbourne Technology, a UK-based data solutions provider, to adopt its cloud-native data management solution. This partnership aims to modernize Northern Trust’s technology by offering cost-effective and scalable data calculation and processing, enabling near real-time delivery of valuations and other crucial data to clients.

Integrating the cloud into their business and technology operations will also help them roll out new features quickly and keep up with the constantly changing customer demands. In this process of driving data and intelligence in their operations, one of the key focus areas for enterprises is prioritizing and sequencing this migration of workloads to the cloud across the various elements in the wealth management value chain. They want to identify the quick wins that would have the maximum impact while having lesser complexity associated with the transition.

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The wealth tree, as seen in the graphic, is what we believe the future of wealth would look like. The fruits and leaves represent wealth for end customers by creating customer delight through innovative products and personalized experiences. This was seen in action in early 2024 when Kinecta Federal Credit Union announced a strategic partnership with cloud-based wealth management solutions provider FusionIQ to enhance its digital investing services by leveraging the platform’s features, such as digital advice, self-directed investing, and other financial well-being solutions. Also, in 2023, J.P. Morgan partnered with TIFIN to launch TIFIN.AI, aiming to accelerate AI-powered fintech innovation in wealth management. This initiative includes using AI for client portfolio insights for advisors, alternative investing, workplace wealth management, and insurance, among other applications.

In this world of personalized experiences, customers want to feel trusted and safe with wealth enterprises as they enable these multi-channel experiences. They want customers to be able to invest in alternative assets and grow their wealth as wealth management enterprises orchestrate all of it.

As enterprises think about this, they want to be compliant and provide a secure and protected environment. There is a need to have a core system that is modular, composable, and automated. There needs to be a lot more API enablement, which can be continuously optimized in terms of the infrastructure and the applications that are running on top of it. To industrialize the data-driven personalization engine, the core system needs to enable it in a trusted, safe, and secured manner so the security aspect becomes paramount. The two big enablers to this journey will be running operations and having data on the cloud.

In the journey to build out this wealth tree, all ecosystem players, from wealth managers and technology providers to service providers, will have a role to play and a different journey to traverse.

We would be interested to hear about your journey in this evolution. Please feel free to reach out to Ronak Doshi, [email protected], Kriti Gupta, [email protected], or Pooja Mantri, [email protected] to discuss further.

Watch the webinar, Transforming to Thrive: Building Winning Operating Models Amid Disruption Across Industries, to learn how enterprises should think about disruptive changes as they go about their transformation agenda.

Navigating the Landscape: The Cost and Benefits of Generative AI Implementation | Blog

Generative AI (gen AI) can significantly benefit the BFSI industry. However, it can be an expensive investment, making it critical for enterprises to conduct a cost-benefit analysis before implementation. Explore the various costs and advantages associated with this technology in this blog, or get in touch to find out more. 

Gen AI has recently gained considerable attention in the banking, financial services, and insurance (BFSI) industry. Many use cases that go beyond creating or summarizing content are being explored throughout the value chain.

Implementing gen AI can improve the velocity of change, increasing the overall efficiency of existing tasks. This technology can streamline operational processes, automate tasks, and enhance customer experience by fostering engagement through tailored experiences. Moreover, it can potentially drive innovation to create change or transformation by generating unexplored ideas, optimizing products, and identifying new market opportunities. Ultimately, this positions enterprises for continuous evolution and success.

Navigating the Landscape The cost and benefits of Generative AI Implementation sf 1

BFSI enterprises have recognized the transformative potential of adopting gen AI, which undoubtedly can disrupt existing enterprise models. In the race to get the early advantage, enterprises face challenges as they reallocate funds from other projects and seek to secure new investments to finance new AI and gen AI initiatives.

Concurrently, cloud costs emerge as a significant concern that can potentially escalate when training AI models. However, the overall cloud cost impact from gen AI hinges on specific use cases and model architecture.

A cost-benefit analysis becomes imperative as gen AI-driven use cases are limited, and most can be explored through other AI technologies. This is particularly important because other relatively less expensive technologies can achieve comparable outcomes with similar efficiency.

While gen AI has generated a lot of hype and rapid investment, it’s not currently viable to implement the technology almost everywhere without understanding the cost implications for achieving the potential gen AI benefits. Let’s explore this further.

Exploring Cost and Generative AI Benefits

Navigating the Landscape The cost and 11of Generative AI Implementation sf 1

Below are some of the high-cost categories across the value chain to consider:

Infrastructure and compute

The computational backbone, encompassing graphic processing units (GPUs), tensor processing units (TPUs), and energy consumption, constitutes a substantial investment. Building and maintaining a powerful infrastructure is pivotal for running complex algorithms and training sophisticated models.

Model training or fine-tuning

Gen AI implementation comes with many fixed and variable costs. Training or fine-tuning gen AI models to meet specific requirements is intricate, involving significant computational resources, expert oversight, and time. These costs are substantial but also the foundation for the gen AI model’s efficacy and adaptability.

Data acquisition, preparation, and processing

Performance is heavily influenced by the data quality on which these models are trained. Collecting, cleaning, and storing data can come with high costs to acquire, prepare, and process diverse and high-quality datasets. Ensuring diverse and representative datasets while maintaining data quality standards can be challenging, ultimately impacting the accuracy and reliability of gen AI outputs. At the same time, acquiring high-quality data for training gen AI models and holistic data readiness initiatives can be expensive and require significant capital investments, especially if specialized or proprietary datasets are required.

Security measures

In a highly regulated industry like BFSI, where data and security are imperative, meticulous attention to security and regulatory compliance is critical. Implementing robust security measures cannot be compromised.

However, this adds costs for deploying cybersecurity measures, encryption protocols, and access controls to protect sensitive financial data, notwithstanding increased investments in security technologies, routine audits, and adherence to industry standards.

Considering that gen AI often relies on large datasets, managing personally identifiable information (PII) necessitates strict adherence to data privacy regulations.

Privacy-preserving techniques, anonymization processes, and implementing consent management systems to meet compliance requirements can be costly. On top of that, continuous monitoring and regular audits are essential to maintain compliance and security standards, contributing to ongoing operational expenses.

Integration and service 

Not all models run independently and often require integration with existing systems. Seamlessly integrating gen AI into existing workflows and providing continuous support have financial implications. The processes of customization, compatibility checks, and uninterrupted service provision collectively contribute to the overall expenditure.

Regulatory compliance

Operating within a highly regulated BFSI industry with standards such as the General Data Protection Regulation (GDPR), the Health Insurance Portability and Accountability Act (HIPAA), and industry-specific regulations necessitates additional investments in compliance monitoring, data governance, and legal counsel.

Non-compliance with these regulations may lead to fines and legal consequences. As the regulatory laws for gen AI are still evolving, enterprises must be vigilant.

In light of the dynamic regulatory landscape, remaining flexible to accommodate incoming regulations is crucial.

Post-implementation

Following deployment, continuous monitoring and proactive maintenance of the systems are demanded to ensure gen AI’s sustained performance. Although this is an ongoing expense, these measures are pivotal for adaptability and longevity.

Talent related costs

Enterprises may incur expenses related to recruitment efforts, training programs, certification courses, and retention strategies to attract and retain top talent in the competitive gen AI landscape. As gen AI continues to evolve and play a pivotal role in digital transformation initiatives, businesses must carefully consider and budget for talent costs to ensure successful implementation and utilization of advanced AI technologies.

While investments in gen AI and related technologies are crucial, enterprises must also invest in their human capital by empowering employees with the skills and knowledge needed to thrive in today’s digital age. Effective leadership and a commitment to upskilling and reskilling will drive successful technology adoption and foster an organizational culture of innovation and agility.

The outlook for cost reduction efforts

While gen AI comes with a high cost, the landscape is evolving daily. Technology companies are substantially investing in developing proprietary AI chips and more efficient architectures, a strategic shift that aims to diminish reliance on expensive alternatives.

Enterprises can also explore a micro use case-led approach to implementing gen AI, deploying small, focused areas where gen AI can deliver clear and measurable benefits. Targeting smaller tasks allows for quicker development and deployment of gen AI solutions, leading to faster ROI (Return on Investment). Micro use cases provide opportunities to test and learn from gen AI implementations, enabling continuous improvement and informing future deployments. Smaller projects require less time and resources compared to developing a large, complex gen AI system.

Moreover, the gen AI domain is experiencing a notable training cost reduction, with some solutions claiming a remarkable 50% reduction. These advancements signal a significant stride toward enhancing AI’s capability and affordability, marking a pivotal turning point in the technology’s ongoing evolution.

While the costs associated with gen AI implementation are evident, the benefits in specific uses can significantly outweigh the expenses. Balancing financial considerations and the innovation potential is key. Enterprises must align their AI strategy with business objectives to position themselves at the forefront of innovation and competitiveness.

To discuss gen AI in BFSI, please reach out to [email protected], [email protected], and [email protected].

Looking for use cases for gen AI? Check out our LinkedIn Live on Distinguishing Gen AI Hype from Real Application, or read our latest research on generative AI and its adoption potential.

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

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.

Contact us to discuss the topic further.

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.

  1. 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.

  1. 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.

  1. 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.

Capital 1 Discover 1

 

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.

  1. 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.

Generation 2.0 of Digital Assets – Modernization Themes Driving the Revolution | Blog

While the future of digital assets was once uncertain, the recent surge in investments, partnerships, and pilot use cases spearheaded by banks and technology giants has laid the doubts to rest. This holds particularly true for cryptocurrencies, stablecoins, and Central Bank Digital Currencies (CBDCs). Our latest research provides valuable insights into the latest trends and the key players shaping the digital asset industry landscape. Read on to learn more.

Reach out to us to discuss this topic further.

Over the past decade, the digital asset industry has undergone a dramatic transformation, evolving beyond its initial cryptocurrency buzz to becoming a diverse ecosystem teeming with innovation and new players. This evolution can be understood by looking at the following two distinct generations:

Generation 1: Laying the foundation (2010s)

Cryptocurrencies and blockchain technology were born in this era, establishing the core infrastructure and sparking public awareness of this nascent space.

Generation 2: Entering the mainstream (2020s)

The current phase is characterized by the growing legitimacy of digital assets fostered by regulatory frameworks and compliance measures aimed at protecting investors. This has attracted financial institutions and corporations and propelled the rise of tokenization as a powerful tool for asset representation.

CBDCs have emerged as a significant focus, driven by their potential to enhance financial inclusion, improve transaction traceability, and streamline cross-border payments. Central banks worldwide are actively exploring CBDCs through pilots, partnerships, and infrastructure development. Similarly, tech giants are focusing on stablecoins, with prominent projects like Diem (formerly Libra) backed by Meta and Coinbase.

Exhibit 1 provides a visual overview of this dynamic ecosystem.

MicrosoftTeams image 69

CBDCs and stablecoins

Both CBDCs and stablecoins are vying for prominence in the digital asset industry, but their paths diverge on key points. Central banks wield the reins with CBDCs, ensuring strict regulations and government backing. This, however, makes banks wary of stablecoins outshining their controlled offspring. Conversely, stablecoin adoption could weaken central banks’ monetary policy influence by redirecting deposits from banks to digital wallets, hindering loan disbursement.

Despite this tug-of-war, CBDCs are gaining momentum. Many countries are setting regulatory frameworks, with active projects like Project Dunbar and Project mBridge testing retail and wholesale applications. While retail CBDCs face hurdles in building confidence, wholesale versions are generating more traction due to their potential to streamline interbank settlements through fewer intermediaries.

Collaboration is key in this evolving arena. Central banks are actively partnering with regional banks for pilot programs. ANZ and Commonwealth Bank have joined Australia Central Bank to explore offline “digital cash” models. Technology providers like Soramitsu are also lending their expertise, facilitating initiatives like a Pan-Asian payment system built on Cambodia’s CBDC.

Crypto ETFs

Crypto ETFs are making digital assets as accessible as buying stocks. This digital asset trend isn’t lost on global giants like HSBC, who are actively expanding into “crypto-friendly” regions. Take Hong Kong, where they’ve launched Bitcoin and Ether ETFs, allowing everyday customers to buy and sell these digital goldmines through familiar channels. Similar initiatives are brewing in South Korea, with KB Kookmin Bank joining the fray and hinting at potential crypto ETFs alongside their CBDC efforts.

The validation doesn’t stop there. BlackRock, the world’s investment behemoth, recently tweaked its proposed spot Bitcoin ETF, potentially cracking open the door for broader Wall Street participation. This move sent ripples of optimism through the cryptoverse, especially after a rough patch triggered by industry meltdowns.

However, the road to crypto nirvana isn’t paved with pure optimism. The Securities and Exchange Commission (SEC) has historically been skeptical, rejecting numerous spot Bitcoin ETF applications, including one from Fidelity. Their concerns? Potential market manipulation and the threat that cheaper ETF access could undermine major exchanges.

Payment capabilities

The digital asset industry landscape is buzzing with innovations aimed at propelling crypto beyond speculation and into everyday use. Revolutionizing payment capabilities and transaction mechanisms is a key focus area. From fintechs to card giants, everyone’s in the game, forging partnerships and rolling out solutions to boost crypto acceptance, scale cross-border transactions, and enhance liquidity management. Let’s look at some examples:

FinTechs – Alchemy Pay, a crypto payments provider, is bridging the gap between crypto and fiat by partnering with domestic payment systems in Australia and New Zealand (ANZ), making crypto purchases a breeze. Imagine buying groceries with Bitcoin – Alchemy Pay makes it possible. And their reach extends far beyond this, with millions of transactions processed for users in over 170 countries. They’ve even teamed up with Legend Trading to further extend their global reach and enhance user experience with seamless crypto purchases and fiat support in major currencies.

Big banks – Financial giants like JP Morgan are embracing the blockchain revolution. The JPM Coin, initially used in US dollars, is now available in euros, streamlining fund transfers between their branches and corporate clients, enabling 24/7 payments and smoother liquidity management. MUFG’s Progmat Coin joins the scene as a blockchain-based stablecoin platform, aiming to become a universal digital payment method that is compatible with other digital assets.

Payments platforms – Wirex, a crypto payments platform, has made a strategic move by partnering with Visa. This alliance grants them Visa membership in the Asia Pacific region and the UK, paving the way for them to directly issue crypto-enabled debit and prepaid cards in over 40 countries. Imagine swiping your Bitcoin-loaded card at your local cafe – that’s the future Wirex is building.

Cards – Mastercard enters the mix with its APAC-first digital wallet integration with Stables. This partnership allows users to convert stablecoins to fiat, enabling global spending at Mastercard-accepting merchants. Additionally, Mastercard is actively fostering innovation through its fintech accelerator program, supporting startups in the crypto and blockchain space.

Beyond the usual players – Deep tech ventures are also pushing boundaries. Crunchfish, a company developing a Digital Cash platform for banks and CBDC implementations, has partnered with LISNR, a proximity verification specialist. Together, they’re offering a groundbreaking proximity-based payment solution for merchants and banks. Envision paying for your coffee just by being near the counter – that’s the futuristic vision Crunchfish and LISNR are bringing to life.

Digital and green bonds

Tokenization, the process of converting traditional assets into digital tokens, is rapidly changing the financial landscape, with digital bonds and green bonds taking the lead. This has spurred enterprises to explore and invest in these innovative assets, attracted by their potential to streamline processes, enhance transparency, and unlock new opportunities.

Financial giants like Goldman Sachs and UBS are already revving their engines. Goldman Sachs’ Digital Asset Platform (GS DAP™) powered the European Investment Bank (EIB) in issuing the world’s first fully digital bond on a private blockchain. Similarly, UBS launched a three-year senior bond on Distributed Ledger Technology (DLT) through SIX Digital Exchange, showcasing the potential for efficient and secure bond issuance.

Green bonds, with their focus on financing environmentally beneficial projects, also are finding their tokenized groove. Project Genesis, a collaboration between the Bank for International Settlements (BIS) and the Hong Kong Monetary Authority (HKMA), developed a prototype platform to tokenize retail green bonds and track their environmental impact. This initiative, along with others from ABN Amro, the Japanese Exchange Group (JPX), and the BIS Innovation Hub, demonstrates the growing interest in tokenizing sustainable investments.

Digital assets custody

The digital asset landscape thrives on partnerships and innovation, and nowhere is this more evident than in custody solutions. While other areas remain entrenched, custody is forging a path forward, laying the groundwork for a robust future built on trust and security. These developments, fueled by partnerships and even the entry of insurers, are poised to propel digital asset adoption.

Let’s look at some key partnerships shaping the landscape:

BNP Paribas – The banking giant plans to offer custody services for Bitcoin and other digital assets, teaming up with fintech heavyweights Metaco and Fireblocks to build a secure and reliable offering.

Zodia – Recognized for its institutional focus, Zodia Custody has set foot in Singapore, aiming to meet the rising demand for bank-grade custody services across Asia-Pacific. Backed by industry stalwarts like Standard Chartered, SBI Holdings, and Northern Trust, Zodia leverages cutting-edge technology and stringent compliance to fuel digital asset adoption in the region.

Canopius – This leading (re)insurer has made its mark by underwriting a groundbreaking digital asset custody product in Singapore. This first-of-its-kind offering establishes Canopius as the pioneer on Lloyd’s Asia platform to provide local coverage for digital asset custody.

These partnerships and developments signify a critical shift. Custody solutions are no longer an afterthought but a cornerstone for building a secure and trusted digital asset ecosystem. With renowned institutions and insurers stepping in, the foundation for mass adoption is getting stronger, brick by brick.

Fueled by technology providers, the current digital asset generation is expected to dominate the market for the next two to three years. However, the true revolution lies on the horizon with the imminent arrival of Generation 3.0. This era will witness a surge in meaningful collaborations across communities, bringing forth a wave of tangible use cases for the public. Tokenization will shift from being a niche concept to a readily accessible tool for everyone.

In this dynamic landscape, competition will be fierce. To thrive, service providers must embrace partnerships and actively build their capabilities. The stark reality they face is either to join the ecosystem or get left behind.

If you would like to share your observations or have questions about the evolving digital asset industry and digital asset trends, please reach out to [email protected] or [email protected].

Discover what changes are likely to occur in sourcing spend, sourcing strategy, and locations, and which digital services and next-generation capabilities are expected to be in demand in our webinar, Key Issues 2024: Creating Accelerated Value in a Dynamic World.

Reinventing the P&C Insurance Claims Value-Chain: Moving to the Claims of the Future Vision | Blog

Heightened momentum for technology-first and automated operations is elevating customers’ need for greater convenience, instant gratification, faster turnaround time, and more self-service options. Today’s digitally-immersed consumers have grown accustomed to doing business anywhere, at any time, and with any device, and this is shaping up the new normal of the insurance industry; transforming the insurance claims journey becomes a pivotal priority for Property and Casualty (P&C) carriers to meet demands for a customer-centric hyper-personalized experience driven by digital technologies. Read on to learn more about the zero-touch claims of the future vision and how to achieve it.

Leading InsurTechs with pure-play digital models are heating up the competitive landscape, making it imperative for traditional insurers to optimize their claims functions. An insurer can achieve future goals by accelerating the adoption of next-generation capabilities.

Amid the digital shake-up and rising demand for delivering an “Amazon-like” experience, insurance operations are plagued with workflow complexities caused by multiple intermediaries and legacy systems. Digital and emerging technology solutions can help insurers reshape the customer claims journey and improve turnaround time while reducing information leakages and fraud and delivering a superior customer experience.

Foundational pillars of a digital-claims future

To embark on a transformational claims journey, insurers need to go beyond traditional after-the-fact claims management, tap into the plethora of available data to unlock immense value, and focus on offering omnichannel experiences powered by intuitive digital technologies. P&C carriers will need to excel at the 3Es: experience, efficiency, and effectiveness.

Winning P&C digital claims offer a compelling digital experience and strengthen customer loyalty. Insurers can differentiate themselves by supporting each touchpoint in the claims journey – starting even before an incident occurs – with data, artificial intelligence (AI), analytics, and other emerging technologies—all while retaining the human touch.

By offering seamless omnichannel customer experiences across claims registration, disputes, timely process updates, final settlements, insurers can improve customer satisfaction and retention rates. This is crucial given that Everest Group’s research shows ~35% of P&C insurers’ priorities across claims management are focused on enhancing customer experience (based on an analysis of 60+ case studies involving claims modernization/transformation).

Insurers also need to drive superior efficiency by enabling data-driven and analytics-driven claims processing. This ensures focus on effective service delivery to reduce claims expenses, while improving claims handling accuracy and ensuring greater customer satisfaction.

Bridging the gap between current and future digital claims-processing

With innovation growing throughout the P&C insurance industry value chain, AI/Machine Learning (ML)-enabled tools eventually will help insurers redefine their roles from claim handlers to claims preventers. P&C carriers flourish when they embrace this mindset shift from a risk transfer to a risk mitigation model.

Insurers can unlock value in the claims industry by employing the internet of things (IoT) and telematics capabilities combined with the connected devices ecosystem and third-party data to identify red flags and alert customers of risks before any loss occurs.

Insurers need to look beyond mere cost-savings, accurately utilize the wealth of data they possess, and transform claims from a necessary back-office function into a source of competitive advantage and market differentiation. Below is a look at the key steps to reach a seamless claims settlement:

Exhibit 1:

Future Enables Carriers
Source: Everest Group

Rigid legacy systems for claims processing can present challenges for insurers and prohibit them from adapting to the evolving customer requirements and optimizing their operations. Legacy IT processes slow progress and innovation, eventually affecting the end-user experience that holds the potential to make or break insurers’ reputations. Taking a one-size-fits-all solution approach for different business lines, failing to adopt modular design principles, and having limited advanced systems skills add to the overall complexity and further weaken the ability of insurers to thrive in today’s competitive environment.

To attain a competitive edge, insurers require instant resolutions and digital experiences on the go. Leading insurers are harnessing the power of unified and custom low-code/no-code platforms with advanced AI and analytics tools to streamline claims processes, modernize systems, and build modern layers on top of existing legacy systems or other core platforms without involving time-intensive and expensive upgrades. This allows insurers to build reusable codes and design “plug and play” environments to deliver enterprise-grade solutions at speed and scale. Low code makes it easy for carriers to simultaneously focus on profitability, enhance customer experience, and fulfill the vision of balancing quick wins with strategic initiatives.

The need for digitalization of workflows and customer interfaces, convenient user journeys, reusability of components and faster configurations, cost optimization, and skill management are the top drivers fueling the demand for low-code/no-code technology for insurers in modernizing the claims process.

For instance, a leading global insurer used a low-code platform to create an intuitive and dynamic first notice of loss (FNOL) prototype application in just 90 minutes and transformed it into a fully functional mobile application for 2,000-plus users in four weeks, delighting customers.

Where do the opportunities lie?

A combination of agile insurance claims process/operating model transformation, adoption of advanced technologies and telematics, a skilled workforce with technical and domain expertise, and a connected partner ecosystem are the fundamental facilitators for the probable future of zero-touch claims.

In the future of claims processing, P&C insurers will be able to facilitate touchless claims decisions, accelerate payment settlements, assess indemnity obligations accurately, prevent fraud, and mitigate claims litigation losses.

Exhibit 2:

Industry Frontrunners
Source: Everest Group

Below are the key elements needed to move from the current state to claims of the future:

  • Acting quickly and flexibly: The rapidly changing environment is compelling insurers to keep up with the pace. Incumbents need to act fast, develop and launch new products, accelerate FNOL processing, and streamline claims management quickly to stay relevant. The need for agility is greater than ever. Adopting the latest technologies and processes will propel P&C carriers to move faster and separate leaders from laggards
  • Adopting advanced analytics and AI: Real-time sensor and IoT data coupled with AI and ML-backed algorithms will enable insurers to process claims efficiently and manage fraud without any human intervention. For instance, leading insurers are using an AI model embedded within the claims workflow to assign a complexity score to each claim based on multiple parameters and process all low-risk claims under a certain threshold. Low-complexity claims are routed for straight-through processing while high-complexity claims are sent to the right team depending on the claims adjuster’s specialization and availability, thus ensuring speed and accuracy
  • Transforming talent management strategy: Modernizing the claims journey requires relying on advanced technologies and a skilled workforce to manage emerging risks. Insurers need to enhance their long-term value proposition to attract skilled workers with technical and domain expertise
  • Partnering with digital claims solution providers: Building partnerships with solution providers can support carriers in extracting maximum value by utilizing the provider’s end-to-end digital claims solutions portfolio. Advanced capabilities across core functions include claims notification, adjudication, and settlement to fulfill P&C carriers’ needs across the claims value chain

To achieve the zero-touch claims of the future vision and keep up with leading competitors, insurers will need to invest in advanced technologies and drive value creation by taking a more proactive and customer-centric approach.

Successful insurers who can deliver a hyper-personalized experience will generate superior efficiency and leverage data and ecosystem insights to proactively detect fraud. Above all, this transformation improves the claims ratio by building predictive and preventive capabilities. Insurers who take these steps will emerge as industry frontrunners.

To discuss transforming digital claims, please reach out to [email protected], [email protected], and [email protected].

To learn more about technology-first, automated customer experiences, watch our webinar, Strategies for Customer Experience (CX) Success in an Uncertain World, for trends and recommendations on what to prioritize to deliver exceptional customer experience.

How Technology Can Help the Wealth Management Industry Navigate Coming Changes in 2023 | Blog

With the economy headed for slower growth, technology is more important than ever to enable companies to better serve customers by providing hyper-personalized experiences. Read on to learn how the disruptions will impact the wealth management industry and the role technology and service providers can play to help wealth managers navigate the choppy waters ahead.

In light of changing investor preferences, mounting regulatory pressures, and a looming economic slowdown, the wealth management industry is at the cusp of change. While the industry has demonstrated good resiliency and recovery post-pandemic, signs point to subdued growth in the next few years.

The wealth management industry has been experiencing one of the longest periods of market growth and economic stability in recent history. Financial support by governments, lower interest rates, and limited consumption opportunities have contributed to rising household wealth, generating increased revenues for wealth management companies from more fees and advisory support.

But the rapid rise in interest rates and fear of an economic slowdown will put pressure on this industry in 2023. Let’s look at the factors disrupting the wealth management industry in the first of our two-part series.

Fundamental change in ecosystem participants – passing trend or here to stay?

The industry is seeing structural changes in ecosystem participants. Traditional wealth managers are no longer the only players offering wealth management services and products. Challenger banks, pension providers, insurance firms, super-apps, nonbank financial companies (NBFCs), and nonbank financial institutions (NBFIs) are entering the market and creating competition.

These emerging segments already have access to a large customer base supplemented by data insights on demographics and buying patterns. This enables them to remove silos for customers and simultaneously improve income streams by reducing churn risk.

Customers now can access investment services within an umbrella of existing offerings. While this is a win-win for both parties, it is making wealth managers apprehensive as they realize the critical importance of retaining and more effectively serving their current customers.

Rethinking growth versus profitability conundrum – impact of a potential slowdown?

While the pre-pandemic era was all about expanding and tapping into new customer segments, the strategy for serving various customer bases has significantly shifted. With the changing market dynamics, the focus has morphed from expanding and tapping into newer segments to building trust with existing customer segments and enabling hyper-personalized experiences.

A potential economic slowdown would have ripple effects on the wealth management industry. The focus on rapid growth would take a backseat as enterprises pivot their attention to reducing costs and improving profitability. This would directly impact tracking advisor productivity, improving advisor-to-client ratios, and enabling hyper-personalized experiences.

At the same time, providing access to emerging themes like Environmental, Social, and Governance (ESG) and digital assets will prove to be differentiators in the long run. Regulatory activity is heating up in the ESG space and will lead to corresponding technology implications for wealth managers’ IT estate, as previously discussed in our blog, New Sustainability and ESG Investment Regulations will Spur a Second Digitalization Wave in Wealth Management.

Technology implications – will the IT estate need to be re-examined?

The wealth management technology estate traditionally has been characterized by multiple disparate systems siloed by products or functions, fracturing the customer experience. At its core, wealth management grapples with a massive data problem – how to effectively analyze customer data, understand their journeys, and identify better cross-sell/upsell opportunities.

Wealth managers need an IT estate that is flexible enough to accommodate these hyper-segments and different products, and their underlying data to address these evolving demands at speed and scale.

Identifying the right platform partner, enabling product expansion via ESG and digital asset offerings, and quickly disseminating this information to advisors will be key priorities for wealth managers as they assess their technology estates.

Identifying the ecosystem strategy for system integrators and other technology companies to improve fractured customer experiences will be equally important for technology providers. At the same time, service providers also will need to orchestrate and assemble best-of-breed solutions for wealth management clients by building a robust partnership ecosystem.

As wealth managers grapple with these market changes, technology has never been more important to help them better prepare and tackle the potential challenges coming their way.

The key questions that need to be answered include:

  • How can the service cost be reduced?
  • How can the right tools be used to improve advisor productivity?
  • How can a microservices-based Application Programming Interface (API)-enabled composable core be built?
  • How can data be leveraged to enable personalized client experiences?
  • How can a scalable and purpose-built cloud infrastructure be used to run mid- and back-office operations on the cloud?

We are interested in hearing how wealth managers are preparing and tackling these market dynamics, and how this is manifesting in the conversations technology and service providers are having with clients. Please reach out to [email protected] or [email protected] to share your thoughts. In our next blog, we will look at the future state of the wealth management industry and provide a technology architecture blueprint for this space.

Learn more about how to deliver better customer experiences in our LinkedIn Live session, Frictionless Customer Experiences: The Key to Unlocking Satisfaction.

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

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:

  1. 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
  2. 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.

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