Financial Firms Should Develop Ecosystems To Upgrade Their Technology

Financial services firms are coming in for some sharp criticism from analysts. In a report HFS released in collaboration with Infosys, opened with: “What is the current market reality? In a word, cluster****, or, more gently, a tale of two cities.”

It proposes partnerships, ecosystems in its term, as the solution. Coalition Greenwich, in its look at the technology needs of asset managers, proposed outsourcing as a useful solution. Conducted on behalf of Northern Trust, its title warned “Only the Fittest Will Thrive.”

HFS discusses the stages that BFS (banking and financial services) firms must go through as “Horizons”. It says that “aging legacy systems a dearth of talent, and a general unwillingness to change make it harder than it should be for BFS firms to get the desired impact from emerging tech.”

Coalition Greenwich found that in the face-changing economics and technology all too many asset managers expected they could rely on existing practice to achieve organic growth.

For those firms that are ready to change, HFS breaks progress into three horizons starting with digital optimization, required to survive, and then followed by end-to-end enterprise optimization. Horizon 1 goals are pretty basic — optimizing existing offerings, automating manual process ad developing digital channels.

But Rohan Ranadive, head of third party risk management at U.S. Bank, said many firms are probably at Horizon 0, at least for some functions.

“In the aftermath of the Silicon Valley Bank (SVB) and Credit Suisse debacles, banks are hyper-focused on managing liquidity, which is going to impact their focus on innovation.”

Horizon 3 is a nimble configurable offering creation and launch, new business models built on cross-industry value and data monetization. But first a firm has to get through Horizon 2 with undefined modernization, plus cloudification, real-time data and decisioning and personalized engagement.

“There is no skipping Horizon 2,” says the report. “Those that try risk getting trapped in the Horizons innovation chasm,” it warned.

“This ecosystem imperative is wildly exciting,” HFS concluded in its report. “It is also wildly unrealistic unless BFS enterprises take measured steps to address enterprise modernization and decades of tech and process debt. Unless the enterprise shop is in order, BFS firms will be unable to reach Horizon 3 because they cannot effectively collaborate with partners.”

While HFS promote partnerships, its report also warns that partners can be a problem.

“Too many ineffective partners are part of the problem…Partners are a part of the problem because commercial banks have an imprecise and overly generous approach to strategic partnerships…Useless partners must get the boot, or banks risk staying stranded in Horizon 1.”

Top concerns: Talent—getting it and keeping it, legacy tech and compounded tech debt and lack of centralized data governance across the organization.

Dennis Gada, SVP and industry head for financial services at Infosys, explained the importance of good data:

“Unless you have good quality data, which is easily available and consumable, it is very difficult to use any of the AI capabilities.”

Monetization is about using data most effectively, and understanding how to draw insights from the data, he added.

Legacy tech is the most easily solved problem, said Ben Rayner, head of analytics and process optimization at Citi Enterprise Operations and Technology.

“By definition, it is depreciated, so the main problems are one, lack of functionality, two, it creates silos, and three, which makes it hard to standardize processes. This can be solved by putting machine learning over the top and pulling data from legacy. This is much more achievable than trying to replace legacy tech. It does not have to be a rip-and-replace—create a digital layer on top. Do not rebuild. This is the only way to transform fast.”

BFS firms struggle to capture real value from their data programs, HFS found. “The lack of front, middle and back office controls leads to poor data and limited validation. With inefficient data architecture and loads of legacy, IT systems parsed across various lines of business and geographies, the distinct challenges of data and legacy tech bleed together in a continuum of cause and effect. No one modernizes because they want to. They do so because they must, which is the stark reality facing established BFS firms.”

Full services firms are increasingly becoming ecosystem orchestrators, HFS found.

“A partner’s ability to deliver cost savings is a top factor in determining strategic value. But here’s the interesting part: Cost is on par with a partner’s ability to deliver co-innovation and collaboration… “

As HFS explored the changing approaches to partnerships in this study, “it became clear that the underbelly of ecosystem enablement requires a lot of change, much of which banks cannot drive or supply on their own…The persistent roadblocks of talent, data, and legacy tech are supported and assuaged by the growing use of end-to-end partners helping to advise, implement, and manage evolving tech stacks, processes, and people.”

Fintechs are a growing resource for BFS firms seeking to modernize. They are helping append legacy innards that are not ready to be ripped and replaced, HFS said. This report is the first in a four-part series examining the growing importance of ecosystems in the BFS market.