Banking on Tech

Kenny Smith, a vice chairman and the leader of Deloitte's financial services industry group, notes that the traditional "renaissance consultant" —the industry expert with the impressive MBA and ability to wield those problem-solving skills broadly—is being replaced by problem-solvers with industry expertise who also possess specialized domain knowledge in blockchain, machine learning, user experience or numerous other complex areas.

Consulting teams with growing ranks of these specialists are busily helping banks build and improve capabilities related to cybersecurity, data analytics, cloud technology, robotics, artificial intelligence, blockchain, customer experience, regulatory compliance, risk management and cost reduction.

Digital, Cyber, Cloud, AI and Blockchain

Ron Lefferts, IBM Global Business Services' managing partner for the firm's financial services sector in North America, uses the term "digital reinvention" to describe much of his practice's work at a time when banks want to deliver customer experiences on par with those at Google, Amazon, Facebook and Apple (GAFA). Technology represents the primary enabler of these customer experiences as well as drivers of other top client priorities, including cost reduction and more proactive and cost-effective regulatory compliance.

"The entire digital transformation agenda is our primary focus," says Peter Davis, who leads EY America's financial services advisory practice. Davis groups clients' requests for technology help into three areas: capabilities that primarily drive efficiency gains, which could involve robotic process automation (RPA), and machine learning; the movement to a cloud-based information technology (IT) environment; and emerging technologies, such as blockchain, that may transform banking as well as many other realms of business and society. "When we talk about new technologies within the banking sector, most of it is 'new' in terms of its application," Davis notes. "We've seen the large technology companies effectively apply many of these technologies for some time now."

Add cybersecurity to the mix and the list of technology-centered consulting projects gets crowded:

Cybersecurity: "Cybersecurity is a top-three risk to any board member," Davis notes. Smith agrees, noting that if there are bankers on the planet who are not gravely worried about cybersecurity threats, it is because "they don't know what they don't know." Large banks continue to invest in consulting services that expand their knowledge of cybersecurity threats and their organization's ability to manage those risks. A commonly shared goal across institutions, Smith says, is to make cybersecurity a "business-as-usual exercise."

Digital and Data Analytics: As Davis, Lefferts and others emphasize, digital transformation remains a top priority among financial services organizations. Banking executives "used to say, 'Tell us how to get it done cheaper, faster, better,'" Krishnan notes. "Now that's changed to, 'Tell us how we can transform.'" Developing GAFA-esque customer experience capabilities, removing billions of dollars of cost, maximizing the value of customer data and other capital-T transformations require a digital foundation. In basic terms, that translates to easy and quick access to the right customer data at the right time combined with the ability to quickly conceive, design and implement new technology applications that support new strategic initiatives. The data, much of which still resides in older IT systems, is incredibly valuable. A financial services CEO once told Smith that banks have more data on their customers than companies in any other industry. Banks have leveraged that data for underwriting, risk management activities and more traditional sales and marketing initiatives (e.g., credit card applications in the mail). Today, they want to figure out how to harness their customer data to drive massive improvement in customer experiences and to their own bottom lines.

Cloud: The shift to a cloud computing model represents the linchpin of digital transformation, so it's no surprise that banks remain extremely hungry for cloud-related technology and services. Krishnan reports that Capgemini is receiving a record number of cloud-related inquiries. Richard Lumb, group chief executive of financial services at Accenture, also ranks cloud among his practice's most common client requests. "We are seeing more financial services executives recognize the benefits of cloud technology," he explains. Now that banks have achieved some success implementing private cloud solutions, they're setting their sights on public cloud solutions, which Lumb says "can offer further advantages in terms of enabling new technologies and unlocking cost savings." Given the amounts of customer data residing in legacy systems, the value of this data and the amount of work involved in moving data to the cloud, this work shows no sign of abating. "If it took you 40 years to build your current technology infrastructure, you're not going to transform it overnight," Davis says. "I think this will be a major challenge as well as an opportunity for the next 10 years. The benefits of moving to the cloud are compelling. My view is that it will happen, but it will take time."

Machine Learning and AI: Recent applications of machine learning, AI and cognitive computing centered on efficiency improvements. Now, Lefferts notes, banks are growing more interested in harnessing AI applications to "improve the end-to-end client experience," whether that means improving customer interactions, overall service, and/or more effectively delivering the right mix of products at the right price at the right time. Lumb also sees growing client interest in the AI applications related to customer service. "The use of chat bots mixed with intelligent responses in process flow will help facilitate the client relationship with the bank," Lumb notes. "Imagine a consumer loan origination in which the client starts with a chat bot telling him what to do and then depending on how the conversation evolves, the system presents the appropriate web screens the client needs to fill to continue with the process."

Blockchain: Also referred to as distributed ledger technology, blockchain "has the potential to drive profound, positive change across financial services, rewriting the way companies operate by delivering greater data transparency, removing redundant processes, and revamping inefficient capabilities," Lumb notes. While bitcoin's eye-popping valuation and volatility continue to generate headlines, financial services companies, consulting firms and technology providers are forming partnerships and consortia to design ways to reinvent complex, inefficient multi-party processes by leveraging the technology's smart contracts along with its unique combination of security and transparency. Smith's colleague Eric Piscini, Deloitte's financial services blockchain leader," authored a CoinDesk column describing 2018 as a pivotal year for blockchain's growth. Piscini credits banks, insurance companies and other financial institutions, for their aggressive role in shaping blockchain applications. IBM's market research indicates that more than 80 percent of banks have some form of major proof of concept or a blockchain implementation underway. "If 2016 was a period of blockchain curiosity and 2017 was when everyone experimented," Lefferts says, "then 2018 will see blockchain move beyond the digital currency realm into the implementation of real enterprise-class blockchain networks. We're working on some of the largest blockchain projects, and we think that it's only the beginning of the understanding of the implementation of block chain." Lefferts is particularly excited about the blockchain's convergence with other technologies, such as internet of things (IoT).

Customer, Cost and Regulatory Risks

In addition to their requests for technology-centered projects, banks are also interested in collaborations that include major technology components to help enable customer delight, drive more efficient compliance capabilities and reduce costs:

Customer Experience: According to Krishnan, more banking executives see a growing need to out-perform competitors on the basis of customer experience.  The drive to improve customer experience management capabilities poses technology and talent challenges. After years of convenient interactions with Amazon on their mobile devices, customers want to communicate with their banks in a similar fashion. Meeting these expectations requires banks to invest, and notch progress, in smartphone apps and other mobile banking technologies. This, in turn, requires expertise in user experience, customer journeys and design. "We're seeing a growing demand these types of technologies and areas of expertise," Krishnan reports.

Cost Reduction: Only part of the allure of digital transformation relates to revenue opportunities; the other driver of transformation among banks relates to an intense desire to operate at a dramatically lower cost point. "I don't think there's a large bank in the U.S. that doesn't have some sort of a significant cost-reduction program underway," Smith notes. "And it's not a matter of reducing costs by 10 percent." Instead, these institutions are looking for new strategies and business models to remove billions of dollars. "You can't do that by nipping around the edges on contracts," Smith continues. "You've got to really change the way you're organized and change the way you're interacting with your customers."

Regulatory Compliance: An evergreen concern in the highly regulated financial services industry, compliance remains a focal point, even under a U.S. presidential administration that appears intent on fomenting deregulation. Despite that intent, regulatory compliance remains a significant burden more than a year into the Trump presidency, and likely will remain so for at least another year. Tim Mohr, national practice leader of BDO's risk and regulatory & investigative due diligence practice, reports that client interest in Anti-Money Laundering (AML) Services remains sharp, for example. And he expects that interest to sustain as regulatory bodies intensify their focus on AML rules. Once new regulatory and enforcement appointees finally fill empty seats, the regulatory compliance relief likely will be subtle—more of a dialing-back of enforcement activities that have shown little change in the past few years. However, many financial services firms have made great strides in strengthening and, more recently, streamlining their regulatory compliance capabilities in the past couple of years. And many banking leaders want to leverage new technologies to make their compliance activities even more effective and more cost-efficient. Craig Stanley, national managing principal of Grant Thornton's financial services industry practice, describes a recent engagement in which his firm helped an institution deploy a proprietary data analytics toolset, designed to address regulatory compliance, to gain insight into  areas of noncompliance and then remediate those issues swiftly via a global delivery model.

Technology Drives Talent Changes Inside Firms

As banks become technology companies whose competitive differentiation hinges more on customer data and the systems and applications they use to harness that data, their consulting partners are reconfiguring their own talent priorities.

Accenture's Lumb indicates that digital skills will be paramount to financial services consulting practices and firms during the next three to five years. He identifies three areas of expertise that will be in particular demand:

1)  Understanding opportunities and challenges of the digital economy and digital technology;

2)  Digital enterprise architects; and

3)  Digital technology experts with change management skills.

EY has a talent concept that the firm refers to as "suits + jeans."  The "suits" include individuals with a deep understanding of existing banking products, operations and compliance requirements. The "jeans" refer to professionals with a background in digital and emerging technologies, agile methodologies and innovative business models. "We continue to expand the skill sets that we hire, including a rapid increase in individuals with STEM and design backgrounds," Davis says. "As we think about the transformation of the banking sector, the secret lies in our ability to bring together the suits plus the jeans to reimagine how the industry operates."

Smith agrees that specialized technology expertise combined with traditional industry knowledge and experience will be crucial in the coming years. He also points to a need for more global experience. "It's easy to embrace a domestic view but every one of these large institutions is very global," Smith adds, "and it's imperative that people understand what that means."

It's also important to look at talent and technology when assessing how the traditional banking sector will evolve in the next few years. In the past 24 months, banks have responded in stride to FinTech upstarts—largely by purchasing or partnering with those start-ups, or by quickly developing their own FinTech-esque capabilities. During the next two years, and probably quite a bit sooner, new competitors (some with extraordinary market capitalization) will emerge.

When that happens, it will be imperative for traditional financial services organizations and their advisors to keep their eye on banks' most prized asset.  As Lefferts emphasizes, "It's really all about the data."

Sidebar: Banking on the Brink—Technology, Talent and New Competition Loom in Financial Services

Talk to enough financial services consultants and you get the sense that the industry is on the cusp of historic changes. These shifts involve technology and talent—and seem increasingly likely to involve new competitors. These are exhilarating times for financial services consulting, especially those focused on the banking and capital markets segment.

"The level of change ahead of us is unprecedented and stunning," says Peter Davis, who leads EY America's financial services advisory practice. "The opportunities have never been more exciting."

Opportunities related to three areas of change appear particularly stirring given their potential for reshaping the industry:

New Competitors

Craig Stanley, national managing principal of Grant Thornton's financial services industry practice, engaged in an eye-opening exercise last summer. He and a colleague assembled a small chart listing the market capitalization of Google, Apple, Facebook and Amazon along with the valuation of the largest dozen or so banks. "What quickly becomes evident is that those four companies can basically do anything they want," Stanley says. "They can buy their way into any industry." And when they do, it can have major impacts on traditional players in those industries: the top three grocery brands lost roughly a third of their value after Amazon's acquisition of Whole Foods was announced last August. "I think one of the next waves of change in financial services will be around what non-traditional industry players might do," Stanley notes.

New Technology

Many financial services practice leaders praise large banks for how they have embraced new technologies in the past two to three years. They have done so by acquiring start-up FinTechs, partnering with technology companies and developing new technological capabilities (mobile banking apps, chat bots, robo-advisors, robotic process automation and more) in-house. "All of the larger players have gotten much better about investigating new technologies," Stanley reports. Certainly, more progress is needed in the movement of systems to cloud-based architecture and in next-generation applications of artificial intelligence and robotics. That said, blockchain is most frequently identified by financial services consultants as the emerging technology with the greatest potential for reshaping the industry.

New Talent

Talent is a primary reason large banks have proven adept at examining and embracing new technologies. Long gone are the days when financial services firms kept their IT and analytics professionals sequestered on a separate floor where they churned away on work thrown over the wall to them by business partners. "Today, you have technology-savvy people working in every department," Stanley says. "Pretty much everyone working in financial services today has to have a baseline understanding of technology—what the technology trends are, and most important, how to use new and emerging technology."

Stanley and other consulting leaders expect this knowledge, combined with growing supply of technology skills and expertise on their own teams, to produce some thrilling innovations. "I tell young consultants joining our practice today," Davis adds, "that I wish I were starting my career now and had the opportunity to do what they will be doing in the next few years."                                              —E.K.

Sidebar: Tax Reform's Long-Term Impact

Banking CFOs and CEOs sounded surprisingly upbeat about the profit declines they discussed on earnings calls in January. That's when executives like JPMorgan Chase Chairman CEO Jamie Dimon promoted the positive impacts of the freshly signed tax reform legislation—despite the short-term earnings hits the new law caused as banks wrote down the value of their deferred tax assets. Although his company endured a one-time charge of $2.4 billion, Dimon emphasized to investors and analysts that "lower corporate tax rates will increase profitability, and financial services firms will need to decide how to direct those gains."

Tax reform's brief bad news may be easier to quantify than its positive impact on the financial services sector—for good reason, according to Peter Davis, who leads EY America's financial services advisory practice.

"After addressing the immediate impact of tax reform, financial services firms will need to take a step back and consider the longer-term impact, which will be significant," Davis says. "Our banking system has been optimized around a tax code that has been fairly stable since its last major change in 1986." Davis also believes that "tax implications will be a significant driver of change, one that causes banks to review their existing business footprint, the products they offer, and their global supply chains."       —E.K.