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The Digitization of Financial Services

If it expects to keep growing, the industry must adopt a digital mind-set.

When you hear the word “digital,” you may think of consumer product companies like Apple and Amazon, or social media channels like Facebook and Twitter. But digital is extremely important within financial services institutions as well. Historically, the sector has been an early adopter of technological tools (such as automation and electronic user devices) because it relies on high-level IT to optimize its business processes and interactions with clients. And it’s now a digitization frontrunner: In 2012, financial services and insurance was the most digitized industry in Europe, followed by the automotive sector and then computers and electronics. The market is clearly rewarding companies that have advanced digital capabilities—those that are digitizing the fastest are seeing the highest growth rates.

So what does it mean to be digital in financial services? And how should firms go about building the optimal digital landscape?

Several industry trends and market conditions have shaped the strategic direction and need for digitization in securities services. Financial globalization has proceeded at a rapid pace in the past few decades. Higher demand for products and solutions, and an increasingly complex economic system mean that financial institutions need to offer a wider array of investment strategies and instruments—over-the-counter derivatives, for example—to a global client base. Catering to clients around the world in turn necessitates the capacity to handle large transaction volumes while maintaining the ability to meet disruptive changes nimbly.

Further, since the 2008 economic crisis, financial services have been subject to stringent reform programs. Collectively, the Dodd-Frank Wall Street Reform and Consumer Protection Act in the United States and the MiFID 2, Solvency II, and Basel III resolutions in Europe seek to strengthen the world’s monetary systems by addressing today’s highly leveraged, opaque, and excessively interconnected financial transactions and high liquidity risk. Reform imposes strict compliance requirements for transparency, monitoring, risk controls, and bans on highly profitable (but risky) activities such as proprietary trading. These reforms are expensive for financial institutions to implement and enforce. Further, margins and asset values have come under pressure, and net inflows for assets under management have declined even as investors continue to press for lower costs.

Financial firms are thinking about doing more than just reacting to regulatory reform, and are investing in digital capabilities as a sustainable solution to meet both compliance and strategic initiatives.  As traditional revenue streams struggle to remain profitable, firms are turning toward digitization, not only as a means to increase cost-effectiveness and efficiency in operations, but also as a platform to develop additional high-margin products and services. These market trends are predicated on a paradigm shift in analytics from a model-driven approach to real-time self-serve analysis, implying that information is always current and available, especially in areas of customer service and engagement, cross-selling, fraud detection, and risk management. Firms on the leading edge of the digitized trend, therefore, have reaped benefits in greater customer insight and reach, higher productivity, and the creation of new business models.

Financial firms are investing in digital capabilities to meet compliance and strategic initiatives.

What’s needed is the pervasive adoption of digital, real-time, and networked technologies; products; and services through interconnected systems and devices. In the securities sector, digitization focuses on delivering key capabilities such as self-service, real-time data and analytics, big data-enabled learning, and streamlined exception management across the key areas of input, processing, output, and infrastructure. The collective and deliberate design of digital processes across an enterprise will define that organization’s technological outlook.
True digitization is substantially more than mere automation: It must include new ways of acquiring, processing, and acting on vast amounts of data. Securities servicers, market vendors, and utilities require access to larger data sets to help uncover new market opportunities, customer trends, and product possibilities. Regulatory bodies, on the other hand, require transparency and need data that is accessible and streamlined across the enterprise. This, in turn, creates a need for strong analytics in areas of pattern matching and correlation and data mining to uncover unmet market and customer needs.

In order to deliver on the promise of digitization, firms must have a digital interface (input, outputs) that can interact with external stakeholders (including clients, regulatory bodies, vendors, external service providers and the market) with minimal human support. Clients can leverage this self-service platform to access various digitized products and service offerings. And all of these capabilities must be built on a resilient, scalable, and reliable digital infrastructure. Creating such an environment requires investments in foundational technology (such as cloud architecture and single-source data repositories) to support these digital offerings.

Given these variables, digitization is a journey that embraces change; it doesn’t happen overnight. Evolution requires transformation and standardization across processes, organizational and operating models, and technology. The amount of change necessary is significant, and must be coupled with leadership drive, frontline support, and execution. But the benefits are even more significant—in terms of cost savings, added revenue, and long-term agility. 

We have seen digital leaders outpace their peers in earnings and stock performance. For example, a global financial services firm launched operations and IT transformation programs to deliver operating model and process efficiencies, enhance service delivery, and accelerate new product innovation. These changes drove more than US$600 million in annualized savings. Reinvestment in cloud computing and data management is expected to further reduce costs and deliver new capabilities around data aggregation and analytics, which will also deliver significant revenue opportunities. Such a transformation will not only ensure faster and cheaper processing for the servicer, but would also present a better and more consistent value proposition for the firm’s clients, resulting in a win for both.

John Plansky

John Plansky is a partner with Strategy& based in New York. He specializes in securities industry business operations transformation.

Caitlyn Troung

Caitlyn Truong is a principal with Strategy& based in Chicago. She specializes in IT and operations transformation, and digitization for leading capital markets firms.

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