The Top Five Technology Trends in Financial Services


9-10-14-CDW.jpgFrom transactions migrating to the cloud, to mobility reaching a tipping point and the influence of big data, the financial services industry is facing a new reality in 2014 and into the future. While addressing customer needs, financial services organizations must also maintain a sharp focus on meeting regulatory compliance standards and proactively addressing cyber threats.

1. Cloud Adoption Accelerates
Shifting business models, an intensified focus on efficiency and demand for customer-orientated technology is driving cloud computing technology adoption like never before. The fact that 71 percent of financial services organizations say they will invest more in cloud computing this year, which is up from 18 percent in the previous year, is proof positive that the cloud adoption ship has sailed, according to a 2013 report from PwC. And, the cloud is infiltrating all sectors of the financial services industry. Sixty percent of banks worldwide will process transactions in the cloud by 2016, while 77 percent of capital markets firms will leverage the cloud this year alone, according to technology research firm Gartner. In addition, many in the financial services industry have started to realize the quantifiable benefits that the cloud can deliver, like reduced infrastructure and hardware costs. The average cost reduction due to cloud computing savings on infrastructure is 23 percent, says a survey of a variety of companies by Rackspace and market research firm Vanson Bourne.

2. Mobility Makes Its Move
Mobility in the financial services industry has reached a tipping point. With the number of U.S. smartphone users predicted to increase to more than 265 million by 2017, according to research and consulting firm Frost & Sullivan, financial services organizations that haven’t created a mobile strategy are putting their growth and efficiency at risk. The mobile app market is exploding as banks, credit unions and capital markets firms embrace mobile services as a way to harness this constant, real-time interaction and significantly enhance the customer experience. In fact, 32 percent of U.S. adults now bank using their mobile phones, 51 percent of consumers use their phones to make a mobile payment and 51 percent of capital markets firms intend to invest in app-driven technology to achieve efficiencies, says surveys by the Credit Union National Association, the Pew Internet & American Life Project and IPC Systems.

3. Cyber Security Concerns Loom Large
The proliferation of mobile apps, cloud computing and big data are just some of the reasons why cyber security remains a top concern for the financial services industry. While retail security breaches demand the headlines, attacks on financial institutions still loom large. In fact, 37 percent of cyber attacks are directed at financial services organizations, according to a Verizon Data Breach Investigations Report. Recognizing that it’s critical to proactively combat rising cyber crime, 93 percent of financial organizations are maintaining or increasing their cyber security investments, says Ernst & Young. This includes allocating 46 percent of information technology (IT) spend toward security improvement, expansion and innovation over the next 12 months.

4. Big Data in the Driver’s Seat
Seventy-one percent of the financial services industry is already using big data and predictive analytics, but the demand for big data is getting bigger, according to the University of Oxford and IBM. This is the year that organizations will truly leverage big data to change the way they do business and achieve a competitive advantage by enhancing their knowledge of customers and prospects. Leading financial services firms are more confident than ever before about how they can use big data: 70 percent of data leaders say they can generate forward-looking insights from their data and 72 percent understand how to integrate performance and risk analytics, according to State Street Corp., which surveyed global financial institutions.

5. Regulatory Compliance Remains a Priority
Making it a priority to stay ahead of the regulatory compliance curve is crucial to the success of any financial services organization. Unfortunately, this is easier said than done. Nearly 80 percent of financial institutions admit to significant concerns about staying abreast of regulatory change and complying with regulator demands, according to a survey by Wolters Kluwer Financial Services. That is likely the reason many are heavily investing in compliance technology—to the tune of a 35 percent growth in compliance spending by 2015, says the Aite Group—as the market maintains its focus on compliance and reform. The trickle down effects of regulatory reforms—such as the Dodd Frank Act and recent Volcker Rule—continue to impact some 87 percent of financial services companies, according to Deloitte.

The Role of the Board in Technology


role-of-the-board-in-technology-white-paper.pngFor most bank boards, technology is a black hole of knowledge. Although they might be perfectly capable of programing their digital televisions or surfing the Internet with their tablets, bank directors generally don’t understand technology in the broader context of how it impacts their institution’s performance and profitability. And they’re not alone, which only compounds the problem. “It’s hard for the bank’s executives to keep up with technology let alone the board,” says Terence Roche, a principal at Cornerstone Advisors in Scottsdale, Arizona.

Unfortunately, the banking industry is changing so rapidly—and technology in many cases is actually driving that change—that directors need to engage in strategic discussion around technology and make that a priority at their regular board meetings. “You can’t have a discussion about banking without having a discussion about technology,” says Bruce A. Livesay, executive vice president and chief information officer for First Horizon National Corp. in Memphis, Tennessee.

Increased Spending
Certainly directors need to have an appreciation of where their banks are making significant technology investments. Celent, a New York-based research and advisory firm, released a forecast in January 2014 that total information technology spending for North American banks, including both U.S. and Canadian institutions, would increase approximately 4.5 percent in 2014 and 4.6 percent in 2015. And what will that money be spent on? Much of it will go towards the maintenance of existing systems and operations, although Celent was encouraged that new investment spending will rise an estimated 11 percent in 2014, which means that a proportionally larger share of every dollar of technology spending will go towards new systems, applications and operational capabilities.

Retail banking initiatives like application enhancements for smart phones and tablets, and the next generation of online applications, are expected to capture some of that increased investment spending, as are commercial banking initiatives like upgrades to existing cash management and treasury solutions as many larger institutions look to deepen their relationship with core business customers. A more demanding regulatory environment, particularly in critical areas like anti-money laundering, will also lead many banks to invest in various compliance-based solutions.

Making Decisions about Technology
Not only do boards need to understand where the technology expenditures are going, they also need to have an in-depth understanding of how technology either facilitates—or impedes—the bank’s overall strategy. Livesay offers this example: The increased cost of regulatory compliance is causing some boards and management teams to consider whether they need to grow larger so they can spread those costs over a wider base. But the decision to grow larger can’t be made in a vacuum. There are other issues that must be taken into consideration, including whether the bank’s current technology platform can support a larger bank. “Can it scale to where we want to go?” says Livesay. If not, the bank could be facing a costly investment to build out its technology infrastructure to support a larger operation.

Another example of where corporate strategy and technology are beginning to intersect is the exploding popularity of smart phones and tablets and the impact this is having on retail delivery systems. In order to remain competitive, most institutions are going to have to make significant investments over the next three to five years to build out their mobile and online retail banking applications, and this also might require more scale to make those investments cost effective. If the board anticipates that it might sell the bank in that time frame, it probably won’t make those investments. But if the board is committed to growing the bank and maintaining its independence for the next three to five years, those new spending initiatives on retail delivery need to be made now so it doesn’t fall behind. “The board needs to look forward and decide where it’s going and what the bank’s technology needs are,” says Cornerstone Senior Director Sam Kilmer.

How a Bank’s Board Handles Technology
At $28-billion asset First Horizon, which has significant activities in retail and commercial banking, mortgage lending, capital markets and wealth management, the board is particularly focused on information security—or as Livesay puts it, “keeping the bank off of the front page of the newspapers.” Protecting the security of customer data is so important that it has become a board level concern at the company. “Cyber-attacks are becoming more frequent and more destructive and that’s not going to slow down, but will intensify,” he says.

The First Horizon board also pays close attention to customer preferences in the digital space and how the growing demand for “anywhere, anytime, any device” capability is forcing the company to alter its retail delivery strategy. While banking is still a relationship-focused business, the retail model is beginning to change as an increasing number of customers make greater use of remote channels like mobile. This migration from branches to mobile has placed new demands on the bank’s technology, requiring that it invest capital resources to keep pace with demand. What does the board worry about? “Where do we place our bets on innovation?” says Livesay.

If the board at First Horizon is comfortable having high level discussions that involve technology, it might be in part because in 2007 it recruited a director—Robert B. Carter, chief information officer at FedEx Corporate Services—who knows something about it. Livesay, who is a member of First Horizon’s executive management committee and reports to the company’s chief executive officer, also makes a presentation at every regularly scheduled board meeting on some aspect of technology. “Every board meeting I am on the agenda,” he says.

Most boards do not become overly involved with technology decisions that are purely tactical, but increasingly they have become very engaged in decisions that are strategic in nature, or could pose a significant risk to the bank if not executed properly. For example, when First Horizon made a decision four years ago to in-source its data center after having used a third-party processor for a number of years, the board was very engaged because of the operational and strategic risks that undertaking entailed. The fact that building a new data center was the second largest capital expenditure in the company’s history also captured the board’s attention, Livesay says. “It was a big data project,” he laughs.

With the exception of Carter, none of the directors on First Horizon’s board is an expert on technology, but they still make it an important aspect of critical board discussions about strategy. And perhaps because they do understand the importance of technology in the overall scheme of things, they also make sure that Livesay has the necessary resources to do his job.

“When I go in with a technology issue, they’ll ask, ‘Do you have what you need?’” he says. “I don’t think that is the case in every company.”

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Digital Directors: A Powerful Boardroom Addition


3-21-13_Russell_Reynolds.pngDigital transformation—the confluence of social, mobile, cloud computing and data analytics—is dramatically changing the banking business. As electronic transactions become the norm and customer expectations shift accordingly, banks are fundamentally rethinking both their products and services and their marketing strategies.

Because digital transformation affects the evolution of the entire institution, there is an increasingly recognized need within the banking industry for the board to provide oversight and counsel to the CEO regarding digital strategy and the development of digital talent across the C suite. But this addition to board responsibilities means that the board itself must have a certain critical mass of digital capability and experience.

Nominating committees have begun to respond by adding “digital directors”—executives who have either management or board experience at a company where digital contributes a large portion of revenue, where digital channels are crucial enablers of business or where the company is regarded as a digital transformation leader in its industry.

But as powerful an asset as adding a digital director can be, doing so successfully requires forethought and planning. The following can serve as a checklist of questions and issues the nominating committee should consider.

Know Where the Bank is on its Digital Trajectory

Some banks are building out their basic mobile strategy, while others have infrastructure already in place and are now leveraging analytics to incentivize usage and engage and retain customers. Still others may be looking to extend their network of partnerships. The specific digital issues the institution is facing now and over the next several years will help determine the type of digital experience most needed on the board.

Understand the Varieties

While one can speak broadly of “digital directors,” the term actually encompasses three distinct types: The first type of digital leaders comes from “disruptor” companies—the social, mobile, cloud computing, data analytics and other firms that are actually driving the changes at a root level.  The second type of digital director comes from “transformer” companies outside the realm of technology that are examples in their industry of successful digital transformation. (The retail, transportation and consumer packaged goods industries are good sources.) The third type of executive comes from either disruptor or transformer companies, but approaches digital less from a strategic than a technological perspective, typically as chief technical officer or chief technology officer. Each type of digital director will have his or her own perspective on the process of digital transformation.

Show Commitment

Expect that any potential digital director will regard an offer of a board seat with a level of healthy skepticism. He or she will have to be persuaded that the CEO has truly embraced digital change, rather than merely responding to pressure from the shareholders or the board.

While a commitment to digital transformation will mean different things at different banks, it will generally include having already begun to build a digital management team to lead efforts in mobile, digital payments and digital marketing. After all, the role of the digital director is to advise on digital strategy—and this presupposes that there is a basic digital capability already in place. No digital director will sign on if he or she is expected to drive the digital transformation process.

One Isn’t Enough

Just as no digital director wants the responsibility of building digital capability from the ground up, he or she will not want to be the one to whom all faces turn when a digital issue comes up. Think of digital expertise like financial expertise: Even outside of the financial services industry, the well-composed board will include several financial experts, representing various perspectives and experiences, to ensure the best possible collective thinking about a critical function. Similarly, bank boards should aim to have at least two or three digital directors around the table.

Don’t Just Transform the Bank

The bank cannot undergo a digital transformation without the board doing so as well. Use tablets to access board documents, as well as online collaboration tools. Spend more time out of the boardroom seeing and trying new technologies first-hand.

But if adding digital technologies will nudge boardroom culture, the addition of digital directors will have a far greater impact, given their likely expectations for high levels of directness and transparency. The challenge here is to add directors who bring disruptive experience without being disruptive themselves. This can particularly be an issue for digital directors who have not served on a public company board before, or on a board outside of the digital realm. Mentoring from a senior board member can be helpful here. But it would be a mistake to expect to smooth the edges completely. Nor should one want to: As more digital directors take their place in the boardroom, it is likely that they will make a positive impact on board culture in ways that cannot now be foreseen.