State of Digital Transformation in Financial Services · One of the biggest drivers pushing financial services firms toward digital transformation is the need to protect against cyberthreats

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State of Digital Transformation in Financial ServicesJ U LY 20 1 7

B L AC K & W H I T E PA P E R

P R E PA R E D FO R

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About this paperA Black & White paper is a study based on primary research survey data that assesses the market dynamics of a key enterprise technology segment through the lens of the “on the ground” experience and opinions of real practitioners — what they are doing, and why they are doing it.

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B L AC K & W H I T E PA P E R | STAT E O F D I G I TA L T RA N S FO R M AT I O N I N F I N A N C I A L S E RV I C ES

PREPARED FOR CENTURYLINK

I N T R O D U C T I O NThis report is part of a global study of more than 1,400 enterprises designed to explore the extent of digital transformation playing out in organizations that are planning or actively applying digitization to strengthen competitive differentiation. In identifying four key organizational pillars – operational efficiency, customer/constituent experience, agility and risk management – as drivers for digital transformation, we assess how strategies are being shaped by business imperatives and the priorities of different key vertical markets. The objective of this paper is to highlight some of the shared learning of enterprise strategists and practitioners with a working knowledge of digital transformation in the financial services and insurance sectors. It will provide insights, directional indicators and recommendations about the state and status of digital transformation, drawing on interviews with more than 500 decision-makers in the banking, capital markets and insurance sectors across the globe. We thank each and every one for their participation.

K E Y F I N D I N G S � More than half of survey respondents (53%) are well established in their digital transformation efforts, with a formal strategy in place.

� One of the most important concerns for respondents (cited by 37%) is how to replace older, legacy technology with newer options, particularly cloud-based solutions (which are seen as ‘very important’ by 64% of respondents). The impact of this transition can be profound in an industry bound by privacy and data governance regulations.

� The most important IT goal, in keeping with its traditional organizational role, is to improve the reliability of systems, networks and infrastructure (45%). There are pools of legacy technology in place that are in need of support or replacement.

� Survey respondents indicated that along with an acceptance of new technologies, they are focused on solutions that are proven and reliable, and that help them manage (and avoid) risk. Notable among the risks cited are cyberthreats – 64% of respondents rated protection against such threats as one of their most critical imperatives.

� Some 38% of respondents consider real-time predictive analytics one of the most disruptive technologies they would consider adopting, followed closely by artificial intelligence and machine learning (37%), and Internet of Things (also 37%). These technologies hint at a wide range of possible advances in how financial products and services are delivered to consumers.

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Digital Transformation in FinanceFor decades, from the ATM to the smartphone app, financial services firms have been at the forefront of digital change. By reacting steadily to shifts in consumer temperament and leveraging new tools to better understand customers and markets, financial services companies have learned how to adapt and innovate. Now, with many businesses on the cusp of profound and lasting digital transformation efforts, our study indicates that financial professionals and their IT colleagues are wrestling with how technology will change their business models.

Digital transformation is a prominent topic among those working in finance and insurance because the market has an enormous stake in processing front-office contacts with high volumes of consumer customers. An increasing portion of the volume of customer contact is handled digitally through new channels, even as much of the ‘traditional’ volume (e.g., voice calls) is now enhanced using digital tools or analysis. The industry generates huge digital data resources apart from the raw data of the communications and customer interactions themselves. Financial services firms have done well to recognize the value of data and put it to use in creating innovative new products and alternative models for customer engagement.

One of the biggest drivers pushing financial services firms toward digital transformation is the need to protect against cyberthreats and manage risk. Companies are looking at digital transformation as a way of codifying their security strategies and ensuring they are current in light of the new sources of data and communications available to them.

The financial services industry has become intensely competitive, subject to multiple points of disruption stemming from advancing technology available to internal IT and also in the hands of consumers. Customer behavior is shifting thanks to smartphones, social media and personal financial tools. Our survey found that professionals in financial services – both line-of-business managers and IT decision-makers – are aware of the need for change, and understand what stands in the way of their digital transformation initiatives. Although the two groups don’t always agree on specific priorities, they have a common view of the overall goals and the need to build a unified strategy for digital transformation.

Figure 1: Current State of Digital Transformation Initiatives Across Financial Services Sectors

We currently have no ongoing digital transformation strategy

We are in the planning stage — researching to form our digital transformation strategy

We have started on siloed digital transformation projects, without an overarching digital transformation strategy

6%

53%

17%

24%

We have a formal strategy and are actively

digitizing processes

Source: 451 Research (N=513).When looking at digital transformation projects, there are typically four main areas where organizations try to improve: overall agility, operational efficiency and reliability, customer experiences, and the management of risk. In each of these areas, businesses can face competing priorities among internal stakeholders. And not all financial services firms are at the same stage of progress in their transformational efforts. For example, more than half of financial services and insurance businesses say they are well under way in their digital transformation projects (53%), with a formal strategy in place, which is slightly higher than firms across all verticals. In all, 77% of financial services/insurance businesses have begun their transformation projects, with most of the rest in the planning stages (17%) – see Figure 1.

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Top Goals Across Key Transformational PillarsWhen asked to identify how they are seeking to transform, respondents cited targeted improvements in operational efficiency as their top goal (29%), compared with a range of 23-25% for the other three major goals. Notably, those in financial services were more likely to focus on better managing business risk than their colleagues in other verticals. When asked to allocate 100 points across these four ‘pillars,’ as they relate to digital transformation, respondents put more emphasis on improving operational efficiency, followed by enhancement of customer experience, agility and better managing risk. Figure 2 illustrates how respondents distributed these points, indicating their relative priority for the four pillars.

Figure 2: Emphasis on the Four Pillars of Digital Transformation at Financial Services Firms

Improve operational efficiency

29%

Improve the level of agility

24%

Improve customer/ constituent experience

25%

Better manage business risk

23%

Source: 451 ResearchFigure 3 illustrates some of the key insights associated with respondents’ views about their intentions for each of the four digital transformation pillars. For example, in improving customer experiences, 40% of respondents indicated a need to work on improving customer-service quality in their branches or facilities, call centers, websites, and/or mobile channels of customer engagement. There appears to be a recognition that for financial services customers, the moment of contact has a particular power in establishing the tenor of the relationship, and thus the lifetime value that each customer represents. Financial services industry professionals are notably interested as well in the way customer experience can be affected by creating innovative products and services, and in adding digital engagement channels to the mix. Line-of-business managers are even more attuned to this than their IT colleagues: 40% of line-of-business executives cited the need to reduce friction points and become easier to do business with, compared with just 27% of their IT peers.

Figure 3: How Financial Services Firms Plan to Improve Across the Pillars of Digital Transformation

Source: 451 Research

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While line-of-business executives are focused improving the customer experience, IT professionals are keen on solidifying the technologies that support these efforts. Agility and risk management are at the forefront of IT concerns. When they look at digital transformation initiatives, IT professionals see opportunities to modernize old infrastructures and bring them up to current standards for speed, reliability, security and resilience. When asked about risk, for example, line-of-business respondents mentioned adherence to regulatory obligations more than their IT peers, while IT respondents cited the job of securing internal data as a priority (overall, 48% of respondents viewed the need to better secure customer data as a main objective, while 45% see a need to better safeguard employee records, financial records and other internal data). These goals are not necessarily in conflict with the customer experience goals of the line-of-business managers – rather, they complement each other, and suggest that the two groups should be working together to assess business processes and technologies. People in both roles at financial services firms have a shared view of the large contours of the problem – i.e., the need to accelerate digital transformation programs – but they differ on the selection of specific outcomes that matter within their organizational domains.

Across the board, 40% of respondents agreed that using IT to facilitate innovation was a strategic differentiator for their companies, another sign of consensus on overall goals (in this case, achieving greater operational efficiency).

The need for better customer experiences means more than just smoother interactions. A solid majority of financial services professionals are keen to create more personalized versions of those experiences. Personalization may require the use of more predictive analytics to match offers to consumers, or to create messaging campaigns that leverage better consumer data to understand their intent. It also will mean a continued commitment to mobile technologies, as consumers have shown an eagerness to do banking, insurance claims and personal financial management on mobile devices, and some of the more progressive financial firms consider this a smart way to differentiate their brand experience.

Achieving greater agility is a more nuanced goal, one that depends less on responding to how the customer behaves than on building a modern technology infrastructure that is flexible enough to allow for growth, and pivoting as business conditions change. Because of the complexity of financial services business processes (and their rigidity, when factoring in regulation), executives remain keenly aware of the potential for disruption from competitors, technologies and even other industries. And they do see a lot of disruption coming their way. As illustrated in Figure 4, nearly half of respondents expect the next three years to be a period of major disruption in financial services caused by digital technology (such as the cloud, mobile internet, IoT, collaborative software, robotics and automation, and intelligent software). The people closest to the problem see the next three years as significantly more disruptive than the last three, with the data showing a 10-point increase in the intensity of disruption.

Figure 4: Market Disruption in the Financial Services Industry – Now and in Three Years

11% 11%

56%46%

33% 43%

Today In 5 Years

MAJOR DISRUPTION(8/9/10)

NEUTRAL

MINOR DISRUPTION(1/2/3)


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Transforming the Process of InnovationFinancial services professionals with a formal digital transformation strategy are faster to innovate than those in other industries, as Figure 5 indicates. The ability of an organization to be innovative with new digital technologies such as biometrics or voice interfaces for access to mobile banking services, for instance, seems to have a direct correlation with digital transformation maturity. When asked to rate their organization’s ability to innovate, 69% of those with a formal digital transformation strategy already in place rated their organization as more capable and faster to innovate. Looking at the group in the early stages of planning, only 52% felt their organization to be quick and capable. The overarching intention of digital transformation is to enable innovation, and the influx of new technologies and IT-enabled processes will help the financial services industry continue to transform.

Figure 5: Perception of How Digital Transformation Leads to More Capable Innovation

Q. In your opinion, on a scale of 1-10, how would you rate your organization’s ability to innovate?

52% 69%

Early StageDigital Transformation

Formal Digital Transformation Strategy

FASTER TO INNOVATE

Source: 451 Research (n=390)

This innovation ability may be due to the early acceptance of some advanced customer contact channels (like SMS and mobile apps) and the industry’s long use of data analytics to segment customers and assign value to them. The financial services sector is also slightly more open to seeing the cloud as a path to digital transformation than others, with an overwhelming majority of respondents (64%) viewing cloud as a ‘very important’ on-ramp, enabler and accelerator to digital transformation (see Figure 6).

This indicates a more evolved view of cloud-based security than in the past, and a degree of latent frustration toward legacy back-office applications still in use (including homegrown core systems). In fact, financial services professionals see inflexible IT systems (and the resulting lack of operational agility) as the main barrier to successful digital transformation, with 38% citing this as the single biggest obstacle, way ahead of the views of executives polled in other industries. Correspondingly, 45% of respondents view the need to improve the reliability of IT systems and networking infrastructure as one of their main imperatives.

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Figure 6: Perception of Cloud’s Role in Enabling Financial Services Digital TransformationQ. In your opinion, on a scale of 1 - 10 how important will the use of cloud services be in the context of digital transformation?

2%7%

27%

64%

NOT VERY IMPORTANT

Importance ofCloud Services

SOMEWHAT IMPORTANT

IMPORTANT

VERY IMPORTANT

Source: 451 Research (n=384)The quest for agility is closely related to the need for improved efficiency. As noted, 40% of respondents see IT as an innovation differentiator, which implies a level of acceptance that technology can be used to put more (and better) financial products in front of more likely buyers, even if constrained by cost pressures. And more than half of finance firms are already well down the road toward digital transformation, even though many (46%) acknowledge that these efforts are likely to take 3-5 years to come to fruition. On a positive note, the research indicates that most respondents have adequate resources, including strong executive buy-in, to complete the process.

Even as firms want to be more agile and efficient, respondents cite risk management as the consistent backdrop to digital changes. The two most important objectives for managing their businesses’ risk are securing customer data (48%) and securing internal data like employee records (45%). Even the third-most popular choice, preventing reputational damage and corporate liability (37%), indicates a need to harden corporate assets and illustrates how financial services firms are not willing to compromise when it comes to data security.

Risk management is a top concern for both IT professionals and their line-of-business counterparts. From the line-of-business executives’ point of view, risk management figures into their willingness to consider new technologies like alternative identity and authentication systems, including biometrics, for customer access. Comparatively, IT professionals appear more aware of the potential to use data analytics as a way of mitigating risks.

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Drivers of Digital Transformation in Financial Services and Insurance451 Research defines digital transformation as the result of IT innovation that is aligned with and driven by a well-planned business strategy, with the goal of transforming how organizations serve constituents, employees and partners; support continuous improvement in business operations; and devise new business models. The three aspects of business we see being transformed most often are: the way a business uses data and business information, how it organizes and runs its business processes, and the technology platforms it uses to underpin its operations.

In the context of financial services and insurance, the momentum for digital transformation is being driven by an awareness that businesses need to adapt to stay competitive in a marketplace that is rife with nimble new entrants that don’t have the legacy technology and process baggage of long-established players. Add in many new types of financial products and a consumer base energized by their own new technology (mobile, social, search and personal financial tracking), and this more complex landscape practically begs for a speedier transition to digital processes.

As shown in Figure 7, the top driver for digital transformation identified by industry professionals is the need to protect against cyberthreats. But just behind that are specific objectives to make the process of doing business easier for customers: personalizing interactions, for example, and making mobile experiences better. Finance professionals are also keen on revitalizing customer contacts with more immersive digital experiences, indicating a desire to find new ways of using data to better identify customer buying intent and leverage multichannel or cross-channel communications to put targeted, contextually relevant offers on the table. Again, there are differences in the particular approaches favored by line-of-business and IT specialists, with those closer to the customer more interested in the possibility of virtual assistants and self-service, and those behind the scenes more keen to use big data and advanced analytics to optimize complex processes.

Figure 7: Imperatives Driving Digital Transformation Initiatives in Financial Services

Optimize the customer journey across multiple channels (web, mobile, store, call center)

Revitalize customer contacts with newer(more immersive) digital experiences

Create mobile experiences for onboardingof new customers

Personalize the customer experience

Compete against new digital native entrants

Enhance mobile experiences for existing customers

Protect against cyber threats 2%

3%

3%

3%

4%

2%

3%

Replace legacy core systems with newer cloud options 3%

Provide contextually relevant recommendationsonline and in-person

4%

26% 8%

29% 8%

30% 10%

29% 11%

30% 10%

33% 9%

32% 11%

34% 9%

33% 11%

64%

60%

57%

57%

56%

56%

54%

53%

53%

Maximizing the potential of new routes to market(e.g. broker/aggregator sites/comparison sites)

4%32% 13%51%

High Importance Medium High Importance Low-Medium Importance Low Importance


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At the same time, some firms admit to being held back by operational barriers that make it difficult to coordinate a company-wide transformation project (see Figure 8). Notably, 45% of respondents cite the lack of agility across departments, or the inability to ‘act like a startup,’ as a barrier to digital transformation. This mirrors the competitive structure of the industry, with new entrants attempting to disrupt markets like mortgages, insurance and personal investing through appeals to simplicity and ease of customer contact (especially through mobile apps). It appears that businesses across the financial services landscape are keenly aware of the need to be competitively nimble, and see digital transformation as critical to differentiating themselves.

One avenue of approach is to consider working with external service providers that know how to manage the complex integrations that come with digital transformation initiatives. Half of respondents in financial services report that they expect to need the help of specialists or third parties, notably from cloud and IT or telco services providers. Asked specifically what services respondents would be willing to outsource to a partner in support of a digital transformation project, 53% selected some form of managed IT or network infrastructure service, while 46% expressed willingness to consider cloud service providers, and 32% would look to a specialist digital transformation consultant.

Figure 8: Perceived Barriers to Digital Transformation Implementation in Financial ServicesQ: Which of the following do you see as the main operational barriers impacting digital transformation projects and specific to the FSI industry?

Inability to create a unified/singleview of customers

Failure to meet changing customer expectations

Limited knowledge of advanced data analytics

Keeping up with competinginnovative products and services

Challenges transitioning to newerpayment technologies

Organizational culture that failsto embrace digital change

Lack of agility across departments,inability to act like a start-up

45%

40%

38%

38%

37%

37%

35%

Too much friction in the customer experience 31%

Source: 451 Research (Base size, n=513 )

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The Importance of Strategic VisionThere are distinct advantages to getting a digital transformation program up and running. Comparing those firms that have already started out following a formal digital transformation plan to those that are still in the early or planning stages, we find that those with a formal strategy see themselves as being more open to innovation, and generally more strategically oriented than the early-stagers (See Figure 9). Those who are already on the transformational journey are more likely to be doing it because they want to focus on improving the customer experience, as opposed to those earlier in the process who see cost control and efficiency as the main reasons to embark on digital transformation. It is clear that the further a firm progresses, the more open it is to a wider spectrum of technology options to optimize its digital transformation strategy.

Figure 9: Strategic Vision – Comparison of Study Highlights on Digital Transformation Between Early-Stage and More Progressed Firms

46%35% CURRENTSPEND

35%46%

74%52%

TRANSFORMATIONAL PARTNER 55%43%

Early StageDigital Transformation

Fast to Innovate

Very Strategic

Importance of Cloud

Reduce costs through operational efficiency

Cloud service provider

Fast to Innovate

Very Strategic

Importance of Cloud

To improve customer experience

IT/Telco service provider

ABILITY TO INNOVATE 69%52 52%

Formal Digital Transformation Strategy

TOPDRIVER

CLOUDSERVICES

Source: 451 Research (n=513)

Figure 9 also illustrates the way in which financial services companies that have taken steps to formalize their digital transformation process come to an awareness of the complexity of the job, and the need for simpler infrastructure to make it show results. Those in the later stages of planning are much more likely to rate the importance of the cloud more highly than those in the early stages (74% compared with 52%) – presumably putting plans into effect has given those firms the confidence to move past some of their legacy platforms that they feel hold them back. Being beholden to legacy infrastructure is one of the largest barriers to moving forward.

As companies move along the continuum, they also look more toward IT or telco service providers as their digital transformation partners than earlier-stage firms do. As many as 55% will use an IT/telco service-provider partner, whereas early-stage firms are more likely to rely on cloud service providers (43%). It is likely that this evolution has to do with bringing more internal stakeholders into the project, and especially with moving planning into a phase that requires IT to participate more fully in asserting the security and risk management profile of a digital transformation effort. Early efforts may be started informally as a form of ‘shadow IT,’ but these efforts are ultimately brought into the light as they are shared more widely and the true scope of projects emerges.

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R EC O M M E N DAT I O N SI F YO U H AV E N ’ T STA RT E D Y E T, B EG I N N OW. There is broad consensus among financial services professionals that a move to more flexible digital infrastructure is needed. For most respondents, this is already under way, but there remains a significant portion of the market hanging back. Those firms that have not yet formally developed a strategy need to do so as soon as possible. Otherwise they risk being undermined in the marketplace by nimbler digital-native startups or larger companies that got an early start experimenting with digital transformation projects.

COMBINE LINE-OF-BUSINESS AND IT INTERESTS WHEN DEVELOPING A STRATEGY. We see three aspects of business being transformed most often, namely: the way a business uses data and business information, how it organizes and runs its business processes, and the technology platforms it uses to underpin its operations. Entrusting some of the transformational fundamentals to a partner and evaluating the cost-benefits of doing so is a critical point on the transformation roadmap. Our data shows that enterprises are increasingly turning to third-party providers – managed IT partners and cloud specialists, in particular – for service support and management, or they expect to need an IT or telco service provider to support their digital transformation programs.

F I N A N C I A L S E RV I C ES D I G I TA L T RA N S FO R M AT I O N M U ST H AV E A F I R M FO U N DAT I O N I N R I S K M A N AG E M E N T. What sets this industry apart from other vertical markets is that it has both an appetite for exploring new operating models and a deep-seated need for strong security features. The study clearly indicates that attempting to impose a digital transformation initiative without placing the deep sensitivity to data privacy and risk mitigation front and center will be missing the main concern of a large portion of financial services decision-makers.

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A P P E N D I XMethodologyThe survey data used in this report was collected in March and April 2017 by 451 Research as part of a global digital transformation enterprise study – commissioned by CenturyLink and conducted across 1,402 enterprise organizations in 11 countries across North America, Europe and Asia-Pacific. It is designed to provide insights that will help executives understand how businesses leverage the changes and opportunities of digital technologies to serve different stakeholders, manage risk, support continuous improvement in operations, and invent new services and business models.

In taking the pulse of digital transformation across a broad spread of sectors, we have been able to identify which new IT choices are becoming popular, explore service-partner preferences, and track investment priorities, as well as establish the state of vertical-specific digital transformation readiness and evolution.

For the purposes of this paper, we reviewed and analyzed data derived from a sample of 513 decision-makers in the banking, capital markets and insurance sectors across the globe.

Study Demographics The digital transformation study involved a combination of web-based surveys and telephone interviews comprising around 30 questions. All respondents had primary responsibility for making purchasing recommendations, influencing decisions and strategy about digital transformation initiatives, or having significant decision-making authority. About 40% of respondents are responsible for decisions about digital transformation strategy, with 60% providing input. Overall, 60% of respondents work as senior IT executives, and 40% lead line-of-business departments for their organizations. Our business segmentation corresponds with the categories typically used by service providers to identify midmarket and large enterprise customers.

Further InformationThis report is one in a series that explore the current state of maturity of enterprise digital transformation strategies representative of organizations in key commercial sectors and government agencies in North America, Europe and Asia-Pacific.

The series comprises a set of reports addressing the analysis of the global picture, as well as three summary regional reports that assess some of the variations identified across geographies.

There are also four vertical market-focused reports, which will help IT and line-of-business executives in financial services, healthcare, retail and US government agencies navigate some of the key issues and considerations specific to digital transformation themes in these sectors.

About CenturyLinkCenturyLink is a global communications and IT services company focused on connecting its customers to the power of the digital world. CenturyLink offers network and data systems management, big data analytics, managed security services, hosting, cloud, and IT consulting services. The company provides broadband, voice, video, advanced data and managed network services over a robust 265,000-route-mile U.S. fiber network and a 360,000-route-mile international transport network. Learn more about how CenturyLink can help you accelerate your digital transformation.

For further information, go to http://www.centurylink.com/digital-transformation

State of Digital Transformation in Financial Services · One of the biggest drivers pushing financial services firms toward digital transformation is the need to protect against cyberthreats

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