Sudhir Pai, EVP, Chief Technology & Innovation Officer, Financial Services Global business at Capgemini.
The finance industry continues to undergo rapid transformation driven by evolving regulatory regimes, technology advancements, changing customer expectations and the proliferation of new business models. Based on current market trends and industry movements, we can forecast the future of finance to be shaped by the four R’s—risk (and resilience), regulation, reformation and reinvention—and accelerated by the three D’s—digital (and data), decentralization and decarbonization.
Impact Of The Four R’s In The Short To Midterm
As the financial industry goes through several concurrent and complex events, four key themes emerge as market drivers. Decision makers should stay abreast of these areas and craft strategies and roadmaps so as not to be obsolete.
1. Risk (And Resilience): The global risk landscape is witnessing an unprecedented phase with rising economic instability, as well as risks associated with climate change. Combine this with rising concerns around cybersecurity, and managing risk has become a boardroom priority for banks and insurers. Furthermore, as new technologies continue to disrupt the industry landscape, such as AI and tokens, balancing value against risk becomes a key challenge for organizations.
2. Regulation: Regulatory regimes are rapidly evolving with increased scrutiny on data privacy to combat risks. Regulators around the world are accelerating the enforcement of these risk management measures to mitigate capital risks, climate risks, fraud, technology risks and more. Investments in areas around financial crime and fraud detection, identity and data management, measurement and reporting will be accelerated by regulatory compliance requirements. AI regulations and data privacy regulations are also going to grow exponentially.
3. Reformation: Digital transformation will traverse new trajectories as value-based cloud, AI native and platform-based approaches become the new norm. Open and embedded finance is gathering mainstream adoption driven by enhanced data-sharing capabilities, API monetization and integrated platform business models, fueling the growth of banking-as-a-service and open insurance. Furthermore, the emergence of GenAI is opening new avenues for business transformation across the industry value chains.
4. Reinvention: New business models are reimagining the industry value chains through disruptive innovations blurring the cross-industry lines. Connected (internet of things, edge computing, 5G), decentralized (blockchain, distributed ledger technology, Web3) and immersive (augmented/virtual reality) technologies are enabling business model reinventions, with new ways of customer engagement and working and new revenue streams.
Examples include banks and insurers accelerating collaboration for bancassurance arrangements, retailers offering customers buy-now-pay-later services and auto manufacturers partnering with payment service providers to offer seamless customer journeys.
Powered By The Three D’s For Industry Transformation
As the market trends continue to evolve at a rapid pace driven by the four R’s, we will witness an industry response embracing three key pillars.
1. Digital (And Data): Digitization will continue to be a key lever for financial services institutions for operational efficiency and cost transformation. Combining the power of data and AI, along with the latest generative AI capabilities, could improve productivity, enhance customer experience, provide personalized products and services and reduce risk.
While cloud migration and legacy modernization will continue, we will see an increased role for artificial intelligence and machine learning, especially for improving customer experience and detecting and preventing fraud. Sustainability and cybersecurity will be driven by new technologies and tools with the evolution of climate tech and cyber tech. I believe the convergence of physical, digital and data will power a digital sustainable economy.
2. Decarbonization: Sustainability with net-zero commitments are in the execution phase. Financial institutions are under increased pressure from regulators as well as customers to integrate environmental, social and governance (ESG) goals into their short- and long-term strategies.
While banks are committing to align their lending and investment portfolios with sustainable financing, insurers are rewarding sustainable practices with reduced premiums (e.g., green home insurance). Strategic initiatives are aimed at reducing emissions and carbon footprint in hopes of transitioning to a low-carbon economy with increased investments in renewable sources of energy. The role of IT and advanced technologies will continue to be crucial.
3. Decentralization: Blockchain and distributed ledger technologies (DLT) are fueling the next wave of transformation in the financial services industry, particularly in capital markets. The central bank digital currency (CBDC) exploration continues with a new form of money offering smart, instant, programmable payments.
CBDCs could potentially improve cross-border payments with automated FX currency conversion and seamless 24/7 settlements. Digital identity solutions combined with Web3 (now moving toward Web 4.0) can further democratize the value exchange mechanism. Interoperability and standards will play a crucial role in the global and scaled adoption of decentralization.
To succeed in the future, financial institutions must focus on risk management, regulatory compliance, digital transformation and innovative business models while embracing sustainability and decentralization. A collaborative approach with both ecosystem partners and regulators will be instrumental in achieving a competitive edge and differentiation in the ever-changing world of finance.