From new deployments to new products and partnership structures – including the creation of nimble ‘banks within banks’ – the possibilities ahead are exciting. Drawing on MinterEllison’s combined legal, risk, regulatory and technology consulting expertise, we examine the key considerations for any financial institution reorienting to become sleeker and smarter, and win the trust and loyalty of its customers.
Understand the competition from established players and start-ups
Established financial institutions bring great strengths to the market. This stems from their status as trusted repositories of customers’ money.
Their weakness is that many remain saddled with legacy systems, bureaucracies and large cost bases. This makes it harder to introduce technological changes at pace. Adding to the pressure, every industry player that innovates successfully – whether an established bank or five-person start-up operating out of a garage – raises the bar for its competitors.
Once you can get a home loan approved in two hours due to online verification processing and approvals, five weeks is unacceptable.”
Another example is banks that use the new Consumer Data Rights to offer a one-stop-shop service facility. This builds brand loyalty by offering customers a convenient app to manage all of their affairs – including additional accounts they may have with rival banks.
Consumers are increasing their use of digital options rapidly, particularly since the pandemic forced many traditionally face-to-face interactions online. The Australian Banking Association says 71% of smartphone users use their digital wallet weekly – up from 40% in 2019. And according to Fintech Australian Chairperson Simone Joyce, the pandemic has condensed ‘at least five years of fintech growth into six months'.
Digital payments are the market's largest segment, says research conducted by Statista, with a total transaction value projected to be AU$131.73bn in 2022. The number of users is expected to grow to 21.7 million in 2026.
In this environment, digital transformation is high on every organisation's list.
The larger financial institutions vary in their approaches. Some are making wholesale changes to their entire systems. Others are introducing smaller, independent systems featuring bespoke technology.
There are costs and benefits to both.
But from the consumer’s perspective, the answer is straightforward.
“As the customer, if I determine that one bank’s got a better technology solution that’s easier for me, I’ll never go back to the others,” Borgese says.
Balance opportunity and risk
Perhaps an organisation is considering a ‘big bang’ overhaul of its core banking system. Or a so-called ‘bolt-on’ deployment that migrates some functions to the cloud, such as enhanced contact centre capability.
Both approaches involve risk.
A large-scale technology transformation requires consistent leadership and a whole-of-organisation commitment, as well as the in-house talent to see the process through. For its part, an approach that blends technologies in stops and starts increases the chance of creating cybersecurity gaps.
The ability for systems to 'talk' to each other is particularly important where one bank or wealth management provider buys another. This is already an issue for the larger organisations grappling with legacy systems.
Another increasingly common structure is where a financial institution sets up an in-house fintech, or partners with an external start up.
In these cases, larger organisations are effectively entrusting the future of their business to small, young players in the market – since they are the ones nimble enough to have developed the niche product.
Careful planning and due diligence are required when entering such an arrangement – particularly with regard to data privacy, and ensuring the financial viability and reputation of the junior firm. The danger is creating a new ‘weakest link’ vulnerability.
Some deal with their risk by effectively taking an option to takeover the company and its technology if they have issues.
Financial institutions are having to contend with risk assessments across an increasingly complex supply chain.”
Consumer Data Right is an opportunity
As the first industry to be covered by Consumer Data Right (CDR) regulations, Australian financial institutions are leading other industries in giving customers greater control over their own data so they can transparently compare service providers. However, this can be challenging for the already heavily regulated financial sector, not least because data collection brings new compliance burdens.
There is an assumption among regulators and the community that the larger financial institutions have a complete package of information about a customer, and can use this to make informed, personalised decisions. However, that is far from reality. The information may in fact be spread across multiple systems, with no ability to integrate it.
Still, as more financial institutions come to terms with their CDR obligations, this will bring more opportunities to innovate. For example, banks can soon collaborate with CDR-compliant partners in the energy sector. With access to other electricity companies’ product reference data, once 'action initiation' is implemented, banks can offer customers a gateway to open and close their energy accounts or compare different service options, simply by using their banking app. Insurance companies and superannuation providers can also meld their offerings.
This brings enormous implications and opportunities if organisations act now to take advantage of them.
“The banks are thinking about what this means for them; how can they play? They’re well placed because they’ve gone through the pain of CDR first – but they will get access to all industries once they’re registered,” Borgese says.
Recognise and embrace the challenge
As financial institutions look to invest in innovative technology, it is important they start with an honest assessment of their existing IT maturity – and stress-test their intended approach.
Resourcing and access to talent are challenges, as the competition for digitally savvy employees is fierce. The unpredictable availability of talent is itself a risk to any large-scale transformation.
Equally, digitally savvy talent needs room to move once embraced by an organisation, whether through an acquisition, partnership or normal recruitment. The broader issue is building a technology culture where the risks of innovation are managed appropriately but not excessively. A deep cultural shift may be needed to ensure decisions can be made in an efficient, nimble manner – with larger organisations incorporating the attributes that make start-ups so attractive.
Organisations need to ensure they are attracting staff with the diverse skills necessary to introduce meaningful change. At the same time, processes need to be adapted to facilitate easy decision-making.
In the words of Michael Lawson, MinterEllison Partner and Financial Services Industry Leader, it’s about “ensuring firms are able to deliver core services while not bogging staff down with unnecessary amounts of overlapping policies and procedures”.
Simon Lewis, MinterEllison IT Consulting Partner, emphasises that financial institutions should view competitive pressures as an opportunity to embrace change. “If customers are constantly looking for something that’s going to make their life easier, they’re going to be more prone to the fintechs,” he says.
“That’s because they can slice and dice the product offering of the big banks without the baggage and the legacy. So, it’s a really critical period for the industry for the next couple of years.”
Key considerations when introducing new technology
When introducing new technology through an acquisition or partnership, leaders should look holistically at the challenge before them. They will need to consider due diligence, risk management (particularly cyber risk), IT procurement, financial implications, intellectual property issues, brand protection, and reputation.
For example, they’ll need to examine what they can do to protect the organisation from financial and reputational risk if a partner firm goes under. Conversely, they’ll need to consider how to seize and scale an opportunity if their new technology indeed turns out to capture the attention of the market.
MinterEllison has a combined service offering incorporating commercial elements, risk management, due diligence, and legal considerations and obligations.
Contact us to learn how you can embrace technology's opportunities while managing the risks.