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Competing in the Financial Services Sector: The Industry’s Top Business Challenges

Posted August 23, 2018| Lenore Scanlon

Digital Disruption in the Financial Services Industry

With the financial crisis mostly in the rear-view mirror, financial services firms are looking forward to a future filled with many exciting opportunities and interesting challenges.  The digital transformation, which began many years ago and continues apace, is central to much of the industry’s change and uncertainty.

Interestingly, under the broad umbrella of financial services—spanning payments, banking, insurance, asset management, brokerage, and more—many common challenges and marketplace disruptions exist.  With an eye toward identifying issues that cut across industry subsectors, we’ve summarized the industry’s biggest challenges and opportunities.  These forces and changes demand that companies truly understand the external environment—so they can mitigate threats, anticipate shifts, leverage new technology, capture new business opportunities, and be prepared for the future.

Blending digital and physical distribution channels without compromising human touch

Rationalizing traditional distribution channels in the digital age remains among the most significant and enduring challenges facing financial service firms.  Determining how to meld the advantages of online and mobile channels with the unabating need for human involvement—providing trusted advice, devising creative solutions, solving tough problems, demonstrating empathy—remains a prominent challenge across industry subsectors.  Banks struggle to optimize their massive investments in real estate as they’ve actively migrated basic transaction to mobile and online channels.  Insurance companies grapple with cannibalization of agent efforts through their own online distribution initiatives.  Broker-dealers offer heavily managed and discretionary offerings for more affluent clients and robo or self-directed offerings to those with lower asset levels (or greater inclination to use those tech-led offerings).

But even with all the self-service options technology has made possible, firms recognize that higher-value interactions with customers often demand interpersonal interaction—a human to guide and counsel the customer.  Just as the retail industry has learned, financial firms that successfully blend the advantages of digital tools and a physical presence (complete with human beings) are increasingly the winners in today’s complex marketplace.  Even Amazon is seeing the benefits of adding brick and mortar to its mix…but that’s a story for another day.

As technology advances, so does the risk of security threats, data breaches, and fraud

Addressing fraud and risk are top of mind for most financial services players who are charged with safeguarding customer money, information, and assets. As quickly as technology is advancing for the good of those customers, it is also advancing for those who seek to steal from, profit from, or otherwise disrupt financial systems.

With the growing risks posed by hackers and fraudsters—made worse by the proliferation of cross-border data exchange—regulators across the globe are mindful of their role as watchdogs of the financial systems and continue to implement new rules and regulations that put pressure on financial services firms.  At the same time, customer expectations around data security are extremely high and unwavering. Institutions that fall victim to data theft or loss are seen as breaching the trust customers place in them and failing in their fundamental duty—as a result, they often suffer reputational damage that can be hard to erase.

Friend or foe: the emergence of fintech

Remaining skepticism and uncertainty among customers, along with rapidly advancing technologies, have given rise to a new class of competition in venture-funded financial technology companies. These nimble upstarts are sometimes addressing “broken” processes in the industry, and sometimes just offering a shiny new way of doing business, often without the built-in safeguards of traditional financial players. But while these players present challenges, they also present opportunities for traditional financial services firms that can benefit from partnering with them or acquiring their expertise and efficiencies. Knowing the difference is critical. Stodgy financial firms are also benefitting from simply having a fire lit under them, spurring them to overcome traditional roadblocks to rapid tech deployment.

Promising but still-elusive advanced technologies

Several advanced technologies—virtual reality, augmented reality, artificial intelligence, advanced analytics, data visualization, biometrics, blockchain, robotics—are within reach and a source of fascination for many, but putting them to practical use is often untested, its value unproven. Sophisticated algorithms can automate underwriting of loans and insurance but have yet to supplant the role of humans injecting their judgement, experience, and intuition.

Biometrics for authentication show great potential, but some efforts are stalled because of the ‘creepiness’ factor consumers feel—maybe the iPhone X will change that. Augmented and virtual reality promise a host of interesting applications in the industry—as a training tool to convey the stress of high-stakes interactions better than traditional role-play exercises, to assist the visually impaired, or to help customers envision their future selves based on various financial choices. But getting customers to don goofy goggles (that scores of others have donned before them) has not quite hit the mainstream, nor have the host of projection-based AR alternatives that are in development.

Fidelity Investments recently unveiled Cora, its voice-commanded financial advisor bot prototype, which can answer investor queries using a suite of tools from Amazon Web Services. JPMorgan Chase allows institutional clients to access its research reports using an Amazon Alexa, much as they might ask her to send more ink for the printer.

Blending the efficiency of these technological tools with the wisdom and expertise of people is a difficult balancing act for financial services firms. On one hand, they know today’s customers like the ease and immediacy of conducting business through digital channels, but on the other hand, they know how much value can come from in-depth needs assessment and personalized solutions surrounding important life events. Bringing together the best of both worlds is the holy grail.

The war for talent to support digital disruption

If the soaring economy wasn’t enough to make recruiting a challenge, financial companies face the added battle of finding the right kind of talent, equipped to meet the demands of the new digital-first world. Finding, training, incentivizing, and retaining the right people is critically important to the future of the industry. New entrants in the workforce may come equipped to work in the new tech-led environment, but lack experience and other skills critical to serving customers. Striking a balance between acquiring skilled knowledge workers and imparting some of the wisdom and soft skills of older workers is a tall but mission-critical order.

New customers, new customer expectations

There is no shortage of analysis and discussion of the Millennial generation, now the largest cohort of adult consumers. Yet, Boomers and Gen-Xers remain critical segments, as well. Financial firms need to carefully determine the best ways to meet the unique needs of all generations, as well as other ethnic and demographic segments. Overall, across the segments, there is heightened demand for customization and personalization of the financial services experience. Segmenting the market, evaluating the demands of various constituencies, and meeting those demands with the help of people and technology are critical success factors in today’s financial services world.

How do financial services organizations make sense of it all?

With so much in flux across the economic operating environment, it is more important than ever to look outside own’s own organization for insights, lessons, and best practices to develop more resilient strategies, that make the most sense for your business model and growth strategy, in face of challenges and disruption. Having a firm understanding of customer demands, competition, the technological landscape, and potential partnership and M+A opportunities will certainly help financial services businesses address these challenges, bringing clarity to the environment and identifying competitive gaps and advantages.

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