Financial Institutions Must Embrace Openness To Thrive in the Future

On September 23, CI&T welcomed Junta Nakai, Global Financial Services & Sustainability Leader at Databricks, to its Future Ready Digital Summit. Junta joined a discussion with CI&T’s David Ritter and Robin Borelli. The following is a summary of the key takeaways from that discussion.

The theme of CI&T’s digital summit was “future ready” so we aimed to characterize the financial services players that will win in the future. According to Junta, whereas scale and capital used to be differentiating advantages, the winners of the future will be those that maximize the benefits of data and attract and retain the best data talent.

Disproportionate value will be captured by those that embrace open-ness in terms of data access and collaboration with outsiders. Indeed, industry groups such as Financial Data Exchange (FDX) and FINOS (Fintech Open Source Foundation) are trying to advance collaborative, open-source solutions.

Indeed, Junta believes that Open Data may transform financial services in much the same way that open-source programming languages transformed the software industry.

Our view is that open-data ecosystems will continue to evolve slowly in financial services. Unlike software, financial services companies are highly regulated and the data being shared is highly sensitive and personal. Thus, banks and the broader data-sharing ecosystem will need to develop protocols that put data security and privacy first. Consumers trust banks with their financial data to a much greater extent than the big technology platforms, but that goodwill could easily be squandered.

We agreed with Junta on a few things, though. First and foremost, banks must upgrade their data foundations and architecture before they can graduate to predictive/prescriptive analytics that enable their services to be personalized in a way that resonates with customers. Junta noted that data scientists involved in artificial intelligence and machine-learning projects typically spend 80-90% of their time correcting, de-duping, and organizing data and just 5% of their time on value-added work.

We also agreed that banks, in particular, have just one major lever left to increase their return on equity. Leverage was capped by regulators after the 2008-09 financial crisis and gross profit margins are tied to prevailing interest-rate levels, so are to some extent out of the bank’s control. That leaves raising productivity as the last way to increase returns, and that includes maximizing the profit potential of relevant data.

Financial institutions have a mountain to climb. Innovation in financial services, as measured by R&D expenditures, has lagged that of other industries by a wide margin. For example, the sector is 2nd in market value globally, but ranks last in total R&D spending. Just nine financial institutions made it into PriceWaterhouseCoopers’ most recent Global Innovation 1000 Study.

While personal investing has been transformed in recent years by mobile apps like Robinhood that offer slick interfaces and commission-free trading of securities, and now cryptocurrencies, core banking services such as getting a mortgage haven’t changed much in decades. Legacy banking infrastructure and an inability to bridge internal data systems has stifled innovation. But, banks seem to be getting the message as digital-first upstarts take market share by improving the customer experience for both basic banking and more complex transactions, such as mortgages.

Indeed, the chief technology and chief information officers at large financial institutions are now typically recruited from technology providers or from non-financial industries, both of which provide a fresh perspective on the best path forward. These new leaders are far more open to collaboration with outsiders, including their rivals, in order to increase innovation. Financial institutions are also transitioning from building and managing databases - which is very capital-intensive - to agile, cloud-based data architectures and applications.

It's clear that legacy infrastructure and the inability to bridge data systems have long stifled innovation in financial services. However, with the influence of tech-centric CTOs and CIOs, FinServ companies are now more open to collaboration and modernizing their outdated IT models of managing data in-house by embracing cloud migration. As a result, we expect innovation by incumbent financial institutions to surge in the years ahead.

David Ritter

Financial Services Strategist, CI&T