The financial services sector leads global technology spending forecasts of nearly $2.65 trillion by 2020, according to IDC research. Challenger institutions are entering the market, often based on technology innovations that established institutions struggle to match. How are the behemoth incumbents responding?
We already know that some are partnering with fintech innovation centers, but that isn’t the only way forward, nor does it necessarily address core challenges the financial services industry faces. Toni Tomic, global head of business development and innovation for financial services at SAP identifies several issues.
For many established banks and insurers, the issue is whether they should hand over the future of your company to the head of digital or the CEO. There is a current lack of boldness to do larger things and not enough of a hands-on approach to innovation.
[Users] run proofs of concept for 6 to 12 months and everything is fine. When these are presented to the board, often the feedback is, ‘Wow, that’s a good exercise. But it’s not executed correctly’. That is not specific to SAP – the entire industry looks at the issue that way.
Barriers to innovation
An actionable, disruptive technology approach to injecting innovation into daily business processes is what seems to be missing in financial services firms, who have other priorities on their radar such as minimizing risk.
According to Tomic, the most straightforward route to obtaining tangible results from innovation is taking a step-by-step approach. For example, a bank might start with automation of HR and finance processes, using machine learning capability. While that doesn’t sound especially exciting, it is a pathway that takes the familiar ‘thing’ forward in a relatively non-threatening manner.
But firms often stumble into issues such as finding the right stakeholders to translate what looks like blue sky thinking to internal users, the SAP executive says. This in turn leads to a trial and error scenario where many projects lose momentum. He adds:
Reservations around innovation are typically based on four issues. Going beyond funding a small proof of concept is one. Once the trial is expanded, there is a second concern around associated costs in areas like infrastructure. Having the right experts with banking and technology expertise is a problem. Getting the whole organization to buy into the project is also a challenge.
Leonardo to the rescue?
One of SAP’s current answers to many of these client pains is Leonardo, a trove of digital technologies and services including artificial intelligence and blockchain-as-a-service. The few sector clients that are successfully using the new products so far have a clear strategy in mind. Tomic says:
From a technology standpoint, it can cover areas like financial processes, reporting and granular data processing with machine learning. From an organizational standpoint, these users look at things like how to reduce the manual work that a shared services department spends reading or typing in data from every document into the financial accounting systems. But the best adoption cases are where clients have devised a value chain of where to use Leonardo, and not just for an individual task.
According to Tomic, effective trials typically take between 6 to 12 weeks to generate meaningful results, but should not go beyond three months. So how is it possible to match such timescales with formal reviews and cautiousness often seen in banks? The answer comes in having a commitment to the project as well as an understanding of the desired end result.
We typically run sessions on innovation design thinking and agile approaches to achieve goals quickly at our own centers or on premise at the client. It’s important to execute that with experts on the ground from the partner side but customers also have to be dedicated to the project.
Dealing with legacy
Since SAP systems are pervasive across the financial services sector, institutions can often find a less complex way around technical difficulties often cited as a barrier to innovation. Tomic explains:
Leonardo is underpinned by our cloud platform, which means using APIs to connect to key systems, so having SAP [products already in place] is an advantage. The SAP cloud platforms is capable of communicating with other systems, including legacy, bespoke applications. The benefit for [existing] clients is that it is much easier to connect to all our APIs.
Since Leonardo is fueled by data, bringing information to a cloud environment – often on-premise, due to regulatory limitations – would be a first step to organizations looking to enhance their existing SAP portfolio with novel additions.
Once the data is on this cloud platform, then you can start doing all these fancy, nice things in terms of innovation. We bring the data into a private cloud environment then use the HANA in-memory computing capabilities to enrich it.
A fintech touch
SAP is well-versed in dealing with startups, having engaged, accelerated, invested or partnered with approximately 5,000 ventures since it began its startup projects in 2012.
Within these initiatives, the German firm grooms businesses developing technologies that could be integrated to its own offering or to individual client projects. Currently, the company is working with 850 startups across various industry sectors.
Some 250 ventures have commercial products available, of which 70 are relevant for banks and insurance companies while 40 are pure fintechs. According to Tomic, some 170 customer deals originated from that startup pool. He adds:
A bank might come to us and say, ‘Well, SAP, we want to not only see how we can innovate using Leonardo, we also want to see how you manage this with startups, so can you bring some to the table?’ We then run innovation workshops with these customers and usually this is where those startups engage with the plan.
As challenger firms come into the market, banks and insurance companies will start asking incumbents suppliers like SAP to accelerate innovation in some areas. According to Tomic, this will be mainly related to improving the customer experience.
A couple of things will hit clients in 2018: one is developing everything related to improving the customer journey, like removing process friction, adding biometric layers as an example and exploiting know your customer (KYC).
Additionally, anything to do with partnerships between companies and fintechs through open APIs will be a continued process, with more fintechs getting deeper in the social media space as another example. This is what the banks and insurance firms should be looking at.
For some long-standing financial services institutions, copying what sector newcomers are doing won’t work. Established firms could potentially emulate some of the new products and services, but the only realistic way to present a completely digital offering is by starting a new bank or insurer from scratch. Some companies are doing just that – launching a new digital brand while improving the portfolio of the parent institutions.
Improving existing portfolios is not easy, either. Data volumes are too high, there are many old systems to re-architect or update, required skills are hard to come by. This leaves limited options to decision makers: either running trials with smaller or new companies and postponing concerns around areas like integration, or bite the bullet with a trusted supplier.
SAP has a strong presence inside financial services, so regardless of how old and complex systems might be, SAP is offering a way to reduce the complexity and cost of integrating new features into the existing ecosystem. In addition, it is also cherry-picking startups that have proven their value for certain applications. This is something IBM is also doing.
I can’t help but wonder if limiting partnerships with large vendors is doing more of the same. There are upsides to eliminating technology complexities and in dealing with startups, but the basic idea is that users add products from the same company to the existing stack. What’s more, SAP’s track record for nurturing startups has not been stellar. Trust, as they say, is a two way street.
At the same time, user organizations will need to keep a close eye on how this smorgasbord of offerings stacks up from both a cost and benefit perspective.Running POCs is fine but sooner or later the time for playing around has to come to an end.
It won’t be an easy path to tread.
Image credit - SAP and public images
Disclosure - SAP is a premier partner at time of writing