Digitalization In The Financial Services Industry

In a trend study, Luenendonk partner Mario Zillmann writes, “Banks and insurance companies are increasingly receiving backing from the regulatory authorities for the implementation of their digital transformation strategies. The regulatory hurdles for cloud use or outsourcing business and IT processes to the cloud have not become smaller, but rather more extensive. However, legislators have recognized that digitization, and with it cloud transformation, is an elementary competitive factor of the banking and insurance sector that absolutely must be provided.” At first glance, this not only results in a lot of work for those involved, but probably high revenues for providers. The move SAP has made concerning its financial services thus seems logical.

Outsourcing financial services

SAP and investment company Dediq announced in April 2021 that they have agreed to enter into a partnership in the area of financial services. The two companies will jointly expand SAP’s financial services portfolio and invest in new industry-specific solutions to better support the banking and insurance industry, which is currently undergoing rapid change. These solutions will be based on SAP software and will be integrated into SAP’s portfolio and product roadmap. Subject to regulatory approval, SAP and Dediq will jointly establish a Financial Services Industry (FSI) company in which both companies will have a stake.

This is not SAP’s first attempt to score in the banking and insurance business with its own software. With the best accounting program in the world, SAP has been an IT supplier to the vast majority of banks since R/3. However, SAP has almost always failed to provide bank-specific software. Smaller acquisitions in the past 20 years have never shown sustainable success. Even IBM has often failed to replace the large legacy systems at banks and insurance companies. Financial institutions were already relying heavily on information technology when the term standard enterprise software had not yet been established, meaning the vast majority of banks had developed their own software on IBM mainframes.

Digital transformation remains challenging

“Technologies and platforms are changing the financial services business,” writes Mario Zillman in the Luenendonk trend study “Cloud Transformation. Strategies and measures of banks and insurance companies on the way to the cloud”. Almost two-thirds of banks and insurance companies see the rapid speed of innovation and technology as a challenge. They often lack agility and flexibility when developing digital products and new offerings due to historically grown structures and processes. Around 70 percent of companies see the lack of digital experts as equally problematic. In addition to these internal factors, the trend toward platform-based business models is one of the most important hurdles in the coming years. Every second bank and insurance company surveyed agreed with this statement.

At the same time, 53 percent of the study participants are pursuing very specific considerations to participate in platforms and become part of ecosystems. Another 23 percent are currently evaluating possible approaches. “The majority of banks and insurance companies want to become platform providers, not product providers, and thus continue to occupy the customer interface. However, only a few market players will succeed in this in the long term,” reports Mario Zillmann, author of the study and partner at Luenendonk & Hossenfelder.

Not only are companies investing in building new digital platforms, but the development of omnichannel-enabled products and services and IT modernization are also key investment priorities. Almost 90 percent of banks and insurance companies will therefore increase their digitization budget in 2021 and 2022. One in three companies will even increase its budget by more than 10 percent. This means that the budget is increasing even more strongly than in the last three years. In addition, the majority of financial service providers are looking at cross-company, digital platform ecosystems. Digitization budgets are therefore being increased. These are the findings of the Luenendonk study “Digital Outlook 2025: Financial Services.”

This Luenendonk study also states, “Most of the banks surveyed are initially pushing ahead with their technological transformation of the IT landscape to an API-based IT platform in the coming years, which is an important prerequisite for digital business models. 63 percent of banks therefore intend to invest in IT transformation over the next few years. At the same time, investment plans focus primarily on improving the customer experience along customer touchpoints, proprietary and not necessarily platform-based digital business models, and process optimization with the help of digitization.”

The recent SAP partnership with Dediq represents another milestone in the implementation of such a strategy. The new solutions are designed to cover all processes in the banking and insurance business and help companies comply with regulatory requirements. They will be based on integrated data with uniform data models and offer the possibility of moving processes relating to financial services to the SAP Business Technology Platform in the cloud.

Meeting customer requirements

Despite highly dynamic change in the financial services market, two-thirds of Luenendonk survey participants perceive the threat to their company from financial services providers with completely digital offerings as low or non-existent, according to the study “Digital Outlook 2025: Financial Services Strategies of Banks and Insurance Companies for Their Path to a Digital Future.” Only six percent of the executives surveyed from the banking sector see a “very great threat” from disruptive offerings, whereas as many as one-third of the insurance executives surveyed (banks: 26 percent) see some threat.

The assessments of the majority lead to the conclusion that their companies see themselves as sufficiently well positioned for the necessary adaptation and change measures brought about by digitization to meet their customers’ requirements for innovative products, customer experience, and digital business models in the future and to become part of the digital platform economy. Zillmann concludes: “An important building block for the future strategies of banks and insurance companies are digital technologies such as cloud computing, data analytics, and intelligent automation with the help of artificial intelligence and robotic process automation (RPA). However, changing the corporate culture towards more agility and innovation is important as well. So, there is much to be done.”