Avenga’s response to the war on Ukraine: Business Continuity and Humanitarian Aid
Director of Avenga Labs
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Most of us already enjoy proximity payments, Apple / Google Pay, and the integration of online stores with digital experiences, and now signing electronic documents using bank account authentication is becoming routine as well as sending money to a contact knowing just the phone number of the person.
Leaving the house without a credit card has become the norm in many European countries, with the phone at the epicenter of any digital financial experience. Banking and insurance applications enable us to do everything we need on our phones, without resorting to using desktop browsers.
Of course, there are financial institutions or entire societies lagging behind, but from the trends perspective, the digital revolution in finance 1.0 is certainly doable and has been completed in many places.
Learn more on how Digital Insurance: Opportunities and Challenges are reshaping the market these days.
Sometimes it’s hard to even imagine what else we can want from our banks or insurance companies. It seems the revolutions have become evolutions and there’s not too much left to innovate and further improve our digital experiences.
One of my favorite mottos says that “when you think you’re done, you’ve just begun”. And fortunately, it appears the entire financial sector is following this idea and is actively pursuing new opportunities using digital technologies.
The first wave was about the automation and digitalization of existing processes. Banking moved from physical banks to mobile banking. There are still companies struggling with their digital experiences, but as a trend, this is now a commodity and something that all of us expect from the banks.
Digitalization has become deeper than just the front-end for the clients, providing only a limited set of operations, such as checking an account balance or sending money to a predefined recipient’s account. Now mobile experiences are complete, end to end, with access to a wide range of products and services.
Still, this was only the first wave.
The second wave, 2.0, is about building entirely new experiences, new products and new services which were not present before the digital revolution. This part is much more experimental and it’s no longer just about automating existing processes and providing digital channels to access traditional services.
This means taking a lot of risks into account and trying new things, of which most will fail. This is usually done by the entire universe of startups, and the fintech and insurtech companies collaborating with traditional banks and insurers. The latter are more limited.
Unfortunately in the EU, there’s a regulation for the financial sector that requires an exit policy, which means being able to go back, from the cloud to on premises infrastructures. This is one of the key reasons why companies cannot fully transform to the cloud, but are limited by the lowest common denominators, such as cloud-native architectures for hybrid clouds. Technologies, such as serverless and machine learning in the cloud, are used much more often in less regulated industries.
Sometimes companies, especially insurance companies, are perceived as being far behind the curve, because they have to support their legacy systems with policies and products that are tens of years old (life insurances for instance) and they are not easy to migrate.
Regulations set the roof for what is possible, however they are expected to be relaxed some in the future. But additionally, because exit strategies are becoming more and more unrealistic, as well as the paperwork, than real options. Companies are so used to working in the cloud that almost nobody imagines going back to on-prem, no matter what the regulations are saying.
It’s … back, kind of.
The physical presence of banks and insurers, which seemed obsolete, is now acceptable in the foreseeable future as an efficient means of handling the limited and complex types of cases requiring personal visits. Many of them can and are replaced by video calls and chatbots, but the industry accepts the fact that not everything will be handled by applications. The goal is to minimize the number of these situations and cases.
I live in a highly digitalized country, Poland, and I don’t remember if I’ve paid in cash or used a credit card for anything in the last year or more. It’s so rare nowadays. But, what does it look like outside the market leaders?
Since 2020, we’ve seen a 5% drop in the global usage of cash worldwide, which is four-time quicker than the natural rate of cash dropping out of use.
There is still a long way to go, but the path is getting shorter and faster than anticipated.
Mobile payments are bigger than ever and they are accelerating more rapidly than ever.
What really is new in 2.0 is the focus on mobile payments. Its acceptance is thanks to simplified mobile applications and using smartphones as terminals. So, now it will be much easier to accept a payment (small store for example) without using dedicated devices.
Software for insurers seems like an old story, as every company has at least a dozen core systems. Yet, the topic is back again. What was possible to do with a modern front-end was too limited by the old back-end, so now there is a massive flow of upgrades to the core systems. It seems counter-intuitive, but it’s also a symptom of the 2.0 revolution reaching the depths of the legacy core systems, and no stone is left unturned any longer.
When we think about (already) traditional digitalization, we mainly think about direct online and mobile channels. I have to inform you that this is so … 1.0.
In 2.0, the focus is on building great experiences for the network of partners, which includes API products and strategies that are augmented with great UX.
Bill payments inside banking apps that are auto-filled, without copying and pasting data from invoices, is quickly becoming the norm. This is an example of the 2.0 experience that was built as a collaborative API effort among multiple partners, benefiting all of them.
Invoice gateways between issuers of invoices and then payments inside banking apps are another example, while paying taxes automatically is yet another example and is due to integration with digital tax offices.
Here comes an interesting piece for those willing to explore What’s Beyond Digital for the Insurers?
All this means a new value stream for customers and business partners.
Starting in 2022, driving style and safety will be the priority while being supported by modern technology and regulations. This is also a great opportunity for more personalized insurance products and risk models.
Smart homes (insurance) help to reduce damages (break-in, water, fire, etc.) with the early detection of problems along with an automatic call for help.
Another key application is biometrics being used on devices (primarily smartphones and tablets) which use modern AI technologies. Users/customers are open to using biometrics instead of passwords even though it risks a little bit their privacy and security because convenience is more important to them.
The automation of repetitive payments by detecting patterns is gaining popularity.
Different client behaviors, as well as different product parameters and offerings are on the rise.
Multi Labelling of the data by different teams, instead of creating separate models, enables faster model reusability in different scenarios, as well as better scoring models, because of the combined knowledge of the different teams and data sources.
Explainability is now built into the algorithms and is not an unusual requirement. Not only do clients want to know why the given decision was made (credit score, risk assessment, etc.), but they want to understand the explanation.
Banking and insurance sectors should combine the data of their customers in order to build better products, yet there are still technological and mental barriers in doing so.
Lots of talk about the bridge between banks and insurance will eventually lead to more collaborative API and data ecosystems. New technologies, such as federated analytics and learning, will make it easier to process data without accessing it.
Blockchain is not so hot anymore and the interest has waned, so what is it useful for in the financial sector nowadays?
It’s currently being promoted as something that can speed up paper document digitization and as a guarantee of the consistency of archives.
Regulation of cryptocurrencies issued by banks is now a hot topic as well.
So many IPOs and so many investments, mergers and acquisitions, along with so much money being spent are fascinating business facts.
FinTech and InsurTech investments in Europe are hot again after a period of some disappointment. The countries investing the most were the UK, France, Sweden and Germany.
Even blockchain and cryptocurrencies, which were in a decline, are back again, and investors are interested in these technologies.
The bubble may have been created by investors; it’s probable. But, what is happening is much more healthy from the business perspective, because it’s all about delivering better experiences, and retaining customers and business partners.
The market and ecosystem of providers are totally saturated nowadays.
What does not work in startups is the distribution of products for individual services using digital channels. This was the key element of the 1.0 digitization, but now it is so saturated that it’s almost impossible to enter. Selling insurance online is not really profitable and it’s doom to fail as well.
Everybody has it, it’s so obvious, and it’s almost an old-story.
Many innovators have moved from traditional banks and insurance companies to fintechs and insurtechs.
The talent gap in these industries is not looking as attractive as big tech and startups, and the gap is growing every day.
The remote work explosion, caused by the pandemic, enabled direct access to specialists which made the prices spike, because this way of working reduced the traditional geographical differences related to the cost of living in different countries. Costs of IT labor were not averaged, by any chance, but significantly increased. The problem of keeping remote workers loyal to the company is a new challenge without a satisfactory solution in sight.
Yet, there are still financial enterprises forcing developers, devops, and testers to work physically back in their offices, losing up to 80% of their workforce as a result and giving away their best people to their competitors. It was a painful wake up call that softened even the most hardened and strict companies.
This seems to be the main threat to the speed of digitalization and the fight for the best people on the market.
Old organizations have been focused on saving costs and optimizing existing processes mostly, or even only.
New organizations in 2.0 are focused on creating new values, new products, and new experiences for their customers and business partners. This is much more difficult and demands an entirely different mindset. And, it’s still easier to replace people than change their mindset so they are more open, risk-taking, and innovative. What was working in a pre-digital era does not work anymore.
It’s not uncommon to see CIOs or CTOs taking the role of COOs or even CEOs in order to move on from the traditional thinking of business with software dividing lines, because such a gap is a mentality problem which is slowing down the transformation.
The European PSD directive was focused on payments, but not limited to them, for instance, it also enabled data exchange from one bank to another.
Digital payments are everywhere and have replaced many other forms, almost entirely. So, this part of PSD’s motivation for change is definitely working.
But, what about other goals?
Linking a bank to another bank is still very rare, so it hasn’t changed that much, even though it has been a long time since it was regulated and then later requires this functionality as an option.
Premium API (EU) is another regulation that may or may not be met with resistance.
Open banking will be standardized like credit card payments, including premium services.
New EIDAS for simplified customer identification of digital identity issuers are going to be another obligation and not an option.
In 2022, crypto assets are expected to be regulated in the EU.
All these regulations mean a lot of work and a major shift in the IT and business ecosystems.
As always, there will be early adopters as well as laggards who will try to stall things as long as possible and even risk paying penalties.
The battle for better interfaces in digital finance offerings was typical for the 1.0 phase of the transformation. Of course as always, they will continue to improve, but they’ve reached a plateau.
The mobile experiences of different banks are not so different from the customers’ perspective. In a longer perspective, electronic banking is a commodity and not an element of a competitive advantage.
The only significant difference one can make now is to fail to keep up with the competition while delivering inferior digital experiences, because others might have already moved on to another phase.
Fintechs are valued more than banks and insurtechs are valued more than many insurers.
So, if you thought (and I don’t blame you) about the financial sector being done with digital transformation, you could not be further from the truth. It was just 1.0.
They are mainstream, not startups, but new regular players. They are cooperating with other *techs and traditional banks and insurers.
So, are the banks and insurers doomed to fail?
It depends on their leadership, as the most successful insurers and banks are now looking more like insurtechs and fintechs than the old versions of themselves.
Banks and insurers are also becoming more like a financial infrastructure with new types of services and enablers for new businesses, such as embedded banking and insurance.
Banks and insurers can slow down this trend (and they really do), but cannot stop it.
Regulations were and are faster and more ahead of the times than the actual readiness of the banks and insurers to implement them. It sounds counterintuitive at first, but many CEOs and CTOs admit it openly (from time to time, though).
These key factors are decisive in the 2.0 era:
Again, this means that a lot of work has to be done in the financial sector so as to keep up with the other huge digitalization waves, and in the 2.0 era it is moving faster and getting more bumpy than in the 1.0 era.