Here’s How Financial Institutions can Stay Agile and Innovative in 2022
September 1, 2022
Innovation is the key to growth. In the right doses and with the right timing it can be incredibly powerful and profitable in competitive markets. There is no question that innovation comes with its own set of challenges and risks, which is why innovation is a critical component for successful long term risk management strategies.
Financial institutions have to overcome many technical roadblocks that can impede their innovation goals, especially as they navigate the compliance landscape. Whichever route they choose, the end result must be secure, responsive, and accurate.
A lot of clients often feel as if financial institutions can only pick one or two of the aforementioned three attributes. Software can be accurate and secure, but responsiveness lags. However, with the right risk management tools, financial institutions can have it all.
The Challenge of Innovation
Financial institutions are constantly trying to leverage the latest and greatest technology, aiming to make their customer and user experiences easier and more efficient. From digital identity solutions, biometrics and decisioning tools to name a few, there are simply too many tools to evaluate in the market . To make matters even more challenging, there are new innovative fintech solutions coming out almost every month.
So how are financial institutions able to innovate quickly and thoughtfully with a bounty of choices and outcomes to consider?
No institution is going to shift from one technology solution to the next and completely change their processes every time. Organizations need to have designed a flexible enough system design so that when new technologies are released into the market, they can easily leverage that new technology without having to rebuild large portions of their technology stack. Inflexibility is the antithesis of being able to innovate and keep up with technological change.
Institutions are faced with an even bigger challenge when trying to innovate around background, or supporting processes. Often these underlying processes do not change fundamentally, either because they are designed for specific reasons, such as regulation, or the change management process around the policies themselves is very bureaucratic within the organization. What does often change are the tools that are being used to facilitate or manage that process. Adapting to those changes leads to more change management, which in itself may be manageable, but left unchecked over several innovative cycles can leave users overwhelmed and frustrated, having to constantly re-learn a new process.
Deciding what is useful can also be a challenge. After all, there are a lot of buzzwords being used—AI, machine learning, neural networks. These terms sound great and intriguing, but what specifically can they deliver to financial institutions? There are certainly ways that AI and machine learning can benefit financial institutions, but every organization has to ask itself two important questions: why should they implement these services and how they will be implemented. Institutions that cannot answer these basic questions will find themselves with very expensive and lengthy implementation projects that ultimately do not deliver on their desired business outcomes.
By leveraging low-code workflow and process automation platforms, such as Pega, organizations can ‘plug and play’ and see which tools within a system can work for their process. After a short period of time, an organization might feel that that a new software solution is not delivering the value they anticipated. At that point, if they are using a platform, removing or replacing the tool (and even testing out a different one) is much easier than working within a system that requires traditional programming. Organizations don’t need to rewrite part of a business process to accommodate a new technology, rather the technology supports the process and can be as flexible as needed over a longer periods.
Aside from technology, factors such as competition and regulatory restrictions can create friction to the innovation process. Organizations can reframe these challenges in a transformative way by enabling change through software.
As financial institutions change and grow, they need to have the flexibility to integrate future innovations. After all, a financial institution cannot just start from scratch every time they switch systems or undergo a major upgrade. Financial institutions need to have foundational infrastructure through which they can plug and play specific end-point technologies. This flexibility is paramount in order to encourage innovation while enabling employees to be the most productive.
The Innovation Investment
Innovation is often expensive and adopting new systems can be risky. There is no guarantee that the developers of some of these software solutions will be around forever. This uncertainty can be paralyzing and prevent organizations from adopting change. On the other hand, some of the most innovative solutions are coming from the newest entrants to the market. Innovation for innovation’s sake does not help customers and can cause confusion and headaches. Adopting tools that do not integrate well into an existing process can create technical debt as teams work to fix problems, not to mention the upfront and possible recurring costs of services.
Finally, there is a risk with innovation focused around specific solutions, as opposed to business outcomes. New technologies might do a very good job at generating interesting data points, but this data may not ultimately translate to an improved bottom line. In a silo, data does not always provide value. Value is created when data is layered with the skilled interpretation of that data and the knowledge to understand how to process it. The result is actionable intelligence. Many of the fintech solutions available today provide a wealth of information, but until institutions can harness that data, they will be inundated with information that is not driving to their business outcomes. Especially in a regulated arena such as financial services, not understanding information can create new risks, as receiving alerts and warnings, but not understanding them, can lead to liability.
Despite some of these risks, innovation is still worth the investment and there many existential risks to not innovating. No one can stop progress, and the danger of not innovating is to become redundant and ultimately relegated to history.
New technologies and innovations also present important new features that can greatly improve the quality of service for financial institutions. Not innovating means that competitors can adopt these solutions and services first and gain a competitive edge in an industry that is already extremely competitive. While there is risk in being a early-adopter, there is always a risk, potentially an even greater one, of being left behind.
The Right Way to Innovate
Clearly, there are different paths to innovation, but innovating in the wrong direction can cause operational stress and financial pain. So what do organizations look for as they innovate? How does the innovation process make organizations better?
First, it is critical that institutions have the capability to leverage, in an efficient manner, many different technologies if they want to truly improve business processes. Organizations want to make sure that whatever they implement integrates with an existing system or framework; otherwise, they are going to struggle with compatibility issues and adoption.
The other reason organizations want flexibility is to reduce dependencies on any one external provider. While most of the focus in an innovation context is on adding services and features, removing some of those services can also be a costly endeavor. To reap the benefits of innovation in the short and long term, institutions should seek to “future-proof”, by creating a system with the capability to both accept new solutions and remove those same solutions as required.
Finding the Balance
Innovation ultimately needs to benefit the customer experience, and the latest innovations for financial institutions bring powerful options for customers.
Of course, innovation carries its own risk, but just like every risk, there is a downside and an upside. Finding the right innovation that clicks with your business is a risk that you should be pursuing, not avoiding.
If you’re interested in learning more about staying on top of the latest innovations in the FInanical Services landscape, check out our on-demand webinar, “How FinTech is Evolving in 2022 and Beyond”. We dive deeper into the topics discussed in this blog post and discuss how organizations can make smart investments that will provide a “future-proof” system.