Interview with Sanat Rao, CEO of Infosys Finacle

• How has the pandemic encouraged financial institutions to innovate and what does this mean for the future of banking?

The pandemic has brought in a sense of urgency to digital transformation. As per the 2021 Infosys Finacle & Efma annual research on ‘Innovation in Retail Banking’, 6 in 10 financial institutions said that the pandemic had made them somewhat, or substantially, more successful at innovation; only 14 percent felt it had compromised their performance. 

That said, banks are still moving at a glacial pace. This is corroborated by the findings of the report where only 14 percent of respondents feel their organization’s digital transformation is at scale, and is delivering as expected. 

We strongly believe that banks can scale innovation in the coming years by focusing on five key themes:

1. Maximizing digital customer engagements to drive growth
2. Digitizing and automating ubiquitously to cut costs
3. Innovating continuously, to create new value and to stay competitive
4. Leveraging the power of new technologies like cloud, API and AI to unlock new possibilities
5. Leverage talented teams and purpose-driven culture to unlock true potential

• What are the key areas that banks feel they need to improve in 2022 and beyond to ensure innovation continues in a way that makes them more competitive and compelling for customers?

Banks are looking at multiple areas for future innovation to gain competitive advantage, such as improvement in digital delivery, lending services, payments and cards etc. However, channel delivery innovation has been identified as the most important innovation area. We believe that banks must scale investments in digital delivery innovation in 2022 and beyond to keep pace with digital banking transactions that are shifting from bank-owned channels to third-party channels as open banking and embedded finance take hold. Given that the pandemic created challenges to banking through physical channels, banks have had to accelerate digitization of channel delivery across the customer engagement lifecycle – from onboarding and servicing through engagement and up-selling/ cross-selling. In fact, the Finacle-Efma ‘Innovation in Retail Banking’ report 2021 found that over 84 percent respondents had increased investment in digital delivery with 44 percent bankers indicating that they have increased investments by more than 10 percent. 

• How can financial institutions ensure they build a healthy innovative culture? 

As banks are in a state of continual transformation, the importance of embracing innovation is not merely an initiative, but a part of the overarching culture within the organization. This approach rests on the foundation of five building blocks – 

1. Making Innovation an organization-wide initiative, where employees can think independently and explore innovative ways to solve problems. 
2. Embracing modern technologies such as Cloud computing, AI, RPA, Blockchain etc. as the foundation for digital transformation. 
3. Distributing data and insights via advanced analytics to anticipate customer behaviour and requirements and use these insights to push contextual, personalized offers at scale.
4. Cultivating external relationships and acknowledge the role of the ecosystem, or third-party channels. 
5. Filling in talent gaps by mapping competencies across functions to identify skill gaps, and bridging those gaps with the help of an agile workforce 

• How important is it for banks to deliver alternative digital transformation strategies e.g. offering customer experience through mobile channels or utilizing AI and advanced analytics? 

We have noticed in this year’s Finacle-Efma ‘Innovation in Retail Banking’ report that banks attribute very high importance to the below digital transformation strategies as having the biggest impact on banking over the next 3-5 years.

• Improving mobile customer experience (90%)
• AI and advanced analytics (86%))
• Workforce skills (76%)
• Open banking APIs (65%) 
• Cloud computing (58%)

 The respondents have also identified automation to back-office processes, IoT based solutions, blockchain technologies as important strategies to scale digital transformation. However, they feature lower on the prioritization scale as compared to the top five strategies. 

• How far along are banks in their digital transformation journeys?

An encouraging finding in the Finacle-Efma ‘Innovation in Retail Banking’ report this year is that 14 percent – up from 7 percent – of bankers feel their organization’s digital transformation has scaled, and is delivering, as expected. Having said that, the remaining 86 percent are at different stages, with the highest being 43 percent, confirming that the digital transformation is partially deployed at most banks.

Many organizations lack success in digital transformation strategies to meet key objectives. Banks have achieved the lowest levels of success in areas such as skillset transformation, committing time and money to strategies, legacy technology and more, many of which are cardinal to digital transformation success. 

• What are the key challenges or threats for the future of banking over the next 5 years?

With the gap between digital leaders and laggards widening rapidly, incumbent banks and credit unions are facing the treat of being consolidated sooner, rather than later. Over 19 percent of respondents said that by 2025, at least 25 percent of financial institutions would be consolidated. 38 percent of respondents further stated that the number of bank branches will be reduced by over 25% from the current levels by 2025. The increasingly intense competitive landscape is believed to be one of the key reasons to drive the consolidation. The rapid adoption of modern technologies, an innovation culture and mindset, accelerated digital transformation cannot be emphasized enough. 

• And what are the key opportunities for the future of banking over the next 5 years? 

Digital technologies present significant opportunities for banks. They have the ability to radically alter the cost structures of banks. The cost-to-income ratio of the top 1,000 banks in the world is around 50%, higher than the 33% of digitally progressive banks, or the even lower costs of digital-only players. Artificial Intelligence technologies like Robotic Process Automation, Cognitive Automation and APIs help in automating labour-intensive processes. Leveraging big-data, advanced analytics, and open banking banks will be able to significantly enhance customer experience. 

There are early signs of pick-up in business model innovation, helping banks keep pace with change in order to remain relevant. New innovative digital models are going from strength to strength. These include – Digital-only Banking, Banking as a Service, Embedded Finance, Digital Financial Advisors, Finance Marketplaces, Financial Institutions led Non-finance Marketplaces, Banking Industry Utilities, and Banking Curators. There are significant opportunities that can be unlocked across all these business models to create, deliver, and realize value in new ways. 

• How can traditional banking providers take advice from fintech firms in their digital transformation journeys? 

Fintech firms today are leading innovation in several products and services. They have scored highest in the battle for lending services, digital delivery, small business banking, investment services and payments. They have adopted modern technology, embraced an innovation mindset and leverage their access to data and analytics to offer faster, cheaper and better products. In fact, in several cases in the report, banks have rated themselves below fintech firms when it came to innovation in the next five years. 

Banks need to come out of their position where, despite adopting digitization, they have held fast to their traditional products and services approach. Similar to the fintech firms, they need to embrace a customer-need angle. To be able to address the customers’ and business’ needs, and deploy digital solutions at speed and scale, and better than before, banks need to collaborate with fintech firms.

• What are the most surprising and/or transformative predictions made by those in the banking sector?

With the unprecedented investments in modern technologies, new-age digital firms unbundling financial services and delivering highly personalized products with speed and simplicity, pipeline-style universal bank is slowly making way for the open platform. 

Four in ten respondents in the Finacle-Efma survey believed that consolidation of incumbent banks and service firms will reduce the number of institutions by more than 25% by 2025 (that’s just four years from now!). Another 52% believed that it will happen by 2030. About 85% bankers believed that bank branches will reduce in numbers by over 25% from the current levels by 2030. Almost three-quarters of respondents believed that at least two or more fintech or big tech firms will become the top ten financial services providers by 2030. 

While a vast majority of banks believed cloud computing will become mainstream, and it is not surprising, very few banks (9 percent) believed that blockchain and DLT would be used by 75 percent of banks by 2025. On the other hand, over one-third executives believed IoT solutions will drive more than 20 percent of the transactions by 2025. 

78 percent of banks surveyed believe that more than 50 percent of payment transactions would be initiated through non-bank channels by 2030. Also, over 73 percent banks have stated that digital transformation would lead to reduction of the current cost-to-income ratios at incumbent financials exceeding by 20 percent.  

These projections underscore the fact that only the financial institutions who adopt a challenger-mindset, digitize meaningfully at scale, support an innovation culture and leverage modern technologies will be better prepared for the ongoing disruption and be future-ready.