Financial resilience faces its moment of truth

By Chris Davis, Partner and Banking Expert, Kyndryl

As of April this year, financial institutions in the UK will have complied with a new FCA policy by submitting documentation which identifies critical services and articulates strategies to mitigate the impact of disruption to them. Designed to bolster resilience in the finance market, the policy means that in-scope firms must now document which services could cause significant harm to clients or put the stability of the broader financial system at risk.

The FCA’s intervention in this area reflects a fundamental truth that digitalisation has made banking a thoroughly IT-centric business. This is not simply to say that processes which were once manual now run on computers; it is that IT has constitutionally altered what finance can do and how it can do it. Among a flourishing of diverse new infrastructure and services, one commonality is a theme of connected, fluid, borderless data.

By breaking down silos and opening up lines of communication between firms, banks can offer customers a more cohesive approach to the diverse parts of their financial lives. This is a significant improvement to the customer experience: a model which more closely matches how they work with and think about their money.

In the process, however, we have also established the conditions for failures which can resonate and cascade much more dramatically than ever before. One reading of the recent history of financial crises could, in fact, be to cite digital speed as a causative underlying factor.

Hence, the FCA’s regulatory stance on resilience is no mere checkbox exercise. Rather, it is a recognition of the progress digitalisation in the sector has made from being theoretical to becoming existential.

Resilience and evolution

Indeed, the recent deadline for firms to have mapped and tested critical services is by no means the end of the road for this policy. In three years’ time – but ‘as soon as possible’ – they will also need to have embedded their resilience plans across operations and evidenced that they are able to operate consistently within risk tolerances.

Moving from principle to execution will be a major process of activation, troubleshooting, and cultural transformation which could easily generate unpredictable challenges. It will not be enough to know how to respond to disruption; staff need to be taking those steps as a matter of routine, resilience infrastructure will need to be constantly tested, and new skills will need to be put in place.

All of this, of course, needs to take place through a period when financial services is continuing to evolve rapidly. As banks work to both compete with innovations amongst their competitors and ameliorate the impact of the technical debt which has built up in core systems which have often been running for decades, technology leaders will be asked to balance some apparently contradictory demands for both change and certainty.

It’s a challenge that could feel a little like servicing an engine while the car is motion – but, with the right perspective, I believe that the work required to meet new expectations for resilience can also be complementary to the increasingly customer-centric view that modern financial services technology enables.

Investing in experience

One key thing that we can learn from resilience preparedness and apply to a deeper understanding of customer needs is that not every financial services system is equally critical. When I speak to firms and begin trying to assess where non-negotiable technology and processes sit within the business, I often find a sense that every system is vital.

That might not be untrue – but it’s an unsubtle understanding of necessity. Settling payments through CHAPS, for instance, is a vital process, but the non-negotiable requirement is that it happens at some point before a daily deadline. It’s only when that fails that customers might start to notice, whereas a significant outage in ATM systems is liable to hit the headlines within hours.

We can apply this kind of discernment across the customer lifecycle – it’s something I think of as the customer’s moments of truth. There might only be, for instance, a few points in someone’s life when they need a mortgage agreement to be finalised, but when all of their possessions are loaded into a van on moving day those points could not be more significant for their attitude to the bank.

As firms enter the process of making sure that resilience is not just theoretically possible, but demonstrably in place, they will also be gaining a granular understanding of potential hurdles, chokepoints, and vulnerabilities that has not historically been available to them. Work invested now to articulate how technology budgets contribute to resilience, how the executive team can better understand their technology stack, and how skills can be raised to anticipate future demand will also put financial services in a much stronger position to meet the more demanding customer expectations of the future.