ISG Provider Lens™ Digital Banking Services - Banking Governance, Risk and Compliance Services - U.K. 2022
U.K. banking is witnessing large-scale technology transformation
The banking industry in the U.K. and Europe is undergoing a major transformation, driven by several changes, including political factors, regulations and innovations. The emergence of FinTech solutions has resulted in the availability of new innovations to replace traditional banking mechanisms. The world witnessed the disruption caused by the COVID-19 pandemic, which then forced banks and institutions to innovate with digitally enabled solutions, thereby setting the stage for the large-scale transformations we see now.
Another factor that has led to the transformation of the banking landscape is the demand for new-age, digital-only capabilities such as the use of mobile devices for day-to-day banking in keeping with the preferences of the shifting demographics. In addition, non-banking technology players have caused disruption in this space.
The banking industry in the U.K. is heavily regulated, and we are seeing the impact of increasing new regulations imposed by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) across segments and functions of banking and financial services. The compliance requirements are setting the stage for large core modernisation and transformation projects.
In addition, the global call for net-zero emissions also requires banks and financial institutions to comply with these demands, driven by the Paris Agreement, and to the requirements set by regulators to address various environmental concerns.
We have observed that a significant number of transformation initiatives led by the providers included in our study are driven by the requirements identified above. We have identified the key factors that are driving the transformation in the U.K.
Market driven, competition-related factors in the U.K.
Customer driven changes and capabilities:
Traditional forms of banking are now being revamped across the U.K. and Europe due to rapid digitalisation and the focus on enabling digital-only solutions. The goals are to perform end-to-end banking capabilities, replace legacy processes, and integrate new technologies and capabilities to enhance end user experience.
FinTech solutions and new entrants in the industry:
There are several new FinTech solutions in banking and financial services, effectively replacing what traditional banks would do, including offering retail banking capabilities, loans, embedded finance solutions and securities trading. These new solutions are highly innovative and efficient, thereby creating the need for banks in the U.K. to also integrate such capabilities.
1. Cloud-enabled, open-banking environment:
Due to several market-driven innovations and technology changes, banks in the U.K. are expected to revamp their legacy core banking infrastructures with the latest technologies, such as cloud-enabled platforms and architectures, to address the evolving market requirements. Open banking, therefore, is becoming a critical requirement for banks, because it allows the integration of APIs and nextgeneration solutions and capabilities from third parties.
2. Next-generation platforms:
Using the cloud and similar technologies enables banks to have more flexibility as it reduces overall maintenance costs and strengthens banks’ capabilities to modernise processes by way of automation, thereby increasing ROI and adding value for all stakeholders due to the significantly reduced operating costs.
3. New, alternative currencies and assets:
Cryptocurrencies, non-fungible tokens and tokenization are now considered as new forms of digital assets and alternative currencies, which are slowly being integrated into mainstream finance landscape and being accepted as mediums of value. We also witnessing projects being led by the central banks to issue digital currencies.
Below are the key regulatory and compliance-driven factors in the U.K. that are driving banking transformation
1. Basel 3.1 and capital frameworks:
Banks in the U.K. need to plan for their readiness to implement requirements to comply with Basel 3.1 and its impact on capital frameworks and risk-weighted assets (RWA), leading to transformation initiatives.
2. PSD2
Banks and institutions need to comply with the requirements of the PSD2 directive, which sets out rules for banks for customer security and integration of APIs via open banking frameworks.
3. Operational resiliency:
Banks and financial institutions in the U.K. need to comply with requirements for operational resilience and operating model design. Based on regulations set by the FCA and PRA, banks are required respond to critical and major operational disruption, which requires them to restructure their legacy technology infrastructures.
4. Third-party risk management:
Open banking architecture and the integration of various applications create dependencies on the overall delivery capabilities of an institution, thereby creating the need for risk management capabilities.
5. Climate risk and net zero transition:
Banks and financial institutions are key facilitators of the transition to net-zero emissions, requiring a change in their existing assets and liabilities, products and offerings for green energy financing. This requires a significant revamp of their portfolios and the development of new capabilities in the context of their operating models, scenario analysis, modelling, performance management, risk management and regulatory requirements.
6. Financial crime, fraud and AML:
Financial crime, fraud, and anti-money laundering (AML) initiatives continue to be high focus areas, with increasing requirements on developing capabilities and technologies to monitor, detect and report financial crime, along with AML, and know your customer (KYC) requirements. These requirements address increasing digitalisation and the use of remote and mobile-phonebased authentication technologies. The changing geopolitical landscape also introduces additional compliance requirements related to increasing sanctions.
7. Cybersecurity and technology risk:
This continues to be another high focus area among regulators in the U.K. due to transformative changes in legacy banking architecture and platforms, leading to the adoption of more data-led services and new architectures, while integrating new open banking based platforms.
8. Increasing regulatory perimeter:
Regulators in the U.K. and Europe are now seeing the need to expand the scope of their supervisory role and governance in keeping with the changing financial services landscape and the emergence of FinTech and embedded finance solutions, including the introduction of new forms of digital assets such as crypto and tokenization. Additionally, the various open banking platforms and embedded finance solutions require banks to invest in capabilities to meet the increasing regulatory demands.
9. Cross-functional digitalisation:
Some of the key market and regulatory drivers identified above, therefore, require banks and financial institutions to transform their legacy core banking platforms and invest in transformation projects, using latest capabilities and technologies. These changes lead to cross-functional digitalisation across business processes, functions and product lines.
This ISG study focuses on the capabilities of service providers under four quadrants. Core Modernization and Integration Services:
Core Modernization and Integration Services:
There is an increasing need in the U.K. to transform legacy core banking platforms and transition to cloud-based platforms, enabling flexibility and transformation of processes to meet the new marketand regulatory requirements in the banking industry.
Technology Transformation Services for Digital Banking:
To meet the changes in the banking industry, there is an increase in adoption and integration of various forms of technology such as AI, machine learning, blockchain, robotic process automation (RPA), natural language processing (NLP), intelligent automation and analytics to automate business processes and increase efficiency. These technologies enable banks to deliver value-added solutions and functionalities to both internal stakeholders and clients.
Banking Governance, Risk and Compliance Services:
Increasing regulatory demands set by U.K. and European regulators are driving the need to invest in large-scale modernisation and cross-functional transformation initiatives to meet compliance and regulatory requirements, arising from both market-driven changes and the expanding regulatory perimeter.
Payment and Card Processing Services:
The payments segment of the industry is undergoing major disruptions due to the expansion of the landscape to include non-banking payment operators, FinTech solutions and new embedded finance innovations. Also, regulations such as the PSD2 require compliance from banks and financial institutions in Europe.
Access to the full report requires a subscription to ISG Research. Please contact us for subscription inquiries.