Executive Summary: ISG Provider Lens™ Digital Banking Services - U.S. 2022
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ISG Provider Lens™ Digital Banking Services - Payments and Card Processing Services - U.S. 2022
The U.S. banking sector undergoes transformation across domains.
The banking industry has been experiencing major shifts globally, driven by emerging technologies, innovations triggered by the COVID-19-induced movement restrictions, changes in consumers’ preferences and behaviors, and the increasing regulations in the industry. The adoption of the net-zero approach and emerging enterprise-level risk management and compliance requirements are also driving banks to change their strategies and businessoperating models.
Key factors driving transformative changes in the banking industry in the U.S. :
Market driven - factors
New entrants in the industry: Banks are facing increased competition from technology and e-commerce companies, such as Google, Amazon and other similar examples, These companies are now entering into the financial services segment and are posing challenges to legacy banks.
Entry of FinTech-related solution providers: There are introductions of FinTech-based solutions into the financial services industry, creating disruptions across several segments, including payments, securities, trading, lending, wealth management and credit-cardrelated offerings.
Need for an open-banking environment: Banks are integrating their infrastructure with the latest technologies to address changing market requirements. Open banking, therefore, is now becoming a critical requirement for legacy banks. Open APIs enable banks to incorporate innovative solutions from external partners, such as FinTech firms, while continuing to upgrade their existing internal solutions.
Transition to digital platforms: The pandemic has driven significant innovations and a transition to remotebased operating systems and processes, which has become the norm for both young and old generations of customers to address their basic day-to-day requirements. Thus, banks that are unable to offer digital capabilities will eventually lose their customer base.
Next-generation platforms: Using cloud and similar technologies enable banks to have more flexibility, as cloud-based platforms reduce maintenance costs and strengthen banks’ capabilities to modernize processes, resulting in an increase in the ROI and value addition for all stakeholders. Next-generation platforms are no longer in the experiment phase; they are enabling banks to radically automate and run at fractions of historical costs. Cloud computing has matured substantially in scope and durability, enabling banks to achieve economies of scale without significant initial capital expenses.
Regulation-related factors
Compliance requirements: The banking industry is witnessing an increase in regulatory requirements, set by international and local regulatory bodies. Thus, banks are expected to address threats such as financial crimes, cybersecurity breaches, resiliency risks to comply with different regulations.
Changing skill sets: A skilled digital talent base is now crucial in banking to accelerate technological changes. This high demand for skilled talent has led to a critical shortage of employees with complex digital skills. This forces banks to make investments in employee training and staff development and to set recruitment standards.
Cross-functional digitalization: The pandemic has led to the need for digital transformation and process-related innovations by global banks, covering all business segments. This has also been triggered by the shift in the competitive environment, with the emergence of various neo banks and FinTech solution providers across the retail, commercial and investment banking segments. The adoption of robotics process automation (RPA), artificial intelligence (AI), machine learning (ML), blockchain and various cloud-based technologies is driving massive changes and transformation in the banking industry.
Furthermore, we have observed that the following factors have been driving digital transformation for Banks, in the U.S.:
• Intensifying regulatory environment: Many areas that were earlier outside the scope of the regulatory oversight are now being strictly regulated in the banking industry in the U.S. These include emergence of digital assets and other alternative payment mechanisms.
• Increased focus on enterprise-level risks: Banks in the U.S. are now increasingly focusing on third-party risk management, the strengthening of governance and risk management frameworks, the adoption of new business models and changes in the overall IT and operational architecture. These changes are due to the growing prominence of new models of hybrid working and collaboration.
• Ukraine-Russia war: The Ukraine-Russia war presents both financial and operational challenges to banks across the world. The impact of the war is visible in the U.S., as the banks in the country are supposed to comply with the new regulations and sanctions imposed by regulators.
• Increasing need to prevent financial crimes and anti-money laundering (AML): There is an increase in challenges due to changing business models and processes, as well as various changes in the banking industry. Hence, banks are looking for advanced digital technologies and capabilities to strengthen their overall risk management capabilities.
• Consumer protection: We expect banking and financial regulators to accelerate consumer-related supervision and enforcement activities in 2022, covering banks and FinTech solution providers.
• Capital and liquidity planning: The regulatory environment is likely to become more stringent due to unforeseen events similar to the COVID-19 pandemic and the changing geopolitical landscape. Banks accordingly need to develop their capital and liquidity plans.
• Retail banking: Shifting demographics, representing Gen Z and Millennials, are driving changes in the retail banking segment. This is attributed to the adoption of new-age technologies, which is driving investments in new tools such as analytics, digital interfaces, chatbots and mobile banking.
• ESG compliance and climate-risk-driven changes: Banks and financial institutions are required to rebalance their lending and asset portfolios to comply with ESG requirements set by regulators. This is triggering the need to transform their existing architecture to accommodate new requirements.
• Technology-related risks and cybersecurity: In the U.S., due to the transformative changes in the legacy banking architecture and platforms, there is an increase in the adoption of data-led architecture integrating new open-banking-based platforms.
• Operational resiliency: Cybersecurity continues to remain another area of heightened focus, as banks are looking for more consumer-facing digital platforms. Additionally, U.S. regulators have set stringent security compliance policies, which has made banks’ operational resilience more important.
This ISG study assesses the capabilities of service providers in the banking segment that cater to the industry requirements of the banks in the U.S.
Core Modernization and Integration Services: There is an increase in the demand to transform traditional core banking platforms to cloud-based platforms to enable the flexibility to cater to the new requirements in the industry. Our findings indicate that such requirements are being addressed by strategic transformation initiatives such as core banking platform transitions, the adoption of banking-as-a-service platforms and open-banking platforms, and the integration of new technologies and FinTech solutions.
Technology Transformation Services for Digital Banking: We have witnessed an increase in the number of various technology transformation initiatives, integrating new technologies such as AI, machine learning, blockchain, RPA, natural language processing (NLP), intelligent automation and analytics. These technologies help automate business processes, increase efficiencies and deliver value-added solutions and functionalities to both internal stakeholders and clients.
Governance, Risk and Compliance Services: With the increasing regulations set by international, national and regional regulatory bodies, the banking industry in the U.S. is focusing on areas such as financial crime monitoring and reporting. Industry leaders are emphasizing new areas of risk management, such as resiliency risk, climate risk management and ESG-based initiatives.
Payments and Cards Processing Services: The cards and payments segment of the banking industry in the U.S. is undergoing major disruptions, as many large technology players and FinTech firms are entering this segment. Banks, therefore, need to embrace emerging technology trends as never before to innovate and improve their services and solutions at an accelerated pace. The cards and payments segment continues to witness transformative changes, with the growth of digital commerce. Some of the new technologies and innovations in the banking industry are real-time payments, payments as a service, supply chain financing, open-banking APIs, e-wallets, digital assets (including cryptocurrencies and stablecoins), payment data monetization and predictive payments.
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