Customer Experience (CX) Is the Most Crucial Point of Differentiation 

FIs often have the same products and services and differentiate on delivery. From the 90s to 2010s, rates and fees were the major differentiator. This has somewhat reemerged in 2023 with the race for deposits and quantitative tightening across the industry, but eventually, the dust will settle with CX at the center of the digital bank. 

CX is so crucial because clients’ loyalty is in flux. Individual segments and even consumers will have nuanced expectations of specific features, such as SSO, face enablement, and customer recognition across distinct products. Many banks have established positive ATM and branch experiences, yet the newer online or mobile portals are the primary modes of interaction for many customers today. Regarding the omnichannel experience, the transition between channels must be flawless. 

Customers today prefer speed and a smooth customer experience and are willing to pay more for these qualities. Yet the struggle to achieve compliance precludes banks’ ability to deliver on all these possibilities with speed. More often, CX execution is determined by the current platform’s gaps and the priorities of current clients. It’s difficult for banks to “be all things to all segments” or serve every client segment in a really great way. Executive Council members advised that “banks should ruthlessly prioritize, rather than being average at 10 things.” 

Banks Must Progress Beyond Table Stakes With Enhanced Data Utilization 

Council members agreed that utilizing core banking data is table stakes for digital transformation. Yet achieving the level of personalization customers are looking for requires other data feeds and sources beyond the core banking system. Behavioral data amassed from monitoring customers’ engagement with different channels better facilitates personalization. That said, combining different data sources can create challenges with data privacy compliance, especially for banks that operate across multiple states or territories each with different regulations. 

Making the jump from data utilization to digital transformation involves a human element in addition to data-driven insights. “It’s not just having the data – it’s what you do with the data,” one council member advised. An integrative model wherein bankers act upon insights with speed and precision to drive and enhance customer engagement can be a powerful driver of success.  

New Technologies and Fintech Partnerships Help Foster an Innovative Culture

Digitally transforming institutions should foster a culture of innovation and agility to adapt to changing customer expectations and market trends. This can include embracing new technologies, collaborating with fintech startups, and experimenting with innovative solutions to provide novel financial products and services.

Collaborating with fintechs can aid in banks’ efforts to achieve an innovative and agile culture. An Executive Council member explained: “BaaS and fintechs are all about digital first. They start there, rather than try to go there.”

Moreover, partnerships with fintechs also present opportunities for smaller FIs and community banks to spread their deposit network and total addressable market over a broader footprint and accelerate digital transformation. Any bank looking to expand its market or diversify its business model should consider fintech partnerships as a potential next step.

Digitization Will Endure as a Strategic Priority in the 2020s

The council meeting confirmed that achieving the “digital bank” is a key strategic priority for their institutions and establishing a digital customer experience is crucial to retail banks’ ability to compete in the 2020s and beyond. The process of digital transformation, catalyzed in recent years by the COVID-19 pandemic, is nonetheless ongoing. While many banks already have digital initiatives underway, few would consider their transformation complete. As they proceed, banks will be tasked with rethinking the relationships among information, people, and processes given new and evolving capabilities. In return, they will reap the rewards of customer satisfaction and business growth.  

The full report, Steppingstones to Digital Transformation: Banks Assess Their Progress, is available to clients of Datos Insights’ Retail Banking & Payments practice. If you aren’t already a client, contact me at achandraker@datos-insights.com to discuss how you can get access. For more information on the Retail Banking & Payments Executive Council, visit our website.

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My latest report on IT outsourcing, co-authored with Mitch Wein, provides a general overview of outsourcing considerations and a checklist for IT leaders on the decision-making process. In 2023, IT leaders should assess the geographic spread of their outsourced staff, considering both traditional offshoring and up-and-coming nearshoring locations.

Offshoring

IT outsourcing has been important to FIs of all sizes since the 1990s. Over the past few years, outsourcing supply chains have been susceptible to geopolitical developments, such as the COVID-19 pandemic and the ongoing war in Ukraine. The hybridization of the workplace resulting from the pandemic has better equipped many institutions to work with remote teams. In 2023, diverse IT outsourcing options are available to financial institutions.

• India and the Philippines: India has been a favored offshoring location for decades due to its large supply of technical talent and comparatively low labor costs. During the COVID-19 pandemic, disruptions in India affected companies’ operations. Although India has largely recovered from the pandemic and continues to produce new talent, major providers have cut back on hiring.
• Eastern/Central Europe: Countries such as Ukraine, Poland, Romania, and the Czech Republic have numerous skilled software developers at lower prices than North American talent. Companies with Russian, Belarusian, and Ukrainian outsourcing operations faced turmoil after Russia’s invasion of Ukraine in early 2022. While the Ukrainian IT industry has largely recovered, business continuity planning will be key for companies that have resumed outsourcing there.

Nearshoring

Even for hybrid or remote workplaces, offshoring poses challenges, including drastic time zone differences, susceptibility to geopolitical developments, and low transparency into an outsourcing partner’s operations. North American FIs may consider nearshoring to the following areas in order to mitigate the challenges presented by locations further offshore.

• Western Canada: Vancouver has become an IT outsourcing location for U.S. companies due to its geographic proximity and strong talent pool. While labor costs are higher than in regions further away, they are not as high as comparable costs within the U.S.
• Latin America: Software developers are more expensive in Latin America than in Asian countries but are significantly less expensive than North American talent. Latin America is also close geographically to the U.S. Its skilled IT talent pool has undergone rapid growth since the early 2020s.

Over the years, outsourcing has come to comprise a greater proportion of banks’ IT staffing. As Fis increasingly rely on outsourcing, they must also create more complex plans, including continuity and contingency planning. FIs should revisit their IT outsourcing strategy at least annually as part of their strategic planning process. Datos Insights has released a CIO/CTO Checklist outlining the steps FIs can take to insulate their staffing from global developments and fluctuations.

The full report, CIO/CTO Checklist: Offshore, Nearshore, and the Implications of Geopolitical Instability, is available to clients of Datos Insights’ Retail Banking & Payments or Commercial Banking & Payments services. If you aren’t already a client, contact me at achandraker@datos-insights.com to discuss how you can get access.

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Technology executives in financial services institutions must stay on top of current and future events to ensure their digital initiatives will be able to weather new developments in the talent market and regulatory space.

Geopolitical Developments Create an IT Talent Challenge

The COVID-19 pandemic has caused significant challenges both for financial institutions and the technology providers that serve them. On the heels of changes in the domestic IT talent market and the need for companies to adapt to the remote/hybrid workplace, disruption to daily life in India caused a shortage of outsourced technology talent.

Geopolitical tensions in Ukraine and Russia have only increased the unpredictability of the IT talent pool. Technology providers have faced significant disruption since February due to the large numbers of engineers and software developers based in Ukraine. For example, 20% of Fortune 500 companies used Ukrainian IT services before the Russian invasion in February. Prominent fintech providers such as retail banking app Revolut and payment platform kevin. have operations in Ukraine and nearby Lithuania, which, in recent years, has also become a fintech hub.

Financial institutions have had to approach hiring creatively during this period, introducing new types of benefits and career development opportunities to stay competitive and retain domestic talent. As for outsourcing, the cost of technology talent in regions outside of Russia and Ukraine is expected to rise due to decreased supply. Organizations are faced with the prospect of increasing expense and uncertainty associated with both domestic and international talent.

Mitigating Adverse Impacts on Innovation in Financial Services

Uncertainty in the global talent market can impact technology organizations even in ways that are not directly related to personnel. Studies show that talent turnover adversely affects innovation for up to five years after the event. That said, executive leadership making strategic choices and taking initiative can mitigate these impacts. Financial services executives, particularly CIOs, need to consider how they can continue to foster a culture of innovation in an increasingly competitive talent marketplace.

Though many aspects and challenges of financial services technology are unique to their sector, North American financial institutions do not exist in a vacuum. Upcoming national regulations and directives will affect financial institutions of all sizes. The key concern for executives is how to make their digital strategy robust and flexible.

The best response technology executives can give to geopolitical uncertainties will involve the creation of a digital governance council to ensure regular oversight and current state assessments. A structured system of review, such as a digital governance council, ensures that digital initiatives can be altered early on if they are impacted by geopolitical developments or associated regulations. Procedures should be tailored to the organization as factors such as size and the specific nature of a financial institution’s business will affect it individually.

For advice on tailoring your IT response to any of the geopolitical factors affecting the financial services industry, contact me at achandraker@datos-insights.com to learn more about Aite-Novarica Group’s Financial Services CIO/CTO Advisory practice.

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