Organizational Transformation: Challenges Facing Financial Services

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2020 marked one of the most difficult environments for financial services in recent history. The International Monetary Fund expects global GDP to decline by 4.4% or close to US$6.2 trillion[1] as a result of the Coronavirus pandemic. Yet although the industry has so far proved resilient, new market conditions mean organizational transformation challenges are inevitable.

The pandemic has reshaped global financial services in many ways: stifled growth for traditional products, fundamental change in the role of branch networks and digitalization at breakneck speed in almost every area. So, what can financial services companies do to meet these challenges and transform their organization in the year ahead?

What business challenges did financial services face in 2020?

It’s important to first say that the challenges facing the finance industry vary by sector[2]. Banking has very different challenges to those in insurance, for example. This article tackles the most prevalent trends in whichever sector they appear:

Branch closures and the rise of online banking

Retail banks are suffering as footfall in their branch networks plummets. This is part of a longer-term trend that has seen more than a third of the UK’s branches close in 5 years[3]. Banks are having to shift customer services online[4] and to contact centers [5], requiring them to model and adapt the supply and demand of resources, continually assess skill sets and constantly monitor costs to stay competitive.

Interest rates at an all-time low

Institutions that sell interest-based products have taken a sizeable revenue hit as a result of ultra-low rates and are turning to fee-based revenue instead. But this change in operating model calls for a fundamental rethink in organizational capability, a process that’s very complex even for the simplest products (see example later on).

Rising insurance claims

Accident and insurance providers are under huge pressure from rising business and employment-related claims alongside reduced revenue[6], so they’re looking to take cost out of the business wherever they can[7]. Not surprisingly, automation is high on their agenda.

Meeting organizational transformation challenges head on

All these challenges are rooted in organizational design. It’s not just a case of expanding a few contact centers or automating certain processes. Structural changes need to be data-driven and built from the ground up to address long-term impact and meet customer and other stakeholder needs.

The following examples illustrate what financial services companies are starting to do and how organizational design thinking can help:

Retail banking and cost reduction

Retail banks like Barclays[8] and HSBC[9] face monumental cost pressures and are undertaking rapid staff redeployment in response to new customer behavior. Having a clear idea of the different work and activities this change brings would enable banks to design changes quickly and effectively.

Barclays is also reviewing the use of office space[10] and modeling requirements for a hybrid workplace strategy. By knowing which desks are being used where, businesses can calculate the cost of unused space and use that data to plan future use or make decisions on their property portfolio.

As well as transforming customer services and operations, banks continue to look for ways to cut costs by automating their back-office processes[11], which requires detailed activity analysis and optimization of work across many locations.

Investment products and business model redesign

Banks like HSBC are moving away from interest-based revenue to being more fee or income based[12]. But again, this requires detailed activity analysis to understand the process changes needed to develop and service new products cost-effectively.

With interest rates at rock bottom or even going negative, banks will need to find new sources of revenue and may begin charging for some services that have previously been free, although this is seen as a risky strategy that could undermine consumer trust.

What is certain is that any business model change will require a seismic shift in long-term strategy.

Insurance providers and robotic process automation

With underwriting being the bulk of the cost for insurance companies, many providers are now going direct to customers online and looking to automate much of the underwriting work[13].

Claims handling is another area that’s ripe for automation to reduce cost. Aside from faster processing, there’s also the opportunity to combine artificial intelligence, data science and technology to improve fraud detection. Zurich Insurance is a good example of this[14].

While addressing specific use cases individually can be effective, planning a blended workforce approach across all insurance operations demands a detailed understanding of task workflow that can only be achieved effectively through organizational design.

Macro trends affecting financial services

One of the most notable effects of the pandemic is the scale and acceleration of several megatrends and the deceleration of others. Despite expectations, the pandemic seems to have slowed down shared services, urbanization and globalization, while faster digital adoption has put digital infrastructure in banking to the test[15].

Consolidation in banking

Faced with market saturation and a multitude of threats[16], many big banks are planning consolidation. In Spain, whose economy has been one of the worst hit by Coronavirus alongside negative interest rates, many banks have recently combined to cut costs[17]. Domestic consolidation, while reducing the number of branches, is a growing trend that could help bank profitability, particularly in Europe[18].

Market disruption from challenger banks

Turning to the US, banks have been slow in digital adoption and could soon see the disruption from challenger banks seen in European markets. As consumer preferences show a decline in the use of bank branches, retail banks will need to focus on growth strategies and operating model redesign to compete against digital-only banks.

Banking as a service

One of the industry’s most significant developments, banking as a service (BaaS) is projected to be an $8.67 billion market by 2027[19], bringing greater operational transparency and better customer experience to retail banking.

As new technologies open up legacy infrastructure, fintechs and neo banks threaten to snatch £6.5 billion ($8.4 billion) in revenue from the big UK banks by 2024[20] unless they find ways to broaden revenue generation through their own BaaS platforms.

Digital payments and cryptocurrencies

As a rule of thumb, payments represent over 80% of customer interactions with banks[21]. Unfortunately for banks, many of these payments are made through online payment specialists and digital merchants.

Banks generate fee-related revenue from payments, but margins have been whittled away by disintermediating merchant services while interest income is being taken away by Apple Pay, Google Pay, PayPal and others. There are a number of options for traditional banks to fight back on digital payments but it’s clear that all require them to break out of their conventional ways.

Similarly, with cryptocurrencies, banks are having to get used a level of transparency and loss of control that doesn’t come naturally. Yet if they are to beat back such threats to their business, they’re going to have to reinvent themselves and change their operating model.

Trends like these are likely to put organizational design high on the business agenda, whether it’s an organizational restructure, transformation or mergers and acquisitions. As macroeconomics over the next decade brings fundamental change, financial services companies will need to find new ways to profitable growth as traditional sources of revenue wane.

Organizational transformation for the long term

2021 is likely to see all sectors of financial services make some significant changes in business model design, digitalization and go-to-market strategy. Even once the pandemic subsides, it will leave behind global changes in consumer behavior that will force financial services to review how they operate.

It’s important to say that all the work that begins this year is likely to stretch many years into the future. And beyond the current economic conditions, the key to adaptability and resilience in the face of constant change will be data-driven organizational design and fast decision-making.

Taking a more structured approach to business transformation through organizational design using analytics and data visualization will give companies a better understanding of the quantifiable benefits over time. By clinging to simple tools like spreadsheets for this work, planners will need to go through short cycles repeatedly to get any sort of long-term view. What business today wants to carry the time and risk of doing that?

[1] International Monetary Fund (2020) World Economic Outlook, October 2020: A Long and Difficult Ascent, October, https://www.imf.org/en/Publications/WEO/Issues/2020/09/30/world-economic-outlook-october-2020

[2] Business Insider (2020) Financial Services Industry Overview in 2021, Dec 28, https://www.businessinsider.com/financial-services-industry?r=US&IR=T

[3] The Guardian (2019) More than a third of UK bank branches have closed since 2015, Sep 24, https://www.theguardian.com/money/2019/sep/24/more-than-a-third-of-uk-bank-branches-have-closed-since-2015

[4] Gallup (2015) Risks to banks from rise of digital banking, Oct 30, https://news.gallup.com/businessjournal/186446/risks-banks-rise-digital-banking.aspx

[5] Although use of contact centers is also on the decline as customers https://news.gallup.com/businessjournal/186446/risks-banks-rise-digital-banking.aspx

[6] Deloitte (2020) 2021 Insurance Outlook, Dec 3, https://www2.deloitte.com/us/en/insights/industry/financial-services/financial-services-industry-outlooks/insurance-industry-outlook.html

[7] Accenture (2020) Covid-19: Navigating the human and business impact on insurance carriers, Apr 9, https://www.accenture.com/gb-en/insights/insurance/coronavirus-human-business-impact-insurance

[8] This is Money (2021) Banks defy Financial Conduct Authority’s plea and carry on shutting branches, Jan 30, https://www.thisismoney.co.uk/money/saving/article-9204697/Banks-defy-watchdogs-plea-just-carry-shutting-branches.html

[9] City A.M. (2021) HSBC set to close 82 branches as customers go online, Jan 19, https://www.cityam.com/hsbc-set-to-close-82-branches-as-customers-go-online/https://www.thisismoney.co.uk/money/saving/article-9214765/How-Covid-nail-coffin-local-bank-branches.html

[10] BBC (2020) Barclays boss: Big offices ‘may be a thing of the past’, Apr 29, https://www.bbc.co.uk/news/business-52467965

[11] FinExtra (2020) Going beyond digitization with back-office process automation, Aug 18, https://www.finextra.com/blogposting/19219/going-beyond-digitization-with-back-office-process-automation

[12] City A.M. (2020) HSBC to overhaul business model as ultra-low interest rates hit profit, Oct 27, https://www.cityam.com/hsbc-to-overhaul-business-model-and-accelerate-plan-to-slash-costs/

[13] Deloitte (2020) 2021 Insurance Outlook, Dec 3, https://www2.deloitte.com/us/en/insights/industry/financial-services/financial-services-industry-outlooks/insurance-industry-outlook.html Increasing automation was the top underwriting priority among respondents in North America, but only ranked fourth among those surveyed in Europe and fifth in APAC. Expanding the use of AI in underwriting ranked eighth in North America versus second in APAC and Europe.

[14] NS Insurance (2020) Zurich UK partners with Carpe Data to fight fraud claims, Mar 11 https://www.nsinsurance.com/news/zurich-carpe-data-claims/

[15] Deloitte (2020) 2021 Financial Services Outlook, December, https://www2.deloitte.com/us/en/insights/industry/financial-services/financial-services-industry-outlooks.html

[16] ING (2020) Banks Outlook 2021, Oct 30, https://think.ing.com/articles/bank-outlook-2021-bank-consolidation-to-continue-to-pick-up-in-2021

[17] Bloomberg (2020) Santander avoids merger wave in favor of digital growth, Nov 17, https://www.bloomberg.com/news/articles/2020-11-17/santander-s-botin-has-no-plans-for-typical-bank-consolidation

[18] ING (2020) Bank consolidation continues to pick up in 2021, Oct 30 https://think.ing.com/articles/bank-outlook-2021-bank-consolidation-to-continue-to-pick-up-in-2021#a4

[19] Research and Markets (2019) Digital Banking Platform Market to 2027, August, https://www.researchandmarkets.com/reports/4841346/digital-banking-platform-market-to-2027-global?utm_source=CI&utm_medium=PressRelease&utm_code=49cvjq&utm_campaign=1302151+-+Global+%248.67+Bn+Digital+Banking+Platform+Market+Analysis+and+Forecasts+to+2027%3a+Evolving+Ecosystems+Due+to+Collaborations+between+Traditional+Banks+and+Fintech+Companies&utm_exec=chdo54prd

[20] Business Insider (2019) How legacy institutions can use open banking to develop new revenue streams, reach more customers and avoid losing out to neobanks and fintechs, May 19, https://www.businessinsider.com/monetization-of-open-banking-report?r=US&IR=T

[21] McKinsey & Company (2014) The digital battle that banks must win, Aug 1, https://www.mckinsey.com/industries/financial-services/our-insights/the-digital-battle-that-banks-must-win

Organizational transformation challenges facing financial services