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Efficient Financial Transformation in Banking

The banking industry has had a rollercoaster of changes over the past few years. While the pandemic affected just about every business, banks were at the forefront. From the Fed’s interest rate changes to inflation to market volatility and especially digital transformation, the way people and businesses use money has changed tremendously.

The next few years will be critical for the banking industry. Since banks are the center of financial changes (whether they want to or not) the industry needs to be on top of all of the challenges:

  • Talent shortage

  • Inflation

  • Industry convergence

  • Technology fusion

  • Redefining the workplace

The Biggest Challenge

None of the challenges are more important than the fast-growing digital assets market. The new financial potentials created by digital assets will have many consequences for banks, by revolutionizing how money is created, transferred, stored, and owned.

Although digital transformation is occurring, financial transformation has been generally focused on compliance and operational activities- meaning more immediate issues. This has caused it to struggle to keep pace with overall digital transformation due to underinvestment in technology infrastructure.

In fact, only one-quarter of the finance professional survey respondents in a Deloitte survey said that finance has transformed as much as the overall banking system!

Finance professionals are “following behind” overall digital transformation, instead of taking a proactive approach to identifying new sources of value that came about from digitization. The best way of going about this is providing a common data and analytics architecture strategy to be more forward-thinking - with a focus on business strategy.

Additional Complications

The next biggest problem is centralization. Data is often fragmented and in disparate systems, making it difficult to collect data into a single source of information. This directly affects finance and banks should look for ways to integrate with more functions such as risk, accounting, forecasting, and compliance that all can benefit from a single source of data and a wider view. In addition, it helps eliminate errors and duplications which tend to be a big problem when different departments are coming to different conclusions by using data from multiple sources.

The centralization problem can have deeper issues that require more than one quick fix and is often constrained by an outdated technology infrastructure. Legacy ERP and other back-office systems move too slowly to produce real-time insights that are essential for strategic actions. A perfect solution to this is implementing FP&A automation software that combines all of the data into one source regardless of the format, reduces costs, and increases productivity and agility. More than three-quarters of survey respondents are in favor of expanding or starting to use third parties to accelerate digital transformation. These cloud-based ERP solutions could be an important element in finance modernization in the banking industry.

As with many other industries, banking is also feeling the brunt of the skills shortage. More than half of the respondents said that hiring tech talent is a major challenge. In the more rigid corporate world of banking, thinking outside the box to hire and retain tech talent is crucial in this transformation.

Another overwhelming response in the survey is that 65% regard upskilling talent as a top priority for the upcoming year. This plays into thinking outside the box in terms of the skills shortage, as oftentimes upskilling current employees is the solution to both problems: (1) There is no need to hire outside people (2) it keeps retention high, as employees’ skills are being used while providing growth and opportunity.

Dealing with risk

One of the most urgent areas that need to be addressed in the banking industry is risk. Although it is not something new, the fast-changing events of the past few years created scenarios in which risk management became a main focus of a wide-ranging challenge. Risks have also become more complex, dynamic, and interconnected than at any point in history.

Digital transformation helps finance teams take control of the potential positive and negative outcomes of these risks, and allows them to be in the driver's seat. However, the combination of the right skilled people and the right technology is the most optimal position.

High market volatility, operational concerns (such as custody constraints), financial crime, and evolving fields such as cryptocurrency, are all areas in which digital transformation and skilled employees are needed to stay ahead. Digital assets and cryptocurrency are even more crucial in getting a head start on managing the risks as these new and unregulated areas can disrupt the industry in many ways.

New risks arise from cloud, AI, climate change, distributed ledger technology, digital assets, and ecosystems. To keep rapidly developing risks at bay, banks should design a modern toolbox for risk and compliance to better manage risks within and across silos to empower the first line of defense.

Many emerging risk disciplines are still nascent within banks. As a result, risk methodologies may not be sufficiently robust and data may be lacking. Talent could also be in short supply, and the control framework may be only partially established. In addition, there may be a superficial understanding of the interconnections among risk domains.

One such evolving area is digital assets and cryptocurrency. These new forms of value exchange are often subject to high degrees of volatility and market risk. Operational concerns, like custody constraints, as well as financial crime and sanctions compliance, are also important considerations, due to the anonymity and borderless nature of public ledgers.

Banks should apply the same scrutiny to these emerging risks as they do to more mature risk domains. And they should get ahead of managing these risks before regulators enforce new rules or threats become too complex.

All in all, banks have been involved in digital transformation for many years to keep pace with business and competition. However, financial transformation is lacking in a lot of areas, which not only slows down efficiency but also exacerbates the problems that already exist. Implementing financial digitalization will take care of these issues and keep the industry ahead of the game and ready for future challenges.

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