Parker Fitzgerald (PFG), the specialist management consultancy, estimates that European banks could boost their pre-tax profits by up to 40% in the next five years if they are able to limit effectively the impact of disintermediation and also maximise the opportunities presented by digital transformation, such as the use of robotics, artificial intelligence and distributed ledger technologies.
However, the consultancy warns that greater technological integration, increased connectivity and greater engagement with customer via digital channels will at the same time expose firms to a new set of digital threats. They also believe that the regulatory risks associated with digital transformation are likely to prove just as challenging for banks as the implementation of the new technology.
A number of new ‘modular’ business models are being increasingly adopted by the finance industry, including those that rely on digital utilities to reduce costs for commodity activities such as Know Your Customer (KYC) and also to leverage further the process automation opportunities offered by ‘fin-tech’ solutions such as robotics.
The emergence of these businesses models will result in a new risk profile, at individual and at industry level, something that the global regulatory community is conscious of but is struggling to keep up with. The reality is that the pace of change is accelerating and the industry has yet to fully understand the problem let alone identify robust solutions.
The established banks are in an unprecedented race to innovate before FinTech companies have the scale to truly compete and threaten their revenue. To do this effectively, PFG believes that banks must align their risk governance with the digital programme now to ensure that they can bring new products and services to market securely or they may find that their digital transformation has some very unwelcome side effects.
Scott Vincent, CEO of Parker Fitzgerald, said:
“The need to automate financial services has never been greater. Any function or process that does not add competitive advantage should be replaced with technology – there are no sacred cows anymore.
This applies to the Risk and Compliance functions that have grown significantly in headcount to deal with the volume of new regulation and make up a significant proportion of banks cost base.
Risk must be considered in the design of each stage of the digital customer journey if the benefits of digital transformation are to be realised. Without due consideration, unmitigated risk exposure and increased operational complexity can quickly erode any uplift in ROE.
“For incumbents, digital transformation will be critical for survival, but managing the digital risk will be critical for success. These challenges will extend beyond the historical experience of many risk practitioners and will require a fundamental upskilling across the business including new board level representation to provide a consistent and unified approach to digital risk.”
While banks are investing significant sums in technology to automate processes and simplify the customer experience, PFG believes that there is still an increased chance of an ‘event’ which could trigger instability or failure of the entire financial system.
In response to the growing demand for banks to navigate digital risks and associated regulation, Parker Fitzgerald has strengthened its executive leadership team with the appointment of Patrick Gormley, who will lead the firm’s Global Digital Practice. Patrick joins from Capco in New York where he was Managing Partner of the CapCo Digital.
Patrick Gormley, Leader – Global Digital Practice at Parker Fitzgerald, said:
‘I am delighted to join Parker Fitzgerald as they are leading the industry in both the understanding of and the response to Digital Risk.
We are working with our clients on leveraging the exciting capabilities provided by analytics, fintech and regtech solution providers in exciting new ways that release the full business potential of these firms but at the same time can be introduced rapidly and cost effectively into operation. In this way, we are helping to define and to build the risk functions for the digital finance era’.
Parker Fitzgerald, which was founded in 2009 in direct response to the Global Financial Crisis, has been helping firms to understand and integrate cutting-edge technology so that it meets these changing operational and regulatory requirements. It is advising a number of retail banks on the best way to mitigate the threat posed by the shift from physical to electronic distribution models.