The ABCDs of Innovation: The new alphabet for next-generation technology

The outbreak of COVID-19 forced organisations everywhere to re-evaluate their current business model. Across nearly all industries, it has accelerated the shift towards digital transformation. Within the financial services sector, there are four stand-out next-gen technologies that firms are leveraging to significantly boost both performance and profitability and to stay relevant in the new operating environment. These technologies are Artificial Intelligence, Blockchain, the Cloud and Digital, what Broadridge calls the ABCDs of Innovation®.

Nearly all financial services firms can see the value in these technologies. Of the 1,000 global c-level executives surveyed in Broadridge’s recent Next-Gen Technology Adoption Survey, the majority labelled these technologies as important, or very important, to their business performance and strategic future.

Essential for long-term business growth

This is because the adoption of these technologies has already begun to provide a host of financial, operational, and strategic benefits across the financial services industry. Senior leaders also expect them to create even greater value over the next two-years as the world adjusts to a post-pandemic new-normal. But what exactly are these benefits?

From a financial perspective, firms can leverage next-gen technologies to reduce costs, increase revenue, improve profitability, and generate greater shareholder value. As a result, businesses who are already investing in next-gen technology are reporting significant year-over-year financial returns on their investments. Furthermore, Broadridge’s survey highlights that the financial benefits of next-gen technologies are set to rise: 67% of respondents expect to see decreased costs and 62% expect to see improved profitability over the next two years through their adoption.

They also bring a competitive advantage to the firms that are adopting them to evolve their operating models. Through day-to-day use, firms are reporting considerable operational advantages from harnessing these technologies. They are accelerating time to market, enhancing risk management, improving staff engagement and customer experience, while enabling faster product creation, and deeper customer analysis.

While resulting in measurable financial and operational benefits, these technologies are also driving less tangible but equally important strategic benefits. Survey respondents reported that emerging technologies are enabling better decision making, greater market share, increased ability to expand and scale, and of course, a greater capacity to innovate.

Different sectors are at different stages of adoption

It is true that some of these technologies are being adopted more quickly and widely than others. For example, the Cloud has become almost ubiquitous and is being used across more job functions than other next-gen technologies. Since the Cloud enables organisations to become more agile by scaling computing power and data storage on demand, and allows for lower operational costs, it acted as a lifeline to many firms during the pandemic as they adapted to the demands of remote working and higher trading volumes caused by market volatility. Calls from within the EU to increase national digital sovereignty could also drive further adoption, with proposals calling for fresh regulation on Cloud-usage. Digital ranks a close second to Cloud in terms of adoption with many firms harnessing the technology for strategic planning and decision making as they leverage increasing volumes of digitised data to improve forecasting.

Interestingly, only a quarter of all firms have reached mid-to-advanced stage implementation of AI, despite offering more powerful data processing and analysis and its wider adoption into more everyday life. This is likely because AI is often more complex to implement than other next-gen technologies, but once adopted, it can automate labour-intensive and sensitive tasks, reduce human error, and enhance decision making. With its adoption, organisations have the potential to shift their employees’ efforts away from repetitive data inputting tasks and place them in roles where they can add true value to the company. Blockchain and Distributed Ledger Technology (DLT) is also not as highly adopted as other next-gen technologies, although this looks set to change. Results show this technology is starting to gather more momentum as firms begin to see the quantifiable benefits it can bring.

Different sectors within the industry are also at different stages of technology adoption. As it stands, universal banks and full-service financial institutions are leading the way and are the most likely to have scaled adoption across their organisations with multiple next-gen technology use cases. They are closely followed by commercial banks, investment banks and insurance companies, many of whom have invested in multiple next-gen use cases at various stages of deployment. 

Hedge funds are primarily at the early and middle stages of next-gen technology adoption, which we expect is the result of many hedge funds choosing to outsource their technology infrastructure to their prime brokers.  More than half of those surveyed from investment and asset managers were also at the early stages of the maturity framework, but it was also found that significant performance gains were likely to widen as these firms move to the later stages of adoption.

On the other end of the spectrum, wealth management was among the least advanced sectors in innovation maturity. This is surprising as customers across all demographics are increasingly demanding a more seamless digital experience from their providers.  Private equity and private debt firms are also behind most other financial services sectors in terms of adoption.

There also exists variation in how firms operating in different regions are approaching these technologies. For example, Broadridge’s study found that North American firms are more likely to speed up their adoption strategies than those in Europe or Asia, and that they are already spending more than these regions in terms of their overall IT budget.

Regional variations across priorities exist as well as differences in opinion where the biggest challenges lie. European respondents showed a higher-than-average interest in the adoption of Blockchain, whereas those based across Asia-Pacific reported that AI would be the technology that they believe would be most likely to improve business performance. APAC firms also displayed a stronger preference to integrate Machine Learning into their operations over the next few years.

While data security was the top concern for all those surveyed, European and North American respondents showcased a greater concern for regulatory and compliance restraints, whereas Asia-based firms highlighted that a lack of sufficient budget would be their second biggest challenge when it comes to adopting next-gen technologies.

Combining technology with talent

Leaders of firms that have already got the ball rolling in terms of adoption look set to further accelerate the pace of their next-gen technology strategies. In contrast, those in the early maturity stages are most likely to be decelerating, which will further increase the technology adoption gap that the industry is experiencing.

This makes it critical for firms to avoid being left behind. To stay relevant to clients in a winner takes all environment, firms must concentrate on two key areas: their spending levels and their talent. On average, it is expected that firms will increase their next-gen technology spend from 11.8% to 15.7% of IT spend by 2023. However, firms categorised as Leaders in the maturity framework plan to increase this to almost 20% of IT spend in the next 2 years.

An increased budget should be coupled with a strategy for accessing and developing the best talent. To drive innovation, companies should seek to hire those with a deep domain knowledge of industry processes, coupled with a solid understanding of how these complex next-gen technologies work, and what is possible. However, this level of skill and experience is highly sought after by recruiters and such demand can make it tricky for organisations looking to hire. One way of overcoming this challenge is to upskill existing staff and to consider outsourcing to a third-party fintech provider. Outsourcing enables firms to benefit from highly skilled, experienced personnel with deep industry expertise, while mutualising the costs and risks of technological innovation.

Different roads to implementation

The financial services industry has now reached an inflection point where technological disruption can be turned into a strategic opportunity.

As many firms are accelerating their plans for digital transformation, it is evident that those with no clear plan risk falling behind and losing their competitive advantage. Senior executives must have a defined strategy for the adoption of next-gen technologies and a vision for how technology will transform their business model in the future.

Leading firms also see the value in leveraging the wider ecosystem of external fintech providers rather than going it alone. By outsourcing to an external provider, firms can benefit from access to innovative new solutions, often fueled by large volumes of data and network effects that individual financial firms cannot replicate on their own. This can be particularly helpful for AI and Blockchain implementation due to their highly specialised and complex nature. More widely used, but less complex solutions, such as the Cloud and Digital, can alternatively be implemented through a mix of in-house and outsourced solutions.

The mutualisation opportunities offered by fintech providers are hard to ignore and mean that financial firms can gain access to new technologies and improve scalability and resiliency while saving time, money, and risk. This allows them to keep up in the ongoing technology arms race and ensure their operating models adapt in response to a rapid pace of industry change that continues to accelerate as the new normal emerges.