Banking & capital markets

Key findings

• Firms in the banking industry are struggling to establish future-ready foundations, especially when compared with most other industries. Talent, as well as environmental, social and governance (ESG) preparedness are of particular concern.
• Data practices are problematic. The banking industry should look to get better at gathering and monitoring data to make evidence-informed decisions.
• The industry lags on most measures of technological readiness. However, it leads in adopting and deriving value from a few technology types such as blockchain and big data analytics.

Firm fundamentals

The banking and capital markets industry is being disrupted by changing customer expectations, new players, new regulations and open banking. Maintaining relevance is increasingly challenging; dealing with these shifts requires a long-term orientation and dedication to fundamental value propositions. Established firms will need to consider alternative business models and increase responsiveness and agility as new entrants try to extend their market foothold.

Banking executives tend to place more importance on process enhancements and their organisations’ ability to adapt than other industries. Even so, they are less likely to prioritise firm fundamentals in their enterprise and digital strategies, putting essentials such as operational alignment, forecasting and decision-making capabilities on the backburner. Only 31% of banking firms consider forecasting and decision-making capabilities a business critical priority in their enterprise strategies, the lowest among all industries, and running counter to executives' stated importance regarding adaptability. Banking executives are acknowledging the importance of these areas to the core function of their businesses while prioritising other areas within their enterprise and digital strategies. Still, leaders should take care not to assume competency or that no further work is required.

Technology and innovative ability

New technologies are dramatically changing the banking and capital markets industry, impacting every aspect of operations from risk detection and credit supply to how collateral requirements are assessed. Firms that are not upgrading their technology are falling behind: as of 2018, thoselacking AI reported 30% lower digital cash flows¹. This gap probably increased during the pandemic, as financial services became even more digitalised. Banks are prioritising digital-led recovery and have rapidly shifted to digital channels to meet consumer demand, as well as focusing on implementing automation.²

There is a technological mismatch, however. While the banking and capital markets industry is a leader in current and planned adoption of some technologies like blockchain, it lags on others that could provide significant value. As firms face increasing pressure to invest in technology upgrades, they will need to prioritise aligning their adoption plans with wider business goals. Executives typically report doing so (Goal-oriented technology planning, 73.6), but there is evidence that the industry needs to broaden its vision. Blockchain has significant potential to disrupt the financial industry, with fintech start-ups already capitalising on this technology.³ But it has plenty of benefits for incumbent banking firms as well, with the ability to reduce costs and streamline payments, asset trading and settlements, among other areas. Given this, it’s no surprise that banking leads other industries in existing and planned blockchain, approximately 13 percentage points above the rest-of-sample average. Yet, the industry is falling behind on other technologies such as quantum computing, despite the high-value use-cases to explore.⁴ To take full advantage of these technologies, however, banking and capital markets firms will have to break further out of their rigid ways to embrace a data-driven future.

Many firms in the banking industry believe their technological modernisation processes are still nascent, but are progressing in key areas.⁵ For example, banking and capital markets firms are more likely than the sample average to strongly agree that they can maintain business continuity through significant IT disruptions. Firms in the industry are also successfully using technology to improve interoperability, leading to a score of 78.4 on Improved interoperability. There may be looming challenges in this area though, as the costs and risks of maintaining legacy platforms are increasing.⁶ Upgrading generally requires moving from mainframe-based systems to streamlined application configurations and cloud-based solutions.

For banking in particular, migrating to new systems with minimal business disruption is key, as customers and clients expect constant, high-quality and secure service provision without delays. Firms should consider the tradeoffs between wholesale and staggered implementations when working to keep pace with competitors and dynamic consumer demands. This requires organisational readiness, forethought, and anticipating challenges during the planning and strategic decision-making processes. Developing a risk management apparatus (including cyber risk) and clearly delineating between projects—those with an immediate impact versus those requiring more long-term management—will be critical in ensuring that a transition strategy meets expectations.

Sponsor's perspective

Financial services: Ongoing march to modernization

"The banking and capital markets industry still bears the scars of the 2008-2009 meltdown, in the form of a stringent regulatory environment and wary consumers. Moreover, upstart fintechs have raised the bar when it comes to offering consumer-friendly, digital-first banking experiences.

Nevertheless, banks, asset managers and financial intermediaries have built a solid digital foundation from which to address the future. For example, the industry was a leader in decentralisation even before the pandemic struck, which allowed for smooth business continuity when lockdowns kept employees at home. Most financial institutions now offer at least some remote work, which should help the industry attract talent, especially younger workers.

Another strength is their use of the cloud; banks, asset managers and financial intermediaries are not only investing in cloud but also obtaining value from their investments. This bodes well for an industry that needs to embrace open banking and shift from legacy mainframe operations.

Future challenges loom, however. The talent shortage could raise obstacles, and the industry as a whole does not sufficiently prioritise strategic and operational alignment. Investment in personalization technology—key to future banking offerings—isn't paying off as much as the industry would like.

By continuing to focus on customer-centricity, core service modernization and more effective operating models, banks, asset managers and financial intermediaries can make headway on being future-fit."

Sanghosh Bhalla, BFS Digital Banking Consulting Partner, Cognizant

Talent

As operational processes become automated and digital, banks will need to fundamentally rethink their people management, starting with a talent-first ethos and digital strategy.⁷ While banking and capital markets executives place a high importance on talent readiness and employee satisfaction, the industry is only halfway to the frontier of best practices when it comes to Talent preparedness (51.1). A general lack of future-ready recruiting practices holds the industry back: for example, only 30% of banking firms have blind application review processes. Even more of a concern is Talent development. Many firms are insufficiently focused on this area, and although all industries struggle here, banking, barely a third of the way to our performance standard, struggles more than most.

Despite this general lack of preparedness, the banking industry is performing moderately well on measures of current Talent performance (74.7). Still, even though it has historically benefited from a reputation for high pay scales and exposure to widely applicable skills, its relative weak spot is the Talent acquisition and retention sub-category, where it is the lowest-performing industry. Banking firms, accustomed to ease of talent acquisition, may be behind on adjusting to the widening, cross-industry digital talent gap.⁸ Reputational damage within the banking sector is another factor thought to be adding to the difficulty of attracting and retaining digitally-savvy young professionals.⁹ As mentioned, a greater focus on future-ready recruiting and talent development practices is crucial for banking firms.

Scores in the benchmark evidence talent’s centrality to banking and capital markets firms, and this excellence aligns with success in other areas. Performance on talent is strongly associated with performance on Firm fundamentals and Technology and innovative ability alike, and these relationships are particularly notable for banking firms.¹⁰ Although many banking and capital markets firms have not invested enough in talent, those that have are experiencing positive outcomes.

ESG

Despite greater demand for progress from consumers and increased oversight by regulators, ESG is the weakest area in the benchmark for banking, and accountability mechanisms are of particular concern¹¹. Banking firms struggle to use data to ensure regulatory compliance and monitor their ESG commitments, making it difficult to accurately report ESG progress. Reporting is quickly becoming essential in guiding final investment decisions: two-thirds of institutional investors believe that ESG will become the “industry standard” within five years.¹² Yet, in an area where all industries struggle, banking and capital markets firms are behind and have, for the large part, not instituted the necessary accountability and tracking measures that enable progress on ESG. The industry has also done little to ensure good corporate governance, with only a quarter of banking firms having stipulations for board diversity and even fewer monitoring data on this issue.

Even with their lack of environmental accountability and tracking capabilities, the industry ranks first on Environmental performance. But as they face rising pressure from investors, banks need to focus their attention to building the foundations needed so that this progress can be sustained. Promoting accountability through transparent reporting and dedicating staff and resources to environmental sustainability are just a few examples of how banks can build capacity in this area.

The same cannot be said, however, for the industry’s current performance across the social and governance aspects of ESG. The banking and capital markets industry has been facing a reckoning with diversity and inclusion since before the pandemic.¹³ While banking scores fairly well on Social performance in absolute terms (68.9), a lack of diversity is driving banking’s lagging scores in this sub-category compared with other industries.

Pressure from a range of stakeholders, including customers, regulators and investors, does not appear to be driving sufficient change or action for the banking industry. Firms should look to internalise signals for improvement in a more systematic fashion. Thus far, the industry has failed to institutionalise a stakeholder-oriented, rather than shareholder-only, alignment, scoring only 39.0 and ranking 8th on Institutionalising stakeholder accountability. Doing so would enable significant gains for banking’s future readiness, and not only in the context of ESG.