Realising the digital promise

With financial institutions motivated for change, a supportive regulatory environment and high levels of investment, are businesses in the Channel Islands ready for digital transformation? And are the islands ready to cement themselves as the world’s leading fintech location?

Launched in November 2020, Jersey for Fintech is a collaboration between Jersey Finance, Digital Jersey and Locate Jersey, aimed at making the Channel Islands the world’s number one location for fintech.

The timing is certainly sweet for a world in a state of almost perpetual lockdown, forced into remote working and ever-more reliant on tech to stay connected. 

In addition to forcing us all on to virtual communication platforms, the Covid-19 pandemic has, according to a recent McKinsey & Company survey, accelerated business digitalisation by as much as three years in the space of nine months.

Yet if financial institutions are to realise – as Deloitte refers to it in its recent report – their “digital promise”, there remain notable challenges to overcome.

In the report Realizing the Digital Promise, produced by Deloitte and the Institute of International Finance, 60 financial institutions across the world give their views on the obstacles they encounter as they attempt to transform their current businesses into digital operations. 

These challenges are complex and vary across organisation type and geography, but the report identifies nine common themes.

The first is that financial institutions are held back by risk-averse investors who do not share the organisation’s digital vision.

The report argues that investors are “still looking for predictable, consistent and stable returns from banks”. This can run counter to the attributes commonly associated with business model transformation and innovation, the report says – “that is, taking risks, experimentation and learning through iterations”. 

Board leadership

But it is not just investors that can hinder transformation. Simeon Moss, Director, Consulting, at Deloitte in Jersey, says boards of directors may also put the brakes on change.

“There needs to be a broader interest from executives,” he says. “It is down to board sponsorship to allow digital innovation to happen across the organisation; the impetus must come from the top down.”

The board must be willing to work with investors to communicate the digital plan and get buy-in at every level says the Deloitte report. They must also be nimble and flexible in their approach if they are to overcome another common challenge – that financial institutions often “lack enterprise agility” to engage in innovative partnerships. 

In other words, some organisations may be too stuck in their ways – or bound by cumbersome regulation – to work with fast-paced fintechs.

Moss says: “Traditionally, financial services organisations have been very used to a heavily regulated set of processes and they are used to being risk focused in what they do.”

But partnerships operate in two directions, and another challenge in realising digital transformation lies in improving fintechs’ ability to work within the regulatory confines imposed on the financial sector.

“Fintechs are culturally very different from traditional financial services companies,” Moss adds. “If we look at banks, for example, they are regulated at entity level, so everything they do has a heavy regulatory focus. 

“Meanwhile, fintechs are not used to the same level of oversight. Instead, they are focused on using technology to solve a particular problem.”

Moss adds that some financial institutions are overcoming the disconnect with their fintech partners by building in-house innovation labs. 

“Where organisations have succeeded is in creating business units that can run in an agile way and test out different ideas,” he explains. “Some institutions have designed fintech labs and incubators where they work with fintechs, invest in them and help them grow while providing them with the governance and regulatory oversight.”

Even when fintechs and financial organisations have managed to align their frameworks and cultures, the regulatory boundaries in which they must operate present another obstacle. 

According to the report, regulation is playing catch-up with technological advances – those interviewed for the research “consistently stressed a desire for regulation to be more agile and dynamic, supporting the notion of a pivot from regulation to supervision”. 

Moss says this means a move to regulations that are principle-based, technology-neutral and able to stand the test of time. 

This is somewhat at odds with the European Commission Payment Services Directive 2, which, although written half a decade ago, is only just coming into force and may no longer be compatible with the current market environment.

In the Channel Islands, however, favour lies in a progressive regulator which, as the Jersey for Fintech initiative demonstrates, is eager to support digital transformation.

“Jersey is strongly placed to capitalise, particularly around the regulatory infrastructure and investment,” Moss says.

Building a talent pool

Alongside this positive regulatory infrastructure, the Channel Islands need to build a talent pool with the requisite skills to support a digital transformation. 

The report states: “The ability to recruit, develop, and retain workers with the right technical skills is vital to a firm’s ability to digitally transform. While effective strategies to entice top talent need to keep pace, retention emerged as the much bigger challenge for the financial institutions we spoke to.”

While this dearth of skilled personnel is not unique to the Channel Islands, their distance from the mainland means extra effort is involved in enticing people to its financial institutions.

Moss suggests finance firms use digital transformation itself to release employees tied up in laborious manual tasks such as payment processing. This will allow them to focus on more value-added activities that can build much needed revenues.

“[Financial institutions] are often constrained by capacity around talent,” he explains. “As well as using digitisation to improve efficiency, organisations need to start automating and introducing a digital workforce component to release capacity and allow the workforce to focus on higher value activities such as developing new services and products.”

Accessing sufficient finance is also a challenge for organisations already seeing margins tightly squeezed in a fee-conscious, heavily regulated environment that is also suffering the fallout from Covid-19. 

The report states: “The high cost of meeting regulatory compliance requirements is compounded by a challenging macro environment, exacerbating the ability to achieve profitable growth.

"While revenue growth had historically been the primary goal for most banks, many organisations now acknowledge that achieving a lower cost-to-serve is just as important in order to grow profitably.” 

Yet failure to speculate on digital transformation means a reduced chance of potential accumulation from making the change.

“Where boards are making decisions on their change portfolio, they should be looking at those strategic decisions through a digital lens,” Moss adds. “Organisations that don’t reconsider their investment for change in a digital manner face a real a danger of getting left behind competitively.”

Moss points to the success of early tech adopters in navigating the Covid-19 pandemic, which demanded the ability to respond digitally. And he adds that since companies will be paying notable sums to maintain outdated legacy systems, it might be a false economy not to redirect that investment into technology instead.

Importantly, that resource needs to be directed towards improving datasets, formalising processes and ensuring consistency across the piece. 

Moss says the 2018 General Data Protection Regulation (GDPR) has helped companies focus on their data requirements, but more needs to be done. 

Participants in the report said they “still have much to fix and learn from internal data before expanding insights from external data”. Further, many organisations say they have not been capturing the right data attributes for developing insightful analysis. 

Moss believes companies should make more use of cloud-based services. “Local organisations have already made the move to Office 365 and use that platform for emails on the cloud, but there need to be bigger moves to running core databases and analytics through the cloud,” he says.

The digital future looks bright for the Channel Islands. As Moss says, the financial institutions are motivated for change, the regulatory environment is supportive and there are high levels of investment.  

Yet that does not mean the jurisdiction is immune to the many challenges that stand between financial organisations and their digital success. Businesses will need to build on the momentum Jersey for Fintech has created if they are to realise their digital promise. 

Source: Deloitte and the Institute of International Finance, Realizing the Digital Promise

• This feature was first published in the Digital Edition of Businesslife in December 2020