FS Tech 2022: Q&A with Karen Avey
Simon Hemsley speaks to Karen Avey, an Armstrong specialist about the opportunities for FS Tech. Karen has worked on numerous B2B research studies for global banks, insurance companies, wealth managers and payment providers as well as voice of the customer programmes for Appway and Accenture. She has supported several successful FS buy side deals for Armstrong.
Understanding FS tech
“Customers are used to the speed and convenience of Amazon, and they now expect that from their banks and insurers as well.” Karen
We talk to our clients and companies a lot about fintech – how different is fintech to financial services technology that banks and insurers and others have been using for decades?
I don’t think it’s that different in theory. They’re both about applying new technology to financial services (FS) businesses, that’s it. They’re using a whole range of technologies to transform the FS industry, which covers banking, insurance, wealth management etc. Where fintech is perhaps different is that it’s tech-first, so deploying automated processes, data analytics, cloud, AI and machine learning as part of the IT environment. There’s an opportunity for fintech firms to displace legacy tech providers.
FS has always been a leader in technology, driven in part by the need to process large amounts of complex data, and to automate processes to increase efficiency and cut costs. Do you think there’s been a step change in the interest and investment in tech in recent years?
The banks are further ahead of most FS sectors now, as they’ve invested more in systems and transformation. Wealth management is trying to catch up. I spoke to a range of insurance companies on a recent project and I was surprised by how far behind banking they are. I get the impression that they have a lot more legacy systems than in banking.
Things are starting to change though as insurance companies, similar to banks, realise they have to digitise rapidly to avoid being left behind. These are real challenges for companies trying to transform their tech and processes, and I’ve seen this with the banks and insurance companies who are struggling to find the development skills they need.
There’s a real skills gap especially when you’re operating in a complex, highly regulated environment where people need to know the tech, the sector, market practice, the regulation and how products are priced. FS companies can’t risk their reputations and the market seems to be moving towards outsourcing technology development to get round the problem of finding the right people.
Drivers for adopting technology
“The CTOs and COOs I’ve spoken to from more traditional financial institutions want to remove the complexity of running multiple ageing systems that don’t talk to each other.” Karen
What are the key drivers and use cases for FS companies looking at new tech?
I speak to a lot of Chief Technology Officers, and everyone has different pain points, but there are some common themes.
1. Customer service
Customers are used to the speed and convenience of Amazon, and they now expect that from their banks and insurers as well. The pandemic has sped up this technology adoption as people have become increasingly comfortable transacting online. That’s unlikely to drop back significantly, so it’s a real competitive advantage for FS companies who can build effective, efficient tech-enabled services.
Regulatory compliance is still a major driver. For banks better tech can reduce the operating costs of complying with regulations as well as improving their chance of finding suspicious transactions. False negatives (like missing potential money laundering) are objectively bad, but many false positives (potential cases that turn out not to be money laundering) can be expensive to hunt down. Better tech can improve the chances of finding the signal from the bad guys as well as reducing time spent sifting through the noise of false reports.
3. Legacy systems
The CTOs and CEOs I’ve spoken to from more traditional financial institutions want to remove the complexity of running multiple ageing systems that don’t talk to each other. They’ve all got these legacy systems that aren’t customer friendly, are expensive to run and it’s getting increasingly difficult to find staff with the skills to maintain them. They want to make things faster and cheaper and they see clear benefits to adopting modern financial technology; more efficiency, customer centricity, and profitable growth.
4. Complex ecosystems
These are complex environments to operate in. For insurance the market is fragmented and they often sell their insurance products through lots of different channels, including banks. These channels may own the customer relationship and the insurer provides the product; the end user just wants to have everything in one place. Not only does the insurer need an IT platform that delivers across all its functions; it also must interface properly with the banks. Added to that it has to conform to all the regulations and data protection laws.
5. Cyber security
There’s also obviously data security and privacy concerns. The costs are massive, IBM recently worked out that the average cost of a data breach in the financial industry is $5.72m. Cyber criminals are increasingly sophisticated, and the FS sector is an attractive target. It’s not just the costs, the reputational damage and regulatory implications are huge.
Opportunities for investors
“It’s hard to innovate using legacy systems and yet it’s really difficult when you look around the market to replace them.” Karen
Is there an inherent tension in financial services between choosing a set of “best of breed” systems or just picking one system that does everything? In my experience, while a system might be able to do everything, it’s probably not going to be good at actually doing all of those things.
Often customers have to choose best of breed systems because they cannot find a niche system that can do everything they need it to. For instance, claims is a core process for insurance companies and their legacy claims handling systems are complicated, slow and falling over. Insurance companies have got this real drive to offer digital self-service because customers want to settle claims much more quickly. They want to invest more into claims settlement using AI for the lower value claims to get them settled within 24 hours. It’s hard to innovate using their legacy systems and yet it’s really difficult when you look around the market to replace them. There’s nothing off the shelf that does a proper job of claims handling. There are definitely investment opportunities for FS tech that delivers a credible, robust and agile claims handling system.
Are there technology trends that investors should be aware of?
FS tech deals continued during the pandemic and there seems to be no sign of activity letting up. It’s a really popular area for investors and you can see why when everybody in FS is talking about digitisation, moving to cloud, improving customer service, cost cutting, efficiency and increasing revenue.
What’s driving fintech is new, it’s about making consumer’s lives simpler whether they are spending, saving or investing money. If they’re going to get the best from an app, as a consumer, it needs to be able to access their bank account, say via an API, and that app will have to have FCA approval as well.
Services and sectors that support that shift include:
- Payments: There are some impressive fintechs in payments, Square has millions of businesses of all sizes – from start-ups to large enterprises – they’re using Stripe’s software and APIs to accept payments, send pay outs, and manage their businesses online.
- Neo banks: Neo banks (also known as an online bank, internet-only bank, virtual bank, or digital bank) are financial institution that operate exclusively online without traditional physical branch networks. Users perform their financial transactions through Neo bank’s app or website. Neo banks offer low fees (no infrastructure cost), better customer service, and enhanced technology using AI. The market size of neo banks was estimated at nearly $35 billion in 2020. A good example is N26 in Germany which got a full German banking license in 2016 and now has customers across Europe.
- Embedded finance and banking-as-a-service: This is where companies and ecosystems embed financial services in their offerings effectively making every company a fintech company. There’s an opportunity here for mid-tier technology companies to play an important intermediary role between traditional financial institutions and their clients; helping them to manage risk and compliance.
- Digital currencies and blockchain are hardly a new trend but they’re quietly becoming part of the underpinnings of new technologies.
- Buy Now, Pay Later (BNPL) is interesting with companies like Klarna who offer direct payments, pay after delivery options and instalment plans in a one-click purchase experience. We’re close to the moment where, as consumers, we’ll be able to do all our financial transactions through one place.
There’s all sorts of interesting new companies and ideas. We’re also seeing crossover into other disruptive technologies like wearables; there’s a company called Preventicum that offers insurance companies a solution which can detect users’ cardiac arrhythmia via smartphone. What’s next is really hard to predict. Given that customers want convenience and speed these trends are very attractive. FS doesn’t really have the option of ‘do nothing’ about them.
Challenges to growth
“FS tech is not one big bucket.” Karen
What are the challenges to adoption of tech by FS companies?
There are the usual implementation challenges of slow delivery, over promising and overspending. You also have to meet the regulation and compliance requirements of both the sector and the jurisdiction you’re operating in. It can quickly become fiendishly complicated and makes it a difficult market to enter.
It’s really important for investors to keep in mind that FS tech is not one big bucket. If an insurance company is looking at their customer journey, they look for an expert in customer journey with experience of insurance. They need both, however, even if you’re an expert in customer journey, they won’t use you if you’re not in the insurance market. The same applies to jurisdictions because they all have different rules. If you’re an expert in Switzerland, it’s really hard to break out of that. Swiss customers want someone who understands Swiss regulation.
Purchasing criteria for tech
“It surprises me how often it still comes back to relationships.” Karen
What are the key criteria for purchasing tech in FS?
It’s important to recognise that these technologies are increasingly strategic, business driven and no longer led by IT. That means the product needs to be easy to use, offer a great user experience and do what it says on the tin. I know that sounds basic, but they don’t always! They may also be working with consulting firms who will influence the decision. It’s important that the FS client likes and has confidence in the team they’re working with. It surprises me how often it still comes back to relationships and that companies prefer to buy technology from people they know or is used by their peers.
Frequently companies can’t properly articulate what they want and need a lot of guidance. It’s important their suppliers listen to their requirements to build the trust of their customers. I’ve spoken to companies who’ve signed on the dotted line without really understanding the difficulty of the implementation, this is exacerbated by the gap in skills we talked about earlier. Often FS companies are looking for the low code / no code approach discussed in Mike Callow’s article where they can train their people to make changes easily and quickly.
This goes back to how to grow these businesses. It’s not like a consultancy where you can hire in people to get the relationships. On the technical side technology companies may take a buy and build approach as they look to add functionality to their product offering. A problem for mid-tier tech companies is that the fintechs get snapped up really quickly and often by the tech giants. PayPal has bought loads, for example they recently bought Izettle which lots of small businesses were looking at. Similarly, FNZ buying Appway is part of the move towards giving institutions a single platform.
The next technology is hard to predict. We do know FS companies still have a long way to go on their digital transformation journeys and they’re all at different stages. Also, that there’ll always be a need to evolve technology in FS to meet customer needs and regulators demands, as both change all the time.
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