Addressing the challenges and riding on the trends in banking and finance for a sustainable digital economy

Technology has revolutionized the financial industry and created a new field of fintech players and digital challengers. Traditional banks cannot sit back, and are digitally transforming to become more efficient and to provide better customer experience.

In recent years, digital banks have become increasingly common in the Asia Pacific. Digital trends and ESG mandates have significantly impacted the financial industry, and fintechs are part of that modernization of the industry.

However, traditional banking and financial services companies have found modernization more challenging due to cumbersome legacy systems, and the need to manage changes to regulations and respond to global forces that continuously affect the industry.

DigiconAsia had the opportunity to interview Dirk Kruse, Global CEO, SAP Fioneer, for his expert perspective of challenges and trends in the fast-evolving world of digital banking.

What are some key challenges financial institutions are facing today?

Dirk Kruse (DK): It is no secret that the financial services industry is changing – fundamentally and at a fast pace.

On the one hand, financial services companies are under growing pressure to deliver better, faster, digital experiences for their customers. But on the other hand, they are also under pressure to provide ever increasing transparency, accountability, and reporting to the regulators.

In the case of incumbents, they are faced with how on earth they are going to update and replace their legacy systems to meet these new requirements, at the necessary commercial speed, without incurring the significant risks of operational failure and budget blowout. Meanwhile, the new digital players are wondering how they can get to market quickly enough and on limited funds.

Data is a huge concern. Not only how to centralise, synchronize and streamline data, so that it can be successfully leveraged to deliver much better personalized customer experiences and business efficiencies, but how to keep it secure.

However, the good news is that there are advanced technological solutions to these problems, and this is exactly where SAP Fioneer plays; providing the products and support to ease and accelerate digital transformation for financial services, and drive innovation to add value to customers and the business.

What are some key trends in core banking and the strategy needed to succeed in the digital economy?

DK: We see seven trends in the core banking market – banks need to address these to service their customers and remain competitive

    1. Open and flexible core operations with configurable standard functionality and for “plug & play” integration with (third-party) business services. Making a bank ‘future fit’ means building in the ability to quickly adapt and connect to multiple new services.
    2. Legacy modernization and clean cores via standard software and APIs, and the decoupling of business and core services. It is essential both for risk mitigation and rapid innovation to keep these components segregated to minimize operational disruption and maximize delivery speed.
    3. Ecosystem banking, acting as open one-stop-shops for financial services solutions and the integration of financial services into non-banking environments (‘embedded finance’). The consumer demand for integrated or ‘invisible’ finance is actually a new revenue stream opportunity for banks.
    4. Seamless omni-channel experience via end-to-end processes and data orchestration across channels and customer self-service. This needs to be planned for and built into any solution; it is now a hygiene factor for customer experience.
    5. Customer-centric, innovative products personalized to match customer needs and obtained through e2e (end to end) processes. Behavioral banking is on the rise; a hyper-personalized service that benefits the customer while reducing risk for the bank.
    6. Move to the cloud to reduce TCO (total cost of ownership), become more agile, improve risk management and launch new services faster. The cloud offers many benefits, and actually reduces risk.
    7. Emerging technologies such as Artificial Intelligence make operations more efficient and help banks in expanding their product portfolios.

There are significant opportunities for banks through all of this. What is fundamental is the need for a data foundation and architecture on which they can build for the future. They also need a core banking solution that is proven, reliable and highly scalable.

Why is ESG a challenge for the banking and finance industry, and how can digital transformation help?

DK: Over the last few years, ESG (environmental, social, and governance) has become an important theme for banks across the world. Europe is at the forefront of this development, which is driven by a rapidly evolving regulatory framework which is challenging the banking industry – as the main industry in focus – to channel financial flows more sustainably.

In addition to regulatory pressure, financial services companies face two other challenges as they try to adopt ESG principles; the business challenge and the implementation challenge.

While regulation of the social and governance components of ESG is still at a very early stage, sustainability reporting is well established. Banks in Europe have been required to report on policies implemented in response to ESG factors since 2018 under the Non-Financial Reporting Directive (NFRD), but the extent and rigor required of such reporting is increasing with CSRD significantly to name one of the many new regulations. Whist CSRD does not apply in Asia, we can expect the requirements for ESG reporting to follow a similar path, and many here are already following the TFCD (Task Force on Climate-Related Financial Disclosures) guidelines.

These changes will hit risk and finance departments the hardest because they will affect the entire risk framework of banks. New data will need to be collected and analyzed, which will require adjustments to internal processes, models, and disclosures.

But ESG challenges go beyond regulation and the risk and finance department. They require a wholesale transformation. Every bank business function will be confronted with unique, but interrelated, problems that are expected to grow in the coming years.

For example, strategy and business development units will need to set an overall ESG strategy, laying out their path to net-zero emissions by 2050. This requires measuring the emissions of their entire portfolio. To achieve this, banks must not only collect and analyze entirely new types of data, but also steer their portfolio and adjust their sales and pricing mechanisms to achieve their net-zero goals.

To build a solid ESG Foundation, banks are struggling with four key challenges:

    1. ESG affects different parts of banks in interrelated ways. For instance, in Europe the risk department must perform the climate risk stress test and report the result to the ECB, as well as applying the results to adjust risk frameworks and upstream and downstream systems, in order to incorporate climate risk into the bank’s risk steering mechanisms. Other departments will also need to consume and process ESG risk metrics and integrate with their own ESG metrics in partially overlapping upstream and downstream systems. The number of adjustments needed and the number of affected systems challenges make it difficult for banks to introduce efficient ESG processes. A solution is needed to accommodate use cases across the board.
    2. Data and analytics are currently being held in silos. ESG data is required in different areas of the bank for their specific use cases. Currently, firms are building up several ESG data repositories, often using highly manual methods, that are not easily accessible across the bank. More importantly, this poses a reputational and compliance risk as efficient reproduction and trail of ESG metrics becomes tedious.
    3. High-quality market data is not widely available. ESG data, such as emissions levels or climate risk exposure is typically obtained from public sources, corporate clients, or ESG data providers. While clients are starting to report on ESG data, and data providers are emerging and evolving quickly, ESG data remains scarce, particularly for small and medium-sized companies (SMEs). In the EU, more data may soon be a legal requirement. Currently, banks must also match external data to bank internal counterparty records and/or asset-level records and harmonize conflicting data points, which requires a lot of time-intensive manual work.
    4. ESG requirements for banks are constantly evolving. Regulatory requirements and expectations from other stakeholder groups such as customers, employees, or investors change frequently. As a result, banks need their ESG solutions to be flexible, especially given the growing regulatory demands and be able to accommodate future use cases. At the moment, these requirements make it particularly challenging for banks to implement an efficient, standardized ESG process across the bank.

To sum up, ESG affects different bank departments in interrelated ways, and those challenges will only increase in the coming years. This means that banks urgently need to develop flexible, efficient, future-proof, and scalable solutions to integrate ESG principles. They need sustainability software that is truly sustainable. Some of the new requirements already apply to financial services companies in Asia already operating in European markets. And generally, the ESG pressure is increasing with regulators such as the MAS in Singapore looking to lead the way.

What is SAP Fioneer’s concept of a Sustainable Finance Platform, and how does it help Asia Pacific’s financial institutions in their digital and ESG transformation?

DK: SAP Fioneer is developing the Sustainable Finance Platform – the ESG platform enabling banks to tackle their end-to-end ESG challenges centrally across all bank units.

The platform is built around a Sustainable Finance Workplace, consolidating holistic, bank-integrated ESG applications, such as climate risk stress testing, ESG advisory, and emission management and steering.

The Sustainable Finance Workplace builds on a central Sustainable Finance Data Hub, a reliable, regulation-compliant single source of ESG truth within the bank. It consists of two core elements: the bank integrated data pool that connects and harmonizes external data with a bank’s internal ESG data. That external data is sourced through the ESG data marketplace, where the bank can choose from contracted prominent ESG data providers and prioritize data fields based on a central data model.

Our standardized ESG software solution produces a data foundation with a clear audit trail that is integrated into all existing banking processes.

We are building an initial use case within the Sustainable Finance Workplace: a holistic ESG client data collection solution that helps banks to collect and verify ESG data from clients in a structured and efficient manner. This choice of prioritization is based on the realization that no matter how well the Sustainable Data Hub is designed, in the current stage ESG data availability from public and proprietary sources alone is insufficient in coverage and reliability in order to fulfill a bank’s ESG requirements. Therefore, we see the client data collection solution as a pressing use case at the moment for banks.

The Client data collection solution consists of an easy to navigate frontend, pre-filled with existing internal and external ESG client data. Hence, the solution minimizes manual effort and time spent in particular for a bank or corporate customer that might have to provide this type of ESG data to a number of banks.

ESG will only play a more central role in the financial services industry. This brings many challenges, but also creates incredible potential, both commercial and societal. Banks need suitable software in order to unlock this potential.