NelsonHall recently attended Capgemini’s financial services analyst conference in Boston, where the company discussed its activities and roadmap for the industry, which is focused on digital services. Here I look at how digital services are now driving Capgemini’s financial services business, with client examples.

Capgemini’s shift to digital financial services

Capgemini formed its financial services unit in 2007 and has grown its financial services business 7-fold from 2007 to 2017, increasing its share of Capgemini’s overall revenue from ~7% to ~28%. In 2014, the financial services unit started its own business transformation to focus on digital services for clients. Today, digital services for global financial institutions represent ~50% of its financial industry business and is growing five times faster than its legacy business. Capgemini’s financial services unit has a client base that is geographically diversified, with ~90% of clients evenly split between the U.S. and Europe, and the rest predominantly in APAC.     

Per Capgemini, and consistent with our research, financial institutions are anticipating severe cost compression over the next five years. For example, some capital markets firms expect 20% cost compression. These firms need to aggressively take out cost and have announced cost takeout programs (e.g. BNY Mellon and State Street) which are now several years old and still ongoing. However, the cost compression will not come in a predictable, straight line fashion. The capital markets industry prices its services based on assets under management (AUM). When the market declines, revenues fall due to declining asset values and redemptions. Capgemini is adapting its pricing mechanisms for hosted and outsourced services to follow the AUM-based revenue streams of its clients. This exposes Capgemini to greater revenue volatility, but should create greater client stickiness by supporting client margins regardless of volumes.

Client examples

The most compelling aspect of the conference was the client presentations. Each of the clients represented has substantially changed its business model to expand its lines of business beyond traditional boundaries. Previously the cost of expanding into new lines of business, with new customer bases and new markets, was cost prohibitive. Now, using digital delivery to lower the cost of entry, financial institutions are creating many new lines of business. Below are two examples of the client activities presented at the conference:

• Large North American bank: this client wants to drive revenues by using APIs to drive ‘headless banking’ and introduce new channels for product distribution. The bank used to launch only fully tested products. Now it is experimenting with launches of beta level products which are then developed in the market. Initial experiments indicate that new products will often require experimentation with pricing models, often derived from non-financial industries, to make the products successful in the market
• Large Asian bank: A well-established bank HQ out of Singapore started its digital initiative few years back and has 30 APIs in use for digital transformation. The bank has implemented many digital bank projects, but some of the LOBs are still in the process of completing their digital transformation. By publishing its APIs, demonstrating successful digital-delivered product launches, and using third-party ITS labor to mitigate the lack of sufficient digital talent to meet demand in Asia, the bank is changing its culture and LOB leaders are pursuing digital product launches as the first choice for new products (due to lower risk and higher expectation of winning new customers). 

In addition, new regulations are driving traditional ITS business, as compliance implementation deadlines continue to drive system modernization. Capgemini has a large payment ITS practice where it is currently working on PSD 2 compliance for European clients. PSD 2 allows any bank customer to use third-party service providers instead of the bank, and requires banks to provide APIs so those third-party providers can access the bank’s platform.

In summary

Banking is changing from a closed-platform industry to an open-platform industry. Digital services are both driving and enabling this change. Capgemini’s client legacy banks are transforming their businesses to adapt to open their platforms to allow customers to customize functionality and products they want to consume. Competitors and partners are gaining access to the bank’s platform to deliver services to the bank’s customers. Creating, managing, and curating APIs is the first step in this evolution. The next step is developing cognitive capabilities to manage the process well.

Finally, the banking industry is being forced to adapt business practices and models from other industries, such as pricing models, to successfully launch new products into the market. Rapid experimentation, coupled with the ability to identify and retain best practices, will be key to banks successfully managing their transition into digital institutions.