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How AI and Digital Transformations Create Value in Financial Products

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Carlos González De Villaumbrosia

November 06, 2023 - 9 min read

Updated: May 6, 2024 - 9 min read

In the sector of financial product development, the influence of digital and AI transformations in financial products is shaping value creation. Despite numerous businesses adopting these technological shifts, a common question remains: "We've embedded digital and AI transformations into our products, but where's the concrete financial return?"

Blog image 1: Digital and AI transformations in Financial Products

Startlingly, global insights reveal that many enterprises have captured merely 31% of the estimated revenue boost and a scant 25% of the projected cost reductions from their digital and AI inclusions. This piece will uncover the real financial consequences of integrating digital and AI into financial products.

What to expect from this article:

  1. Digital divide in banking: Understand how institutions embracing digital & AI innovations fare against those that don’t.

  2. Key drivers: How product-focused impacts of digital transformation affect financial success.

  3. AI in product's lifecycle: Discover the importance of integrating AI and digital tools throughout a product's lifecycle.

  4. Strategies to harness digital power: Unlock actionable insights to optimize your financial products. 

  5. Tech fluency in finance: Grasp the necessity for leaders to speak the digital language and learn from industry pioneers.

The impact on financial products

The banking sector offers an unparalleled lens into the consequences of digital integration on financial products. Analyses of this industry hint at the merits of digital adoption and underscore a strong distinction: those banks that embraced digital enhancements consistently outshone those that lagged.

From 2018 to 2023, most financial institutions, ranging from banks to fintech startups, that went on board with digital transformation and integrated AI into their applications and services enjoyed a pronounced edge in annual total shareholder returns compared to their counterparts that remained more hesitant about these technological leaps. 

Moreover, these forward-thinking institutions saw a notable uptick in their returns on pretax tangible equity (ROTE) throughout these years.  On the contrary, institutions that took a more cautious stance towards integrating both digital and AI innovations into their operations registered only marginal gains in their ROTE during the same timeline.

1. The underlying factors

Diving deeper into digital transformation within the broader financial sector, the product-focused impacts are unmistakably clear. Those institutions that not only championed digital initiatives but also masterfully embedded AI into their products and services carved a distinctive trajectory of success. This strategy amplified their active customer base, drove their revenue graphs upward, and efficiently streamlined operational costs.

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While the pioneers in digital and AI adaptation celebrated a consistent upswing in active user counts and robust retail revenues, the more tentative players often hit a growth ceiling in customer metrics and even registered a slight dip in retail earnings. The story of operational expenses further underlines this divide: while innovators maintained a lid on rising costs, the traditionally inclined faced steeper operational hikes.

However, it would be an oversight to chalk up this success solely to mobile technology integration. Sure, having a user-friendly mobile interface is a prerequisite in today's financial world, but it's merely the starting point. The core of competitive superiority lies in digital sales. Institutions that emphasized innovative product approaches experienced a significant rise in digital sales over five years.

2. The core differentiator

The true driving force lies in how products are designed and operations are planned. Successful institutions integrate digital and AI tools throughout the product's entire lifecycle, from the first customer touchpoint to the detailed aspects of service and maintaining long-term relationships.

This comprehensive, end-to-end commitment to product enhancement and innovation, fortified by AI and digital tools, differentiates the leaders from the pack.

Charting a strategic direction and execution are key. Those financial entities that have harnessed dedicated teams, consistently pushing the boundaries of innovation, have set new benchmarks in optimizing every aspect of the product journey. Their focus on transformation, coupled with a clear vision of the goal, captures the core of value creation in today's financial sector.

Harnessing the power of digital and AI in financial products

The merging of digital and AI has become the foundation for innovation, particularly in financial products. But what strategies truly unlock the potential of these technological advances to offer a competitive edge? 

Blog image 3: Digital and AI transformations in Financial Products

Leaders across industries recognize the need to integrate digital and AI capabilities into their offerings. Yet, the path to combining these technologies with existing systems, personnel, and procedures remains elusive for many. 

To bridge this gap, here are several actionable and adaptable strategies you can employ to excel.

1. Manage data effectively

Harnessing the power of digital transformation and AI demands an acute focus on effective and scalable data management. While it's tempting to dive into innovative algorithms, the real challenge lies in creating systems that can scale across diverse sectors. 

Surprisingly, solutions designed for one industry, such as insurance, can have a significant overlap with entirely different sectors, like mining. This discovery emphasizes the vast potential of reusable code components.

The core of data's potential lies in structured management. 'Data products', managed by dedicated teams, provide organized data sets accessible across various departments. 

Learn more about Data in Product Management

Learn how data analytics can improve Product Management and make informed decisions with our Data-Driven Product Management: Using Analytics To Make Better Product Decisions post.

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Blog thumbnail: Data-Driven Product Management: Using Analytics To Make Better Product Decisions

For example, J.P. Morgan successfully adopted this approach, bypassing the need for a massive data lake and ensuring efficient data access. As a result, their AI-driven tools became more accurate and effective.

It's essential to prioritize strategic data management over expansive data lakes without direction, treating data as a key asset. Financial products' success in the digital age depends on making data accessible and adopting a strategic 'data product' mindset.

2. Be ready to face challenges 

Success in digital and AI transformations requires more than intent and funds; it hinges on top-tier leadership. To truly capitalize on these technologies, initiatives need backing from the organization's highest levels. 

blog image 4: Digital and AI transformations in Financial Products

Forming and leading cross-functional teams towards a unified goal is key. Investment is necessary, but it must be strategic. Though outlining objectives is straightforward, actual implementation is complex, especially with the rapid advancements in data architecture.

Goldman Sachs stands out in this arena. With strong executive leadership, they launched Marcus, a digital-only bank that integrated advanced AI to personalize user experiences, exemplifying the synergy of vision, leadership, and technology.

3. Master adoption and scalability

Adoption and scalability are two critical pillars in digital transformation. While financial backing is essential, the real key is understanding and catering to the end-users.

Rather than allocating funds to vague change management initiatives, businesses need to strategically channel resources into incentivizing adoption. This means ensuring that the individuals responsible for leveraging new digital tools are the actual business owners, not just the digital teams.

Success stories and failures both reveal valuable lessons. For a digital transformation to yield genuine results, it needs to add substantial value to the user.

Rather than solely collecting data, the focus should be on enhancing the user's experience and providing solutions that resonate with their day-to-day operations. Digital transformations are, after all, a mix of art and strategy, necessitating both creative and practical approaches.

4. Gain a long-term vision

Digital transformation isn't about seeking immediate solutions or hoping for instantaneous results. Companies often find themselves burdened with technological debt, resulting in outdated systems and integration challenges that hamper their ability to adopt innovations swiftly. While it's tempting to look for shortcuts, building a robust digital infrastructure requires both time and sustained effort.

blog image 6: Digital and AI transformations in Financial Products

A significant oversight many businesses make is treating digital transformation as a one-time task. They pour resources and time into short-term projects, expecting immediate results, without realizing the essence of true digital evolution. Such an approach doesn't account for the dynamic nature of technology and market demands. It's a continuous process, not a finite project.

For example, consider JPMorgan Chase & Co., one of the largest global banks. Over the years, they've understood the essence of continuous digital evolution. With initiatives like the launch of their digital-only banking platform, 'Chase Digital', they've showcased how digital transformation is a long-term investment, not a short-term remedy. Instead of just implementing new tools, the bank focuses on integrating these tools into its existing systems, always with an eye on the future.

5. Nurture talent

Successful digital transformation centers on people. Combining advanced technology with the right talent is key. Upskilling current teams, as JPMorgan Chase did, can be more efficient than only hiring new tech talent. Recruitment should go beyond hiring, focusing also on effective onboarding and retaining talent. 

Adjusting talent management, like valuing skills over tenure, and understanding varying expertise within roles are essential as well. The emerging role of the 'Product Leader' blends business, customer, and tech insights, like at Fidelity Investments, ensuring products meet user needs. CEOs should adopt an operational model that benefits the whole organization in its digital journey.

6. Gain tech fluency in financial transformation

A foundational step for leaders is to prioritize education. Before embarking on any transformative path, you should spend a significant amount of time learning the tech lingua franca. 

In today's financial sector, understanding terms like 'data engineer', 'technology stack', and 'data architecture' is paramount. This equates to learning from other industry players and fostering a shared tech vocabulary.

Leading this shift is the CEO. No longer is tech expertise just the domain of the Chief Information Officer (CIO). Modern successful businesses centralize technology in their strategies, effectively making each business leader a tech advocate.

Take Jamie Dimon, JPMorgan Chase's CEO, as an example. He didn't merely delegate tech responsibilities but took the initiative to grasp the intricacies himself. Initiatives like the Chase mobile app and JPM Coin attest to his tech-forward approach, cultivating a culture of continuous learning throughout the company. Instead of placing blame during challenges, the emphasis is on improvement and adaptation.

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At its core, the evolution hinges on cultivating a tech-fluent, agile mindset throughout the organization. As we stand on top of a financial revolution, the challenge lies in harnessing these digital tools effectively, fostering continuous learning, and maintaining an unwavering commitment to excellence. The future of finance is undoubtedly digital, and those poised to lead are the ones who speak its language fluently.

Updated: May 6, 2024

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