idc futurescape: worldwide financial services 2020 predictions€¦ · in no particular order, our...

October 2019, IDC #US44313719

IDC FutureScape

IDC FutureScape: Worldwide Financial Services 2020 Predictions

Marc DeCastro Michael Araneta Steven D'Alfonso Rivka Gewirtz LittleSabitha Majukumar Robert Parker Karel Pleva Jerry SilvaMartin Stiller Thomas Zink

IDC FUTURESCAPE FIGURE

FIGURE 1

IDC FutureScape: Worldwide Financial Services 2020 Top 10 Predictions

Note: Marker number refers only to the order the prediction appears in the document and does not indicate rank or importance,

unless otherwise noted in the Executive Summary.

Source: IDC Financial Insights, 2019

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EXECUTIVE SUMMARY

This IDC Financial Insights study presents the top 10 predictions for the financial services industries. Each prediction is shaped by a common set of key drivers that provides a planning tool for technology leaders and their line-of-business counterparts to use in their IT strategic planning efforts. The challenges of the industry today continue to be shaped by trying to match fintech innovations, meet customer expectations, and protect the brand while resources are scarce and regulatory burdens persist.

In no particular order, our 2020 predictions for the worldwide financial services market are as follows:

Prediction 1: By 2022, 50% of insurers worldwide will work with at least three insurtechs, as the industry adapts to an evolving connected ecosystem.

Prediction 2: By 2023, 10% of the world's adults will register for a blockchain-based self-sovereign identity, creating an expanding market of 485 million people who seek to own and control their digital identity.

Prediction 3: By 2021, 15% of in-branch transactions will be prestaged on digital platforms and fulfilled at ATMs, drive ups, tellers, or lockers at the branch as physical and digital experiences merge.

Prediction 4: By 2024, 40% of banks will partner with fintech disruptors through cloud ecosystems to offer real-time payment overlay products addressing business and cross-border challenges.

Prediction 5: By 2023, 40% of insurers will automate claims processes with artificial intelligence technologies and conversational interfaces to improve speed of response, efficiency, and personalization.

Prediction 6: By 2021, the penetration of microinsurance will grow by more than 20%, fueled by uptake of mobile payments, insurtech innovation, and the resulting lower transaction costs for insurers.

Prediction 7: By 2025, 50% of global tier 1 banks will use quantum computing to review portfolio allocations, algorithmic trading, and pricing strategies, exponentially improving the ability to respond to the market.

Prediction 8: By 2024, 80% of banks will be purchasing and integrating fintech solutions from cloud marketplaces.

Prediction 9: As traditional corporate banking business models are coming under pressure, new XaaS models will grow to 4% of total corporate banking revenue by 2023.

Prediction 10: By 2022, 20% of banks will expand lending to nontraditional consumer and small business borrowers by using machine learning, alternative data, and fintech partnerships.

This IDC Financial Insights study developed seven drivers that both CIOs and their business partners should consider over the next five years. The list is not meant to be exhaustive nor is it meant to be final. IDC Financial Insights publishes a new list of drivers annually, and many are evolutionary. Last year's drivers were instrumental in developing this list, just as this year's drivers will be critical to the formulation of next year's drivers.

Of the seven drivers, it became clear that some drivers had further reach within financial services than others. These drivers are more far reaching and thus are likely to have the most complexity and cost in implementation. Key drivers listed in the Summary of External Drivers section are in order based onthe number of times they were cited by the global analyst team as impacting the prediction. At the end of the study (see the External Drivers: Detail section), a more in-depth analysis of the drivers is provided.

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According to Marc DeCastro, research director, IDC Financial Insights, "As disruption becomes the

new normal, incumbent financial service firms are finding that they need to do more than just keep up

with those challenging the status quo. Customers' expectations continue to rise as the implementation

of innovation is being accelerated by things such as artificial intelligence, the Internet of Things, next-

generation security, and robotics. Now, more than ever, financial institutions must embrace

transformation while balancing risk, security, and compliance requirements."

IDC FUTURESCAPE PREDICTIONS

Summary of External Drivers

Rising customer expectations: More convenience, customization, and control

The age of innovation: Driving the future enterprise

The platform economy: Competing at hyperscale

Accelerated disruption: Navigating business challenges as volatility intensifies

Intelligence everywhere: AI's opportunity and implications

Crisis of digital trust: Escalating threats mandates strategic responses

The future of work: Agile, augmented, borderless, and reconfigurable

Predictions: Impact on Technology Buyers

Prediction 1: By 2022, 50% of Insurers Worldwide Will Work with at Least Three Insurtechs, as the Industry Adapts to an Evolving Connected Ecosystem

The insurance industry worldwide is flourishing, in terms of not only markets (there is significant growth

in the uninsured in developing markets) or premiums but also insurers exploring alternative networks

of value creation. This value creation expands the notion of the insurer's business from traditional risk

protection to being more "connected" to the day-to-day life (personal), operations (corporate), and

management of assets (property and casualty and others) of customers. Insurance therefore becomes

more "connected," following IDC Financial Insights' view of the major transformation ongoing in

banking. In the evolving connected insurance ecosystem, the insurtechs — those that were meant to

disintermediate traditional insurers — do not make headway on their own, instead, they partner with the

long-standing global insurers (i.e., a shift from disruptors to enablers). However, for this model to fully

take root, incumbent insurers will need to open core parts of their technology, business processes, and

operations.

Core insurance systems are opening up to technology capabilities from new third-party solution

providers — all aiding in new ways of risk assessments, risk pricing, and product development. Of

course, global insurers will prefer global partnerships among insurtechs, but country-specific insurers

will opt for a larger number, and a broader spectrum, of insurtechs. Leading to a higher-than-usual IT

budget growth among insurers in the near term is the push for industrialized product development

(including design, rules, pricing, and configuration management) externalized from the core engine

and supported by insurtech partners. Technology teams will have to build API-enabled business

processes that allow trusted third-party partners to create this new insurance product-and-service life

cycle, supported by a "platform" business model that allows multiple participants (fintechs, customers,

and suppliers of value) to connect and interact to create and exchange capabilities. Insurers too will

need to connect to new data sources essential in the use of advanced analytics for hyper-

personalizing customer experiences (CXs), but also in personalized pricing and fraud management.

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Associated Drivers





IT Impact

Technology teams within insurance organizations will work toward creating a platform that is able to integrate various solutions and service providers to bring in speed and agility in business functions so that the business can focus on its core competencies of risk and pricing and build its new competencies in ecosystem building.

Unlike monolithic legacy systems, platform solutions help develop systems of engagement (particularly channel systems) much faster than before.

New types of technology risk considerations emerge as this more open and more collaborative insurance gains momentum. These include information security threats for new channel types, but also risks in new business processes for claims and policies, identity and access management, web application protection, and API governance and security.

IT teams will take on this pro-growth, pro-innovation agenda while they continue to meet burgeoning requirements for governance, risk, and compliance (GRC). Insurers will have to ensure that there is no trade-off between the pursuit of real and long-term connected insurance and urgent compliance work.

Business Impact

Business has to be good at adapting rapid product development frameworks, but also frameworks for business and IT alignment, as new products, product features, and functionalities are iterated, built, and brought to the market quickly. Anticipate long product development cycles, typically 6–18 months, even in mature markets.

Insurtech solutions around customer experience, on-demand insurance, usage- and value-centric offerings, and frictionless insurance experiences are most mature and are first among insurtech adoption. White labeling is a strong trend among many leading insurance organizations investing in or partnering with insurtechs.

Take a clear customer-focused agenda when evaluating partners. How would these new ways of insurance make it easier for customers to consider, buy, own, and manage insurance products — and especially for price-sensitive markets, how do all these reduce the cost of insurance products and services?

Guidance

Identify and partner with insurtechs that align with the insurer's strategic priorities — especially couched around being more customer centric. This will ensure that insurers are able to establish themselves as truly transformative digital players that respond to changing customer and market needs in the evolving connected insurance ecosystem.

Take on the approach of several forward-looking insurers for partnering best practices. Consider also the alliances/association of insurtechs with leading digital transformation (DX)service providers in the market as an important criterion. This will help mitigate potential delivery and scalability issues in the long run.

Work with technology partners that can support modular and microservices-based insurance applications, as these are inevitably the technology architecture in connected insurance. Technology service providers should also be able to support pay-per-use options — as these become the new methods of technology provisioning and consumption among insurtechs.

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Prediction 2: By 2023, 10% of the World's Adults Will Register for a Blockchain-Based Self-Sovereign Identity, Creating an Expanding Market of 485 Million People Who Seek to Own and Control Their Digital Identity

The regular occurrence and increasing scale of data breaches that affect millions of people are driving

internet users' desire for control over their identity. Currently, individuals maintain many digital

identities, one for each organization we interact with online. Self-sovereign identity (SSI) based on

blockchain technology will enable users to control access to their digital identity attributes. Blockchain

and allied technologies, such as distributed ledgers, have emerged in the customer identity and

access management space because they provide secure, controlled, and trusted access to users'

identity attributes on an immutable record. Users control a "digital identity wallet," which will create a

universal log-in across disparate websites or applications. From a bank perspective, online users

applying for new accounts using SSI will be trusted entities, eliminating new account fraud risk.

Associated Drivers






IT Impact

Adopting a blockchain-based identity scheme will require a substantial development to ensure alignment with blockchain protocols and address interoperability with internal and external systems. Vendor-provided solutions will not be functional out of the box without development

work.

Scaling issues will arise in early days as individuals, banks, and governments ramp up

adoption of blockchain SSI. Blockchain success is dependent on a network effect, and as

more organizations adopt SSI, more value will be derived from the technology.

Blockchain identity initiatives often get stuck in development and research stages because of a

lack of stakeholder "buy-in" across the organization.

Business Impact

Strategic direction must be coordinated from the top of the organization to ensure that all business lines and applications will be aligned. Coordination at the chief risk officer or chief

privacy officer is a likely starting point.

SSI adoption will require a new way of thinking within institutions. Under SSI, the user is the

sole owner of his/her personal data and controls which attributes are shared and with whom.

SSI can provide a substantial benefit to a bank's know-your-customer (KYC) process. Today, KYC processes across the banking industry are challenged with reducing operating expense associated with the onboarding of new customers. An SSI scheme can enable an efficient,

accurate, and auditable process.

Guidance

Develop a digital identity road map for your organization. Engage all stakeholders and the board of directors to agree on and determine the direction and technologies that the

organization will adopt and move forward with.

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Centralize customer identity management and KYC functions to ensure that the blockchain

digital identity can be used by all lines of business, ensuring a seamless customer experience.

Financial institutions will need to reimagine the identity verification and authentication process. Banks must prepare to accept blockchain-based SSI as well as federated identities that may

be built using various distributed ledgers or security protocols. Financial institutions should consider working with firms that have built identity networks allowing them to act as an

"identity broker."

Prediction 3: By 2021, 15% of In-Branch Transactions Will Be Prestaged on Digital Platforms and Fulfilled at ATMs, Drive Ups, Tellers, or Lockers at the Branch as Physical and Digital Experiences Merge

The branch continues to be a strategic initiative for financial institutions around the world. Incumbent

banks have a significant investment already in the branch, and with declining transactions and

expensive overhead, they continue to try to figure out how to best optimize the branch network.

Challenger banks often do not have access to a physical location and thus need to contend with how

to satisfy the needs of the customer, which at times requires a visit to a financial institution location to

close a loan when a wet signature is required, to make a currency and coin deposit, or quite honestly

to complete a transaction that simply does not lend itself well to self-service digital technology.

Prestaging transactions is something that many institutions have begun rolling out, primarily through the

use of the mobile phone to prestage an ATM transaction. Consumers are still warming up to the benefits

of prestaging a transaction, and at the moment, there is no significant time savings of going to an ATM

and dipping your card versus prestaging on mobile banking. What may change this is the introduction of

physical lockers, similar to what is being used by some of the large retailers. If consumers can prestage a

transaction, let's say a cash withdrawal with a very specific breakdown of denominations not available at

the ATM, and pick it up 24 hours a day, 7 days a week at a branch locker, then we anticipate prestaging

will become more popular. This also will continue to shift the branch workforce away from fulfilling

transactions and more to being advisors on bank products and services.

Associated Drivers





IT Impact

Modifications will be required in the branch to properly handle prestaged transactions. This includes modifying existing ATM software to recognize a card swipe or NFC tap from a card

that is in the process of completing the transaction.

Hardware modifications at the ATM must be accelerated to allow NFC technology, particularly

as digital banking platforms and digital wallets gain in acceptance and usage.

Solutions that are currently being rolled out by large big-box retailers of having onsite lockers

to complete a transaction will become necessary in some locations.

For remote locations, enhanced networking and communications will be required in addition to

higher levels of physical and digital security, particularly where lockers are installed.

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Business Impact

Modifying customer experiences that highlight the ability to prestage will need to find screen space on the mobile and online experiences. As new features and functions are added,

financial institutions may need to start to reassess how they design the user experience (UX)

and create it from the lens of the customer as opposed to that of the financial institution.

Adoption of digital wallets has been faster in some regions than in others; however, the ability to authenticate using NFC, whether through a digital wallet or through the financial institutions,will provide the customer with more options to use the bank's plastic to conduct transactions in

the branch or at an ATM.

Improve customer loyalty by having lockers available that can provide customers with

everything from money orders, reordered checks, replacement debit cards, or cash in therequired denominations, which will provide bank employees with the ability to offload some

routine transactions even further and focus on more cross-selling and complex activity.

Customers will demand that they have network availability and it will be provided to them in a

safe and secure environment in order for them to use these solutions, particularly the lockers.

Guidance

Work with firms that lead on customer experience and develop digital banking solutions that look at how a customer might anticipate his/her banking experience. Borrow concepts from nonbank entities that have mastered the art of a beautifully and functionally designed

experience.

NFC has to become more readily available in order to start the process of creating a digital

wallet and reduce the overhead of plastic management. Banks need to begin serious rollout of NFC adoption at the ATM as well as for in-branch authentication and also work with retailers

for point-of-sale integration.

Lockers represent a great opportunity of merging automation, technology, and a personal experience. Locker concepts are likely going to be more successful with a concierge type

approach that guides individuals to the lockers to pick up their prestaged transaction and

provides the bank with a great face-to-face opportunity.

Brightly lit and secure environments for lockers will be required, and perhaps, some institutions may choose to first only offer lockers in the branch lobby as customers get used to the idea of picking up their transaction request. For remote locations, telecommunication

upgrades may be required, especially as video interactions with customers is added.

Prediction 4: By 2024, 40% of Banks Will Partner with Fintech Disruptors Through Cloud Ecosystems to Offer Real-Time Payment Overlay Products Addressing Business and Cross-Border Challenges

Real-time payment schemes have emerged across the globe, promising much needed speed in

settlement. But these rails also introduce infrastructure modernization, which enables digital,

automated, and intelligent payments and openness for innovation. It is at the intersection of speed and

modernization that banks and fintech collaborators will find entirely new revenue streams.

Modernization is driven by payment schemes, which are generally designed with built-in overlays that

allow banks and third-party partners to design unique payment products that run atop the rails. In

addition, most schemes are built to support ISO 20022 messaging protocols, which allow payments to

run with rich free-field data, including entire invoices or in-depth instructions. These data-driven

payments lie at the heart of new products.

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In the early days of real-time payments, banks have been largely unclear on how they will productize

and monetize adoption of new rails. Customers aren't necessarily prepared though to significantly pay

more for simply speed in processing. In general, the revenue linked to basic money movement is flat or

at least has slowed in growth. Fintechs, on the other hand, have made significant progress in creating

value around added commercial payment capabilities. Now, as open API ecosystems emerge, banks

will partner with fintechs to design groundbreaking services that operationalize data-rich payments and

speed.

Applications already emerging include integration of payments into ERP systems in the corporate

treasury for rapid invoice and payout automation, as well as the ability to offer on-demand batch

payments, such as emergency payroll. While banks could design these integrated payment solutions

on their own, they will increase their transaction volume, speed of innovation, and market reach by

partnering with fintechs. To facilitate this shared ecosystem, banks are investing in payment

processing platforms that are real-time and modernization ready, as well as API ecosystems that allow

third parties to originate payments that run through the bank. Many vendors now offer payment

processing platforms or hubs that are agile enough to support a multitude of new payment offerings

and which interconnect with a cloud-based API framework and orchestration layer to enable

collaboration.

Associated Drivers




IT Impact

Many banks will need to re-architect their payment platforms to handle real-time processing and scale, as well as to support modernized services. Those institutions that have invested in payment hubs may still have integration work to do on an API framework to support

collaboration.

New collaborative payment ecosystems require technology transformation beyond the payment platform. They will also require a connected core. Next-generation payments will be

part of a wider investment initiative.

Connected banking introduces a new layer of fraud risk and therefore banks must update their

financial crime systems. As one example, fraud monitoring tools must be able to assess the data points extracted from transactions that were originated through a third party using

purpose-built analytics models.

Cloud readiness is key in establishing a collaborative payments ecosystem. In some cases, banks will move their entire payment processing platforms to the cloud, adding a surrounding

API layer. In other cases, they'll keep their on-premise approach and add a cloud-based API

framework and orchestration layer.

Business Impact

The deep divide that has long existed between traditional banks and fintechs in payments will, by force of regulation and market demand, begin to close. This will blur the lines on who owns the customer experience. In the end, users will determine who owns their experience and that

will largely depend on value.

Payment revenue will become richer but more complicated. Banks and fintechs have a lot of work to do to innovate new products and then package and price them in a way that attracts

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customers and produces revenue. This kind of strategizing will impact the way banks market

even legacy payments.

Banks will be under pressure from customers to provide real-time payments long before they have established their truly groundbreaking new payment products. They will need to juggle

customer demand with a lack of clear revenue stream until they find answers.

Guidance

The road to modernization requires banks to rethink both organizational structure and technology. Modernized payment platforms integrate the processing of multiple payment types

within the bank, which are often today managed by separate groups. Payment modernization

readiness should be driven by an intersectional payments team within the organization.

Bank-fintech payments collaboration will be enabled by an open banking initiative. The payments team must play a central role in that initiative. If the bank does not have an initiative, the payments team will spend a lot of time in getting key stakeholders aligned for collaboration

as this will have impact on the core, channel, compliance, and financial crime functions.

While there are a slew of interesting payments fintechs, many will simply not succeed. Banks

must carefully curate the range of fintechs they work with, both to add the right customer services and to ensure they are working with financially viable players. Create innovation

investment arms to help launch or stabilize fintechs of interest.

Prediction 5: By 2023, 40% of Insurers Will Automate Claims Processes with Artificial Intelligence Technologies and Conversational Interfaces to Improve Speed of Response, Efficiency, and Personalization

Insurance customers are increasingly looking for simple and frictionless ways to engage with their

providers. They expect this the most in a claim situation that affects them both emotionally and

financially. Often, this is when they are most frustrated due to long waiting times to reach call center

representatives or claims case handlers, filling up multiple forms, or answering umpteen questions. At

times, they can't reach a case handler out of hours or find answers to queries in online FAQs. The

frustration is exacerbated as it is obvious even to the customers that some or all parts of the claims

process can be made "no touch" in many lines of business (e.g., flight/train delay insurance claims,

simple auto accident, or health insurance claims).

Insurers can take advantage of artificial intelligence (AI)–enabled conversation interfaces (chatbots,

robo-advisors, etc.) to enable contextual and highly personalized customer engagement that can drive

satisfaction. As cognitive solutions learn more from interactions, the extent of personalization will

improve. Data collected through interfaces will enable insurers to extract information about brand

engagement, which is an added advantage.

Digital aspirants in the industry are proactively looking to increase investments in:

Fully automated, intuitive claims systems for reporting, tracking, and settlement functions delivered through multiple channels (This includes, but are not limited to, intelligent data

extraction from forms, effective fraud detection using predictive models, and better insights

through advanced analytics.)

24 x 7 virtual as well as human-augmented bots to provide personalized, humanlike interactive

experiences and contextual information on products or services

Robo-advisors that can reduce the need for human staff to handle simple claims

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Associated Drivers



IT Impact

Initiating AI-centric projects will be a huge eye-opener as data readiness is a key consideration. IT will need to work hard to get the house in order in terms of data quality,

diversity, governance, and compliance to successfully execute an AI strategy.

IT needs to consider a platform-based approach that addresses integration of internal

(transactional) and external (government databases, social media, Internet of Things, etc.) data and preparation, aggregation, model building, deployment, containerization, and

monitoring of data.

Freedom to operate and be self-sufficient are critical for AI teams to thrive; hence IT must have

cloud adoption as a top priority.

IT and the functional stakeholders must function in a close-knit fashion, and there should be more openness to internal and external data sharing within the boundaries of privacy and

security.

Business Impact

Implementing a hassle-free service at the "moment of truth" (i.e., claims) in insurance will help improve customer experience, trust, and brand loyalty — thus bringing in an overall positive

impact on the business.

Delivering "empathy at scale" is a key differentiator, especially in claims — insurers must be

mindful that machines may not be able to meet this objective at least in the initial stages as

they are still learning.

Insurers need to be cautious about potential increase in errors if the machines are not matured enough to handle complex cases. This can be counterproductive and lead to customer

frustration.

Although customers are becoming more open to automated services, they will want human interaction when they need it. Hence AI-enabled interfaces must complement existing

channels and not replace them.

Guidance

Consider implementing an AI foundation to support the automation journey as cognitive technologies can be a true game changer to transform insurance claims. Secure the end-to-

end claims journey and use customer data with consent to drive experience algorithmically

while also engaging emotionally with human intervention where needed.

Fast-track digitalizing the claims forms, building workflows, integrating with third-party and legacy systems, and automating decisions. Consolidation of data and AI tools and services

across different parts of the business will be crucial.

Focus to incorporate more data and analytics into the claims process to improve accuracy and efficiency as delivering "empathy at scale" using machines can prove very challenging — at

least in the initial period.

Be mindful that the success of conversational interfaces depends on a multitude of factors that

go beyond cognitive technology, so consider these in your overall strategy. These factors include (but are not limited to) integration, security, data protection, analytics, design and,

more importantly, an open mindset.

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Prediction 6: By 2021, the Penetration of Microinsurance Will Grow by More than 20%, Fueled by Uptake of Mobile Payments, Insurtech Innovation, and the Resulting Lower Transaction Costs for Insurers

The term microinsurance was coined based on the microfinance projects in low-income Asian

countries. Therefore, it is most commonly used to describe insurance in a form affordable to low-

income populations of the developing world. It may include products of various structure and size, but

almost always with high volume and low cost.

A significant cost item of microinsurance is the cost of administration and distribution. For this type of

insurance to spread, this cost item has to be low. And that is exactly what will be the effect of the

current spread of mobile technologies. The acceptance and penetration of these technologies in the

developing world is growing. This is opening a huge potential market (currently largely unserved) to

financial institutions, which will utilize the spread of fintech and insurtech innovations and develop

suitable products.

Geographically, the target markets will mostly consist of developing countries of South America, Africa,

and Asia, which are experiencing massive growth of population. The share of population with any kind

of insurance is still very small, typically under or around 10%. That makes for very attractive

penetration opportunities and growth rates. Add to this mix a rapidly declining cost of distribution and

administration of insurance policies, the ability to provide usage-based insurance, and other innovative

forms of insurance products, all of which the new 3rd Platform technologies enable, and you can find

the use cases and opportunities everywhere. Millions of low-income families, entrepreneurs, and

farmers will be able to afford coverage of some of their most urgent risks by various forms of life or

property insurance.

Associated Drivers




IT Impact

Microinsurance relies on mobility for its existence, but as it also provides interesting and valuable use cases for mobile technologies, it will support their further spread and acceptance.

Technological innovation will need to include all members of potential ecosystems. Mobile phones and apps for insurance account management or micropayments are only one side of the solution. The other parts need to include mobile or connected technologies for healthcare providers or other service providers.

Bringing mobile technologies to developing markets presents new opportunities to fraudsters, in the form of both vulnerable uninformed users and incomplete tech barriers. New risk management and anti-fraud solutions will be needed to prevent and mitigate fraud risks and a potential backlash in the form of mistrust from customers.

Business Impact

Microinsurance will make insurance business commercially attractive in developing markets, without any kind of subsidies or government assistance. Growth opportunities are huge, risk

levels are manageable, and operating costs are minimized by technology.

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Industry structure will be rapidly developing toward ecosystems, enabled and linked by mobile technologies. Participants will include large multinationals as well as insurtechs or small local

mutual insurance cooperatives.

An increase in utilization of healthcare services is one of the potentially most remarkable

consequences.

Guidance

Large multinationals may now get in the game; the market is open to business. Traditional

distribution structures will not be useful, and mobility-enabled self-service models will prevail.

To spur growth, focus must be on covering the most pressing insurance needs of the low-

income population segments, not on selling high-margin products.

Develop a joint business model with mobile operators, and in case of health insurance with

healthcare providers. Develop platforms; create ecosystems.

Prediction 7: By 2025, 50% of Global Tier 1 Banks Will Use Quantum Computing to Review Portfolio Allocations, Algorithmic Trading, and Pricing Strategies, Exponentially Improving the Ability to Respond to the Market

Still in relative infancy, technology providers are showing the efficacy of quantum computing by

announcing larger and larger systems on an almost monthly pace. Gate-based quantum devices are

approaching 100 qubits, while annealing machines already operate in the thousands of qubits. Google

has hinted that, for the first time, its quantum system was able to achieve "quantum supremacy," a

goal accomplished when a quantum machine can perform some calculation that cannot be performed

by traditional silicon digital computers.

Firms such as IBM and Microsoft are providing cloud-based access to quantum machines in order for

anyone to begin to develop algorithms that can be used to solve real-world problems. In the most

significant case, Fujitsu and Atos have deployed quantum simulators on specialized high-performance

computers that reproduce quantum annealing to solve combinatorial problems, such as optimized

portfolio allocations that are already being used by banks to find the optimal allocation of assets in their

portfolios. Although not yet running on true quantum devices, the software being developed will be

immediately portable to quantum machines when they become commercially available. IDC Financial

Insights believes that this will happen within the next three years, and that tier 1 institutions globally will

use quantum annealing to solve combinatorial problems in a fraction of the time than possible using

traditional compute platforms.

Associated Drivers




IT Impact

Although most quantum development platforms support today's programming languages (Python, Java, etc.), there will be a need to train IT staff on the new paradigms associated with

quantum algorithms.

Using quantum resources is not inexpensive, so care must be taken to identify the most

appropriate use cases against which quantum compute is applied.

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The first implementations of quantum compute will be standalone platforms by necessity. But, IT groups must look at a future where quantum compute will be an infrastructure resource

integrated into the institution's architecture.

Business Impact

The ability to review and restructure asset portfolios in exponentially less time than possible using traditional computers will drive a focus on portfolio efficiency that is unparalleled today.

Analysis and reallocations could be done in an almost real-time time frame.

Opportunities to increase revenue or decrease costs will be gained by being able to leverage

the speed with which portfolio modifications can be modified.

Rather than being a threat to security (quantum computing can theoretically "break" today's

encryption standards), quantum computing will support the development and adoption of post-quantum security protocols that are impervious even to quantum devices, helping banks

regain the trust and loyalty that has eroded after years of data breaches and fraud.

Guidance

As quantum computation, even of the simulated variety, is not inexpensive, banks should ensure that the data fed to the algorithms is clean and robust before using it for predictive

modeling.

Institutions should develop "quantum centers of excellence" to ensure that financial and staff resources are prioritized. These centers will initially be made of IT staff analyzing the impact to

training, DevOps, security, and so forth, but will eventually grow to include line of business as

they identify use cases against which quantum resources will be used.

Institutions should participate in the growing ecosystem of hardware manufacturers, software providers, and systems integrators as they help form tomorrow's quantum environments. This includes everything from encouraging the use of quantum sandboxes to participating and

supporting new standards bodies that will inevitably form.

Even now, institutions need to research and educate themselves on the types of quantum

computing — gate versus annealing — and understand the capabilities each can bring to the

business.

Prediction 8: By 2024, 80% of Banks Will Be Purchasing and Integrating FintechSolutions from Cloud Marketplaces

In the banking sector cloud marketplaces have emerged in the past two years. Their rise was enabled

by major IT programs such as transformation of a monolithic architecture to microservices,

containerization, and open banking. Those initiatives have enabled banks to start developing smaller

components internally as well as integrating third-party solutions from IT vendors and fintechs too. The

upswing will be driven by the need for building a competitive user experience while achieving higher

operational efficiency.

Particularly, partnerships with fintechs are enabling banks to outsource many of their innovation

initiatives. The fintech landscape is, however, highly fragmented and to banks it is challenging to build

many single relationships. Vendors of core banking platforms understood that they are in a good

position to mediate those relationships. Hence they start pre-integrating selected functionalities from

fintech start-ups and offer those cloud-enabled solutions through a marketplace platform.

Similar to an app store for smartphones, the cloud marketplaces give banks access to third-party IT

systems and fintech particularly. They allow a seamless integration of a trusted functionality without

performing redundant due diligence and integration processes. Like any other marketplace, cloud

©2019 IDC #US44313719 14

marketplaces have the power to negotiate better terms with fintechs than banks alone. However, some

marketplaces might act only as intermediaries. Those platforms will have limited power to influence

terms and conditions established between a buyer and a seller.

Associated Drivers




IT Impact

Cloud marketplaces are primarily offered as an extension of a vendor's core banking platform;hence the integration of a third-party solution purchased through the marketplace is seamless. An abstraction of the business logic from the execution venue brings code and infrastructure

independence, which assure compatibility with any cloud-enabled third-party solution.

Cloud marketplaces reduce integration complexity because a marketplace provider ensures full compliance, security, and performance testing to guarantee reliability of the offered

functionality. It is also responsible for creating a developer experience fostering innovation. An

API management portal enables wider development ecosystem to jointly develop new APIs.

IT solutions offered through a marketplace are deployed on a cloud infrastructure operatedeither by the associated core banking vendor or, if the vendor allows, on the bank's private infrastructure. The use of a hybrid cloud architecture can significantly ease allocation of a

specific (e.g., critical) workload to a low-latency and secured execution venue.

Business Impact

Better terms and reduced complexity will increase accessibility of high-end technology to the

banking sector, including small and medium-sized banks.

Cloud marketplaces will simplify the diversity and complexity of contracts, pricing, and service-

level agreements when buying software from the fintech.

Seamless integration to the existing core banking solution enables banks to accelerate their

innovation capabilities, promptly address customer demands, and respond to emerging trends.

Guidance

When selecting a cloud marketplace, make sure it allows a direct connectivity and compatibility to your front-middle-back office, particularly if the marketplace solution is offered

by other than your core banking vendor.

Consider a marketplace with a hybrid cloud architecture. Some jurisdiction might prevent banks to use third-party applications operating on a foreign datacenter. Hybrid cloud will give

you an ability to place workloads across multiple execution venues and allow you to process

sensitive data in-house or in another controlled and secured environment.

Make sure you can influence the selection process of fintech available through the marketplace and directly contribute in forming new APIs. You should also have the ability to

review the results of compliance checks as well as performance and security tests.

©2019 IDC #US44313719 15

Prediction 9: As Traditional Corporate Banking Business Models Are Coming Under Pressure, New XaaS Models Will Grow to 4% of Total Corporate Banking Revenue by 2023

We expect open banking to have an even bigger impact on corporate banking than the retail

counterparts. Corporate treasurers have long demanded more transparency, better access to funding,

improved risk management and productivity support and, of late, access to real-time payments and

real-time data. Hence corporate banks will have to revisit their product and services offerings or face

growing disintermediation as treasuries increasingly source for new solutions from the emerging digital

treasury ecosystem.

Progressive banks are already diversifying traditional products and transactional business models and

exploring new data-driven products, advisory services, and managed services propositions, also

categorized as anything as a service (XaaS). XaaS refers to a fundamentally new value proposition,

where the bank uses its own software and operational capabilities to act as a service provider to

manage entire functional processes for the customer. Examples include core processes such as

treasury as a service, banking as a service, account receivables/account payables as a service, but

also noncore processes such as KYC as a service, identity as a service, and salary as a service. This

will allow banks to drive value for their customers and leverage their unique position in the ecosystem

to future proof their business.

Associated Drivers





IT Impact

XaaS requires banks to modernize their business applications and migrate applications to the cloud to improve performance, scalability, and accessibility. Legacy applications will be either replaced or modernized using microservices deployed in containers to facilitate the migration

and should be exposed through APIs.

XaaS depends on hyper-automation. Banks must eliminate manual bottlenecks and deliver full

straight-through processing to deliver services at scale and at manageable cost. Robotic

process automation and smart automation using machine learning will be key enablers.

Self-service automation will also be essential to deliver high service levels by enabling

customers to resolve basic requests themselves and not create new manual bottlenecks.

Business Impact

Customers will see value in the outsourcing of day-to-day treasury operations. IDC's 2019 Corporate Treasury Survey shows that 70% of treasurers are interested in treasury as aservice and 61% are interested in KYC as a service. Corporate banks should explore building

these capabilities or face growing competition from new players and traditional vendors.

IDC predicts that XaaS will be among the biggest new revenue opportunities for corporate banks in the open banking era. We expect that by 2023, XaaS models will generate around

$37 billion in revenue.

XaaS, however, means a completely different revenue model, resembling more that of an

outsourcing services provider than that of a bank. This means banks will have to completely

©2019 IDC #US44313719 16

revisit their finance function and implement comprehensive performance metrics to measure

and invoice customers.

Guidance

Assess internal strengths and weaknesses to identify processes where the bank can offer

value to its customers.

Test the waters with customers and prioritize the biggest pain points.

Explore partnerships with other services providers, banks, and other ecosystem participants.

These can help with the application development, shared infrastructure, and business case.

Modernize business applications and infrastructure to drive automation, scalability, and

performance first. Only if applications are highly automated and efficient, it makes sense to

test XaaS propositions in the market.

Prediction 10: By 2022, 20% of Banks Will Expand Lending to Nontraditional Consumer and Small Business Borrowers by Using Machine Learning, Alternative Data, and Fintech Partnerships

Banks are on the brink of breaking the mold in their lending programs to expand services to

nontraditional borrowers through diversified offerings. This change is driven by fintech competition and

will be enabled by open banking ecosystems and advanced technologies. Until recently, banks have

remained in lending programs that rely on traditional risk models based on credit bureau data and

historical transactions. While these models are profitable, they don't introduce room for new growth. In

fact, they often result in higher-than-necessary decline rates to keep risk manageable.

Meanwhile, over the past few years, fintechs have innovated with flexible lending models that extend

services to nontraditional users by looking beyond traditional bureau scores — using a multitude of data

sources that portray a more holistic view of borrowers. Their platforms employ machine learning to

crunch this data in near real time for rapid decisioning. Meanwhile, fintechs have aimed for a

frictionless lending experience with digital onboarding and real-time disbursement. Ironically, many

fintechs have used banks as a key source of risk decisioning data, often obtained through risk screen

scraping activity.

As a result, the next generation of alternative lending programs will see banks and fintechs collaborate

in their offerings, in large part enabled by new open banking ecosystems. This will take many shapes.

In some cases, banks will partner with third-party lenders through their own API-enabled

marketplaces. In that scenario, fintechs will be responsible for marketing, customer acquisition,

onboarding, and verification while the bank owns the loan and collection. In other cases, banks will

build out their own alternative lending decisioning platforms, going directly to market through

marketplaces, with funding either from the fintechs or their own competition.

Associated Drivers




©2019 IDC #US44313719 17

IT Impact

Banks have a long way to go in preparing for open banking or fintech collaboration. A key starting point is transforming for a connected core, which supports the rapid provisioning of

microservices necessary for new lending models and data provisioning. Banks will need to

build standardized internal and external API frameworks, among other supporting processes.

Alternative lending relies heavily on AI — or, specifically, machine learning — to crunch data, make rapid decisions, and trigger actions. Many vendors overpromise and under-deliver on AI capabilities, and banks will need to conduct thorough proof of concepts (POCs) to ensure

models are accurate, agile, and transparent for regulatory purposes.

For those banks seeking to offer their own customer-facing alternative lending services, digital

onboarding, identity verification, and authentication will be key, and these are generally not

supported by existing tools.

Fraud coverage is entirely necessary for alternative lending since decisions and disbursements often occur through digital channels in real time. Many fraud vendors today do not offer monitoring and analytics models that are specific to lending. Banks will need to vet

their vendors to seek purpose-built tools.

Business Impact

As banks move into online marketplaces, alternative lending services will be a key category of offering. Banks must prepare new lending models and also clearly delineate which services

fall under their traditional lending lines of business.

Banks will find themselves in the role of traditional financial institution and fintech as the

alternative lending ecosystem takes shape. In some cases, banks will provide data and lending services to be sold by third parties, while in others, they'll resell services from others

that are competitors.

The rise in alternative lending, and specifically collaborative go-to-market partnerships, will result in organizational change that will be complicated. For one, traditional lending lines of

business will need expertise in facilitating collaborative relationships; in addition, they will likely

have a ringed-fence team responsible for bringing alternative lending to market.

Guidance

With the threat of a pending recession, banks must be extremely careful in how they extend alternative lending models. This could make it more attractive to partner with fintechs that have

already made it through a few lending cycles.

To handle alternative lending programs, banks need to assign a specialized team that also hasthe responsibility of engaging with technology and business teams seeking to build out the larger open banking ecosystem. There needs to be roles in the organization specifically

focused on building and maintaining fintech partnerships.

Some early alternative lending fintechs have failed and had to morph their business models.

Banks should do extensive research where possible on these use cases.

Alternative lending depends heavily on new technologies. Thorough POCs will be necessary

as banks look to adopt new analytic platforms, data subscriptions, digital onboarding, and

fraud solutions.

©2019 IDC #US44313719 18

ADVICE FOR TECHNOLOGY BUYERS

Insurers must focus on their core competencies of risk and pricing while building new competencies that develop an ecosystem of engagements, particularly channel systems,

faster than ever.

Modernize identity management and KYC functions to ensure that the blockchain digital

identity can be used by all lines of business, creating a seamless customer experience.

Digital and physical will merge in-branch locations as prestaging transactions begin to take off,and the usability of such experiences will determine future adoption of these money-saving

and, potentially, revenue-producing transactions.

Modernized payment platforms will be required to integrate the process of multiple payment

types, which today are managed by separate groups within the organization. Payment modernization readiness should be driven by intersectional payments teams within the

organization.

Implementation of an artificial intelligence foundation will be required to support the automation journey as cognitive technologies can be a true game changer to transform

insurance claims as well as the retail and commercial banks.

Think small when it comes to things such as microinsurance or microlending. Focus must be

on covering the most pressing needs of the low-income population segments, not on selling

the highest-margin products and services.

Develop "quantum centers of excellence" to ensure that financial and staff resources are properly prioritized. These centers will initially be made of IT staff analyzing the impact to

training, DevOps, and security, to name a few initial areas that will need to take priority.

To accelerate innovation, banks will be able to influence the selection process of fintech available through third-party marketplaces and directly contribute in forming new APIs. Banks

should also review results of compliance checks as well as results performance and security

tests of these new APIs.

Modernize business applications and infrastructure to drive automation, scalability, and performance first. Only if applications are highly automated and efficient, it makes sense to

test XaaS propositions in the market.

We have already seen the entrance and subsequent exit of new lending models introduced by fintechs. Those failed business models must be modified prior to reentering the market or risk

failure once again. Banks would be wise to learn from the use cases that led up to the failures

before entering the market.

EXTERNAL DRIVERS: DETAIL

Rising Customer Expectations: More Convenience, Customization, and Control

Description

Customers accustomed to the personalization and ease of dealing with digital-native companies such

as Google and Amazon now expect the same kind of service from every business in every industry.

The changing expectations are most evident in the newest generations of customers, but all customers

are demanding more convenience and personalization. At the same time, they want more control of

what data is collected and how it is used. Intelligent customer agents will start to intermediate the

©2019 IDC #US44313719 19

relationship on the customer's behalf, taking more control from the vendor. Companies that

systematically collect, measure, and analyze data to create exceptional, personal, relevant, and

compelling experiences can set themselves apart from their competitors.

Context

With new customer expectations being set by thriving companies that disrupt markets, the previous

levels of customer service are no longer good enough. New business, operational, and organizational

models are required to meet continually growing consumer expectations. 38% of companies that are

digital natives report that they are "almost constantly online" through their device of choice, the mobile

phone, providing unparalleled access to behaviors and preferences, that they expect to be turned into

customized engagement and experience. While there is also backlash, customers seem willing to

relinquish some control over their data in exchange for a sufficiently engaging personalized experience.

The Age of Innovation: Driving the Future Enterprise

Description

Digital transformation — the continuous process by which enterprises adapt to or drive disruptive

changes in their operations, customers, and markets — is now being driven by multiplied innovation.

Competition is powered by platforms and ecosystems where network effects and innovation feed off

themselves. But the changes and innovations aren't accidental; they are driven by data, analytics, and

learning, which feed and multiply more innovation. Data drives intelligence yielding insight and

knowledge, allowing for action and creating value. Automation and machine learning revolutionize

operations, providing major increases in productivity and efficiency. To compete, companies must

balance digital and industrial competencies and master them at scale. Yet these efforts will not

succeed without leadership and talent and the enterprises' ability to affect change.

Context

With direct digital transformation investment spending of $5.5 trillion over the years 2018–2021, DX

continues to be a central area of business leadership thinking. Industry leaders are transforming markets

and reimagining the future through new business models and digitally enabled products and services. At

the same time, companies that digitize their operating model may see a 40% increase in productivity.

Purely digital opportunities aren't enough anymore. New opportunities will come increasingly from

combining digital technology with physical assets. To succeed, digital natives need to adopt and

transform the traditional world of industrialization and specialized assets. Industrial natives need to adopt

and master digital technologies that could affect robustness, reliability, and safety.

The Platform Economy: Competing at Hyperscale

Description

Understanding and provisioning the platforms that will sustain, advance, and scale business and

operations are essential for every business. The platform is where the future of software,

infrastructure, and connectivity will evolve and where edge will be accessed, integrated, and

optimized. Megaplatforms compete to own infrastructure, artificial intelligence, and development

environments. Application-centric platforms look for the network effect to expand their reach. Industry-

specific platforms harness multiplied innovation to build niche ecosystems. Capturing profits will be

highly dependent on controlling or participating in the right platform. Every business must incorporate

these new realities into its platform strategy.

©2019 IDC #US44313719 20

Context

Today, we are in a platform economy — one in which tools, capabilities, and frameworks based upon

the power of information, cognitive computing, and ubiquitous access will frame and channel our

economic, business, and social lives. Leading organizations are shifting to platform thinking to evolve

their business models and manage their technology architecture. Platform thinking is a fundamental

shift in business strategy, moving beyond product differentiation and pricing and toward ecosystem-

based value creation. It is also a long-term, sustainable response to new realities in the DX economy,

one in which organizations digitally transform themselves into digital-native enterprises.

Accelerated Disruption: Navigating Business Challenges as Volatility Intensifies

Description

Today, survival of the fittest is linked not to size or strength but to the ability to change — to move quickly,

react, adapt, seize opportunities, and be agile. With the increasing uncertainty in economic rules, political

stability, climate effects, and disruptive innovations in the marketplace, a sense of urgency pervades

companies concerned about their competitiveness and longevity. Beyond that, organizations' ability to

navigate the increasingly complex and uncertain business environment has become essential. The new

imperative is to keep pace with business change by increasing the speed of business operations, the

speed at which changes are delivered, and the speed and scale of innovation. Survival means

understanding and adopting these new approaches quickly, throughout the organization.

Context

The best-performing companies are pulling away from the rest, creating a bifurcated and unequal

landscape where a few firms exhibit high productivity and profits. The global superstar companies and

the unicorn start-ups leverage innovation cultures, agile organizations, and disruptive approaches to

everything from machine learning to talent acquisition in order to adapt to complex uncertainty; adjust

their products, services, and operations; and seize opportunities.

Intelligence Everywhere: AI's Opportunity and Implications

Description

Accelerating progress in AI is impacting experiential engagement, business processes, strategies, and

more — autonomously creating a significant portion of new innovations. Bu, as automation and

augmentation increase, so do the ethical issues and opportunities for misuse, surveillance, invasions of

privacy, and more. Many future applications will be developed by AI without human supervision. Beyond

that, augmented humanity — the fusion of digital technologies and humans — for improved mobility,

sensing, and cognition will become routine. There are justifiable concerns and issues around AI–enabled

applications, bias, and transparency and the long–term impacts of these on workforce transitions and the

essential elements of being human. Social pushback is demanding accountability and rights. Business

and governments need to address the ethical and legal issues of AI to realize its opportunities.

Context

AI innovation and application are being driven by massive investments in all kinds of industries.

Hospitals are testing how AI can enhance care, school districts are looking at AI-equipped cameras

that can spot guns, and human resources departments are using AI to sift through job applications.

Government agencies, including law enforcement, are looking for ways to harness this next

technological revolution to meet their ends, while others are demanding accountability and an

©2019 IDC #US44313719 21

"algorithmic bill of rights." With industries investing aggressively in projects that utilize AI software, IDC

forecasts AI systems will more than double from 2018 to 2022 to $79.2 billion, with a compound annual

growth rate (CAGR) of 38.0%.

Crisis of Digital Trust: Escalating Threats Mandates Strategic Responses

Description

The new digital environment has significantly changed organizations' exposure to adversarial risk.

Organized threat actors leverage AI to find and exploit new vulnerabilities. Ransomware, cybercrime, and

nation-state attacks are increasingly common events that cause significant business disruptions, high

costs, and reputational damage. The first global cyberwar may be just over the horizon, bringing

unknown havoc with it. In the face of daily incidents, many consumers, citizens, and partners have lost

faith in technology, business, and government, creating a crisis of trust. Regulations, publicity, and fines

increase risk aversion, while the positive correlation showing that higher levels of trust yield higher levels

of GDP demand action. Protecting the security and privacy of digital assets and cultivating the ability to

anticipate, identify, contain, measure, and address risks are critical to mitigating the crisis.

Context

Bad decisions, poor leadership, complexity, and cybercrime result in breaches that have a significant

impact on businesses and customers. New approaches such as zero trust and distributed integrity are

proving themselves and blockchain shows promise to provide the "glue" for some digital trust issues.

At the same time, quantum computing has the potential to redefine current security assumptions and

practices. But the crisis of trust goes beyond just security concerns. Social and other media are

deepening trust inequities between informed and uninformed citizens, fueling discord within societies,

while lack of trust between governments grows across them. AI shows promise in curating information,

but there is little trust in whomever is managing the AI or the information.

The Future of Work: Agile, Augmented, Borderless, and Reconfigurable

Description

Technologies are rapidly changing who, or what — and where, or how — work is being done. A new

generation of workers have new expectations for work, culture, and space. The future workspace will

be a mix of physical and virtual. Work culture will be more collaborative, while the workforce will be a

combination of people and machines working together. Organizations are using new contracting

models to create an agile, borderless, and reconfigurable workforce. However, the new skills required

to thrive in this new era are still in short supply. To bridge the digital talent gap, organizations need to

retrain and reskill existing staff, develop access to new talent pools, and attract new resources. Society

must equip and educate up-and-coming generations for the future while bringing existing workers up to

speed to address current needs. Employees must become lifelong learners.

Context

The demographic shifts led by millennials entering the workforce and technology advances are driving

fundamental changes in the workplace. Good pay, positive cultures, diversity, flexibility, and access to

leading-edge technology are all important keys to keeping workers happy at work. The short supply of

digital talent, particularly in data science, security, and CX design, is forcing organizations to adopt

new approaches to work. IDC predicts that by 2021, 60% of G2000 companies will have adopted a

future-workspace model — a flexible, intelligent, and collaborative virtual/physical work environment —

to attract new talent and improve employee experience and productivity.

©2019 IDC #US44313719 22

LEARN MORE

Related Research

Critical External Drivers Shaping Global IT and Business Planning, 2020 (IDC #US45540519,

October 2019)

IDC Financial Insights: Connected Banking Digital Transformation Road Map (IDC Financial

Insights #US45461219, August 2019)

IDC's Worldwide Digital Transformation Use Case Taxonomy, 2019: Banking (IDC Financial

Insights #US44300119, July 2019)

IDC FutureScape: Worldwide Financial Services 2019 Predictions (IDC Financial Insights

#US43052618, October 2018)

IDC FutureScape: Worldwide Payments 2019 Predictions (IDC Financial Insights

#US43348718, October 2018)

IDC FutureScape: Worldwide Corporate Banking 2019 Predictions (IDC Financial Insights

#EMEA44384418, October 2018)

About IDC

International Data Corporation (IDC) is the premier global provider of market intelligence, advisory

services, and events for the information technology, telecommunications and consumer technology

markets. IDC helps IT professionals, business executives, and the investment community make fact-

based decisions on technology purchases and business strategy. More than 1,100 IDC analysts

provide global, regional, and local expertise on technology and industry opportunities and trends in

over 110 countries worldwide. For 50 years, IDC has provided strategic insights to help our clients

achieve their key business objectives. IDC is a subsidiary of IDG, the world's leading technology

media, research, and events company.

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