Digital Transformation

Digital transformation in the Financial Services industry: Adapt or get left behind

The financial services sector is made up of a wide variety of organisations. Everything from digitally driven start-up, ‘app only’, exchange-traded fund platforms targeting millennials, through to the more traditional commodities traders, operating open-outcry on the London Metal Exchange - both fall under the financial services umbrella. 

Some of these firms are well ahead on their digital journey, many in fact have never been non-digital, while others are just at the beginning of their digital journey. 

The one thing that unites them all is that digital change is on their board’s agenda. In The Real Economy’s latest topical survey exploring the current state of digital transformation across the middle market, 69% of respondents said that their digital investments will become more important over the next three years. In the financial services world, we know that this is a top priority.

Shift to digital

The pandemic fast-tracked the growing digital transformation of the financial services and insurance sector, redefining customer behaviour and engagement. Our recent topical survey illustrates how much the middle market is prioritising digital transformation and further innovation, with the growing application of automation, artificial intelligence, digital marketing, cloud solutions and blockchain.

This shift in behaviour can be clearly seen by the significant reduction in cash payments witnessed over the past few years. In 2021 just 15% of all UK payments were made in cash, almost a third were contactless. This trend toward non-cash payments has plateaued following the re-opening of businesses with a higher cash usage but illustrates how the pandemic pushed forward digital first financial behaviour.

There has also been a marked reduction in physical bank and building society branches in the UK over the past few years. This has been accelerated by the growing demand for digital interactions from customers, as well as the reduction in demand for cash. Since 2012, ONS data shows a 33% reduction in 2021 from 13,345 branches. This is teamed with the reduction in the number of ATMs in the UK, which, following its peak in 2015 at 70,600 of both free to use and pay to use, has seen a reduction of 25% this year to a level last seen almost 20 years ago.  

Given the growing customer demand for digital interfaces, ease of use and speed of transactions, investing in digital transformation needs to be a priority for financial organisations if they are to remain competitive. This is particularly clear given the threat of challenger banks who often have emphasis on digital.  

One of the biggest obstacles facing more traditional banks, and one that challenger banks avoid, is the legacy infrastructure from decades of old business processes. This legacy infrastructure has made investment in core systems for digital services a strategic priority. This is particularly key for private banking that is often run on these legacy systems and has been relatively slow in adopting new digital practices. 

Challenger banks are generally seen as a more convenient method of banking, typically providing fast customer support, without the need for face-to-face interactions. However, positively for the traditional banks, a recent YouGov study found that only 17% of people in the UK trust challenger banks as much as their traditional counterparts.


FinTechs and InsurTechs are disrupting the financial services sector. They are driving innovation and are quickly adapting to changes in customer behaviour with use of their modern platforms, aided by the lack of any legacy systems to navigate. 

Incumbents are increasingly viewing FinTechs as strategic partners and are seeking ways to collaborate and develop products with them to modernise their systems and offerings.  

For banking, payment modernisation goals are: 

  • speed to market; 
  • evolve with client demands; 
  • ease regulatory compliance; and 
  • reduce costs. 

We are seeing FinTechs take advantage of the ubiquitous use of fingerprints and face recognition on smartphones, by increasing the ability to make payments simpler and more secure using biometrics.

Beauhurst recently listed Revolut at the top of the UK’s 200 most valuable high-growth cross-sector companies by pre-money valuation over the three years to August 2021. Fintech was also the UK’s top-performing sector in 2021, with 26p in every £1 of equity investment secured in Q1 2022 going to FinTech companies. 

Of the UK’s current highly sought-after unicorn companies, 1 in 2 are FinTechs, including four of the biggest challenger banks: Revolut, Monzo, Starling Bank, and OakNorth. All based in London, the fintech capital of Europe. 64% of the equity investment secured by UK challenger banks in 2021 went to the UK’s three main challenger banks (Revolut, Monzo and Starling Bank).

Data from PitchBook Data Inc illustrates that venture capital is the bigger player when it comes to FinTech and InsurTech in the UK, but 2021 saw the most ever corporate and private equity deals, demonstrating a maturity curve. With investors moving away from ‘growth at all costs’ and accelerated growth in digital transactions sparked by the pandemic reverting to normal, we anticipate there may be less of an appetite in 2022.

Comparatively, insurance has seen far less disruption. However, there are emerging opportunities within the sector to innovate digitally, with InsurTech both enabling and forcing traditional insurers to adopt a more digital approach. There are currently 524 high growth insurance companies in the UK, 95 of which are in the venture stage of evolution. This growth is expected to continue. 


Many traditional financial services and insurance firms are still operating on legacy systems. These are often old systems stacked on top of each other. Untangling and then sorting them is an arduous task, especially if firms have made acquisitions in the past where the systems have not been effectively integrated. This leaves firms propping up legacy infrastructure at the same time as transitioning to newer systems with fewer skilled resources. This is why the disrupters are so well placed with their newer, intertwined and purpose-built systems, built for expansion. Organisations need to think of technology and talent investments as joined up elements of their business. For example, in insurance, providing more meaningful work to attract and retain talent by investing in key business areas such as policy services, underwriting or claims management.

This is particularly challenging with an already squeezed labour market. Despite the cost-of-living crisis, many are not returning to the labour market, when comparing data from May-July 2022 to pre-pandemic December -February 2022. The number of Britons on long term sickness climbed to 2.5 million, the highest since records began in 1993. Long term sickness is the largest economic inactivity reason as a percentage comparatively.

Vacancies in financial services and insurance has seen its highest spike since 2001, with vacancies per 100 employee jobs being over 50 consistently during 2022.

A recent report on the UK’s start-up and scaleup recruitment landscape identified that of the high-growth companies that are currently hiring, 50% operate in Business & Professional Services, with the strongest being the banking, marketing and recruitment sectors. The number of staff leaving banks for FinTechs around the world is near its highest level in over a decade. Attracting and retaining the dominant generations of the current workforce will require innovation from the more traditional employers.

To win in the fight for talent the sector must consider using process intelligence to combat workforce challenges. Extending the scope to non-traditional pools of talent, such as apprenticeships or return-to-work programmes will help boost diversity. In Loonshots, the author and trained physicist, Safi Bahcall, suggests that rather than focusing on a corporate culture, organisations should focus more on organisational structure that harnesses innovation, and where there is a need to have creative minds focussing on innovation separately from those responsible for the steady growth of an organisation. Bachall also suggests the investment in a chief innovation or creative officer to manage the two and generate a collaborative and harmonious culture. 

With labour shortages and inflation, it is key to focus on efficiencies within internal processes and eliminating waste. Google CEO, Sundar Pichai, was recently quoted saying, "we want to make sure as a company, when you have fewer resources than before, you are prioritizing all the right things to be working on”.  

Cyber security 

Given the financial services industry is a hot target for cyber criminals, a principal concern with all elements of digital transformation remains to be cyber security. The NFIB Fraud and Cybercrime dashboard, at the time of writing, showed that the number of reports relating to cybercrime in the last 13 months was 31,892 with reported losses of £7.1m, this reduces to 2,590 reports and £3m solely for organisational reports. The highest reported crimes related to hacking.  Cyber security risk has risen due to various factors, inclusive of the current conflict in Ukraine. The number of reports received across our client base has seen as significant growth of breaches or attempted breaches as a result of the growth in adoption of social engineering techniques to defraud. The Real Economy survey of the middle market found that 95% of cyber security breaches are still caused by human error, despite the levels of investment within cyber security space. This suggests overwhelmingly that, as well as getting secure infrastructure, it pays to have a sound investment of staff training in cyber security risks. Whilst cybercrime losses can damage an organisation financially and interfere with operations, reputational losses can be immeasurable.

During a macro-economic shift, it is essential that those operating within the financial services sphere reboot their digital transformation strategies for the next decade to keep pace with the change in technology, shifts in customer demand, attract and retain talent and maintain overall resilience. With the financial services industry going from not just creating financial instruments but to orchestrating a service in this digital transformation, organisations need to think about data privacy and protection, cyber resilience, bias within automated systems and disruptors.

For more information on financial services and digital transformation, contact Erin Sims.

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