Is the BFSI vertical facing recessionary headwinds?
In an in-depth interview with Dataquest, Jaideep Poondir, Senior Vice President, Banking and Financial Services, Cognizant talks about the state of the BFSI vertical, the impact of macro economic changes, IT spending patterns and the demand outlook.
— JAIDEEP POONDIR, Senior VP, Banking and Financial Services, Cognizant
What would be your appraisal of the BFSI space - are you seeing strong headwinds shrinking growth? The banking sector is witnessing broad structural as well as macro-economic changes. Central banks and regulatory bodies have adopted policies designed to manage interest rates, raise capital requirements, impose new regulations, and institute risk-mitigation measures, such as restricting proprietary trading.
Macro-economic concerns and a prolonged low interest rate environment have also been impacting discretionary spend in the banking sector for the past few quarters. The situation has been further complicated by the uncertainty arising from the Brexit vote in the U.K. Surprisingly, some of the large U.K banks have handled these uncertainties to some extent by posting earnings largely unchanged from last year. Things could be different next year when Britain formally starts the process to leave EU.
In the U.S., there is a growing chorus that the new administration will reduce the regulatory burden on banks. This may offer a strong impetus for banks in the U.S. that are looking to invest in digital-led growth. While we anticipate these positive movements, given the uncertainties around macro-economic environment, global economic growth, energy sector and commodities markets, the banking sector may be more cautious in spending in the near term.
Having said that, financial institutions are embracing new digital technologies to change the way they interface with customers and employees and manage their operations. Likewise, it is increasingly clear that the Fintech revolution is driving our banking clients to invest in significant changes to their business model to meaningfully pivot towards becoming digital enterprises. For example, Goldman Sachs, which has traditionally been in the institutional business, has embarked on consumer banking through an online lending platform and offerings around retail savings accounts.
We believe that the medium to long-term outlook for our BFSI business remains as strong as ever. Our pipeline is healthy and, we continue to make investments in skills and capabilities that will help us meet our clients’ evolving need as they look for new solutions that allow them to defend their businesses against digital disruptors, while innovating to create new areas of growth.
On the insurance front, one of the factors driving the need for our services in the insurance industry is a desire to improve the sales and marketing process, both by deepening direct retail customer relationships and strengthening interactions with networks of independent and captive insurance agents, often through the use of digital technologies. Insurers also seek to enhance their profitability by differentiating their products and services, resulting in a need for specialized underwriting models and systems. Additionally, many insurers seek to improve business effectiveness by reducing expense ratios and exiting non-core lines of business and operations.
Are BFSI buyers taking a conservative approach to IT buying right now and if yes, why? With several of our insurance clients who are also pressured by the low interest rate environment, demand has remained solid over the past year. Clients have been particularly interested in applying traditional optimization levers, while creating competitive advantage through process excellence, leading to more effective operating models and corresponding topline revenue growth. This is evident in their focus on transforming underwriting and claims processes through managed services, or other outcome-based delivery models. Can you comment on the BFSI IT spending patterns and what are they investing on in terms of IT? In BFSI, like the other industries we serve, businesses are becoming more technology-intensive and our clients are more dependent on technology and data to compete and win in the digital era. The range of skills required in today’s technology landscape have broadened, further supporting the demand for services companies such as ours.
Additionally, we are witnessing increasing activity in areas such as automation, cloud adoption, API (application programming interface), Agile and DevOps. Processes that were traditionally reliant on human intelligence are now under the purview of automation, thanks to emerging technologies such as artificial intelligence, machine learning and robotic process automation. Cloud adoption, an area where banks have always lagged due to privacy and regulatory concerns, is now catching up quickly. As security standards improve, big banks are chalking up plans to scale up their infrastructure-as-a-service model on public/private hybrid cloud to save costs. Driven by the need to meet customer expectations and thwart competitive threats, banks are adopting agile and DevOps methodologies to accelerate the application development process.
In insurance, we are helping companies go beyond managing claims to preventing losses with the power of predictive analytics. There is an increased focus on automation and digital, particularly in areas that improve customer experience and customer self-service, often through harnessing data and analytics to drive real time decisions. Do you think Indian IT players have over-dependence on BFSI and is it time to diversify their vertical play in terms of revenues? The BFSI sector has historically been the most aggressive adopter of technology and hence the largest revenue contributor for the IT services industry. That said, we think the IT industry has diversified well, tapping into opportunities presented by other industry sectors such as retail, manufacturing and logistics, energy and utilities, media and entertainment, as well as the public sector. From a Cognizant perspective – what is your outlook/ strategy for BFSI? As we look ahead, we believe our market opportunity has never been greater. That’s because with more technology in every product and behind every customer experience, and more data generated at every turn, our clients’ businesses are, and will continue to become, increasingly technology-intensive.
Our opportunity then is to work with our BFSI clients to help them win by making the fundamental, technologyenabled changes throughout their organizations that are required for them to compete in this new technologyand data-intensive world. In enabling this kind of work across our clients’ businesses, from front to back, we have aligned all our capabilities into three practice areas: Cognizant Digital Business, Cognizant Digital Operations and Cognizant Digital Systems and Technology.
In looking ahead of evolving client needs, we continue to identify emerging technologies with the potential to create real business value, while also scaling the most promising technologies, productizing services, solutions and business models, and speeding them to market. We are working to incubate new IP-based offerings and realize the potential of developing technologies.
One such technology is blockchain. Financial services firms across the world are actively exploring the applicability of blockchain to their businesses. In fact, banks are taking the lead in advancing the application of blockchain and are even open to collaborating with their competitors to decode the technology.
The BFSI sector has historically been the most aggressive adopter of technology and hence the largest revenue contributor for the IT services industry