In an in-depth interview to 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.
If you look at CY 15 and CY 16 (the 3 quarters) 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 UK. Surprisingly, some of the large UK 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 US, 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 macroeconomic 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?
In the September-ended quarter of 2016, our Banking and Financial Services segment was up 1.8% sequentially and 7.1% year-over-year. During the quarter, the increased macroeconomic uncertainty and the prolonged low interest rate environment that we have witnessed throughout 2016 continued to moderate spending at several of our larger banking clients. Our super-regional banking business continues to perform well as many of these clients look to us for solutions which both optimize costs and generate revenue.
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.
Let me explain that with the example of Key Bank, which wants to leverage digital to compete and lead in their category. We are working together to simplify the way they do business, and offer their customers streamlined experiences, financial wellness tools, and digital product offers and services. Cognizant is helping with the implementation of and transition to the Oracle Banking Platform. As part of our work, we’re helping in delivering improved digital experiences on web and mobile interfaces, re-engineering business processes, and enabling new technology architecture for the bank’s retail digital channel. This retail digital channel modernization is the first wave of the transformation, but we’ll expand the use of the platform to manage other core processes, and to deliver newer and differentiated services to customers within the coming year.
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.
What about the Insurance part?
In insurance, we’re 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. For example, we are working with The Guardian Life Insurance Company of America to implement a next generation IT solution by modernizing its big data infrastructure with Cognizant BIGFrame, a platform solution that leverages Cognizant’s extensive big data and mainframe expertise. Using the BIGFrame solution, Guardian will fast-track its modernization program while minimizing risk and operational impact. The new platform based environment integrates data from multiple sources, providing comprehensive data-as-a-service to internal teams for self-service analysis, improved decision-making, and faster product development.
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, technology-enabled changes throughout their organizations that are required for them to compete in this new technology- and 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.
While Cognizant Digital Business is about helping clients reshape their products, business models, and customer and employee experiences, Cognizant Digital Operations is focused on re-engineering, digitizing, harnessing the power of analytics, managing and operating our clients’ most essential business processes, lowering operating costs through automation, improving user experiences, and delivering better outcomes and topline growth. Across the practice, we are creating automated, data-driven platforms and industry utilities.
Our Cognizant Digital Systems and Technology practice works with clients to simplify, modernize and secure IT infrastructure and applications, unlocking the power trapped in their technology environments. Our BFSI clients are finding it unique and differentiating that Cognizant can consult with them to build digital businesses, operations and systems.
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 de-code the technology.
Keeping in mind our clients’ focus on leading technology innovation, we are actively building blockchain prototypes for the financial services industry at our dedicated lab in Pune. Many of our banking clients are engaging us for co-innovation around potential blockchain opportunities or by requesting use cases and proof-of-concepts relevant to their businesses. An example of this is our engagement with Mizuho Financial Group, one of the largest financial institutions in the world, to develop a blockchain solution for secure record-keeping of documents among Mizuho Financial Group companies around the world.
In the last 2 years what proportion of revenues have come from BFSI and expected in CY 16 end of year?
In calendar years 2014 and 2015, financial services represented approximately 41.8% and 40.3% of our total revenues.