By Karim Parra
Consulting in the financial sector shouldn’t be confused with financial consulting: the latter refers to the provision of advisory services on topics such as how to investment money, making a retirement plan, how to manage excess liquidity or alternatives to improve cash flow. When a company in the financial sector (banks, asset managers or insurance companies) makes the decision to hire a consulting firm, it has special needs to cover that might be common across the industry depending on many factors.
Twenty years ago, the financial industry had clearly defined groups of topics that covered almost the entire universe of projects that consulting firms were hired for: accounting and tax advisory, cost optimization (a polite name for cost cutting) and operational efficiency. Nowadays, financial institutions have other kind of priorities, many of which are consequence of externalities such as the arrival of new technologies and a dramatic rise in the regulation of financial markets. If the intention were to sum up in one phrase the evolution of consulting in finance it would be valid to state that, today, consulting in finance is driven by external processes instead of internal processes, which is how it used to be in the past.
I Digital Transformation
This is probably the most important, fast changing and potentially disruptive factor that banks will face in the next decade, not only because of its impact on the new products developed by the industry but also because of its determinant impact in the establishment of the relationship between a financial institution and its potential and actual clients.
On this topic BCG points out five elements that should be taken into account when a company defines its digital strategy. At the top of the list is located “Assessing the strategic impact of digital”. The reason behind this is simple and straightforward; the digitalization process will determine aspects such as the pace of growth of a bank, its market share and even its survival in the industry. Nowadays, banks and financial institutions should be focused on more than just mobile applications that allow costumer to perform basic transactions; instead the target of these so called “apps” must be to become fully functional interfaces that cover every aspect of the customer experience. According to a joint report from the World Economic Forum and Deloitte released in 2015, the future banking experience has to meet these conditions: be fully virtual, be customer driven, meet high quality standards, be tailor made (fully customized) and be externalized in order to ensure a continuous online service.
There is no disagreement that the world is a different place after 2008, when one of the biggest players in the financial industry announced the closing of its operations after the mismanagement of exotic products and fraudulent investments with client´s assets. It was the beginning of turbulent times in the banking sector, and followed by important and dramatic restructures of relevant participants such as investment banks and insurance companies, a deep and harmful financial crisis that has only been exceeded for the Great Depression of 1929 and, two years later in 2010, a debt crisis in the Eurozone that left an imprint of fear and uncertainty in the market, especially in investors, that still remains.
Given this lack of trust in the relevant actors of the capital markets the most important regulators around the world such as the Security Exchange Commission (SEC), the Fed, European Central Bank and the European Bank Authority, among others, decided to issue new rules and requirements in order to heal and recover the fundamental driver of the market, the investor confidence.
The result of this new scenario is a package of rules and laws that compile a set of new measures, techniques, reports and procedures that aim to:
- Increase the quality, relevance and availability of information.
- Make accurate estimations of potential risks but overall prompt a more technical-supported management of financial risk.
- Reveal all exposures faced by investors when they put their money in one product or portfolio.
- Prevent the inclusion of unnecessary or undisclosed variables whose influence could lead to unconsidered losses that might exceed the tolerance or willingness of clients.
With this wave of new mandatory requirements, consulting firms have become the key partners of banks and insurance companies when they need to develop new software or tools, implement new systems, interpret new legislation from legal and applied perspectives, optimize capital consumption and strengthen risk management teams. These more demanding and stricter supervisors have opened the door to profiles that financial markets barely considered before such as software developers, system engineers, lawyers, mathematicians and bachelors in physics or statistics.
III Product Development
As financial institutions become more democratic and directive boards more diverse, informed decisions have gained importance, especially when they are linked to launching new products, diversification or maybe expanding a portfolio of services, or exploring new market segments or geographies. Most of these informed decisions are made based on technical analysis of data that allows the identification of trends, patterns or opportunities. These kinds of analysis can be accomplished by consulting firms that generally count on solid groups of experts in big data and data miners who can handle massive volumes of information and extract relevant figures and facts that can support the final conclusion achieved.
An “extra sauce” that consulting firms can offer to their clients and that will certainly differentiate the service provided, once again taking advantage of their teams and structure, is the performance of sophisticated analyses based on simulation techniques, the definition of potential risk scenarios, and the assessment of impacts and exposures through sensitivity studies that can provide a wider picture of a particular situation. Finally, many big brands of the consulting industry can leverage their international capillarity, which is a key factor when advising projects in which the knowledge of the local markets and its particularities is relevant.
IV Other Strategic Projects
This field also includes the “traditional” motivations for consulting projects, such as the reporting structure redesign, the commonly feared and unpopular cost optimization, the assessment of brand impact and recognition, and the implementation or updating of software. Also, it is possible to classify in this group those very specific projects that can only be conducted by certain firms based on their particular niches. For example, Big Four companies are very well known for a high quality advising in tax affairs, some brands as Mercer are recognized for consulting in human resources and so on.
In this ecosystem known as the “financial sector”, just like in nature, species develop and create relationships that in some cases result in mutual benefit, and, as species evolve, the relationship that keeps them linked does so as well. This is the same dynamic that one can observe among consulting firms and their clients. It is obvious that consulting firms provide an appreciated service for banks, insurance companies, asset management firms, etc., and, as compensation in this form of mutualism, these institutions not only hire consulting firms but also force them to innovate and adapt to new scenarios, and this cycle ensures a fresh and updated ecosystem.
- The Future of Financial Services How disruptive innovations are reshaping the way financial services are structured, provisioned and consumed. World Economic Forum, 2015.
- Perspectives on Corporate Finance and Strategy. McKensey, report number 69, February 2019.
- The Five Rules of Digital Strategy, article published in: https://www.bcg.com/publications/2019/five-rules-digital-strategy.aspx. BCG, May 29, 2019.
 Cleared for Takeoff – Five megatrends that will change financial services, 2015.