The mantra that “every company is a software company” has become a cornerstone of modern business strategy, driving innovation and growth across industries. Originating from the tech sector, it suggests that all companies must develop their own internal software capabilities to stay competitive.
Nowhere is this trend more apparent than in financial services, where banks and other institutions are increasingly pouring dollars and resources into artificial intelligence (AI) and software development. According to a report from the McKinsey Global Institute, the financial sector’s spending on AI is projected to experience substantial growth, with an estimated increase from $35 billion in 2023 to $97 billion in 2027.
But as financial institutions rush to embrace these technologies, there’s increasing risk they are straying too far from their core strengths. Is the relentless pursuit of tech innovation is causing these organizations to lose sight of what truly sets them apart? It’s time for banks to reconsider this mantra and explore a more balanced approach — one that leverages technology without sacrificing the foundational competencies that have long defined their success.
AI Hype and Financial Services
The financial services sector has been at the forefront of the AI revolution. From automating customer service through chatbots to leveraging machine learning for fraud detection and personalized financial advice, the potential applications of AI are vast. The excitement around AI stems from its promise to revolutionize traditional financial processes, improve efficiency, and enhance customer experiences.
The push to adopt AI — and amidst the frenzy around generative AI — has often come at the expense of core functions. In their pursuit of becoming “software companies,” many financial institutions are making strategic AI specialist hires to make the most out of generative AI models. These investments are often carefully scrutinized by risk management teams, ensuring they align with the institution’s core strengths. Nevertheless, this focus on new technology may still divert critical resources away from areas that have historically defined their success — risk management, customer relationships, and regulatory compliance. While AI is a powerful tool essential for growth, this shift in focus can dilute the institution’s core strengths, ultimately undermining its competitive advantage.
The Pitfalls of Building In-House AI Capabilities
In the race to stay ahead of technological advancements, many financial institutions have opted to build their own internal AI development teams. The rationale seems straightforward: owning AI themselves can provide a competitive edge, enabling tailored solutions that address specific business needs, while giving financial institutions more control over its outputs. However, this approach comes with significant drawbacks.
First, the cost of building and maintaining a top-tier AI team is exorbitant. The Wall Street Journal reported some tier-one AI experts can easily get total compensation packages of $1 million a year or more. Financial institutions must compete with tech giants for scarce talent, driving up salaries and associated costs. Additionally, the rapid pace of technological change means that these teams require constant training and development to stay current, adding to the overall expense.
The efficiency and ROI of these in-house investments are also questionable. Not all financial institutions have the scale, infrastructure, or technological foundation to justify building extensive in-house AI capabilities. For smaller and mid-sized banks, the resources required to develop and maintain such endeavors may be disproportionate to the benefits. Even larger institutions often struggle with the integration of new technologies into their existing systems, leading to operational disruptions, inefficiencies, and sometimes a failure to achieve the anticipated results.
There are numerous cautionary tales within the industry. Some institutions have encountered significant delays and budget overruns in their AI initiatives, while others have failed to meet their goals entirely. For instance, the deployment of AI-driven customer service bots — intended to enhance customer satisfaction — has, in some cases, led to increased customer frustration and confusion when not executed with proper attention. The inability to seamlessly integrate these bots with existing customer service frameworks has sometimes resulted in a negative customer experience, rather than the improvement that was promised.
Dig deeper:
- Banks Want Customers to Take Security Seriously. Here’s How They’re Doing it.
- What Do FDIC Examiners Think About AI? To Find Out, I Asked One
- 13 Prompts for Banks Deploying AI to Build Essential Marketing Collateral
The Importance of Core Competencies in Financial Services
Given the significant challenges associated with in-house AI development, financial services institutions would be wise to instead double down on their core competencies—areas where they have traditionally excelled and that are critical to their long-term success — while outsourcing their AI strategy to established experts. Mastery in core areas — such as risk management, customer relationships, regulatory compliance, and financial advisory services — is crucial for maintaining a competitive edge and delivering value to customers. By diving into building inhouse expensive AI teams headfirst, they risk spreading themselves too thin and losing focus on the priorities that brought them to prominence.
Refocusing on core strengths can yield substantial benefits. For example, by enhancing customer experience through personalized financial advice, banks can deepen customer loyalty and foster long-term relationships. Improving risk assessment processes can lead to more accurate lending decisions and better management of financial exposures. Ensuring rigorous regulatory compliance is not only crucial for avoiding costly penalties but also for preserving a strong reputation in the market.
Outsourcing software and AI development to specialized providers is a strategic opportunity that can offer significant benefits. By partnering with technology firms, banks can tap into cutting-edge advancements without bearing the heavy burden of developing and maintaining them themselves. This approach can lead to substantial cost savings, as organizations bypass the high expenses associated with recruiting, training, and retaining top-tier tech talent. Outsourcing allows internal teams to concentrate on what they do best — delivering superior financial services and maintaining strong customer relationships — thereby driving excellence in areas where they have the most expertise.
Ultimately, by prioritizing core competencies and leveraging external partnerships for technological needs, financial institutions can strike a balance between innovation and stability. This approach ensures that they remain agile and competitive in the evolving financial landscape while staying true to the foundational strengths that have long defined their success.
AI is a powerful ally, enabling financial institutions to streamline operations, innovate faster, and stay ahead in an ever-evolving market. To achieve sustainable success, however, these institutions need to rethink their approach to software and AI investments. By focusing on core competencies and leveraging specialized providers for technological needs, these institutions can optimize their operations and achieve the results they’re looking for.
Leaders in the financial sector must evaluate where their resources are best allocated for long-term growth and stability. It’s not about rejecting technology; it’s about integrating it in a way that complements and enhances the institution’s fundamental strengths. In doing so, financial services institutions can navigate the future with confidence, delivering exceptional value to their customers and maintaining their position in an increasingly competitive market.