• UK banks face a £38.4bn annual regulatory cost burden
• AI and automation promise faster ROI than traditional tech investments
• Many financial institutions lack leadership's understanding of AI’s benefits
• Legacy systems and over-reliance on big tech limit transformation
• Regulators are scrutinising AI’s risks to consumers and systemic stability
• BIS highlights successful AI use in KYC and credit underwriting
• Boards urged to boost digital expertise and embrace tech leaders
• AI helping firms map and restructure complex legacy infrastructures
• Firms that can prove robust governance may shape regulatory direction
• Transformation seen as key to improving customer experience

The financial services sector may be embracing technological innovation with renewed urgency, but a triple whammy of old thinking, increased scrutiny, and a lack of tech literacy are threatening to derail progress.

That’s the view of industry insiders who see outdated processes and lack of skills as a key barrier to leveraging tech to cut costs and enhance customer experience.

According to digital solutions provider Reply, rising operational pressures show no sign of letting up. Regulatory compliance alone cost the UK banking sector £38.4 billion last year, equivalent to £21,400 an hour.

The escalating threat of cybercrime adds further financial and operational strain, leaving many firms feeling as if they are sprinting to stand still.

Yet, emerging technologies, especially automation and generative AI, offer a path to leaner, more efficient operations without resorting to large-scale offshoring.

KPMG research shows that over half of banks are targeting savings of 10 per cent or more over three years through transformation efforts.

Unlike traditional capital projects, AI-powered tools can deliver rapid returns, making the business case increasingly compelling.

But realising those returns is proving difficult. The financial services industry still suffers from a widespread lack of technological awareness at the executive level, and many leadership teams fail to grasp the operational power of AI and struggle to move beyond deeply embedded legacy infrastructure.

Others fear losing control of their risk and compliance frameworks amid rapid innovation.

Technology giants dominate the market, locking financial firms into long-term dependencies that limit agility.

Even when appetite for transformation exists, navigating complex, ageing systems left behind by successive generations of engineers often demands forensic insight.

In response to this, some firms are now using AI to reverse-engineer its entire tech stack – likened to “decoding the DNA of a Jurassic Park system – to understand what exactly it owns and how it functions.

This type of intelligent unpicking may prove crucial in helping firms rebuild with purpose rather than patchwork. 

The regulatory environment adds another layer of complexity. The Bank of England is already examining how AI could introduce systemic risk, while the Financial Conduct Authority is probing its impact on consumers.

Regulators may publicly highlight the benefits of innovation, but their private concerns – bias, privacy breaches, operational fragility – are keeping compliance officers up at night.

Rather than retreat, some experts argue that firms should take the initiative. Financial institutions that can demonstrate strong governance frameworks and articulate their risk controls stand a better chance of influencing the regulatory narrative.

With most regulators still shaping their positions on AI, there is a rare opportunity for industry-led direction.

There are already success stories to build from. AI-driven systems now handle billions of transactions in anti-money laundering monitoring and have streamlined once-cumbersome onboarding and underwriting processes.

These advances have not only slashed labour costs but also improved accuracy and decision speed.

Upskilling senior leadership is now seen as an essential step in transforming digital tools and services – bringing CIOs and CDOs into the conversation is a good first move, but much more is needed to foster the cultural change required for real innovation.

Boards that rely solely on external consultants to fill the gap may find themselves outpaced by bolder rivals who understand that innovation is not simply about trimming budgets but about improving the human experience in a digital world.