There are many large forces sweeping society, from demographic and social
changes to shifts in global economic power. But one force in particular –
namely, technological breakthroughs – is having a disproportionate effect on financial services. Here we look at the ten most important technology-driven influencers that will shape competition in this industry by the decade’s end.
- FinTech will drive the new business model:
For a long time, new market entrants found it difficult to break into the financial services industry. The large, well-established financial institution that we call ‘incumbents’ had advantages in size and their networks added
a multiplier effect. They had strong compliance systems in place to manage ever-increasing regulations, and they had the client base and resources to
prosper even in tough economic conditions.
Well, not any more. FinTech disruptors have been finding a way in. Disruptors are fastmoving companies, often start-ups focused on a particular innovative technology or process in everything from mobile payments to insurance. And, they have been attacking some of the most profitable elements of the financial services value chain. This has been
particularly damaging to the incumbents who have historically subsidised important but less profitable service offerings.
2. The sharing economy will be embedded in every part of the financial system.
By 2020, consumers will need banking services, but they may not turn to a bank to get them. Or, at least, maybe not what we think of as a bank today. The so-called sharing economy may have started with cars, taxis, and hotel rooms, but financial services will follow soon enough. In this case, the sharing economy refers to decentralised asset ownership and using information technology to find efficient matches between providers and users of capital, rather than automatically turning to a bank as an intermediary.
3. Blockchain will shake things up.
In the late 1990s, when companies began to realise the Internet’s potential power, e-commerce investment and experimentation soared. And despite the ‘dot com crash,’ it is unlikely that anyone would deny just how revolutionary the technology has proved to be. Today, there are curious
similarities with blockchain— both in how companies are being funded and how they are exploring use cases.
Blockchain systems could be far cheaper than existing platforms because they remove an entire layer of overhead dedicated to confirming authenticity. In a distributed ledger system, confirmation is
effectively performed by everyone on the network, simultaneously. This so-called ‘consensus’ process reduces the need for existing intermediaries who touch the transaction and extract a toll in the process. In financial services, that includes those who move money, adjudicate contracts, tax transactions, store information and so on.
4. Digital becomes mainstream
Two decades ago, many large financial institutions built ‘e-business’ units to ride a wave of e-commerce interest. Eventually, the initial ‘e’ went away, and this became the new normal. Internet development and large technology investments drove unprecedented advances in efficiency.
Today’s digital wave has the same markers: separate teams, budgets and resources to advance a digital agenda. This agenda extends from customer experience and operational efficiency to big data and analytics. In financial services, we have seen this approach applied to payments, retail banking, insurance and wealth management, and migrating toward institutional areas such as capital markets and commercial banking.
5. Customer intelligence will be the most important predictor of revenue growth and profitability
Do you know what your customers value? Are you sure? Customer intelligence used to be based on some relatively simple heuristics,
built from focus groups and surveys. These were proxies for real, individualised data about consumer behaviour, and the results were pretty hazy. Now, technology advances have given businesses access to exponentially more data about what users do and want. It is an amazing
opportunity for whoever can use analytics to unlock the information inside, to give customers what they really want.
6. Advances in robotics and AI will start a wave of ‘re-shoring’ and localisation.
When ATMs were first introduced, many customers refused to use them. Gradually though, after time and training, they came to see that ATMs could offer a better service experience. And trust followed.
ATMs are robots. They are very simplistic, purpose-built robots – but they provide consistent, convenient, low-cost service and customers have grown to trust them. The same principles will apply to other, more sophisticated financial services applications. There have been astonishing advances in robotics and AI, machine learning and pattern recognition in recent years. Over the next five years, we will see a shift from standalone uses to full integration into a company’s business-as-usual activities.
7. The public cloud will become the dominant infrastructure model
As significant as the shift toward cloud-based computing has been, it is just getting started. Today, many financial institutions use cloud-based software-as-a-service (SaaS) applications for business processes that
might be considered non-core, such as CRM, HR and financial accounting. They also turn to SaaS for ‘point solutions’ on the fringes of their operations, including security analytics and KYC verification. But as application offerings improve and as COOs and CIOs get comfortable with the arrangements, the technology is rapidly becoming the way
that core activity is processed. By 2020, core service infrastructures in areas such as consumer payments, credit scoring, and statements and billings for asset managers’ basic current account functions will be well on the way to becoming utilities.
8. Cyber-security will be one of the top risks facing financial institutions.
Financial services executives are already depressingly familiar with the impact that cyber-threats have had on their industry. Unfortunately, it is not likely to change for the better in the coming years, due to the
• Use of third-party vendors
• Rapidly evolving, sophisticated and complex technologies
• Cross-border data exchanges
• Increased use of mobile technologies by customers, including the rapid growth of the Internet of Things
• Heightened cross-border information security threats
9. Asia will emerge as a key centre of technology-driven innovation.
America’s reputation (and Silicon Valley’s, in particular) as a technology juggernaut is so ingrained that it can be easy to miss the globalisation of
innovation. But if you happen to look behind the social network or the router that sends your email, you will quickly see how rapidly things are changing everywhere.
Asia offers some key advantages to Western-based companies looking for innovation, including lower-cost but highly skilled resources (arguably on a level with those in the West), and a large market for testing and launching new products and services. Disruptive innovations typically begin as low-cost products and services that target the most price-sensitive customers. Asia, with its wealth constraints, vast population and favourable regulatory environment, represents an ideal fertile ground for disruptive innovation, as many industries have discovered.
10. Regulators will turn to technology, too.
The use of technology and its implications are not limited to financial institutions. Regulators are rapidly adopting a wide range of data gathering and analytical tools too. They are trying to learn more about individual institutions’ activities and overall systemic activity. They also hope to monitor the industry more effectively and to predict potential problems instead of regulating after the fact. Using sophisticated analytical tools on large volumes of data, regulators can compare scenarios and address potential issues before they become full-scale market problems.