FinTech: Headwinds or Windfall for Incumbents?

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Guest post by Dean Nicolacakis, Principal, Co-leader FinTech Practice, PwC

In the next five years the financial services industry will look unrecognizable. In fact, workers are worried about losing their jobs, according to a new survey. Due to the convergence of the financial services industry and technology—dubbed FinTech—more than 3,000 Certified Financial Analysts said asset management is at the most risk followed by banking, securities and insurance. What can CEOs and CIOs of the industry’s incumbents do to turn disruption’s headwinds into a windfall?

Money is digital and highly disruptable. This disruption didn’t happen overnight. For years, startups have been taking advantage of low barriers of entry to innovation. With easy access to technology both in their hands and those of consumers, a skill for making connections and leveraging data, they army crawled their way into the territory of the industry’s incumbents. Now that the change has turned from a drum beat into a bang, signs of the upending of the financial services industry are hard to ignore.

  • Wealth Management
    Online investment management sites are replicating the services you get from a financial advisor at much lower costs. Although high net worth investors will likely stay the course, this new segment is especially ripe for the middle market.
  • Lending
    While the focus over the last 18 months has been marketplace lending, the industry is missing the larger innovations at play here – namely cloud-based platforms that are highly configurable and very low cost, improved processes for more intelligent and faster underwriting, and new better digital user experiences. The marketplace lending business model is under stress but the innovations are real.
  • Payments
    Payments has moved from a necessary step in commerce to increasingly embedded within the transaction. We are seeing the innovators move up to higher sources of value including using the underlying data for higher purposes in market, product expansion (e.g. receivables factoring), new transactional credit capabilities and advanced information services.
  • Insurance
    You can plug a device into your car that rewards you for safe driving with substantially lower insurance rates. News of cheaper insurances rates is spreading like wild fire and will burn holes in the bottom lines of insurance incumbents if they don’t pay attention.
  • Banking
    Digital banking is taking hold with large banks with differentiated features winning an increasing share of digital natives. Innovators are creating point solutions with differentiated experiences for goal-based savings and personal financial management and new core banking platforms are about to challenge the industry with step function reduction in cost and increased flexibility that the industry can’t ignore.

We don’t need to tell you that everything is different. Anyone with a credit card can get the tools they need to innovate as the cloud and open standards have leveled the playing field. These disruptors aren’t playing the game of the past where large amounts of capital are necessary to win market share. They aren’t even inventing new products and services. And, they don’t try to be everything to everyone. What they are skilled at is making connections between services, people and data around a particular area. Integration is their game and the traditional financial services industry needs to learn how to play.

Get Serious about Evaluating Emerging Technology
New technologies are rushing down the pike at such a quick clip that monitoring is a full time job. You need someone who is completely dedicated to the task of exploring emerging technologies and pondering their potential for disruption. This scouting must take place on a global scale as well. Companies simply aren’t taking the task of evaluating emerging technologies serious enough. And when they do, they apply traditional business thinking to the process. This isn’t traditional competitive analysis that product teams do, and it isn’t only emerging technology monitoring that the CIO does. It takes business and IT working together to learn from the innovation ecosystem. Evaluating emerging technologies requires striking the right balance between freedom, measurement and agility.

Move from Mergers to Partnerships: Cultivate Rather than Conquer
Merging with companies is nothing new for the industry. But succeeding in the digital age requires more than absorption and rebranding. The industry must figure out how to truly partner with outsiders to succeed. Claiming victory isn’t conquering, but cultivating a comingling of skills, talents and brand messages to bring the best of all worlds to the consumer. Traditional players have a lot to learn from startups. A recently successful partnership was created when a start up digital advisor was integrated with a large multi-line asset manager. Not only did the large company leverage the skills and technology of the start-up, but they also focused on learning about their talent acquisition processes and their career paths.

Integrate to Innovate
Integration in today’s fast-paced, data-driven environment requires different internal technology capabilities. Legacy systems are holding companies back. Traditional players must clean up their technical debt and shift their systems to more flexible environments that can push and pull devices and data more effortlessly, seamlessly and quickly. Make the transition to more open APIs and plug and play applications to create a foundation for innovation. Big incumbents that are used to building everything need to integrate more. Small incumbents that are used to buying also need to integrate more!

For example, a large US retail bank is facing a seven figure IT estimate to make their current 25 year old lending platform compliant with recent regulatory changes. An alternative cloud based platform is available that can handle all of the regulatory requirements with simple configuration. The question they are facing is can we build a model where we can selectively move this small subset of loans that need this functionality to this new platform instead of building everything. The cost to do so is less than the cost to build the one change and the ongoing operating cost is a fraction of the old system.

Create an IT Culture of Speed, Agility and Quality
Companies must revamp their cultures both in IT and the business. Move away from old waterfall methods of design to more DevOps, Agile methods, which includes testing environments as well. Ramping up the rate at which products and services are delivered versus sticking with the status quo is the difference between riding a digital wave and getting sucked into a riptide. A wealth management firm, with roots of being innovative in the internet era, was facing being behind in the digital advice space. They took a radical approach to catch up by ring fencing a team that directly reported to the CEO and building an entirely new platform in four months. This would have taken 18 months if they followed their traditional methods. Now they are looking to add more priorities ‘the new way’.

Disruptors are forcing the hands of the incumbents of the industry. Watching and waiting to see what happens is a death knell. Incumbents need to get wise to the game that disruptors are playing—primarily integration—and beat them or join them.

Follow Dean on Twitter @nicolacakis

Image shared by Hartwig HKD

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