by Daniel Diemers & Fred Gregaard
Digital didn’t have a lasting impact on most financial services the first time around in the late 1990s, but now it’s definitely here to stay. The challenge for the industry is less about predicting and reacting to individual trends than adopting new approaches to assess the impact of technology on people’s behaviour, formulate the right ‘strategy that works’, and implement solutions rapidly, flexibly and proactively. While outsiders are set to change the face of financial services, all is not lost for established players, provided they get busy quick.
First Published in Disclose http://disclose.pwc.ch/25/en/financial-services-could-digital-pave-the-way-for-a-new-client-centric-model/
The first Internet wave back in the late 1990s gave financial services a severe buffeting, but failed to permanently rearrange existing structures. However, the technological disruption of the last ten years or so, coupled with the regulatory strictures triggered by the 2008 financial crisis, have left no doubt that digital transformation is here to stay − as much in financial services as in other industries already further down the road to digitisation.
For financial services executives, who grew up in a bricks-and-mortar world with infrastructures and business models that hadn’t radically altered in decades, this can be a real challenge. Some are even still in denial. We still see the media ridicule companies that operate with Bitcoins, and indeed Blockchain, the technology underlying the leading virtual currency, is so complex and abstract that it’s hard for anyone but an expert to grasp how it works, never mind its potential for severely disrupting the way financial services operate. Who’s to say that Blockchain will even turn out to be a great disruptive force? Or predict which of the other emerging technologies – such as artificial intelligence or virtual reality – will achieve a major breakthrough and pave the way for completely new business models in financial services?
The truth is, nobody really knows. Even the mighty Google originally failed to spot the power of apps; instead it put all its eggs in the browser basket, and had to change tack to catch up. Most tech experts will refuse to venture a prediction five, or even three, years into the future. Where does that leave leaders in financial services who have to make decisions that will shape the fate of their organisation during their tenure and beyond?
Learning to read the technology landscape
In recent years financial services executives have been so busy staying abreast of new regulatory issues that most have understandably had little time to explore the latest developments in technology and assess their impact. But while nobody can claim to have a complete overview or be able to predict the future, it doesn’t do any harm to keep an eye on and understand the main trends. Here are some of the technologies currently in the running.
- Crowdfunding, peer-to-peer lending and social investing Now that technology enables people to connect online, they don’t necessarily need an intermediary in the form of a large bank to borrow, lend or invest. This could revolutionise financial services, particularly in third world countries, where most people are online only via a smartphone. Western bankers beware: many of the forces of global transformation are being driven by people in the developing world rather than in traditional markets.
- Artificial intelligence (AI) AI still isn’t taken as seriously as it deserves to be. But the first robo-advisors (online investment platforms driven by algorithms) are already making inroads into the market for simple investment profiles. And it’s worth considering the potential that still remains for artificial intelligence to transform mid- and back-office processes so that they no longer need people to run them.
- Big data analytics Banks and insurance companies have always possessed a mass of data, much of which has remained unexploited. But with lower margins creating greater pressure and the power shifting to consumers, the financial services sector has to learn from other industries how to use this precious data to find out more about its customers. The tools are now available in the form of big data analytics.
- Virtual reality (VR) There have been huge advances in VR since the 1990s. A technology once limited to abstract 3D houses and simulations is set to have a massive impact on the mainstream and disrupt all industries. VR will radically change the way we interact with people, computers and the Internet. Imagine a world where clients can consult their virtual relationship manager in a perfect 3D environment on their way home in their self-driven car. Are they going to fly for hours to another city for the same advice? Are financial services players going to have the technology and processes in place to interact with their clients in this newly-found downtime?
- Blockchain and cryptocurrencies We’ve already talked about Bitcoin. It’s easy to knock it, but just consider the potential of universal cryptocurrencies that don’t require validation from an authority such as a bank, especially in developing countries where people don’t have access to a stable currency and may trust their central banker less than most of us do. We’re seeing the emergence of new categories of money. We’re also seeing a new kind of trust: digital natives are more likely to trust technologies and algorithms than institutions or individual people. This has massive implications, and the financial services industry has to be able to respond.
Learning to understand people’s behaviour
While it’s good to be able to read developments, it’s important not to get too hung up on the technology itself, and to realise that technology has to be picked up by people if it’s to provide a breakthrough. Distinguishing the hype from the technological gold nuggets means being able to look at people and their behaviour, and thinking about how the technology might fit in in social and economic terms. You don’t have to be a futurologist to do so. Just ask the real experts in digital technology − your children or grandchildren – and notice what’s exciting them, what media they’re using and how, and what they’re not so enthusiastic about. They’re the next generation of financial services customers, so it’s their needs and habits that have to be understood rather than those of an older generation whose ways are already familiar.
This technological strategic foresight is crucial for any company − financial services included – that is serious about surviving the coming decades. There’s no guarantee of getting it right every time, but it’s a good place to start. Depending on the size and nature of the organisation, it can be worth hiring this foresight from outside in the form of advice on digital strategy and implementation. But a lot can also be done with existing resources by encouraging people within the organisation, especially more creative and innovative members of staff, to feed their technological know-how and experience into strategy, product development, distribution and business models, and get them actively involved in the process.
Changing mindsets, marshalling resources
In this scenario the role of an experienced executive is to instil strategic foresight as a key capability of the organisation and put a proactive strategy in place that ensures the potential and necessity of digital transformation are at the core of the company’s business model. But it also means recognising that the pace and uncertainty of change require a new approach to developing and implementing models, products and services. The important thing is to have a point of view and act on it promptly, even if it means bringing an offering to market before it’s fully mature. In the digital economy, customers are able, and often expect, to be involved. There are therefore new possibilities for listening to customers and finding out what they really need and want. Why second guess when you can ask them directly?
Companies shouldn’t be afraid to change their minds or admit failure. In such an unpredictable business and technological environment, they’re almost bound to fail on occasion. They can build that into their plans and formalise processes for using setbacks as an opportunity to learn.
Build on your strengths
Realising the necessity of digital transformation doesn’t mean abandoning your strengths. Players with a good name and reputation in the financial services marketplace can build on this trust in the digital era. Customers booking accommodation on an online sharing platform might lose a good night’s sleep if the room isn’t what they expected; but a client investing via a new, untested online platform stands to lose a lot of money if things don’t turn out. While new players from completely different areas of business might well shake up financial services, established players can capitalise on the fact that trust in a name and experience still means more than in most other industries.
Experienced financial services executives are also very familiar with the regulatory landscape and the challenges of compliance. If they can build on this experience, have a feel for where the industry is going and how the regulatory landscape will change, and combine this with an understanding of the technology, they’ll be much better placed to work out how new technologies can help assure compliance more efficiently and effectively. It’s worth remembering that the pace and reach of technological change are as much a challenge for the regulators as for banks and insurance companies. Regulation is global, and in the digital space there’s a good deal of potential for regulatory arbitrage for those that can seize it.
Work out where you need support
As in all areas of business, there’s plenty of outside help at hand if you need it. A large firm, such as PwC, can provide support all the way from discussing how to incorporate digital in business strategy at C-suite level to actually implementing new, user-centric digital solutions on the customer’s behalf – and all the steps in between, including tax, legal and compliance in different countries all over the world. Companies should examine what resources they have, what capabilities they want to build themselves, and what they want to buy in. It may make sense for a large organisation to have its own innovation laboratory. Others may prefer to work with an outside expert network. The mix will differ depending on the organisation, but it’s crucial to understand the issues and the importance of having a clear strategy to find the most appropriate balance.