It’s only one year since the World Economic Forum launched its Disruptive Innovation in Financial Services work group, but the atmosphere is decidedly different. Last year the collective mood of this cross-industry group was one of denial, largely due to the regulated nature of the financial services industry. This year, a well-known Silicon Valley entrepreneur challenged us to think differently, suggesting we take a clean sheet approach. And the mood couldn’t be more different, as this group embraces the fact that disruptive innovation has arrived.
Many of us in the financial industry developed professionally in a world that was about technology. However, today the curve is absolutely steeper – just think about how Uber and PayPal have changed the nature of their fields. There is also a realization now that technology is but one part: it is really about data and technology. The emerging trend among corporations and banks alike has been to hire chief data officers. We have the term and industry issue “big data” partly to thank for this. However, many of these same firms have still kept their chief information officers; I’m often left wondering about the difference between data and information and how these roles work together.
The emergence of big data as a business issue has changed the industry’s conversations with clients, particularly around opportunities like powerful analytics used to discover trading and investment opportunities or manage risk. But these terms can also be alienating.
Room to innovate in the financial industry
The financial industry has held a collective and, arguably, misguided view that in a heavily regulated industry like ours we can’t innovate. In fact, for a while innovation was a dirty word, often associated with debt securitization and risky products. But no doubt innovations that bring more transparency and address industry needs would be welcomed by regulators. As for the financial industry, clearly innovations that address duplication, overlap and waste would also be welcomed.
Know your customer (KYC) and anti-money laundering (AML) regulation has spawned such developments and that’s why we, and a couple of others, have launched services to remove duplication and create new data standards, capturing the needs of both regulators and industry members alike. Financial institutions are recognizing that they are doing too much themselves: there are not enough standards, particularly related to data, and there are inefficiencies inherent in their processing. Beyond KYC, there are further opportunities for utilities to help financial institutions with non-revenue generating processes, such as customer records management and more.
We do know that established incumbents in our industry are still reeling from the aftershocks of the financial crisis and this has pushed innovation down the priority list. This is not surprising given that regulation of this industry has increased rapidly over the past five years and the current focus on “management by expense control” rather than by revenue growth and new markets. However, things are changing. A senior work group member privately spoke of his bank’s focus on new ventures by having a dedicated group that can innovate in any area, even ones of incumbency, focused not just on cost but growth.
It is clear that if the capital markets and the established players don’t innovate, new entrants, including Silicon Valley technology firms, will. A Silicon Valley expert at the Forum spoke of bitcoin and cryptocurrency as an interesting area, but not from a “digital gold” or asset point of view or as a currency or form of digital payment. The real potential is in the platform. This becomes interesting when you begin to think of emerging digital assets. Stocks essentially become digital records, and the same goes for car and home ownership. We may begin to see the emergence of “smart contracts” and this transforms the applications that can be built. Disruptors in Silicon Valley are looking at the financial industry’s assets and rethinking platforms and potential applications.
Lessons from developing markets
Another fast-growing area of innovation is in digital identity. This developing area extends well beyond financial services and will touch everything in our lives. One of the group members spoke of how 600 million people in India are now authenticated biometrically and how Nigeria is going one step further by layering payment technology on top of this. We heard that in Pakistan some customers can withdraw funds from cash machines using their national number and a biometric measure, such as their fingerprint or a retinal eye scan – all without removing a debit card from their wallets. Clearly, this will transform society and is an area where industries can come together to collaborate and to establish governance from the very inception.
There is also much to learn from developing markets, particularly with the penetration and acceptance of mobile technology, well beyond standard telephony. Mobile technology poses a threat to the unbundling of banking with its immediacy to clients and relationships, as well as its ability to serve as a channel for payments, as corporates wonder why they have to pay their banks to pay money to themselves.
Given borrowers don’t necessarily care where they get their money, we’ve already seen peer-to-peer lending taking some of the cream away from the banks, benefiting from its largely unregulated stature. One of the pioneers was Kickstarter in 2009, which was reported to have channelled over $850 million from 5 million backers in five years. The World Bank estimates this will grow from $6 billion in 2013 to $100 billion by 2025 – and this could be a conservative estimate.
I was reminded in the session that the Lloyd’s of London insurance market started 300 years ago and was one of the earliest examples of crowdfunding risk. The concept might not be new, but it’s the speed and adoption that is breathtaking. Savers like me can also take funds out of the traditional banking system, having opened a lending account in just over three minutes. The customers of tomorrow, or the under-25s, don’t necessarily think of banking in the same way. We could see tomorrow’s customers bank with mega brands they trust – perhaps Apple or Google – and this will impact the overall capital markets.
The message to the industry is clear. Young innovators are out there right now thinking about how to unbundle the capital markets and disrupt your business model. Innovations tend to start low in the food chain and then pop up. If the financial industry isn’t addressing a need, it is leaving itself open to disruptors that will too happily intercept the opportunity. While regulation is a reality of our industry, financial firms can take a lesson from Silicon Valley, where innovations are created with speed and then regulators are brought in to make it work.
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