The financial services industry is innovating at an accelerating rate, learning and applying the lessons of the sharing economy and business models of online innovators.
The rapid growth of innovative platform businesses, the development of new technologies and their effect on the changing expectations of customers are leading many financial firms to review their business models radically.
The financial services industry has recognized that expectations have changed for customers about how they expect businesses to engage with them. This is as true for businesses as it is for individuals. These new behaviors, and the technologies that serve them, are disrupting the norms of everything from how capital is raised and how start-ups form to how supply chains operate and even how people are employed. In its global banking annual review, the consultancy McKinsey warned that banks face a wipeout in some financial services, and that some are in a “high-stakes struggle” to defend their business models against digital disruption.
But it doesn’t have to be like this. The World Economic Forum has been looking at the nature of this change, and at its next meeting in Davos it will be scrutinizing a report from its Disruptive Innovation in Financial Services steering group which it convened to identify the emerging innovations and their impacts on global commerce. In the capital markets group that I chair, for instance, it was clear that there are real opportunities for financial technology providers who can help institutions outsource those processes which they are obligated to perform, but which do not generate revenue.
The steering group’s report (The Future of Financial Services) is a comprehensive analysis of the opportunities ahead. Perhaps its key conclusion is that disruption cannot be considered a one-off: It is now an integral part of doing business in financial services. There is continuous pressure to innovate. Young, lean, innovative businesses are out there right now thinking about how to unbundle banking and disrupt existing business models. If the financial industry isn’t addressing a need, it is leaving itself open to disruptors that will too happily intercept the opportunity.
It also finds that incumbent institutions are pursuing parallel strategies, aggressively competing with new entrants while also providing them with access to financial infrastructure and services.
Significantly, it finds that the innovations are having the greatest impact where they employ business models that are platform based, data intensive and capital light. These companies are making strategic use of data to acquire customers and drive revenues at a fast pace. They are agile and, as platform businesses, they are scalable.
The opportunities afforded by the technology are genuinely exciting. More has been written this year about the opportunities of blockchain, the distributed ledger technology underlying bitcoin, than there has been about bitcoin itself. In September 2015, we hosted a hackathon in London at which teams of developers applied the technology to solve business problems ranging from inefficiencies in the way companies come to market to the failure of many travelers to claim on their insurance for cancelled trips.
The industry is certainly going through unprecedented change, but technology is not the only influence. Risk and regulation are creating constraints which are changing the profitability of many business areas. Increased capital requirements mean old forms of business are less profitable, and liquidity is harder to find across many markets. Banks continue to optimize capital and cut costs whilst meeting new regulations.
In the meantime some 20,000 FinTech start-ups and financial institutions are rushing to get involved in this changed landscape. Innovators and entrepreneurs fight over ideas such as crowdfunding and peer-to-peer lending, blockchain and digital identities, and transfers across cash payments and securities trading.
Thomson Reuters is enabling these innovators, providing them with the means to build their businesses alongside our financial platforms. Earlier this year we introduced the Elektron API family – a set of Application Programming Interfaces (APIs) that allow customers to easily access real-time content, and enable customers to innovate by creating their own applications. The Eikon App Studio enables users to create apps blending Eikon’s leading news, market data and analytical tools with proprietary research and other third-party data: Users can create apps for their own use or for release to the wider industry – all via Eikon itself.
We have a unique perspective on FinTech: We know that this sector is not new. In 1851, Paul Julius Reuter saw the potential of technological development and started his financial information business – a FinTech start-up for the Victorian Age. He set up his first office in London next to the Stock Exchange, so his staff could get news quickly from the trading floor – what we would now call a low-latency strategy. The 19th century telegraph network is sometimes referred to as the Victorian Internet. Reuter was truly a dot-com pioneer.