Today’s financial institutions are evolving in an environment of rapid change where a confluence of rapid technological advancement, regulatory change and evolving consumer preferences are driving new innovations and welcoming disruptive entrants that are breaking old trade-offs and redefining notions of financial value.
A blessing that aptly describes this moment in history. We would go further and say we are living in disruptive times. In 2014, the World Economic Forum’s Banking and Capital Markets group initiated a project to examine the role of Disruptive Innovation in Financial Services. Capco, sitting at the intersection of information technology and financial services, was asked to join both the steering committee and the working group.
This project explores how these innovations are empowering consumers, fostering new business models that threaten to disintermediate the activities of legacy players, while creating advanced capabilities that enable faster, more efficient, and more sophisticated financial activity. It considers how these trends could reshape the financial services ecosystem over the next five years, and how they can collaborate with innovators driving this change to take an active role in the forming of the ecosystem.
At the Annual Meeting of the World Economic Forum held in Davos, Capco Founder, Rob Heyvaert gave the opening remarks at the private session for the project. Attended by CEOs and senior executives of firms who have influence in Financial Services, Rob challenged this cross-industry group to adopt a beginner’s mind when it came to disruptive innovation in our industry. These new innovators are taking risks, adjusting their business models, moving into adjacent markets, as well as morphing, merging, and collaborating. He reminded them that as leaders of an industry where trust had all but evaporated, they had the fiduciary responsibility to architect a financial services industry befitting future generations. He urged the leaders to cultivate a culture of innovation - to not quell disruption but be open to it. As a group, they must Disrupt with Purpose.
No longer can the industry hide behind the shield of regulation as both a barrier to entry for innovative companies and a reason dismiss investment in innovative technology. Regulators want to renovate the global financial architecture following the recent financial crisis and innovative firms that bring transparency and efficiency to the sector are being looked upon favorably. The skepticism of 2014 that disruption was a fad had faded and was replaced by a healthy acceptance and renewed willingness to explore areas of collaboration and partnership.
Distributed cryptographic protocols like Ripple and the Blockchain and mobile money solutions like M-Pesa have the potential to relieve key pain-points in the global payments and settlement system by enabling faster, more traceable and more efficient transfer of value, but also carry new risks, uncertainties and the potential for significant disruption of incumbents.
The rapid proliferation of the internet of things (connected home, connected cars, and connected self) and advancements in genetic screening are creating real-time data streams of highly granular, individualized information relevant to individual and organizational risks. Equipped with improved connectivity, advanced data science and the availability of cheap processing power, insurers will be able to mine these and other data sources efficiently and effectively to improve underwriting accuracy.
In the face of rising customer expectations, new and existing players - who are accustomed to providing bespoke, flexible customer interactions over multiple digital platforms - may be better suited to cater to the changing needs of customers than exiting financial institutions. At the same time, increasing automation and commoditization of once high margin activities create pressures on the business models of incumbent financial institutions; particularly in transaction banking, consumer lending and wealth management.
Specialized external service providers are providing faster, cheaper and more advanced versions of today's in-house capabilities while new market platforms are facilitating the flow of information among financial institutions. These innovations are eroding the benefits of scale typically enjoyed by large incumbents, and thereby lowering barriers to entry by smaller players.
In a world where Eric Schmidt, Executive Chairman, Google, USA, believes that “almost all of the problems can be solved by more broadband connectivity,” this project still has some way to go to understand the impact of disruption in the financial services industry. Harvard Business School Professor Clayton Christensen first coined the term disruptive innovation to describe a process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves up the market, eventually displacing established competitors. 2015 will be an important year for answering some of these questions and will without a doubt throw some brand new questions into the mix.