The customers of today have access to incredible technology and information. Connected supercomputers in their pockets are fast-enabling democratisation and disintermediation of services. Consequently, this raises the question: Is the financial industry facing an Uber-like moment? Global investment trends would suggest so - venture capitalists are placing their bets on FinTech to cause digital disruption. In 2014, Fintech attracted $12 Billion in investments, which is 300% more than the $4 billion raised in 2013.
It appears that 2015 was a bumper year as well, with investment reaching approximately $30 Billion. It may be a drop in the ocean for an industry with $470 Billion in profits, but it may also be the sparks of a fast catching fire for this industry.
Upon using these new Fintech firm’s services, one element is clear. They have the customer at their core. Born on the back of an app-centric culture, new businesses are creating convenient and cost-effective experiences by utilising new technology and trends. The traditional model of firms creating products, handing them over to sales teams who then take it to the customer through controlled channels, is over.
Next generation financial services are built on interactive, mobile-friendly interfaces that emphasise a consistent customer experience through multiple channels.
Figure 1 – Global Investment in Fintech. Source: The Economist
All revenue streams are under threat
Digital disruption is threatening the three main profit sources of banks and examples of well-funded new players are emerging rapidly.
Firstly, net interest margin is now competing with peer-to-peer lenders and players utilising novel methods with big data to identify credit-worthy customers. New lenders such as LendUp are also transparent and engaging - giving points for on time payments which can be used for lower rates.
Although more protected, the second source of charging customers for payment is under pressure too. Paypal has already taken a big portion of the online market and now Squareand Apple Pay are encroaching the physical space.
The third source of profits is a combination of fees banks charge customers for their services. Simple is a mobile, online bank with no fees that is growing fast amongst millennials. Further, customers can now opt for much lower charges at foreign exchange by using companies like TransferWise. Easy to use, it works by cleverly matching people looking to transfer funds from both countries.
All financial services are under threat
Inevitably, other financial services will soon find themselves under similar intrusion. Big data and machine learning are technologies that do extremely well in information rich industries such as insurance and investment. Firms can use massive volumes of user activity logs and social networks to identify the insurable and attach that to simple interfaces for adjusting their coverage. In the investment and pension fund community intelligent algorithms are replacing active fund managers.
However, major financial institutions may often consider these early technologies as unattractive, because their mainstream customers don’t want it and the expected margins are not sufficient to cover their large fixed costs. This creates opportunity for lean, innovative start-ups to establish themselves.
Indeed, it’s important to remember that existing financial institutions are large with high fixed costs. Therefore, there are major implications to losing margin and volume to cheaper, user-friendly competitors. Breakeven revenue can approach rapidly, and suddenly, firms are forced to aggressively cut costs while at the same time invest into new technology.
These sizeable, slow-turning ships must not underestimate the speed at which technology and lean companies can spread. History is littered with examples of established industries overlooking a change in market competitiveness. Unfortunately, entering late means starting at the bottom of the experience curve against competitors with years more learnings.
Becoming customer-centric and undergoing digital transformation must fundamentally reshape the way a company aims to create value for the customer.
Full transformation, therefore, needs to take in two key areas:
The external: Customer engagement excellence. Companies need to define and execute a clear customer engagement strategy as well as create a customer-centric culture. This can be done by mapping and assessing the existing customer journeys across different channels. Firms must consider key dimensions across the experience – what brand voice is coming across? How are customers being engaged and rewarded? Is this experience consistent?
The internal: Digital operational excellence. A new external experience can only be created if internally, the business is aligned. This is broad-based and involves hard and soft measures. On the hard side, it involves a redesign of processes and introduction of new systems. On the soft side, it involved creating a digital, customer-centric culture and relooking at the organisational model to be less product focussed.
Connecting with the connected
Adopt a digital, customer-centric mindset. A new culture and way of thinking is required if companies are to adapt to the new landscape. An organisation will have to be willing to let go of dated views and rules. This will include revising how its employees make decisions and how management rewards performance.
Align internal processes and systems. The digital mindset extends beyond just culture and applies to the artefacts of the organisation. The processes supporting the customer services need to be made lean and automated where necessary. Additionally, channels need real-time contextual engagement.
Elevate analytics and data. Underpinning the customer experience should be a clear and single view of the customer, detailing the products and history of interactions so they can have a consistent experience. Analytics and data need to support this.
Be willing to invest. Major changes internally will require investment in new IT systems and change programmes. As the technology changes rapidly, this will be ongoing and should also look to next level advances. However, it also applies externally and companies must constantly monitor the market for innovation and potential acquisitions.
Enable innovation programmes. Many companies unconsciously hinder innovation. To circumvent this, they need to introduce explicit innovation programmes (for internal and external elements) and associated governance and rewards. Barclay’s is an example with their Accelerator programme that nurtures FinTech start-ups in return for 6% equity
Disruption is coming
We have all witnessed the speed at which technology adoption can happen.
Even if the market in South Africa is smaller than in the United States, Uber showed us how technology can enable rapid globalisation. It is thus critical that financial services prepare their operations so they are not caught flatfooted when the change comes.