The Future of Financial Services

by Jörgen Eriksson on July 18, 2015

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The World Economic Forum have issued a new report on the Future of Financial Services. The report is very well written, and well aligned with projects we have done at Bearing for SWIFT and also new research on fintech clusters.

For decades, banks, insurance companies and other asset managers have employed the same relatively static, highly profitable business models. They make money on deposits and management of money, and on fees for transactions on the customers money. But today they find themselves confronted on all sides by innovators seeking to disrupt their businesses through financial technology. Rising investments in fintech start-ups globally are helping fuel the challenge to entrenched players, with $12.2 billion invested into the fintech sector last year, more than threefold the total of 2013, the report notes.

The World Economic Forum report draws on over 15 months of research and 100 interviews with industry experts and a series of workshops that put strategy officers from global financial institutions in the same room as fintech innovators to discuss the changing industry. Their findings suggest this round of innovation just might make the big names in financial services rethink their business models in some very fundamental ways for the six fields of financial services that the report identifies.

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According to the report, there are five characteristics of today’s innovators to suggest this time might really be different when it comes to disruptive innovation in financial services:

1.     They are deploying highly focused products and services

Past innovators often tried to replicate the whole bank, resulting in complex business models that meant “more of the same” and either appealed only to the most tech-interested or price-conscious customers.

Today’s innovators are aggressively targeting the intersection between areas of high frustration for customers and high profitability for incumbents, allowing them to “skim the cream” by competing with the incumbents’ most valuable products. Bankers who once thought financial regulation was a barrier to new entrants are seeing non-bank fintech rivals go after the most profitable areas of their business, while avoiding regulated market segments.

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It is hard to think of a better example of this than remittances – banks have traditionally charged very high fees for cross-border money transfers and offered a poor customer experience, with transfers often taking up to three days to arrive at their destination. UK-based company Transferwise is challenging this process using an innovative network of bank accounts and a user-friendly web interface to make international transfers faster, easier and much cheaper. Thanks to this business model, the company now oversees over £500 million of transfers a month and has recently expanded into the US.

2.     They are automating and commoditizing high-margin processes

Innovators are also using their technical skills to automate manual processes that are currently very resource intensive for established players. This allows them to offer services to whole new groups of customers that were once reserved for the elite.

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Automated advisors like Wealthfront, FutureAdvisor and Nutmeg have automated a full suite of wealth management services including asset allocation, investment advice and even complicated tax minimization strategies, all offered to customers via an online portal. While customers must forego the in-person attention of a dedicated adviser, they receive many of the services they would offer at a fraction of the cost and without needing to have the $100,000 in investible assets typically required.

As a result, a whole new class of younger, less wealthy individuals are receiving advice and support in their efforts to save, and it remains unclear if they will ever have the desire to switch to a traditional wealth adviser, even as their savings grow to the point where they become eligible for one.

3.     They are using big data strategically

Customer data has always been a central decision-making factor for financial institutions. Bankers make lending decisions based on your credit score while insurers might look at your driving record or require a health check before issuing a policy. But as people and their devices become more interconnected, new streams of granular, real-time data are emerging, and with them innovators who use that data to support financial decision-making.

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FriendlyScore, for example, conducts in-depth analyses of people’s social networking patterns to provide an additional layer of data for lenders trying to analyse the credit-worthiness of a borrower. Does your small business get lots of customer likes and respond promptly to complaints? If so, you might be a good risk. Are all of your social connections drinking buddies “checking in” at the same bar? Well that might count against your borrowing prospects.

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Meanwhile, a new breed of insurance company is identifying ways to generate streams of data that help them make better pricing decisions and encourage their policy-holders to make smart decisions. Oscar, a US-based health insurer provides its clients with a wearable fitness tracker free of charge. This lets Oscar see which policy-holders prefer the couch to the gym and enables them to provide monetary incentives (like premium rebates) to encourage customers to hit the treadmill.

As the sophistication of these analytic models and wearable devices improves, we will likely see more and more financial services companies working to nudge their customers towards better behaviour and more prudent risk management.

4.     They are platform based and capital light

Companies like Uber and Airbnb have shown that marketplace companies, which connect buyers and sellers, are able to grow revenues exponentially while keeping costs more or less flat. We wrote about this in a recent blog article about disrupting the customer interface.

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This strategy has not gone unnoticed by innovators in financial services. Lending Club and Prosper, the two leading US marketplace lenders, saw their total originations of consumer credit in the US grow from $871 million in 2012 to $2.4 billion in 2013. Lending Club alone issued $3.5 billion in loans in 2014.

While this is only a fraction of total US consumer debt, which stood at $3.2 trillion in 2013, the growth of these platforms is impressive. Analysts at Foundation Capital predict that marketplace lenders will issue $1 trillion in consumer credit, globally, by 2025. Even more impressive, they have done so without putting any of their own capital at risk. Instead, they have provided a place where borrowers looking to get a better rate can meet with lenders (both individuals and a range of institutions such as hedge funds) who are eager to invest their money.

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Crowdfunding platforms like Kickstarter have achieved something similar, becoming an important source of funding for many seed-stage businesses. These platforms connect individuals looking to make small investments in start-ups with an array of potential investment targets, and allow the “wisdom of the crowd” to decide which companies will and will not be funded (while taking a slice of the funds from those that are successful).

5.     They are collaborating with existing dominant players

This one might seem strange. After all, disruptors are supposed to replace the old economy, not work with it. But this is an oversimplified view. Smart investors have realized that they can employ bifurcated strategies to compete with incumbents in the arenas of their choosing while piggy-backing on their scale and infrastructure where they are unable to compete.

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For their part, incumbents are realizing that collaborating with new entrants can help them get a new perspective on their industry, better understand their strategic advantages, and even externalize aspects of their research and development. As a result, we see a growing number of collaborations between innovators and incumbents. ApplePay, the most hyped financial innovation of the past year, does not attempt to disrupt payment networks like Visa and MasterCard, but instead works with them.

About Jörgen Eriksson :

Jörgen Eriksson is the founder of Bearing and is the Chairman of the firm since it was created. He has successfully expanded Bearing into covering projects on four continents. He is also Adjunct Professor of Innovation Management at the International University of Monaco and at Universitat Politècnica de Catalunya in Barcelona and he is an active member of the Founders Alliance organisation.

Working with consulting engagements across Bearings practices, he has over the past fifteen years participated in and supervised a large number of client projects, from innovation system development and place development and branding, to merger and acquisition assignments and leading edge research and business development activities for key clients.

His new book, Branding for Hooligans, will be published in 2015. It is about how innovation and branding are key survival factors in our modern times of hyper competitive markets.

Prior to Bearing, he was Director of Europe, Middle East, and Africa for Trema Treasury Management, a technology and consulting services provider, supplying financial software solutions for the global financial industry, Clients included The European Central Bank, Citibank, SEB, South African reserve Bank, Deutsche Bank, Abu Dhabi Investment Authority (ADIA), as well as many other large financial institutions and Fortune 500 companies.

Early in his career Eriksson was educated at the Stockholm School of Economics, where he studied economics, financial economics and philosophy. He then worked in Scandinavian investment banks and also for the Swedish Institute of National Defense Research.

You can contact Jörgen on e-mail jorgen.eriksson@bearing-consulting.com, connect on LinkedIn on http://fr.linkedin.com/pub/jörgen-eriksson/0/38/8a0/ and follow him on twitter on joreri508.

{ 1 comment… read it below or add one }

Paddy Kamatkar July 28, 2015 at 14:02

Excellent synthesis of a rapidly changing landscape of the financial services industry.

Although even as I agree to most all points, I can’t agree with your characterization of “capital light.” The development of technology platforms takes several millions of dollars and development of a commercially deployed and feature rich financial system platform can easily run into several hundred millions. Counting earlier failed attempts or the cost of other building blocks – it can run into billions – albeit, not necessarily incurred by the sole final entity owning and operating any given platform – case in point Big Data appliances and applications.

Yet, appreciate your very illustrative and illuminating analysis – hats off!

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