Banks, insurance companies and other financial service providers are all aware of the coming FinTech (financial technology) revolution. From robo-advisors to predictive analytics, low/no-cost transaction platforms to mobile wallets, the financial services landscape is set to change dramatically in the next few years. But are the industry incumbents taking this anywhere near seriously enough? And are they recognising the true scale of disruption that’s about to hit them? All indications are that they are not.
Most of them seem to think FinTech will affect them on the fringes of their businesses, nibbling away at a few product lines. Many think that FinTech can be incorporated into their existing systems and structures as new channels and slightly tweaked services. But FinTech is much more than this: it is a full-frontal assault on the very business model of financial services itself, taking advantage of the lowest levels of trust ever experienced by financial service providers to fundamentally change the rules of the game.
Here are five questions that financial service providers should be asking themselves. These questions will help navigate a better path to the future than the one you’re on now – as long as you’re honest about the answers you give.
1. If all transaction, agency and management fees were slashed to zero, where would your revenues come from?
The purpose of banking is to assist the reallocation of value in a system. Moving excess value held by one group of individuals to another group who are seeking value. There is a transaction associated with this transfer – return for the giver, cost for the receiver. At its core, banking is about finding and putting these people together. The bank is the middleman who takes a transaction fee for facilitating this exchange of value. At the heart of the FinTech revolution is the concept of disintermediation: the removal of the middleman. In fact, this is at the heart of the digital revolution, from Uber to Amazon.
Branches, middleman services, transaction brokers, notaries and conveyancers and many more services are being done more efficiently and effectively using digital platforms. And increasing they’re being done by artificial intelligence (see the next question). When customers realise there is no longer a labour cost involved in a service, they often demand it fall in price. And when customers find an option that does not involve a middleman, they typically choose to use it.
There are some obvious ways this will affect financial services. Roboadvisors will give automated investing advice, even relying on social assistance rather than professional expertise like eToro does, for example. Services like Zopa bring willing creditors together with potential borrowers. Kickstarter and many other platforms bring investors together with entrepreneurs seeking funding. Trov supplies on-demand short-term insurance. We have no doubt we will soon see health and life insurance linked to fitness tracking devices and DNA analytics like 23andme.com. And the list goes on and on.
With that background, let’s get back to our question. One could argue that all the potential FinTech disruptors will charge users for their service, and banks could just pick up those charges as new revenue streams. This fails to see that FinTech platforms are absolutely slashing their transaction costs and charging a fraction of the fees that banks do. And there is not one FinTech that has the legacy costs of any established financial institution. The big, ostentatious head office, the sprawling branch network, the legacy IT infrastructure, the bloated employee numbers (yes, even after all the retrenchments, banks and insurance companies still have armies of minions doing work computers could do much better than them) and, of course, the salary bill.
Let’s deal with that last item quickly: We know the average bank employee never sees those big figures and doesn’t get a bonus, but there are plenty of people at the top end of financial services who are ridiculously overpaid for the value they actually add. It’s those people who are most in need of asking the questions we’re posing, and we doubt they’ll agree with us, but that doesn’t make us wrong and them right. Our prediction is that a decade from now, FinTech would have decimated banker’s pay. In the Wall Street area of Lower Manhattan, there must be in excess of 100,000 people earning $250,000 or more right now. Much of their work can be done by machines, and is probably worth less than $100,000 in real market value anyway.
Controversial statements, we know, but this is at the heart of our first frightening question. If your current revenue streams are taken away or dramatically reduced and you were forced to show real value to your customers, what do you have to show them that they would be willing to pay for. I suppose another way of asking this is: when all the work you currently do is done by the machines, what value is there for you to add and how will you prove its worth to your customers? If you still have any.
2. How much of what you do can not be described by an algorithm?
Question 1 is only powerful if you believe that the machines might actually be able to do your work. Our experience in working with financial services clients all around the world is that they understand that certain low-level tasks are easy to automate, and in fact are actively looking to bring artificial intelligence into their systems. But because they think like bankers and have used their existing IT departments to try and develop these systems, they have created monolithic, clunky and unfriendly systems that don’t really look like they’ll ever compete with the humans in the system.
We’ve also seen the dealmakers in financial services convince themselves of how complex, once-off and difficult the solutions are that they find for their clients, and therefore think that a machine could never do this. They are wrong. If you can describe the steps you take to do your job, someone can write the algorithm to teach a machine to do it. If you can train someone else to do what you do, and outline the decision tree that will get you to a solution, someone can write the algorithm too – no matter how complex or nuanced it may be.
Artificial intelligence is going to be able to do much more, much sooner than you think.
We’ll go even further: FinTech is not a banking innovation – it is a technology innovation that is being directed at Financial Services. And that’s why the FinTech startups are going to win. They are not bogged down in the systems that banks and insurance companies have set up over years and years. Accountants, actuaries and other traditional financial services skill-sets cannot fully understand the implications of FinTech, how best to respond to FinTech, or how to develop in-house FinTech solutions. We need to bring broader digital technology skills into the conversation. Not many banks have these skills available in-house.
We’ll answer our own question for you: Not much. Not much at all. Your response should not be to deny this, but rather to change the question: when the computers are doing all of the work we’re currently doing, is there any part of my job that requires some humanity? Is there really any part of your job that relies on things like intuition, relationships, “bedside manner” or emotions? These are the only possible places for humans to add value. It seems to us, though, that financial services companies have spent the last century trying to remove these from their systems.
3. Do your customers trust you? Really?
This question is the most hard-hitting of all, and we can and must answer it for you. Banks are now the least trusted of all professions. Insurance companies and investment managers are not much better off. Every day we read another story of some predatory banking practice being brought to light, making it clear that banks are incapable of learning lessons and only need the slightest excuse to screw their customers royally. Yes, this will sting any banker reading it, and you might be tempted to stop reading now and write us off as ill-informed observers who are prone to hyperbole. That would be a mistake.
Financial services need to realise that they are not trusted by their customers. They are merely tolerated. And as soon as there is an alternative, clients will jump ship in droves. Some will do so on principle. Your customers are not loyal, they just have a habit of using you, and don’t have too many options. FinTech will change that in the near future.
Trust is a key issue in financial services. In fact, it is THE defining feature of almost all products and services provided in this sector of our economy. And it has been utterly eroded in the past decade. This point can not be overstated. It’s implications are immense.
4. Which customers will FinTech companies take from us?
Just when you thought you’d heard the worst news, this one is even more of a shocker.
In a white paper recently produced by our team at TomorrowToday (see below for details of how to access this), we explain that FinTech is not going to take away all clients from traditional organisations, only the cheapest and most profitable ones. At the moment FinTech is less encumbered by regulation and associated hurdles. The products and options FinTech players are bringing to market, and ones they’re still developing, skirt the edges of financial services governance and will compete with incumbent stakeholders as if they had a hand tied behind their back and their shoe laces tied together.
FinTech also uses processes that banks are not good at, specifically related to the interrogation of big data in order to drill down to markets of one. More than a cliche for FinTech, this has become a reality, and Fintech startups will be very selective in poaching only the best clients from banks and insurance companies. They will not have any loss leader or cross subsidisation strategies, and are likely to leave banks with hugely unprofitable books. FinTech is both more nimble and more effective. FinTech is creating new channels, achieving the same results, without using the traditional transactions.
FinTech do not look at your existing business through the same siloed lens that you do. They also are not thinking so much of products or channels, but rather in terms of profitable clients. They will pick off your best customers one by one, and leave you with a right royal mess of red ink.
5. Who is the real competition in your industry?
Talking of silos, let’s move to our last frightening question. Banking has traditionally innovated around product. FinTech is not coming from this perspective, but rather is an innovation around channel and business model. Stakeholders in financial services and banking are viewing FinTech as a financial innovation platform – this perspective is fundamentally flawed. FinTech cannot simply be incorporated into existing banking structures and systems – it will force a rework of the entire system. We’re not sure banks and insurance companies are anywhere near ready for that.
But it’s even more significant than that. FinTech innovations are currently being viewed in silos (this is the default setting for the industry anyway – banks have been trying for nearly two decades to get a “single view of the client” and still have come up short). The real disruption will come when multiple FinTech-powered services are offered on one platform or from one source. Using API’s and other digital enablers it will be possible to create a seamless single point of contact for the customer but drawing on a network of disparate individual services in the back end. This is another indication that the true disruption in FinTech relates to channels of offering rather than the specific way in which products are designed.
At the moment most FinTech startups are not seeing themselves as systemic disruptors – they’re competing in similar silos to the way banks are acting. When they do see the broader systemic reality the real power of the revolution will reach its first major tipping point. There is a major opportunity for banks here to partner with a range of Fintech startups, offering them this single brand. But this will only work if the banks don’t stifle the style of the Fintech when they acquire or partner it.
The actual revolution is going to come from elsewhere. It will come from companies that have not seen themselves as offering financial services, but have rather built digital platforms and ecosystems and simply add financial services as an “afterthought”. Maybe one of the most frightening statements for any business person is “Apple has just entered your market” (or Google or Amazon, if you prefer). Financial services should be particularly nervous of this.
So, this final question is actually a trick question. Because the REAL competition for banks is unlikely to even be “in your industry”.
I am going to cheat again, and sneak an extra question in here as well: Are we ready to innovate our business model, rather than just our channels and products? I know many smart, forward-thinking bankers and insurers who would answer a resounding YES to this question, in their personal capacity. But then they wake up from that lovely dream, put on a suit and drive to work, where they beat their head constantly against the brick wall of outdated thinking, atrophied systems, legacy IT infrastructure and unhelpful orthodoxies.
Maybe, just maybe, the biggest threat that financial services companies face are themselves.
How much time have we got?
This could actually be a sixth question, but let’s make it the conclusion of this simple exercise we hope you’ll do with your team. The answer is that you have less, and more, time than you think.
In late September 2016, driverless taxis became legal in Singapore, Uber put its first fully legal driverless car to work in Pittsburgh, USA and bought Otto a company that has developed a driverless trucking solution, and the UK launched driverless cars in Milton Keynes. Driverless cars have gone from science fiction dreams to reality faster than anyone could have predicted, and the regulations have changed even faster than that to allow them on our roads. It’s breathtaking.
FinTech will move at a similar speed. You have less time than you think to respond.
But, let us also say that you should not panic. You have slightly more time than you think, because where we find ourselves now is at the peak of the hype cycle of innovation. There will be a dip soon, as some startups collapse, others consolidate and some mess up. FinTech is currently making much more noise than its market share warrants – it’s actually still a bit-player in the Financial Services scene. The disproportionate market profile is indicative of the market being hungry for alternatives and largely dissatisfied with the way the industry is currently engaging with it. But it’s only as these bit-players consolidate and achieve scale that they will become more significant and real competition. This is probably 18-24 months away. In the FinTech universe that’s a lifetime away. For banks, that will come too quickly. So, maybe, on reflection, now is the right time to start panicking.
We called these questions “frightening”. Frankly, if you’re not frightened by them, you haven’t understood them properly.
The TomorrowToday Global team are excited to unveil a timely new white paper entitled “FinTech and the Digital Disruption of Financial Services“, supported by our latest keynote presentation / workshop called the Future of Money.