Historically, most independent insurance agencies have been slow to adopt new technologies, instead relying on their personal service to clients to differentiate themselves in the market. While it’s true that trusting an agent who has your security, protection and best interests at heart is a huge part of what makes the independent agent extremely valuable, customer expectations are shifting.
Modern consumers embrace a digital-first environment. They expect high-end technology and automation to support their shopping, entertainment and banking needs, and insurance quickly joined that list. About five years ago, buoyed by strong capital investment and a surge in insurtech startups, direct-to-consumer personal lines disrupted the industry by bypassing the advisory and guidance upon which the independent agent model was built. Now, it’s the commercial industry’s turn, as we begin to see similar evolution in distribution models on that side.
To remain relevant, independent agents must keep pace with the changing landscape of consumer behavior and the technological demand. Customer experience is more important than ever. When it comes to attracting and retaining clients, and delivering on expectations for speed, it’s critical to be efficient and digital.
API solution integration has become one of the most crucial components of digitization, enabling smoother workflows and increased efficiency and allowing agents to meet customer expectations for real-time, personalized service. By providing a framework for connectivity, application programming interface (API) protocols allow various pieces of software to interact, to share data, and to move data and tasks from one step of a process to the next. For independent agents and the entire value chain that supports them, APIs are game-changing. They give agents the combination of the digital-first approach customers expect, with personal attention and dependable service.
Here’s why APIs are transforming the industry for agencies, customers and insurtech providers.
APIs improve office workflow. As in every business, productivity and efficiency are critical in any agency. The ability to complete tasks faster, to save time and effort, not only means less work but also frees up more time for agents and customer service reps to spend collaborating with clients to better understand their needs. With something as simple as writing an auto policy, an agent may start and end the process in two pieces of software — first in the agency management system (AMS) and then in the underwriting system. This requires the agent to toggle back and forth, rekey data and perhaps even hand off the process to another individual. With API integration, the data is entered once, moves through the entire process with an electronic handoff from one system to the next, and can even be picked up by a second individual seamlessly. By cutting down on time and frustration, employees can spend their time on more productive, revenue-generating efforts.
APIs reduce data entry burden. The problem with lack of integration in most agencies is that it requires redundant data entry. And, each time customer data is entered increases the risk of error and inconsistency. For example, if a CSR enters client Amy Smith Jones’ name into the AMS with no hyphen, but the agent enters it into another system with a hyphen, there are two separate records for the same customer. Now, it’s impossible to see the client’s entire account, and there may be duplicate mailings and other communication breakdowns. With API integration, data is entered once — eliminating the time wasted in redundancy, reducing the risk of data entry errors and ensuring data consistency.
APIs improve customer relations and retention. Insurance customers expect personalized service and attention. So, when they call the agency for help, they expect that their agent is familiar with their policies and situation. But, in many agencies, simply handling an incoming call is a lengthy process. An operator answers the phone and determines how to route the call, and then the agent must ask some questions to find out how he or she can be of service. With an API integration between the phone system and the AMS, the handoff happens seamlessly. When the customer dials in, the system uses reverse phone number lookup to identify the caller and pops up the customer’s policies on the operator’s computer screen and which agent handles them. Now, the operator can greet the client personally and transfer the call quickly. When the agent answers, they already have information about the client’s account and can immediately ask whether the call is regarding the homeowners or auto policy. This is just one example of how an API-enabled, streamlined system not only eliminates extra steps but also provides the personalized customer experience that clients expect from their agency.
APIs demonstrate your digital prowess. As we’ve already established, consumers expect a certain level of modern, digital automation in practically every aspect of their lives. Using APIs to connect digital technologies gives your agency the forward-thinking image that attracts customers who value that quality. For example, even something as simple as mobile document signing technology that integrates directly with your agency management and underwriting solutions can streamline the process for clients. They can log in from wherever and whenever on their mobile device, sign as required and keep the process moving. Even with the personal service an independent agency strives to provide, there will still be clients who prefer less human interaction and a more digital approach, and APIs allow agencies to retain those clients while still addressing their automation expectations.
APIs allow tech providers to remain relevant. There are many solutions in the insurtech industry that solve a niche problem — fillable forms for commercial line submissions, for example, or digital signature solutions. Even some of the larger AMS platforms don’t address every aspect of agency workflow, and many depend on complementary software to fill those gaps. API integrations allow the entire insurtech industry, especially point solutions, to thrive by continuing to provide value in the larger scheme. For the larger platform providers, this saves time and money in developing those features and allows the smaller niche players to remain relevant.
API integrations clearly benefit the entire insurance value chain, from carriers, underwriters and agencies to insurtech providers and consumers. The alternative — continuing to operate with proprietary systems that don’t adhere to industry standards, perpetuating inefficiencies and detracting from the customer experience — will keep the industry stuck in the dark ages and ripe for disruption by new solutions that radically transform the process and the customer experience.
Programs such as Vertafore’s Orange Partner Program are just one example of API programs creating a new model for the industry, enabling rich integrations that empower independent agencies to leverage a broad spectrum of solutions, not only within the platform’s ecosystem but also with a wide range of third-party providers. This type of open API approach ensures both technological consistency through integration standards and allows the entire industry to evolve and grow, while providing a more satisfactory experience for customers.
This is my first week at Bold Penguin… marking the true beginning of my insurtech life.
I’ve followed insurtech for more than three years, writing and speaking on the movement, but my vantage point has always been one of the intrigued outside observer.
And while one week does not make you a qualified insurance technology startup guru, here are my first seven insights after diving headfirst into my new role as chief marketing officer at Bold Penguin.
1) Small Business Insurance Is the Holy Grail
McKinsey & Company has been referring to the SMB market as one of the “few bright spots” in the property/casualty insurance sector for years now.
Because no one owns the small business insurance space. The marketplace is fragmented, and generally speaking the commonly accepted customer experience is poor at best. Yet, done right, small business insurance is a growing and profitable market segment.
This is by no means breaking news.
That doesn’t diminish the fact that no one has small business insurance figured out, (except maybe…), making the SMB market the holy grail of meaningful organic growth for the foreseeable future.
2) There Is No Road Map
In case you’ve never worked for a startup before, there is no road map for success.
Insurtech startups are creating solutions that haven’t existed before. Look at the work that Chris Cheatham is doing in policy automation at RiskGenius or Mike Albert and Allan Egbert are doing in open APIs at AskKodiak.
Quite literally, they’re making things up as they go along.
…because they have to. The work lives in uncharted waters.
My point is, just as insurtech startups must mature into the greater insurance ecosystem that has existed for more than 400 years, the more traditionally oriented organizations (and individuals) must accept the slightly more haphazard nature of startup companies.
Insurance carriers with open-mindedness to the realities of trailblazing startups will position themselves out front as the partners of choice for insurtechs mapping solutions for our industry’s most challenging obstacles.
Winners and losers of the digital insurance revolution will be determined in the race to remove the most friction from the customer experience.
This doesn’t mean removing human agents or blowing up the traditional insurance carrier model. Rather, we must think of insurance as a service and create flow throughout the customer journey.
I joined Bold Penguin because it’s my belief that their solution will be the foundation upon which many winning agents, brokers and carriers build their unique customer journey.
Whether you partner with Bold Penguin or not, make no mistake, the race to remove friction is real and it’s happening right now.
If your organization is not having serious conversations about the customer journey, you’re already losing.
4) It’s Time to Ask “What if?”
It’s time for everyone to start asking “What if?” when it comes to the future of insurance.
What if APIs are the future?
What if customer experience is all that matters?
What if we can’t build it ourselves?
What if half our agency plant retires in the next five years?
What if our carrier partners demand digitization?
Whether you believe these scenarios will come true or not isn’t the point. The insurance marketplace is changing rapidly and being prepared for all the “What if?” scenarios possible is the only way to survive…
…because no knows what’s actually going to happen.
5) Disruption Is Dead
From now on, every time you hear the words “disruption” or “disruptor” come out of a startup’s mouth, your insurtech B.S. alarm should leap to life, the blaring sirens and seizure-inducing flashing lights overwhelming your senses while an impenetrable B.S. Protection Barrier envelops your entire body like some scifi force field.
Seriously though, disruption is not the answer.
Instead, insurtechs should focus on collaboration, facilitation and integration with traditional partners, building on the previous foundation as much as possible and alongside where it does not.
6) Culture, Culture, Culture
I’ve seen first-hand the impact a toxic culture can have on organizational success.
We’re under more pressure to spend more time, to get more done every single day. Work-life balance has become a cliche joke.
While I believe in hard work, giving more of yourself than is asked in the job description and just kicking ass in general, organizational culture must be a fit to achieve our goals of world domination.
Here are three aspects of insurtech culture vital to success:
Always put staff satisfaction first. An inspired team believes, an uninspired team blames.
Never blame the customer. Period. Own your outcomes. The customer may not always be right, but the customer is never wrong.
Don’t take yourself too seriously. As an old mentor used to tell me, “Everybody ?s.”
I’m sure there are more. But these were the three most obvious to me after spending time at the Bold Penguin headquarters this week.
7) Your Story Matters
Your story matters as much as your product.
It doesn’t matter how amazing, revolutionary or game-changing your product or solution is, if your story doesn’t make sense, if people can’t connect the dots between your solution and how it benefits them and their organization, your product essentially doesn’t exist.
This is something we need to do better at Bold Penguin.
We’re not amazing at telling our story today.
We’re going to change that.
One of many reasons I joined Bold Penguin was that the whole story had yet to be told.
I feel like I’ve found a gigantic diamond just lying there on the sidewalk.
And while everyone else walks past, oblivious to the treasure they’ve just nonchalantly stepped over, to the trained eye all it takes is a craftsman-like approach to telling the story of what Bold Penguin can do for insurance agents, brokers and carriers to unlock industry defining value.
According to the most recent CIAB Market Study, “Driving organic growth, hiring and recruiting talent and enhancing the customer experience remain top organizational priorities” for the U.S.’s top insurance brokerages.
With 80% of CIAB’s responding agents and brokers listing “driving organic growth” as a top priority for 2018, it’s exciting to be part of a company working to solve organic growth concerns, not through disruption but through collaboration, facilitation and integration.
Artificial intelligence is booming in insurance. In a recent report, Celent identified AI use cases around the globe and across the insurance value chain.
Uses include customer engagement (USAA’s Nina); product optimization (Celina Insurance Group, Protektr); marketing and sales (Usecover, Insurify, Optimal Global Health, Ping An); underwriting (ZestFinance, SynerScope, Intellect SEEC, Swiss Re); claims (Tractable, Ant Financial, Gaffey Healthcare); fraud detection (Ant Financial, USAA); risk management (Achemea); and business operations (Ping An Direct, Union Life).
Insurers are wise to innovate with AI technologies. Early adopters will face challenges but will also have the potential to reap greater rewards by improving efficiency and customer engagement.
Here are five challenges for carriers to consider when innovating with AI:
1. What technology to use when. When embarking on a digital transformation, there may be a number of solutions available for a given problem, one of which could be AI. But while AI may resolve an issue, it is important to examine all the potential solutions and decide which one is the best fit. Perhaps robotic process automation (RPA), application programming interface (API) or another automated solution is best suited. Can an existing technology be leveraged?
Deciding what solution to apply when requires you to look at the whole organization and all the issues upfront. This allows CIOs and CEOs to examine each problem, decide on the right technology solution and make sure it complements the overall strategy and budget.
2. Big data + AI = big strategy. A second challenge surrounds the management of big data obtained from customers, core systems, brokers/agents and insurance exchanges. Add to that the varied types of data that AI is managing, analyzing, communicating and learning from and things get a little more complicated. Here’s a list of the different data types AI may be working with:
Structured, semi-structured and unstructured data
Data is also classified as real-time, historical or third-party — yet another dimension to consider. Make sure your strategy takes the necessary data variables into account: where data will come from, where it will flow to and how it will be handled at various points in the customer journey.
3. Managing customers across swim lanes. This leads us to challenge No. 3: the ability of AI to engage with customer data at key touchpoints during the customer lifecycle. For example, if Lucy has group benefits as well as voluntary products, car and house insurance, how will her data be managed and optimized across swim lanes?
What will be the touch points for AI? When will other insurtech solutions be present? When is human intervention required? And how will this data be used to inform future risk decisions?
4. Harnessing AI’s multidisciplinary capabilities. AI encompasses machine learning, deep learning, natural-language processing, robotics and cognitive computing, to name a few. You can read my blog post here to learn more. Deciding what technical abilities will be required to solve your problem could present challenges as the lines between disciplines blur.
Additionally, the next wave of AI could come from entirely different industries, such as aerospace, environmental science or health — but it will still have applications for insurance. The best way to overcome this is to examine your AI needs across solutions and select vendors with the right capabilities to execute them.
5. Communicating past tech speak. As AI becomes mainstream, the challenge of helping non-technical business professionals understand these complex applications is real. AI systems can require a level of technical expertise beyond the everyday scope of business.
True digital transformation, regardless of technical complexity, affects everyone in the organization. Ensuring the vision is shared will matter as day to-day operations, tasks and activities change. Find someone who can break down the benefits of these new solutions into bite-sized pieces that everyone understands to ensure buy-in and ultimate success.
The question of whether AI will indeed disrupt the industry or simply enable its full digitization is still not known. It will not be the solution to every problem. However, if implemented strategically, it may hold the capacity to create an entirely new way of insuring — and delighting — customers in a rapidly changing landscape.
The growing use of smartphone apps and wearable devices to generate personal health and lifestyle data poses a dilemma for privacy. While individuals have much to gain using apps to help them manage health concerns, the privacy of the data itself may be at risk.
Consumer-grade devices that link across internet networks are rather vulnerable to hacking. The levels of security that can be tolerated by users fall short of enterprise networks. The portability of wearables and smart devices, carelessness with passwords and lack of encryption mean confidential data is much more at risk of being stolen.
Apps use a program interface (API) to access sensors in devices themselves — GPS, messages, even the camera — and to collect data. Many apps combine data to draw conclusions (accurate or otherwise) about the user’s health. Some insurers are already using activity data from fitness trackers to enhance products. It seems likely the trend will continue as apps become more sophisticated and hardware develops broader appeal.
U.S. federal and state laws require published policies concerning the use, disclosure and safeguarding of personal data by mobile apps. Health data are subject to special restrictions. In addition to imposing restrictions on sale and disclosure on all personal data on apps, EU data protection directives and national laws have more restrictions for health data; for example, explicit consent requirements. Apps must comply with all applicable legal requirements for processing health data and personal data more generally, including consent requirements of various levels of specificity and explicitness for different types of uses and disclosures of different types of personal data.
It may not occur to most users of a fitness app that their personal data will be disclosed to the device manufacturers, which may sell it to third-party advertisers or share it with data aggregators. The terms and conditions of apps are not always read, or the developer is based beyond national legal boundaries. The relatively short life cycle of many apps could also mean personal data may end up lost as the apps become defunct.
A survey by the Global Privacy Enforcement Network found that, in 85% of the 1,200 apps reviewed, the owners failed to clearly explain how they were collecting, using and disclosing personal information. EMEI (unique serial) numbers of smartphones make identification of individuals simple, and many app users mistakenly believe their information stays private.
I have previously written about how wearables and apps that use smartphones as a hub can play an important role in life and health insurance (see my slideshare: The Growing Impact of Wearables on Digital Health and Insurance). Research in the U.K. shows half the population now monitors their health problems this way, and 95% of doctors see more patients bringing their own data to appointments. The trend is expected to continue — more than 140 million wearables are expected to be sold in 2020, up from around 70 million in 2014.
Underwriters and claims assessors will process increasing levels of digital health data in their day-to-day work. However, if patients cannot believe the health data they store in apps is private, they may resist calls from clinicians to use them. It’s important to address concerns over data privacy or failures to protect individual’s sensitive information, so patients’ resistance does not stall this innovation.
This is the second in a four part series. To read the first article click here.
To help industry players navigate the changes in the banking, fund transfer and payments, insurance and asset and wealth management sectors, we have identified the main emerging trends that will be most significant in the next five years in each area of the FS industry.
Overall, the key trends will enhance customer experience, self-directed services, sophisticated data analytics and cybersecurity. However, the focus will differ from one FS segment to another.
Banks are going for a renewed digital customer experience
Banks are moving toward non-physical channels by implementing operational solutions and developing new methods to reach, engage and retain customers.
As they pursue a renewed digital customer experience, many are engaging in FinTech to provide customer experiences on a par with large tech companies and innovative start-ups.
Simplified operations to improve customer experience
The trends that financial institutions are prioritizing in the banking industry are closely linked. Solutions that banks can easily integrate to improve and simplify operations are rated highest in terms of level of importance, whereas the move toward non-physical or virtual channels is ranked highest in terms of likelihood to respond.
Banks are adopting new solutions to improve and simplify operations, which foster a move away from physical channels and toward digital/mobile delivery. Open development and software-as-a-service (SaaS) solutions have been central to giving banks the ability to streamline operational capabilities. The incorporation of application program interfaces (APIs) enables third parties to develop value-added solutions and features that can easily be integrated with bank platforms; and SaaS solutions assist banks in offering customers a wider array of options—which are constantly upgraded, without banks having to invest in the requisite research, design and development of new technologies.
The move toward virtual banking solutions is being driven, in large part, by consumer expectations. While some customer segments still prefer human interactions in certain parts of the process, a viable digital approach is now mandatory for lenders wishing to compete across all segments. Online banks rely on transparency, service quality and unlimited global access to attract Millennials, who are willing to access multiple service channels. In addition, new players in the banking market offer ease of use in product design and prioritize 24/7 customer service, often provided through non-traditional methods such as social media.
So what?—Put the customer at the center of operations
Traditional banks may already have many of the streamlined and digital-/mobile-first capabilities, but they should look to integrate their multiple digital channels into an omni-channel customer experience and leverage their existing customer relationships and scale. Banks can organize around customers, rather than a single product or channel, and refine their approach to provide holistic solutions by tailoring their offerings to customer expectations. These efforts can also be supported by using newfound digital channels to collect data from customers to help better predict their needs, offer compelling value propositions and generate new revenue streams.
Fund transfer and payments priorities are security and increased ease of payment
Our survey shows that the major trends for fund transfer
and payments companies are related to both increased ease and security of payments.
Safe and fast payments are emerging trends
Smartphone adoption is one of the drivers of changing payments patterns. Today’s mobile-first consumers expect immediacy, convenience and security to be integral to payments. In our culture of on-demand streaming of digital products and services, archaic payment solutions that take days rather than seconds for settlement are considered unacceptable, motivating both incumbents and newcomers to develop solutions that enable transfer of funds globally in real time. End users also expect a consistent omni-channel experience in banking and payments, making digital wallets key to streamlining the user experience and enabling reduced friction at the checkout. Finally, end users expect all of this to be safe. Security and privacy are paramount to galvanizing support for nascent forms of digital transactions, and solutions that leverage biometrics for fast and robust authentication, coupled with obfuscation technologies, such as tokenization, are critical components in creating an environment of trust for new payment paradigms.
So what?—Speed up, but in a secure way
Speed, security and digitization will be growing trends for the payments ecosystem. In an environment where traditional loyalty to financial institutions is being diminished and barriers to entry from third parties are lowered, the competitive landscape is fluid and potentially changeable, as newcomers like Apple Pay, Venmo and Dwolla have demonstrated. Incumbents that are slow to adapt to change could well find themselves losing market share to companies that may not have a traditional payments pedigree but that have a critical mass of users and the network capability to enable payment experiences that are considered at least equivalent to the status quo. While most of these solutions “ride the rails” of traditional banking, in doing so they risk losing control of the customer experience and ceding ground to innovators, or “steers,” who conduct transactions as they see fit.
Asset and wealth management shifts from technology-enabled human advice to human-supported technology-driven advice
The proliferation of data, along with new methods to capture it and the declining cost of doing so, is reshaping the investment landscape. New uses of data analytics span the spectrum from institutional trading and risk management to small notional retail wealth management. The increased sophistication of data analytics is reducing the asymmetry of information between small- and large-scale financial institutions and investors, with the latter taking advantage of automated FS solutions. Sophisticated analytics also uses advanced trading and risk management approaches such as behavioral and predictive algorithms, enabling the analysis of all transactions in real time. Wealth managers are increasingly using analytics solutions at every stage of the customer relationship to increase client retention and reduce operational costs. By incorporating broader and multi-source data sets, they are forming a more holistic view of customers to better anticipate and satisfy their needs.
Given that wealth managers have a multitrillion-dollar opportunity in the transfer of wealth from Baby Boomers to Millennials, the incorporation of automated advisory capabilities—either in whole or in part—will be a prerequisite. This fundamental change in the financial adviser’s role empowers customers and can directly inform their financial decision-making process.
So what?—Withstand the pressure of automation
Automated investment advice (i.e. robo-advisers) poses a significant competitive threat to operators in the execution-only and self-directed investment market, as well as to traditional financial advisers. Such robot and automatic advisory capabilities will put pressure on traditional advisory services and fees, and they will transform the delivery of advice. Many self-directed firms have responded with in-house and proprietary solutions, and advisers are likely to adapt with hybrid high-tech/high-touch models. A secondary by-product of automated customer analysis is the lower cost of customer onboarding, conversion and funding rates. This change in the financial advisory model has created a challenge for wealth managers, who have struggled for years to figure out how to create profitable relationships with clients in possession of fewer total assets. Robo-advisers provide a viable solution for this segment and, if positioned correctly as part of a full service offering, can serve as a segue to full service advice for clients with specific needs or higher touch.
Insurers leverage data and analytics to bring personalized value propositions while managing risk
The insurance sector sees usage-based risk models and new methods for capturing risk-related data as key trends, while the shift to more self-directed services remains a top priority to efficiently meet existing customer expectations.
Increasing self-directed services for insurance clients
Our survey shows that self-directed services are the most important trend and the one to which the market is by far most likely to respond. As is the case in other industry segments, insurance companies are investing in the design and implementation of more self-directed services for both customer acquisition and customer servicing. This allows companies to improve their operational efficiency while enabling online/mobile channels that are demanded by emerging segments such as Millennials. There have been interesting cases where customer-centric designs create compelling user experiences (e.g. quotes obtained by sending a quick picture of the driving license and the car vehicle identification number (VIN)), and where new solutions bring the opportunity to mobilize core processes in a matter of hours (e.g. provide access to services by using robots to create a mobile layer on top of legacy systems) or augment current key processes (e.g. FNOL3 notification, which includes differentiated mobile experiences).
Usage-based insurance is becoming more relevant
Current trends also show an increasing interest in finding new underwriting approaches based on the generation of deep risk insights. In this respect, usage-based models—rated the second most important trend by survey participants—are becoming more relevant, even as initial challenges such as data privacy are being overcome. Auto insurance pay-as-you-drive is now the most popular usage-based insurance (UBI), and the current focus is shifting from underwriting to the customer. Initially, incumbents viewed UBI as an opportunity to underwrite risk in a more granular way by using new driving/ behavioral variables, but new players see UBI as an opportunity to meet new customers’ needs (e.g. low mileage or sporadic drivers).
Data capture and analytics as an emerging trend
Remote access and data capture was ranked third by the survey respondents in level of importance. Deep risk (and loss) insights can be generated from new data sources that can be accessed remotely and in real time if needed. This ability to capture huge amounts of data must be coupled with the ability to analyze it to generate the required insights. This trend also includes the impact of the Internet of Things (IoT); for example, (1) drones offer the ability to access remote areas and assess loss by running advanced imagery analytics, and (2) integrated IoT platforms solutions include various types of sensors, such as telematics, wearables and those found in industrial sites, connected homes or any other facilities/ equipment.
So what?—Differentiate, personalize and leverage new data sources
Customers with new expectations and the need to build trusted relationships are forcing incumbents to seek value propositions where experience, transaction efficiency and transparency
are key elements. As self-directed solutions emerge among competitors, the ability to differentiate will be a challenge.
Similarly, usage-based models are emerging in response to customer demands for personalized insurance solutions. The ability to access and capture remote risk data will help develop a more granular view of the risk, thus enabling personalization. The telematics-based solution that enables pay-as-you-drive is one of the first models to emerge and is gaining momentum; new approaches are also emerging in the life insurance market where the use of wearables to monitor the healthiness of lifestyles can bring rewards and premium discounts, among other benefits.
Leveraging new data sources to obtain a more granular view of the risk will not only offer a key competitive advantage in a market where risk selection and pricing strategies can be augmented, but it will also allow incumbents to explore unpenetrated segments. In this line, new players that have generated deep risk insights are also expected to enter these unpenetrated segments of the market; for example, life insurance for individuals with specific diseases.
Finally, we believe that, in addition to social changes, the driving force behind innovation in insurance can largely be attributed
to technological advances outside the insurance sector that will bring new opportunities to understand and manage the risk (e.g. telematics, wearables, connected homes, industrial sensors, medical advances, etc.), but will also have a direct impact on some of the foundations (e.g. ADAS and autonomous cars).
Blockchain: An untapped technology is rewriting the FS rulebook
Blockchain is a new technology that combines a number of mathematical, cryptographic and economic principles to maintain a database between multiple participants without the need for any third party validator or reconciliation. In simple terms, it is a secure and distributed ledger. Our insight is that blockchain represents the next evolutionary jump in business process optimization technology. Just as enterprise resource planning (ERP) software allowed functions and entities within a business to optimize business processes by sharing data and logic within the enterprise, blockchain will allow entire industries to optimize business processes further by sharing data between businesses that have different or competing economic objectives. That said, although the technology shows a lot of promise, several challenges and barriers to adoption remain. Further, a deep understanding of blockchain and its commercial implications requires knowledge that intersects various disparate fields, and this leads to some uncertainty regarding its potential applications.
Uncertain responses to the promises of blockchain
Compared with the other trends, blockchain ranks lower on the agendas of survey participants. While a majority of respondents (56%) recognize its importance, 57% say they are unsure or unlikely to respond to this trend. This may be explained by the low level of familiarity with this new technology: 83% of respondents are at best “moderately” familiar with it, and very few consider themselves to be experts. This lack of understanding may lead market participants to underestimate the potential impact of blockchain on their activities.
The greatest level of familiarity with blockchain can be seen among fund transfer and payments institutions, with 30% of respondents saying they are very familiar with blockchain (meaning they are relatively confident about their knowledge of how the technology works).
How the financial sector can benefit from blockchain
In our view, blockchain technology may result in a radically different competitive future in the FS industry, where current profit pools are disrupted and redistributed toward the owners of new, highly efficient blockchain platforms. Not only could there be huge cost savings through its use in back-office operations, but there could also be large gains in transparency that could be very positive from an audit and regulatory point of view. One particular hot topic is that of “smart contracts”—contracts that are translated into computer programs and, as such, have the ability to be self-executing and self-maintaining. This area is just starting to be explored, but its potential for automating and speeding up manual and costly processes is huge.
Innovation from start-ups in this space is frenetic, with the pace of change so rapid that by the time print materials go to press, they could already be out-of-date. To put this in perspective, PwC’s Global Blockchain team has identified more than 700 companies entering this arena. Among them, 150 are worthy to be tracked, and 25 will likely emerge as leaders.
The use cases are coming thick and fast but usually center on increasing efficiency by removing the need for reconciliation between parties, speeding up the settlement of trades or completely revamping existing processes, including:
Enhancing efficiency in loan origination and servicing;
Improving clearing house functions used by banks;
Facilitating access to securities. For example, a bond that could automatically pay the coupons to bondholders, and any additional provisions could be executed when the conditions are met, without any need for human maintenance; and
The application of smart contracts in relation to the Internet of Things (IoT). Imagine a car insurance that is embedded
in the car and changes the premium paid based on
the driving habits of the owner. The car contract could also contact the nearest garages that have a contract with the insurance company in the event of an accident or a request for towing. All of this could happen with very limited human interaction.
So what?—An area worth exploring
When faced with disruptive technologies, the most effective companies thrive by incorporating them into the way they do business. Distributed ledger technologies offer FS institutions a once-in-a-generation opportunity to transform the industry to their benefit, or not.
However, as seen in the survey responses, the knowledge of and the likelihood to react to the developments in blockchain technology are relatively low. We believe that lack of understanding of the technology and its potential for disruption poses significant risks to the existing profit pools and business models. Therefore, we recommend an active approach to identify and respond to the various threats and opportunities this transformative technology presents. A number of start-ups in the field, such as R3CEV, Digital Asset Holdings and Blockstream, are working to create entirely new business models that would lead to accelerated “creative destruction” in the industry. The ability to collaborate on both the strategic and business levels with a few key partners, in our view, could become a key competitive advantage in the coming years.
This post was co-written by: John Shipman, Dean Nicolacakis, Manoj Kashyap and Steve Davies.