Tag Archives: business risk

FinTech: Epicenter of Disruption (Part 4)

This is the final part of a four-part series. The first article is here. The second is here. The third is here.

FinTech is more than technology. It is a cultural mindset. Companies hoping to flourish need to shift their thinking to better meet customer needs, constantly track technological developments, aggressively engage with external partners and integrate digitization into their corporate DNA. To fully leverage the potential of FinTech, financial institutions (FIs) should have a top-down approach and embrace new technologies in every aspect of their businesses.

Putting FinTech at the heart of the strategy

The majority of our respondents (60%) put FinTech at the heart of their strategy. In particular, a high number of CEOs agree with this approach (78%), supporting the integration of FinTech at the top levels of management. Advances in technology and communication, combined with the acceleration of data growth, empower customers at nearly every level of engagement, making FinTech essential at all levels.

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Our survey supports this notion. Among the respondents that regard themselves as fully customer-centric, 77% put FinTech at the heart of their strategy, while, among respondents that see themselves as only slightly customer-centric, only 27% put FinTech at the same level. A smaller but still significant share of respondents disagrees with putting FinTech at the heart of their strategy (13%). This might be a business risk in the long run, as firms that do not recognize the impact of FinTech will face fierce competition from new entrants. As rivals become more innovative, incumbents might run the risk of being surpassed in their core business strengths.

The share of respondents from fund transfer and payments organizations that want to put FinTech at the heart of their strategy exceeds 80%, a high proportion compared with other sectors. At the other extreme are insurance and asset and wealth management companies, where, respectively, only 43% and 45% of respondents consider FinTech to be a core element of their strategy.

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Adopting a ‘mobile-first’ approach

Adopting a “mobile-first” approach is the key to improving customer experience. As Section 2 shows, the biggest trends in FinTech will be related to the multiple ways financial services (FS) engages with customers.

Traditional providers are increasingly taking a “mobile-first” approach to reach out to consumers (e.g. designing their products and services with the aim of enhancing customer engagement via mobile). More than half (52%) of the respondents in our survey offer a mobile application to their clients, and 18% are currently developing one. Banks, 81% of which offer mobile applications, are, increasingly, using these channels to deliver compelling value propositions, generate new revenue streams and collect data from customers. According to Bill Gates, in the year 2030, two billion new customers will use their mobile phones to save, lend and make payments.

Significant growth in clients using mobile applications is expected by 2020. While, currently, the majority of respondents (66%) contend that not more than 40% of their clients use their mobile applications, 61% believe that, over the next five years, more than 60% of their clients will be using mobile applications at least once a month to access financial services.

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Toward a more collaborative approach

Whether FS organizations adopt digital or mobile strategies, integrating FinTech is essential. According to our survey, the most widespread form of collaboration with FinTech companies is joint partnership (32%). Traditional FS organizations are not ready to go all-in and invest fully in FinTech. Joint partnership is an easy and flexible way to get involved with a technology firm and harness its capabilities within a safe test environment. By partnering with FinTech companies, incumbents can strengthen their competitive position and bring solutions or products into the market more quickly. Moreover, this is an effective way for both incumbents and FinTech companies to identify challenges and opportunities, as well as to gain a deeper understanding of how they complement one another.

Given the speed of technology development, incumbents cannot afford to ignore FinTech. Nevertheless, a significant minority—rather than a non-negligible share (25%)—of survey respondents do not interact with FinTech companies at all, which could lead to an underestimation of the potential benefits and threats they can bring. According to The Economist, the majority of bankers (54%) are either ignoring the challenge or are talking about disruption without making any changes. FinTech executives confirm this view: 59% of FinTech companies believe banks are not reacting to the disruption by FinTech.

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Integrating FinTech comes with challenges

A common challenge FinTech companies and incumbents face is regulatory uncertainty. FinTech represents a challenge to regulators, as there may be a risk of an uneven playing field between the FS and FinTech companies. In fact, 86% of FS CEOs are concerned about the impact of overregulation on their prospects for growth, making this the biggest threat to growth they face. However, the problems do not correspond to specific regulations but rather to ambiguity and confusion. Industry players are asking which regulatory agencies govern FinTech companies. Which rules do FinTech companies have to abide by? And, specifically, which FinTech companies have to adhere to which regulations? In particular, small players struggle to navigate a complex, ever-increasing regulatory compliance environment as they strive to define their compliance model. Recent years have brought an increase of regulations in the FS industry, where even long-standing players are struggling to keep up.

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While most FS providers and FinTech companies would agree that the regulatory environment poses serious challenges, there are differences of opinion on which are the most significant. For incumbents, IT security is crucial. This highlights the genuine constraints traditional FS organizations face regarding the introduction of new technologies into existing systems. On the other hand, fund transfer and payments businesses see their biggest challenges in the differences in operational processes and business models. The complexity of processes and emerging business models, as explained in Section 1, which aim to lead the payments industry into a new era, have the potential to both disrupt and complement traditional fund transfer and payments institutions. Their challenge lies in refining old methods while pioneering new processes to compete in the long run.

Just more than half of FinTech companies (54%) believe management and culture act as roadblocks in their dealings with FIs. Because FinTech companies are mainly smaller, they are more agile and flexible. And, because most are in the early stages of development, their structures and processes are not set in stone, allowing them to adapt more easily and quickly to challenges.

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Conclusion

Disruption of the FS industry is happening, and FinTech is the driver. It reshapes the way companies and consumers engage by altering how, when and where FS and products are provided. Success is driven by the ability to improve customer experience and meet changing customer needs.

Information on FinTech is somewhat dispersed and obscure, which can make synthesizing the data challenging. It is therefore critical to filter the noise around FinTech and focus on the most relevant trends, technologies and start-ups. To help industry players navigate the glut of material, we based our findings on DeNovo insights and the views of survey participants, highlighting key trends that will enhance customer experience, self-directed services, sophisticated data analytics and cyber security.

In response to this rapidly changing environment, incumbent financial institutions have approached FinTech in various ways, such as through joint partnerships or start-up programs. But whatever strategy an organization pursues, it cannot afford to ignore FinTech.

The main impact of FinTech will be the surge of new FS business models, which will create challenges for both regulators and market players. FS firms should turn away from trying to control all parts of their value chain and customer experience through traditional business models and instead move toward the center of the FinTech ecosystem by leveraging their trusted relationships with customers and their extensive access to client data.

For many traditional financial institutions, this approach will require a fundamental shift in identity and purpose. The new norm will involve turning away from a linear product-push approach to a customer-centric model in which FS providers are facilitators of a service that enables clients to acquire advice and interact with all relevant actors through multiple channels.

By focusing on incorporating new technologies into their own architecture, traditional financial institutions can prepare themselves to play a central role in the new FS world in which they will operate at the center of customer activity and maintain strong positions, even as innovations alter the marketplace.

FIs should make the most of their position of trust with customers, brand recognition, access to data and knowledge of the regulatory environment to compete. FS players might not recognize the financial industry of the future, but they will be in the center of it.

This post was co-written by: John Shipman, Dean Nicolacakis, Manoj Kashyap and Steve Davies.

FinTech: Epicenter of Disruption (Part 3)

This is the third in a four-part series. The first article is here. The second is here.

Typically, disruption hits a tipping point at which just less than
50% of the incumbent revenue is lost in about a five-year timeframe. Recent disruptions that provide valuable insight include streaming video’s impact on the video rental market. When broadband in the home reached ubiquity and video compression technology matured, low-cost streaming devices were developed and, within four years, the video rental business was completely transformed. The same pattern can be seen in the Internet-direct insurance model for car insurance. At present, 50% of the revenue from the traditional agent-based distribution model has been moved to direct insurance providers.

Revenue at risk will exceed 20% by 2020

According to our survey, the vast majority (83%) of respondents from traditional financial institutions (FIs) believe that part of their business is at risk of being lost to standalone FinTech companies; that figure reaches 95% in the case of banks. In addition, incumbents believe 23% of their business could be at risk because of the further development of FinTech, though FinTech companies anticipate they may be able to acquire 33% of the incumbents’ business. In this regard, the banking and payments industries are feeling more pressure from FinTech companies. Fund transfer and payments industry respondents believe they could lose as much as 28% of their market share, while bankers estimate that banks are likely to lose 24%.

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A rebalancing of power

FinTech companies are not just bringing concrete solutions
to a morphing consumer base, they are also empowering customers by providing new services that can be delivered with the use of technological applications. The rise of “digital finance” allows consumers to connect to information anywhere at any time, and digital services can address their needs in a more convenient way than traditional nine-to-five financial advisers can.

According to our survey, two-thirds (67%) of the companies ranked pressure on margins as the top FinTech-related threat. One of the key ways FinTechs support the margin pressure point through innovation is step function improvements in operating costs. For instance, the movement to cloud-based platforms not only decreases up-front costs but also reduces continuing infrastructure costs. This may stem from two main scenarios. First, standalone FinTech companies might snatch business opportunities from incumbents, such as when business-to-consumer (B2C) FinTech companies sell their products and services directly to customers and position themselves as more dynamic and agile alternatives to traditional players. Secondly, business-to-business (B2B) FinTech companies might empower specific incumbents through strategic partnerships with the intent to provide better services.

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FinTech, a source of opportunities

FinTech also offers myriad possibilities for the financial services (FS) industry. B2B FinTech companies create real opportunities for incumbents to improve their traditional offerings. For example, white label robo-advisers can improve the customer experience of an independent financial adviser by providing software that helps clients better navigate the investment world. In the insurance industry, a telematics technology provider can help insurers track risks and driving habits and can provide additional services such as pay-as-you-go solutions.

Partnerships with FinTech companies could increase the efficiency of incumbent businesses. Indeed, a large majority of respondents (73%) rated cost reduction as the main opportunity related to the rise of FinTech. In this regard, incumbents could simplify and rationalize their core processes, services and products and, consequently, reduce inefficiencies in their operations.

But FinTech is not just about cutting costs. Incumbents partnering with FinTech companies could deliver a differentiated offering, improve customer retention and bring in additional revenues. In this regard, 74% of fund transfer and payment institutions consider additional revenues to be an opportunity coming from FinTech. This is already true in the payments industry, where FinTech generates additional revenues through faster and easier payments and digital wallet transactions.

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This post was co-written by: John Shipman, Dean Nicolacakis, Manoj Kashyap and Steve Davies.

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How to Build a Fail-Fast Culture

There’s a lot of talk these days about how failure is not just fine but fantastic.

Tech companies famously tout “fail fast”-style mantras. One of Facebook’s guiding principles is “Done is better than perfect.” Many start-up founders are known for having built companies that failed before finding long-term success.

The philosophy of encouraging mistakes and quickly learning from them complements the design-thinking movement. In this way of thinking, you’re encouraged to launch quickly, shipping imperfect product and iterating based on customer feedback.

But what role can this approach play in a slow-moving, large company? After all, many of the small start-ups that encourage fast failure will grow quickly, and maintaining that kind of culture as it scales is tricky. How do you treat not-quite-perfect, disappointing or outright failed ideas and projects as acceptable among hundreds or thousands of employees?

Here are a few guiding principles for instilling an innovative, fail-fast philosophy in a larger organization.

Set up mini innovation groups: I worked with an organization that set up small teams across the company with the mandate to drive innovations in the everyday routines of work. The teams discuss new processes, test their ideas and then present a summary of improvement initiatives. They share ways to extend their concept, and the teams look at other potential business implications. A review board makes the final approvals based on the portfolio and suggests ways to make wider impact. It’s an organized, civilized and, yet, wholly innovative way of working in a bigger company. And if the teams’  ideas fail? Well, at least they were given permission to try.

Focus on feedback year-round: If you were working on a new project and it failed to launch or didn’t perform well in a test, would you want to hear about what you could’ve done better from your manager a year later? Real-time development happens throughout the work days and weeks– not during an annual performance review – and allows you to constantly and more quickly improve. But this is a change you should make as part of a bigger talent innovation strategy in performance management – it can’t be executed effectively alone.

Recruit, promote and succession-plan differently: To encourage a fail-fast mentality, we must reimagine what we consider successful. Along with rethinking annual performance reviews, consider what guidance and framework you use to define a productive employee. Can you reward the team that boldly pushed new ideas, even if the ideas didn’t come to fruition? Is a top performer one who differentiated your brand in the marketplace with a new angle, even if it didn’t have the same broad reach as last year’s campaign? Adhere to what principles your organization’s strategy prioritizes, but ensure you’re not inadvertently punishing people who take smart risks.

Follow basic culture evolution lessons: Strategy+business magazine’s article “Culture and the Chief Executive” shared how culture can evolve by following four tenets, and they’ll of course apply here, too.  The basic steps to remember:

  • Demonstrate positive urgency by focusing on your company’s aspirations — its unfulfilled potential — rather than on any impending crisis.
  • Pick a critical few behaviors that exemplify the best of your company and culture that you want everyone to adopt. Set an example by visibly adopting these behaviors yourself.
  • Balance your appeals to the company to include both rational and emotional cues.
  • Make the change sustainable by maintaining vigilance on the few critical elements that you have established as important.

Know your limitations: Certain companies, organizations within an enterprise and missions can more easily afford to push the envelope and experiment than others. While inspiration can come from the tech world, there are limits to how far your organization can go. The key is to understand, challenge and ultimately work within these limits to foster a culture of innovation. Even in risk-averse circumstances, some businesses exercise the fail-fast philosophy on non-mission-critical projects that won’t harm the business, brand or customers if they don’t pan out. This approach can reinforce your culture and can empower and engage the team. It can even lead to new value if the idea can spark other future, more achievable initiatives.

It’s difficult to create a work world balance where innovation and creativity can quickly become executable projects or products in the market while also staying within the complex boundaries of a large organization — especially one that’s regulated.

But a learning culture that embraces fresh ideas, even those that could fail, is increasingly essential. More than ever, our clients ask PwC to help them stay competitive and innovative while smaller organizations threaten their growth. And, more than ever, big businesses risk losing talent to these companies, too.

To keep up, you’ve got to re-up. There’s little progress to be made by doing things the way you’ve done them in the past few years. If you consider how your company’s culture could better embrace risk and failed ideas, you’ll be better positioned to deal with more unpredictability and to grow in the future.

Thought Leader in Action: At Google

Loren Nickel, who has a major role in our profession as the director of business risk and insurance at Google, got his start without even doing a job interview.

That story begins when his mother researched careers and suggested that in college he study to become an actuary. Nickel pursued statistics and actuarial science at the University of California, Santa Barbara (UCSB), and became president of the Actuary Club – with its maybe 10 members, he says.

He wanted to build interest, partly to get more prospective employers to come to UCSB, so he decided to set up a website – this was in 1994 and 1995, before Netscape exploded on the scene through its initial public offering and introduced the Internet to the public consciousness. Nickel wrote the software for the website himself and paid $35 of his own money to get the UC system to host the site. He then used his e-mail address to answer questions from students and others about the actuary program at UCSB.

The word got out, at least to one UCSB alumnus who played an important role in Nickel’s career. John Alltop, who was in charge of the actuarial services division of Fireman’s Fund, asked Nickel if he knew of anyone who would be interested in an internship. Nickel raised his hand. Alltop, who is now president of Actuarial & Risk Management at Bickmore Risk Services, asked him to visit. At his own expense, Nickel drove 365 miles up the coast to Novato, north of San Francisco, and paid for a night in a hotel. He says that the second he walked in the door he was given the internship even though “I told them I hadn’t even done anything for them yet.” Shortly thereafter, Fireman’s Fund hired Nickel full-time.

He worked on various national accounts, and Fireman’s Fund rotated Nickel every 18 to 24 months to different operating divisions, ranging from workers’ comp and property risks to general liability, enabling him to learn different facets of the insurance business. Nickel learned the “big picture” by seeing how Fireman’s Fund used the actuarial component in its underwriting of client risks. Then he became the underwriting manager.

In that capacity, Nickel was able to work with brokers and sales teams to see how actuarial projections fit in. He developed his communication, sales and people skills. That experience launched Nickel into his next career move, working for AON, a leading brokerage firm. This included an assignment in London to work with the operational risk team, designated as a center of expertise. Returning to the U.S., Nickel led AON’s actuarial division in the Western region, which included providing actuarial consulting services for Google for nearly three years.

He joined Google in the spring of 2015. Nickel, who is 41 years old, lives in Marin County, north of San Francisco, so he commutes perhaps an hour and a half each way on one of the famous Google buses, to his office a few minutes from headquarters well down the peninsula in Mountain View. The bus is comfortable enough and the Wi-Fi so good that the ride is basically an extension of his office.

Nickel says his consulting experience at AON is a good fit at Google, where his risk management responsibilities could be best described as “advisory work.” He works in consultation with various Google teams to help keep them more informed and able to make better decisions from a risk viewpoint. Perhaps the biggest change is that he’s now on the buyer’s side of transactions. This, of course, includes multiple brokers and insurers.

Google’s stated mission is to organize the world’s data and make it usable by everyone on the globe, and all new products or services relate to that vision, but Google’s renowned “moonshot program” searches for disruptive innovations – which, by changing how people do things, can change the nature of risk. Google has fewer boundaries than most business ventures, to stimulate innovative thinking, so a traditional risk management program, with all of its financial constraints, doesn’t fit the Google model of business development. (Nickel is quick to point out that Google does employ a vast number of risk management best practices to protect its employees, property, users and the general public.)

Nickel leads a risk management team of four direct reports, with an additional five Googlers who work within the risk management structure. He says Google is much less about the function where someone works (i.e., risk management) than about the right mix of individual skills. For instance, on his team, some have an insurance background while others have skills in legal, actuarial science, project management, accounting, etc. “It’s a very different mix of personnel than what you would find in a traditional corporate risk management department,” Nickel says.

Asked how he gets in tune with and integrates risk management concepts with Google’s diverse divisions around the world, he says that making strong relationships is No. 1 – knowing the right people. This ensures that Googlers are aware of the advisory and outreach team in risk management. Risk management does not serve as a policing authority but serves more as an information source. Other corporate teams, such as legal, partner with risk management as issues arise. Responsibilities are clearly assigned and managed exclusively by organizational silos, as in most organizations. Nickel says everyone is very receptive about the information that the risk management team shares – in previous jobs, he often saw posturing.

Nickel says a guiding principle at Google is that “Googlers take care of other Googlers,” so risk management is in the culture, and safety is paramount. Even the food choices are healthy. Google provides its more than 60,000 Googlers with free, very nutritional and delicious food and snacks as well as a wide variety of campus features that promote health and well-being. Google even provides onsite medical providers at its larger locations. Without sharing statistics, Nickel makes it clear that Google has “phenomenal” workers’ comp claim experience that is far better than companies of its size. He added that Googlers feel respected and appreciate how well they are treated.

Asked if Google has any official opinion about the ownership or operation of driverless cars, where its pioneering work has sparked extraordinary interest, he said the risk department does not provide opinions on the products that Google creates. He did say the department is focused on making any new Google technology safer, getting it to market faster and winning support from regulators. “We do not determine how autonomous vehicles are used,” he says. “Instead, the goal is to facilitate the creation of great technology that could improve the world.”

When asked what advice he would give to newcomers in risk management, Nickel suggests that they try to experience different roles from different perspectives – from both the insurance and user sides — with respect to the implications of risk in organizations.

“These diverse experiences provide a deeper context to the bigger picture of risk,” Loren says. “Risk managers have to have more than one style, approach or understanding of risk to truly be impactful.”

From an educational standpoint, Loren adds that a “good grounding and understanding of mathematics and statistics is extremely helpful….For me, risk management success is much less a factor of knowledge than it is to gain perspective and practical experience. You need to learn to take nebulous concepts and to organize information that can be put into a plan that other people can understand and act upon.”