Tag Archives: financial services

Your Next Director Should Be a Geek

Imagine that you were a major investor in a leading company, and its board of directors had no members with independent, world-class financial expertise. Who would look after your interests? You could probably coach the directors to ask good questions, but they would lack the competence to judge the answers. The board would not be able to engage management in robust conversations about the complexities of capital structure, mergers and acquisitions, financial accounting, reporting, regulatory compliance or risk management. Most investors and regulators would deem such a board unfit to carry out its fiduciary guidance and governance responsibilities.

Yet that’s precisely where many companies are when it comes to information technology. Digitally driven change is becoming as critical an issue to most companies as finance. Companies are being called on to reimagine and reconstruct every aspect of their business; customers, suppliers and markets expect no less. Consider the rapidly expanding use of mobile phones in retail and banking. Or the changes foreseen in the transportation industry due to car-hailing algorithms and driverless vehicles. Already, one MIT study has found that digitally adept companies are, on average, as much as 26% more profitable than their competitors. And that advantage is only likely to increase.

The boards of many large companies are ill-equipped for these shifts. That was the conclusion of our 2015 study of more than 1,000 nonexecutive and executive directors at 112 of the largest publicly traded companies in the U.S. and Europe. By analyzing company filings and public information, we found that all too many boards lacked the expertise needed to understand how technology informs strategy and affects execution. In Europe, for example, 95% of the companies we assessed, excluding technology and telecommunications companies, still had no non-executive directors with deep technology fluency. In the U.S., almost half of the surveyed companies had no technology expertise on their boards. These included major financial-services, insurance, industrial and consumer products companies. Yet each of those industries is grappling with complex strategic questions that hinge on technology.

See Also: How Leadership Will Look in 20 Years

Even boards with world-class technology expertise can have blind spots in areas of strategic importance; these include analytics, cybersecurity and digital fabrication. And even experts who keep up with particular technologies may miss the general effects of rapid technologically driven change on core products, business models and customer preferences.

Many board members are aware of these deficiencies. They know that their companies will either embrace technological change and claim the markets of the future or be put out of business. In 2015, a PwC global survey of large-company directors found that 85% of the respondents were dissatisfied with the way their companies were “anticipating the competitive advantages enabled by technology.” Almost as many, 79%, said their boards did not sufficiently understand technology.

The pervasiveness of the problem is troubling for anyone who cares about these companies — but it also represents an enormous opportunity. At the board level, there is a need for knowledgeable, incisive “geeks”: independent directors with experience and perspective in putting technology to use. In the past, many boards have compensated by relying on management or external consultants for strategic advice. But the stakes are now too high to take that approach.

Boards can no longer duck the responsibility for the company’s digital transformation. They must take real ownership by ensuring that they are equipped to fully understand this part of the board agenda. Otherwise, how can they adequately oversee their company’s strategy, investments and expense base? How can they guide profitability, manage risk, assess management performance and ensure proper talent supply? Below are three critical steps you can take to better prepare your company for these challenges.

1. Hold out for sufficiently broad and deep expertise. Although company leaders agree on the need to attract technology-fluent directors, they often approach the undertaking as an exercise in diversity. They “check the box” by bringing in one person to stand for the full technological field, rather than seeking multiple directors with relevant experience and insight.

To assess the severity of this deficiency in the companies we studied, we analyzed the resumes of their nonexecutive directors on four distinct aspects of technology: pure-play disruptive digital business, enterprise-level IT, cybersecurity and the digital transformation of Fortune 500–sized enterprises. Each is critical to boards’ oversight responsibilities, and fluency in each requires a distinct body of knowledge and experience. Few experts in enterprise-level value-chain IT could offer expert guidance on building disruptive digital business, and vice versa. We found that more than 90% of the companies, including technology and telecommunications firms, lacked expertise in one or more of these critical technology areas. Our research revealed only two companies that addressed all areas: Google and Wells Fargo.

To address the gap, you must open multiple board seats for people with technological experience. Just as having only one woman on a board has proven to be insufficient, having just one IT-savvy member is problematic. To fill these seats, you may have to reach beyond the traditional search targets of former CEOs and CFOs. Tap into recent CIOs, CTOs and other C-level leaders at successful information-intensive companies; retired military officers with large information-technology commands; and senior consulting and private equity partners with deep cross-industry expertise in enterprise technology transformations. Resist the urge to rely solely on Silicon Valley experience. Start-up experience is valuable, but addresses just a small part of the large enterprise technology challenge. Likewise, the “move fast and break things” attitude in Silicon Valley often does not translate well to other industries.

When recruiting these board members, be wary of candidates without fresh experience; in fast-moving fields such as cybersecurity or disruptive digital technology, people who are no longer active don’t always keep up with the latest trends. If executives in the business sector are scarce, look elsewhere; other sectors may be surprisingly relevant. In financial services, for example, understanding sophisticated process control is increasingly important. The best prospective board member may come from the logistics industry — from, say, FedEx or UPS.

2. Support robust discussions of technology with the right kinds of practices and management structures. There are two possible mechanisms for accomplishing suitably robust discussions. The first is to establish a formal technology-focused subcommittee of the full board, on par with other oversight functions such as audit or compensation. This can be helpful in raising critical issues and promoting deep discussion of complex topics. It also creates a mechanism for engaging external advisers.

Alternatively, set up a technology advisory committee that meets regularly with top management and periodically reports to the board. AT&T does this. It may be easier, with such a committee, to attract best-in-class expertise, given that the time commitment is low and there are no full fiduciary responsibilities. Typically, advisory committees can also rotate members more frequently than a board can. It must be remembered, however, that an advisory committee reports to management, not the board. This will color its advice.

Whatever the structure, it is important for this group to address topics that go beyond technology strategy and IT governance. The most important priority may be enterprise strategy and the ways in which technology makes new value propositions possible. FedEx, which is as much a technology company as a transportation icon, has used such a board to great effect for many years.

3. Set the right context. Alan Kay, one of the foremost pioneers in personal computer conception and design, once said, “Point of view is worth 80 IQ points.” The context with which your board of directors views technology is a critical element for enterprise success. They must collectively understand the 10 to 15 drivers of technology that have taken quantum leaps in the past decade — for example, big data and analytics, cloud computing, mobile technology, artificial intelligence, the Internet of Things and autonomous transportation — and the potential implications each has for the company.

They must also have a clear view of their own company’s IT landscape: their existing hardware and software, including estimates of redundancy, age, robustness, any risk of obsolescence and costs. For example, how many marketing systems, customer databases and human resource systems does the company have? How interoperable are those systems? The need to ask these types of questions about a factory or back-office footprint would be obvious, but boards have generally neglected such inquiries regarding technology. The board must also understand risks related to technology, the defenses currently in play and any weaknesses in those defenses. Most important, the board must understand how the company’s IT systems relate to the company’s overall strategy, and what capabilities are needed to support it.

It falls to the board to ensure that the company has a multiyear plan to address technology needs while reducing costs and risk. Boards need not grant a license to spend. On the contrary, the hallmark of computers and networks is that they continually get faster, better and cheaper. These benefits accrue only to those with modern gear, however, so frequent upgrades are essential.

Finally, the board must incorporate its expanded technology context into larger deliberations. Talent recruiting and leadership development should be designed to fill gaps in technological fields. The criticality of IT should inform the review of proposed mergers and acquisitions. A close link to the audit committee is important because technology affects regulatory compliance and ethical issues. And the relationship to full board strategy discussions is critical.

Of course, placing someone with world-class technology expertise on a board does not guarantee success. Many technically proficient companies have lost to upstarts with a better product or service. But without this expertise, boards cannot play their most important role: intervening with substantive conversations about strategic decisions early enough to make a difference. And without these focused conversations about technological investments and decisions, boards cannot fulfill their fiduciary responsibilities.

Today, every board of directors has a once-in-a-generation chance to leapfrog the competition through technology competency. The opportunity is great because the task is difficult, and there is no large pool of talent waiting to be recruited. Those companies that meet this challenge successfully will capture the markets of the future.

A version of this article appeared in the Summer 2016 issue of strategy+business.

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.

Screen Shot 2016-04-08 at 3.02.32 PM

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.

Screen Shot 2016-04-08 at 3.03.26 PM

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.

Screen Shot 2016-04-08 at 3.04.51 PM

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.

Screen Shot 2016-04-08 at 3.05.55 PM

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.

Screen Shot 2016-04-08 at 3.11.59 PM

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.

Screen Shot 2016-04-08 at 3.13.04 PM

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.

Key Regulatory Issues in 2016 (Part 2)

The complexities of the current regulatory environment undoubtedly pose significant challenges for the broad spectrum of financial services companies, as regulators continue to expect management to demonstrate robust oversight, compliance and risk management standards. These challenges are generated at multiple, and sometimes competing, levels of regulatory authority, including state and local, federal and international, and, in some cases, by regulatory entities that have been newly formed or given expanded authority. Their demands are particularly pressing for the largest, most globally active firms, though smaller institutions are also struggling to optimize business models and infrastructure to better address the growing regulatory scrutiny and new expectations.

In the first part of this two-part series, we covered the first five key regulatory issues we anticipate will have an impact on insurance companies this year. Here are the final five:

6. Transforming the Effectiveness and Sustainability of Compliance

Compliance continues to be a top concern for financial institutions and insurance companies as the pace and complexity of regulatory change, coupled with increased regulatory scrutiny and enforcement activity, have pushed concerns about reputation risk to new levels. These firms need to be able to respond to changes in their internal and external environments with flexibility and speed to limit the impact from potentially costly business shifts or compliance failures. To do so, however, can demand enhancements to the current compliance risk management program that build adaptability into the inter-relationships of the people, processes and technologies supporting compliance activities; augment monitoring and testing to self-identify compliance matters and expand root cause analysis; and integrate compliance accountability into all facets of the business. Compliance accountability starts with a strong compliance culture that is supported by the “tone from the top” and reaches across all three lines of defense, recognizing that each line plays an important role within the overall risk management governance framework. Transforming compliance in this way allows it to align on an enterprise-wide basis with the firm’s risk appetite; strategic and financial objectives; and business, operating, functional and human capital models.

7. Managing Challenges in Surveillance, Reporting, Data and Control

Driven largely by regulatory requirements and industry pressures
for increased speed and access, trade and transaction reporting has become increasingly complex. Capturing and analyzing vast amounts of data in real time remains a massive challenge for financial services firms, as regulators continue to initiate civil and criminal investigations and levy heavy fines on broker-dealers, investment banks and insurance companies based on failures to completely and accurately report required information. In addition, ensuring compliance with federal and state laws prohibiting money laundering, financial crimes, insider trading, front running and other market manipulations and misconduct remains critically important. In the coming year, it will be essential for financial institutions and insurance companies to reassess the strength and comprehensiveness of their compliance risk management programs to better manage and mitigate both known and emerging regulatory and legal risks and respond to prospective market structure reforms.

See Also: Should We Take This Risk?

8. Reforming Regulatory Reporting

The financial services industry, including the insurance sector, continues to face challenges around producing core regulatory reports and other requested financial information, as demands from both regulators and investors have increased exponentially in the wake of the financial crisis. For insurance companies, the IAIS faces a significant challenge as there is no common basis of accounting applied across jurisdictions, either for regulatory or financial reporting purposes. The need for consistent regulatory reporting has been highlighted by the efforts of the IAIS to develop an insurance capital standard for IAIGs as well as basic capital requirements (BCR) and a higher loss absorbency (HLA) for global systemically important insurers. The IAIS is moving toward a market-consistent basis of valuation for both assets and liabilities to underpin this effort. Complementing the work previously performed by the Financial Stability Oversight Council, which solicited comment on certain  aspects of the asset management industry that included requests for additional financial information that would be helpful to regulators and market participants, the SEC published rules to modernize and improve the information reported and disclosed by registered investment companies and investment advisers (Investment Company Reporting Modernization, proposal published in June 2015).

Among other areas of reform, the SEC’s rule is intended to provide enhanced information that will be used to monitor risks in the asset management industry as a whole and increase the transparency of individual fund portfolios, investment practices and investment advisers, particularly for derivatives, securities lending and counterparty exposures. Fund administrators and managers will likely need to carefully contemplate and implement new governance, operational and reporting capabilities that will be necessary to support enhanced reporting and disclosure requirements.

9. Examining Capital

Recovery and Resolution Planning and the EPS for large U.S. bank holding companies, foreign banking organizations and insurance and nonbank financial companies have brought capital planning and liquidity risk management to the forefront, as regulators have sought to restore both public and investor confidence in the aftermath of the financial crisis. Financial institutions, including nonbank SIFIs, are required to demonstrate their ability to develop internal stress testing scenarios that properly reflect and aggregate the full range of their business activities and exposures, as well as the effectiveness of their governance and internal control processes. A growing number of state regulators have adopted the Own Risk and Solvency Assessments (ORSA) requirement to support insurers’ risk management and capital adequacy.

The international development of an insurance capital standard for IAIGs continues along with BCR and HLA requirements. In the U.S., the NAIC and state regulators are working closely with the Federal Insurance Office, the Federal Reserve and industry participants to develop a group capital assessment. Insurers, however, are challenged to fit capital requirements originally designed for banks into the insurance business model along with group capital into local entity capital requirements. The potential variability and current uncertainty resulting from these and other pending requirements may limit funding flexibility and make capital planning difficult, as financial institutions will need to consider the ties between capital and liquidity in areas such as enterprise-wide governance, risk identification processes, related stress testing scenarios and interrelated contingency planning efforts.

10. Managing the Complexities of Cross-Border Regulatory Change

The largest financial institutions and insurance companies must now understand and manage regulatory mandates across more jurisdictions and services than ever before. Regulatory obligations and cross-border pressure points continue to challenge global financial firms to move past their current reactionary mode of response to tackling high-impact regulatory change. For insurers and their regulators (both international and domestic), the integration of ComFrame (Common Framework) into local entity requirements as they are adopted by individual jurisdictions will be such a challenge. Anticipating the recognition of “equivalence” or a covered agreement for certain U.S. regulations under Solvency II for U.S. insurers operating in Europe is another. However, to address these challenges, financial institutions and insurance companies will need to consider implementing a regulatory change management framework that is capable of centralizing and synthesizing current and future regulatory demands and incorporates both internally developed and externally provided governance, risk management, and compliance regulatory change tools. This framework will enable financial entities to improve coordination across their operations and gain insights that can improve overall performance, ensure risk management and compliance controls are integrated into strategic objectives, avoid redundancy and rework and better address regulatory expectations in a practical and efficient way.

This piece was co-written by Amy Matsuo, Tracey Whille, David White and Deborah Bailey.

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%.

Screen Shot 2016-04-08 at 2.28.21 PM

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.

Screen Shot 2016-04-08 at 2.33.19 PM

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.

Screen Shot 2016-04-08 at 2.33.19 PM

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

FinTech: Epicenter of Disruption (Part 2)

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.

Screen Shot 2016-04-08 at 2.03.03 PM

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.

Screen Shot 2016-04-08 at 2.03.52 PM

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.

Spread Out

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.

Together

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.

Blocks

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.