Disrupting the Financial Services Industry: FinTech

According to the World Economic Forum, FinTechs have:

Materially changed the basis of competition in financial services, but have not yet materially changed the competitive landscape. They play a critical role in defining the pace and direction of innovation across the sector but have struggled to overcome the scale advantages of large financial institutions.

Key takeaways for financial institutions:

Payments

  1. Data monetization
    • New competition and increased regulation will continue to make core payment activities less profitable, pushing payment providers to focus on data monetization as an important source of revenue. Data streams will be significantly more valuable where they are granular (eg: product-level data) and multidimensional (eg: location data), marking data cooperation and partnerships critical to successful monetization.
  2. Local payment needs
    • Instead of designing payment solutions based on technology, institutions will focus on how their customers prefer to pay, and design payment solutions that fit their customers’ lives-which will lead to regional solutions. Furthermore, emerging countries without a mature payments ecosystem will likely take the lead in developing payment solutions.
  3. Power of large merchants
    • As the ability of large merchants to influence their customers’ payment choices grows (particularly in online transactions), their negotiating power within the payments ecosystem will grow accordingly. Combined with increased importance of product-level payments data, merchants will be able to wield this power to lower fees and influence the broader evolution of payments ecosystems.

Insurance

  1. Value chain shift
    • Once tightly vertically integrated, the insurance value chain is rapidly being modularized by new technologies that allow for splitting activities across many different players. Leading organizations are using this modularity to their advantage, pursing flexible partnerships that allow them to aggressively compete for adjacent profit pools.
  2. Complex products, simply distributed
    • To remain competitive, insurers need to simultaneously achieve two seemingly contradictory objectives: on the one hand, they must develop complex and highly personalized products to meet customers’ needs; on the other, they will need to significantly simplify the origination process, enabling even highly complex products to be sold directly through online and mobile channels.
  3. Connections changing insurers
    • Connected insurance will fundamentally change the way insurers operate, shifting their focus from risk assessment to risk prevention and creating the imperative to work with original equipment manufacturers to build in connections. To achieve this, however, insurers must overcome existing perceptions of connected insurance products, convincing customers that they represent an improvement over current products.

Digital Banking

  1. Distributors or manufacturers?
    • The rise of product platforms in digital banking will force market participants to make a choice between a strategic focus on product distribution (ie: becoming the platform) or a focus on product manufacturing. This choice will have far-reaching implications for their businesses and customer interaction models, as well as for their competitive landscape.
  2. Fewer, bigger winners
    • The advantage of being the market leader will increase significantly for both product manufacturers and product distributors. Platforms will offer customers improved transparency into products, significantly increasing the advantage for the best products. For distributors, significant economies of scale in access to data and customer awareness will feed a virtuous cycle of growth.
  3. Ecosystem imperatives
    • Under all possible end states, digital banking institutions will forge more relationships with other financial services and, increasingly, non-financial services firms-meaning that within the digital banking ecosystem, a proficiency for establishing partnerships and a willingness to create win-win, symbiotic relationships will lead to more partners.

Lending

  1. The lowest funding costs win
    • Despite innovations in origination and adjudication, the online lending model is fundamentally limited by high and unstable funding costs in its ability to compete with banks. The need for a consistent funding source at a cost similar to that of deposits for banks will drive online lenders to acquire banking licenses-unless an alternative funding source can be found.
  2. Lending goes digital
    • Marketplace lenders and technology firms have reoriented customer expectations. Leading lenders are expected to offer simple credit origination experiences, where a combination of design and automation provides customers with a frictionless application experience and a swift response.
  3. Lenders use data effectively
    • Leading lenders are using data to improve both the effectiveness and the efficiency of their adjudication processes. They employ new sources of data to underwrite applications whose risks could not previously be assessed (eg: thin-file customers), and reduce underwriting costs by automating the collection and analysis of key data (eg: using data collected directly from a small-business accounting platform). Moving forward, lenders will increasingly look for new signals/data to inform lending decisions.

Investment Management

  1. Differentiation of offering
    • The ongoing industry-wide automation and externalization of middle and back offices, combined with the ubiquity of robo-advisory offerings, are commoditizing the investment advisory value proposition. Consequently, leading firms will seek to identify and invest in other ways or differentiating themselves to stand apart from competition, in particular through deeper personalization of customer offerings.
  2. Advice-driven customer guidance
    • As robo-advisors become more ubiquitous and more sophisticated, leading investment management companies will look to use these capabilities to deepen their engagement with robo-advisory customers, drawing on new sources of data to deliver advice on all aspects of their financial lives. This will mark the start of a change in their role from robo-investors to true robo-advisors.
  3. Role of human advisers
    • The human adviser will still be crucial when differentiating products, especially for high-net-wealth customers, but the role of such advisers will shift in leading companies from product selection to a focus on customer engagement, emotional intelligence and decision support.

Equity Crowdfunding

  1. Improved liquidity at seed stage
    • Leading crowdfunding platforms will increase the amount of seed-stage funding available to entrepreneurs, thus filling a valuable niche in the fundraising ecosystem, especially in parts of the world with less venture capital investment.
  2. Regulator balance
    • Regulation plays a significant role in shaping the equity crowdfunding industry across all possible end states, whether crowdfunding platforms go direct to consumers or partner with incumbents. Regulators must balance encouraging crowdfunding and ensuring adequate due diligence.
  3. Integration with broader financial ecosystem
    • In order to achieve a sustainable level of scale, equity crowdfunding platforms will need to grow their scope of funding through integration with the roader financial ecosystem (eg: incorporation into wealth management platforms) and will need to establish secondary markets with sufficient liquidity.

Market Infrastructure

  1. Insufficiency of technology alone
    • New technological solutions alone are insufficient to enable the creation of new market infrastructure of to drive significant changes in existing infrastructure; this will make “minimum viable ecosystems” of cooperating stakeholders critical to development. Leading players from both the public and private sphere will seek to actively participate in and shape the direction of these stakeholder groups.
  2. Navigating regulatory uncertainty
    • Differing regulatory direction around the world will likely lead to both regionalization and uncertainty in the short and medium term. Financial institutions will need to develop the flexibility to rapidly adapt to both large-scale regulatory changes and regionally divergent regulatory treatment of emerging-market infrastructure  technologies.
  3. New value chain pressures and opportunities
    • Regulation and technological advancements are driving efficiencies, which will put pressure on incumbents to consolidate their positions and thus shorten the value chain. Forward-looking firms will seek to position themselves in areas that will continue to add value, including areas currently occupied by other firms.

*Link to complete article can be found here.

 

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