How can we bring innovation alive in financial services and create organizations that balance today’s customer needs with preparation for the future?
In the previous edition of Frontiers in Finance, we noted the re-awakening of a sense of urgency towards growth and transformation in the financial services industry. In particular, we explored some of the challenges inherent in embracing the digital age; and the implications of bringing innovation to the heart of core business processes in order to both reduce costs and transform business model dynamics.
The ‘digital customer’ is much talked about. ‘Digital innovation’ is also the focus of executive bandwidth. But here we look at some of the issues of the third pillar of digital transformation — the ‘digital enterprise’.
The last point is a critical issue for the industry as the gap between the richest and poorest widens in many societies, and social tensions increase between the haves and the have-nots. Rebuilding trust and credibility depends on getting this right.
A key issue, then, is how to bring innovation alive in financial services, and create organizations that balance today’s customer needs with preparation for a future that could look very different. If we were to take at face value the more exaggerated claims for developments such as cloud-based computing, cognitive technologies, robotics and blockchain, we might conclude that the financial world will soon be transformed into a nirvana of inexpensive, consistent products and services delivered instantly online via tablet and smartphone, from financial advice for retirement to complex mortgage loans — all in a matter of minutes.
But of course immediate and effective implementation of a huge range of transformative technologies is not a realistic prospect. The adoption rate of technological innovations increases as they become proven, and the difficulty for management (especially for senior managers not personally close to the delivery and deployment of new technology) is to assess when, and how boldly, to place their bets. Leaders in financial services have to determine the fundamental business cases for these new enabling technologies; and when and how to adopt them. Should they be pioneers, fast followers or skeptical observers, allowing others to take the lead in the first wave of introduction?
We can consider some of these opportunities in more detail.
The transformation to cloud-based services is clearly now a mature strategy, and one that provides major opportunities not only for well-established institutions but also for new entrants seeking to build new enterprises. While the development of cloud services initially focused on simple transactional processes such as ledger systems, it is quickly expanding to embrace global, cloudbased operations such as risk systems, actuarial modeling and secure systems for rapid processing of onboarding, know-yourcustomer operations and other regulatory requirements.
As cloud technology comes of age, it can begin to be used for more complex and secure operations, protected by security standards that are already now as good as the best in the industry. It is important to note that this is not just a cost reduction ploy. Many of our clients are also finding real benefits in terms of sustainability, consistency and easy upgrade paths for new developments. Regulators have also been quick to respond to the opportunities. In the ASEAN region, for example, one financial regulator sees the potential of cloud technology underpinning a range of fintech developments as an important contributor to reducing costs for consumers and pursuing its goals for financial inclusion. When regulators appreciate and promote new technology in this way, it is a sign that it has really come of age.
On the other side of the equation, there are growing competitive threats from those organizations — from outside the established financial services sector — who are masters of the platform approach. Companies such as Amazon are promoting cloud-based industry vertical tools in a manner that is the envy of some established financial services providers. They are making available specialist applications and application programming interfaces for authentication, biometrics I By Jeremy Anderson Chairman, Global Financial Services Innovating for a digital world 4 | Frontiers in Finance Chairman’s message Frontiers in Finance | 5 and integration of pre-existing applications in secure ways intended to help the process integration and fast development and prototyping of online digital services. More and more senior executives in the industry ask me whether the technology giants present a greater threat than the fintechs in disrupting business models.
At the other end of the innovation spectrum, development of blockchain technology — digital ledger services — is still in its early days, but progress is moving much more quickly than was previously forecast. Applications are being trialed in areas as divergent as derivatives, payment systems, client onboarding, investment management and insurance contracts. Many of those now engaging with the blockchain ecosystem are surprised by the speed of this progress.
It was previously assumed that the major benefits of blockchain would emerge slowly, being dependent on network effects, multiple participation and critical mass. Today, new concepts are being originated continually, to the point where we are reaching a critical turning point for their adoption as transformational elements in new business processes and business models. The major constraints now lie in creating robust business cases and ensuring the extensive implications of the technology are thoroughly understood before deployment.
Technology alone cannot carry the whole burden of innovation. As we have seen, the case for cloud technology is already made and accepted. That is readily becoming apparent for blockchain. The key issues are managerial: how best to move from proof of concept to end-to-end beneficial impacts on core value chains or key product and market sectors. Senior management and technologists need to work together to appreciate the real potential benefits, assess the scale of change required and innovate effectively across complete endto- end processes. The realities of change management — human resources, time, costs, data — will really bite on the adoption of these technologies.
Developments in digital labor, from robotics to full cognitive computing technologies, will help create smooth adoption pathways by eliminating costs and improving efficiency. Robotics applications are already with us, taking over dull, repetitive tasks which otherwise depress the enthusiasm of talented individuals. Cognitive technologies face similar implementation hurdles to those in the blockchain case, in that major investment is needed to underpin artificial intelligence learning and enable its full potential to be realized. It is still in its early days; skilled professionals will not be supplanted — or even significantly supplemented — by cognitive systems in the near future. But the direction of innovation is clear.
However, the longer-tem implications for employment and skills are less so. There is an unresolved debate among economists over whether digital labor, like other transformative technologies, will create or destroy jobs. Optimists argue that technology always creates net new employment as the economic growth it stimulates outweighs the destructive impact on older industries. Pessimists argue that this time it is different; and the persistent structural unemployment in parts of the developed world could suggest that digital technology is already having a detrimental impact. These are deep issues that we plan to pick up in a future edition of Frontiers.
As organizations struggle to develop more agile operating frameworks to confront these multidimensional challenges, they face a dilemma: should they aim to pursue innovation within clear and existing organizational boundaries? Or is it quicker and more effective to build networks and partnerships with small, agile specialists — in fintech, insurtech, regtech and the rest — who can boost internal innovation potential? In the second case, we could increasingly see major established players developing softer and more permeable boundaries, with ideas and solutions moving more freely through the organizational wall as required.
The automotive industry is facing similar challenges, and it is fascinating to see similar strategies and similar processes emerge. For example, the development of autonomous self-driving cars depends on an intimate convergence of automotive and computing technology, so that a car will increasingly become a computer on wheels; it is no accident that Google is one of the prime movers in this field. But as this technology matures, it carries significant implications far beyond the auto manufacturer — including for insurers and financial services organizations that will have to respond to major changes in the pattern of vehicle ownership and use. The energy sector, too, will face disruption as electric vehicles increasingly displace gasoline and diesel. None of these developments will be possible without extensive collaboration across existing corporate and sectoral boundaries.
To the extent that financial services firms have to adopt similar strategies, they will have to deal with comparable implications. Softening organizational boundaries carries significant risks for security, for protecting the sources of competitive advantage and for compliance. On the other side of the fence, financial regulators face increasing difficulties. The philosophy of regulation, almost by definition, depends on there being clearly defined and delineated entities to be regulated. As this changes, the practice of regulation will have to change with it, to focus on cross-boundary processes rather than in-company management and systems. It is to the credit of many regulators that they have recognized the potential of technology and innovation to improve the industry while bolstering consumer protection and economic robustness. We review the increasing use of regulatory sandboxes to encourage controlled experimentation elsewhere in this issue.
Looking forward, however, if we begin to see much more widespread cross-sector convergence, with skills and techniques being transplanted from sectors far away from financial services, regulators may have to confront real trade-offs between the pillars of financial stability, consumer protection and the drive for innovation and new thinking. An agile and effectively regulated financial services sector is essential to social and economic stability. One of the lessons of the global financial crisis is that if innovation is driven outside the system by intensive regulation, it can cause serious damage to consumers and to the wider economic system.
In many ways, perhaps we can again look to the future with a sense that the best of times may be coming for financial services. We noted in the last edition a renewed sense of the opportunity for innovation and growth in our industry. There has never been a better opportunity for companies to innovate and reinvent themselves at previously unimaginable speed. And yet it could also be seen as the worst of times — in order to capitalize on these opportunities, and stay ahead of changing customer demands in retail, corporate and other institutional contexts, leaders face unprecedented challenges. Their success in rising to these challenges will determine how well they negotiate the transition to the new digitally driven, rapidly changing, customer-focused world.