Finance and technology

future assist financial services group and disruptive technology in financial services
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Nataliebarry,New Zealand,Researcher
Published Date:13-07-2017
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The Future of Financial Services How disruptive innovations are reshaping the way financial services are structured, provisioned and consumed An Industry Project of the Financial Services Community Prepared in collaboration with Deloitte Final Report ● June 2015 The mandate of this project was to explore the transformative potential of new entrants and innovations on business models in financial services Project Context We set out to address three major problems that have prevented a comprehensive understanding of the state of disruptive innovation in the industry:  There is no common taxonomy or understanding of which innovations are the most relevant  There is no clear understanding of the evolutionary path of emerging innovations  The implications of those evolutions on incumbent business models are unclear, creating significant uncertainty for traditional players as they strive to react to growing competitive pressures Project Approach We structured our research around three main questions, each requiring distinct actions: Which emerging innovations are the most impactful and relevant to the financial services industry? 1 Action: We identified 11 key clusters of innovations based on how they impact the core functions of financial services How will these innovations impact the ways in which financial services are structured, provisioned and consumed in the future? 2 Action: We considered a range of scenarios for the degree and nature of impact each cluster of innovation could have 3 What would be the implications of these changes on customers, financial institutions, and the overall financial services industry? Action: We analysed the implications of each scenario on customers, incumbent institutions and the overall financial services ecosystem 10 Over 15 months of research we engaged with industry leaders and innovators through interviews and multi-stakeholder workshops Industry Leaders Innovators  Oversight, guidance and thought leadership from 16 C-suite executives  In-person and phone interviews with 100+ innovative new entrants and 25 strategy officers of global financial institutions and subject matter experts Global Workshops  Facilitated six multi-stakeholder workshops at global financial hubs with 300+ total participants including industry leaders, innovators, subject matter experts, and regulators Hong Kong SAR Tianjin, China Boston, USA New York, USA London, UK Davos, Switzerland 4 Sep. `14 11 Sep. `14 30 Sep. `14 21-22 Oct. `14 2 Dec. `14 21 Jan. `15 11 The outcome of this work is the first consolidated taxonomy for disruptive innovation in financial services Research Framework We have structured our framework against six functions of financial services and eleven clusters of innovation. Functions of Financial Services Even in an environment of rapid change to the design, delivery and providers of financial services, the core needs those services fulfill remain the same. We have identified six core functions that comprise financial services :  Payments  Insurance  Market  Deposits & Provisioning Lending  Investment  Capital Management Raising Clusters of Innovation We have identified 11 clusters of innovation exerting pressure on traditional business models 12 We have synthesised six high level insights on innovation in financial services Key Research Findings Innovation in financial services is deliberate and predictable; incumbent players are most likely to be attacked 1 where the greatest sources of customer friction meet the largest profit pools Innovations are having the greatest impact where they employ business models that are platform based, data 2 intensive, and capital light The most imminent effects of disruption will be felt in the banking sector; however, the greatest impact of disruption 3 is likely to be felt in the insurance sector Incumbent institutions will employ parallel strategies; aggressively competing with new entrants while also 4 leveraging legacy assets to provide those same new entrants with infrastructure and access to services Collaboration between regulators, incumbents and new entrants will be required to understand how new innovations 5 alter the risk profile of the industry – positively and negatively Disruption will not be a one-time event, rather a continuous pressure to innovate that will shape customer 6 behaviours, business models, and the long-term structure of the financial services industry 13 In the following pages, we have summarised our insights by function and cluster Insight Summary – Reading Guide This section provides a summary of our findings, divided by function and clusters within the functions. For each cluster of innovation we have defined the major disruptive trends, summarized the impact, and examined key implications for institutions in that function and cluster. Function grouping Innovation cluster Key trends driving disruption in financial services business model Summary of the activity that the cluster of innovation is creating Major implications for financial institutions as a result of activity within the cluster 14 Key Findings Payments Cashless World Emerging Payment Rails Key Disruptive Trends Key Disruptive Trends Mobile Streamlined Integrated Next Generation Cryptographic P2P Mobile Payments Payments Billing Security Protocols Transfers Money Summary Summary New consumer functionalities are being built on existing payment The greatest potential for cryptocurrencies may be to radically systems and will result in meaningful changes in customer streamline the transfer of value, rather than as store of value behaviour Implications for Financial Institutions Implications for Financial Institutions  Financial institutions may lose control over their customers’  As more efficient alternative rails are adopted, the role of traditional transaction experience as payments become more integrated intermediaries as a trusted party may diminish  With reduced visibility, becoming the default card among specific  Financial institutions may face a new set of risks (e.g., reputation, customer segments will become critical security) and regulatory issues as they participate in new rails  Winning issuers will be able to gain visibility into more of  Applications of these technologies can expand beyond money customers’ spending patterns, build more holistic understanding transfer to modernise other financial infrastructures of customers, and create more competitive offerings 15 Key Findings Insurance Insurance Disaggregation Connected Insurance Key Disruptive Trends Key Disruptive Trends rd Disaggregated Sharing Self-Driving 3 Party Smarter, cheaper Wearables Internet-of-Things standardised Distribution Economy Cars Capital sensors Platforms Summary Summary Emergence of online insurance marketplaces and Ubiquity of connected devices will enable insurers to highly homogenisation of risks will force big changes in insurers’ personalise insurance and proactively manage clients’ risks strategies Implications for Financial Institutions Implications for Financial Institutions  In an increasingly commoditised environment, the risks of  As customer relationships evolve from short-term product-based to customers being more fickle will increase and creating loyalty long-term advisory, capturing customers early on becomes critical through innovation will become more important  As insurers become a hub for customer data, their strategic value  Insurers’ ability to benchmark against competitors will become within full-service financial institutions will grow more important as customers gain ability to comparison-shop  Forming partnerships with data providers, device manufacturers and  With increased margin pressure, insurers will need to increase other ecosystem participants will be critical to enable connected their size by expanding either scope or scale insurance 16 Key Findings Deposits & Lending Alternative Lending Shifting Customer Preferences Key Disruptive Trends Key Disruptive Trends Virtual Banking Banking as Platform Evolution of Mobile P2P Lean, Automated Alternative 2.0 (API) Banking Processes Adjudication Summary Summary New lending platforms are transforming credit evaluation and New entrants will make meeting customer demands more loan origination as well as opening up consumer lending to non- important, creating an imperative for banks to reconsider their traditional sources of capital roles Implications for Financial Institutions Implications for Financial Institutions  Intensified competition will narrow spread between deposits and  Financial products will increasingly be offered on a stand-alone basis loans, decreasing financial institutions’ profitability limiting incumbents’ ability to competitively cross-subsidise  As savers turn to alternative platforms, traditional deposits and  Financial institutions’ ability to collaborate with non-traditional investment products will be eroded players and other institutions will become essential  Distribution of customers’ credit portfolio over a large number of  Financial institutions will need to choose where they will specialise alternative platforms may make it difficult to measure customer’s and where they will leverage external partners (e.g., product creditworthiness manufacturing vs. creation of customer experience) 17 Key Findings Capital Raising Crowdfunding Key Disruptive Trends Empowered Angel Alternative Investors Adjudication Summary Crowdfunding platforms are widening access to capital raising activities, making the overall ecosystem richer Implications for Financial Institutions  Access to more diverse funding options allow new companies to grow at a quicker pace and shorten the average time between early funding stages  Distribution platforms create a venue for investors to tailor their investment portfolio across dimensions beyond financial return  As the barriers to enter the asset class fall, it becomes ever more important for traditional intermediaries’ profitability to find undiscovered “start” investments 18 Key Findings Investment Management Empowered Investors Process Externalisation Key Disruptive Trends Key Disruptive Trends Social Automated Advice & Retail Algorithmic Advanced Natural Process-as-a- Capability Trading Wealth Management Trading Analytics Language Service Sharing Summary Summary Robo-advisors are improving accessibility to sophisticated The scope of externalisable processes is expanding, giving financial management and creating margin pressure, forcing financial institutions access to the new levels of efficiency and traditional advisors to evolve sophistication Implications for Financial Institutions Implications for Financial Institutions  New entrants will place pressure on margins and intensify  The ability to access sophisticated capabilities without large competition among traditional players in more specialised infrastructure investments flattens the playing field for mid-sized segments institutions  As more advisory functions become automated, distributing  Organisational agility will become critical to sustain competitiveness wealth products via proprietary advisory channels will become as high-value capabilities are continued to be commoditised less effective  Externalisation of capabilities may result in workforce skill loss by  As new entrants widen the access for mass customers, they will preventing the development of a holistic view of operations compete for customers’ traditional savings deposits 19 Key Findings Market Provisioning Smarter, Faster Machines New Market Platforms Key Disruptive Trends Key Disruptive Trends Fixed Income Funds / Fund Private Equity / Private Commodities & Machine Accessible Artificial Intelligence / Big of Funds Venture Capital Company Derivative Data Machine Learning Data Contracts Shares Shares Summary Summary As the popularity of high frequency trading declines, the focus of New information platforms are improving connectivity among algorithmic trading may shift to smarter, faster response to real- market constituents, making the markets more liquid, accessible, life events and efficient Implications for Financial Institutions Implications for Financial Institutions  The impacts of event-driven algorithmic trading on liquidity,  As traditional differentiators among intermediaries (e.g., ability to spread and systemic stability are unclear discover counterparty) become commoditised, the importance of advisory services will increase  With end-to-end trading activities automated, even small errors in data integrity, trade strategy, and execution will lead to large  Information platforms will evolve the standards for best-execution impacts from a best-efforts basis to more quantifiable and comparable metrics  Regulators have the potential to significantly alter the course of developments in this area 20 We identified six important themes that cut across functions and touch multiple clusters of innovation 1 Streamlined Infrastructure  Emerging platforms and decentralised technologies provide new ways to aggregate and analyse information, improving connectivity and reducing the marginal costs of accessing information and participating in financial activities Automation of High-Value Activities 2  Many emerging innovations leverage advanced algorithms and computing power to automate activities that were once highly manual, allowing them to offer cheaper, faster, and more scalable alternative products and services Reduced Intermediation 3  Emerging innovations are streamlining or eliminating traditional institutions’ 5 role as intermediaries, and offering lower prices and / or higher returns to customers 4 1 4 The Strategic Role of Data 3  Emerging innovations allow financial institutions to access new data sets, such 2 as social data, that enable new ways of understanding customers and markets 6 5 Niche, Specialised Products  New entrants with deep specialisations are creating highly targeted products and services, increasing competition in these areas and creating pressure for the traditional end-to-end financial services model to unbundle Customer Empowerment 6  Emerging innovations give customers access to previously restricted assets and services, more visibility into products, and control over choices, as well as the tools to become “prosumers” 21 At the conclusion of the research phase, the Steering Committee gave us a mandate to dive more deeply into high-potential areas of disruption Next Steps We have identified three major challenge areas related to innovation in financial services that will require multi-stakeholder collaboration to be addressed effectively. We are launching a project stream related to each area, with the goal of enabling tangible impact. The Forum is uniquely positioned to support advancements against each challenge due to its ability to:  Convene senior multi-stakeholder groups and align diverse perspectives  Create thought leadership on cutting-edge issues with long-term implications to the industry Challenges Projects New financial products and services are creating significant regulatory Regulatory Models uncertainty and fueling perceptions of regulatory arbitrage for Innovation Decentralised systems, such as the blockchain protocol, threaten to Applications of disintermediate almost every process in financial services Decentralised Systems Outdated identity management protocols create risks and Blueprint for inefficiencies for both service providers and consumers Digital Identity We will be presenting outcomes from these projects in early 2016 22 Reading Guide for the Detailed Sections of the Report 23 The following detailed sections of the report are organised based on key innovation clusters and how they map to the core functions of financial services 24 We have analysed the relevant cluster of innovations for each key area of impact and developed scenarios that present potential answers Report Structure A B C Background Context Analysis of Innovations Future Characteristics D Scenarios  Brief analysis of current state  Overview of key innovations  Key characteristics of future  Summary of potential outcomes business models and processes impacting the topic models of financial services related to the key question for the in the impacted function enabled by innovations for the topic in a scenario format  Key characteristics of the impacted function  Summary of historical innovations  Narratives and case studies to developments further illustrate each scenario  Impact of the innovations on the  Key pain points and challenges current state value chain  Necessary conditions required for with the current state each scenario to be realised  Comparison of the current state models and innovations  Implications of the scenario on customers, incumbents and overall industry  Key opportunities and risks associated with the scenario Key insights from the analysis of each topic and relevant cluster of innovations have been summarised in the Executive Summary and Conclusions pages in each module 25 Detailed Research Modules 26 Payments How will customer needs and behaviours change in an increasingly cashless payments landscape? 27 Payments: Cashless World Executive Summary Context / Innovation  A number of innovations have emerged in the past five years leveraging mobile devices and connectivity to make payments simpler and more valuable. Examples range from digital wallets to automated machine-to-machine payments  The majority of these innovations will modify front-end processes to improve the customer and merchant experience while leaving the underlying payments infrastructure undisrupted Future of Payments  These innovations will reduce the use of cash and make payments less visible to payers. They will also enable financial institutions and merchants to use data-driven customer engagement platforms ‒ As more payment solutions allow customers to link their bank accounts for direct payment and seamless point-of-sale vendor financing, the use of credit cards could be displaced by these platforms ‒ Customers may lose visibility into their payment choices, increasing their default cards’ share of wallet and reducing the importance of some traditional differentiators like brand and design ‒ The elimination of a need to carry physical cards and the emergence of payment decision support systems could support the proliferation of niche and merchant issued cards, splintering wallet share among many cards Key Implications  Success of any innovative payment solution will require a strong customer rationale to switch, as most customers do not consider the existing payment regime to be broken  In an increasingly cashless future payment providers who can embrace emerging payment innovations to offer differentiated, value-adding digital experiences will be able to deepen their relationships with customers and take a dominant place in the changing market landscape 28

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