Innovation for financial services is to a large degree around using technology to disrupt various business model components. The focus is on achieving economies of scale, increasing efficiency, and facilitating peer-to-peer interaction. Different stakeholders play different roles in the FinTech ecosystem. There is a trend toward better servicing customer needs relying on omnichannel experiences. Regulators should be seen as a friend rather than an enemy. But most important, the future starts now, and can only be approached with sound change management capabilities.
The Singapore Management University hosted on October 15th and 16th the fifth annual InnoFin conference on innovation for financial services companies. This year’s focus was all around FinTech topics and how technology may disrupt traditional financial services business models.
Interesting key note speakers from both academia and industry, combined with pannel discussions, company visits, and workshops presented a comprehensive overview of the ongoings in financial services innovation. Even though, no groundbreaking insights where presented, the two days conference confirmed to me that a lot about innovation for financial services is around using technology to disrupt business model components that are relying on
- economies of scale,
- efficient execution, and
- peer-to-peer interaction.
The FinTech ecosystem
To grasp what the future will bring … or not bring, it is important to understand the structure of the FinTech ecosystem, illustrated in Figure 1, as well as the roles of the individual players.
Traditional banks try to compete in FinTech by setting-up innovation labs and hiring Chief Innovation Officers (CIO). They organize hackathons, trying to identify the next big technology shifts. Real-time payments, consumer lending, as well as block chain technologies are on the top of the agenda. The goal is to experiment with new technologies and ready the organization for upcoming changes.
Interestingly the CIO is more often than not reporting into the IT division rather than directly to the executive board, positioning innovation at the technology rather than the business level. Whether hiring a Chief Innovation Officer is a hype or a lasting value driver remains to be seen.
The main challenge that traditional banks face are coping with their organizational complexity and resulting slowness to implement change. Currently regulations still protect them by providing a high barrier to entry, a big wall. But it is only a matter of time before other players succeed in digging tunnels through the regulatory wall.
System integrators, like IBM, SunGuard, or Avaloq, form a second category of natural players in the FinTech ecosystem. They take a technology approach to innovation. Their main added-value is in seamlessly integrating diverse technologies. They are seen as playing a key role in enabling innovations to move from the prototype to the roll-out stage. As their business model is built on partnering with financial services companies, one cannot expect them to come-up with disruptive business models.
The start-up world is definitely where the hype of FinTech can be smelled. When studying start-up business models, one can identify four key areas allowing to build unique value propositions:
- Start-ups focus on achieving customer stickiness rather than generating cash flows. The assumption is that the stickier a customer is, the higher his/her future value generating capabilities will be.
- Start-ups try to create value for the customer by reducing information asymmetry between the provider and consumer of financial services and charging a fee for intermediation.
- Start-ups focus on scale and volume rather than margins. They compete in areas that are seen as less interesting by traditional players.
- Start-ups zero in on extracting value from big data, using their analytical expertise around
- distinguishing between noise and information,
- extracting information by structuring data, and
- monetizing the value of big data.
There exist two types of FinTech start-ups,
- those that work with banks, by supporting them with technology in reducing costs, increasing revenues, and improving the customer experience, and
- those that unbundle the banks’ value chain and try to disrupt their business model by focusing and competing on execution skills.
Finally, big internet players are seen as the biggest threat to traditional banking. They are thinking and / or experimenting with entering the banking market through the bottom of the value chain. They aim at leveraging their unique capabilities of
- reaching the masses and building peer-to-peer relationships,
- handing and extracting value from large volumes of data, and
- efficiently executing processes through the use of technology.
A typitcal example is Apple entering the market of credit card payments with their Apple Pay product. Another is Alibaba.com, serving their customers with their e-Credit Line solution.
Many see the GAFAMs as a major threat to the financial services industry because of their unique capabilities as well as their available cash for investing in large scale roll-outs of their offerings.
According to different speakers, the financial services industry needs to rethink its future along four dimensions:
- The customer engagement needs to be rethought towards an anytime, anywhere, anything mentality. Successfully mastering the omnichannel customer experience will be key.
- The relationship with the regulator needs to shift from enemy to friend.
- More of the IT budgets need to be shifted towards new / innovative projects, supporting big data, omnichannel access, compliance, risk management, gamification, and authentication.
- The IT platform needs to better aligned with future trends of cloud computing, big data, customer mobility, and social business focusing on cognitive systems, natural language interfaces, robotics, next generation security, 3D printing, and the internet of things.
Programmable asset sharing technologies, like block chain, resulting in different cryptocurrencies were also a hot topic. But they are still seen in an R&D experimentation phase, rather than being ready for the masses. Especially the challenge of scalability is still not fully solved.
Approaching the future
Gaining insights about how the future might look like is one thing, but the more challenging question is, what should I do about it? Contrary to Einstein’s quote “I never think of the future – it comes soon enough”, there existed consensus among the participants that the future starts now!
This means that waiting is not an option. Whichever role a company wants play in the FinTech ecosystem, it should start prototyping using design thinking based approaches and customer journey concepts.
Depending on the degree of insight and expected engagement, different approaches, from focusing on automation, through setting up collaborations, running an incubation lab, to engaging with startups are possible.
But don’t forget that innovation without execution is only ideation. That means, actively addressing the challenge of change as early as possible is key for success.
- FinTech is about using technology to disrupt business model components of financial services companies by focusing on economies of scale, efficient execution, and peer-to-peer interaction.
- Without a focus on customer needs and mastering the omnichannel customer experience, any FinTech initiative will fail.
- Block chain technology and associated cryptocurrencies should be actively monitored.
- Prototyping based design thinking approaches, combined with change management capabilities, provide a sound toolbox for innovation.
*) GAFAM stands for Google, Apple, Facebook, Amazon, Microsoft, the five giants of the Internet