In a matter-of-fact way he states: ‘Financial institutions will adapt, they have to. Don’t forget that over the years lots of brands that were very strong at one time or another have simply disappeared. Some banks will too, as technical companies innovate.’
In a global report published last March (Blurred lines: How FinTech is shaping Financial Services) PwC explores some of the specific ways in which the digital revolution is transforming how customers access financial products and services. It says that although the sector has experienced a degree of change in recent years, the constant penetration of technology-driven applications in nearly every segment of financial services is something new. Lying at the intersection of finance and technology, Fintech is a phenomenon that has been accelerating the pace of change at a remarkable rate and is reshaping the industry’s status quo.
‘New digital technologies are in the process of reshaping the value proposition of existing financial products and services,’ they say. ‘While we should not underestimate the capacity of incumbents to assimilate innovative ideas, the disruption of the financial sector is clearly underway. And consumer banking and payments, already on the disruption radar, will be the most exposed in the near future, followed by insurance and asset management.’
They suggest that up to 28 per cent of global banking and payments businesses are at risk by 2020 and up to 22 per cent in the insurance, asset management and wealth management sectors. In consumer and commercial lending, for example, the emergence of online platforms now allows individuals and businesses to lend and borrow between each other. Lending innovation also manifests itself in alternative credit models, use of non-traditional data sources and powerful data analytics to price risks, rapid customer-centric lending processes and reduced operating costs.
Vooght is relatively relaxed about this changing landscape, however, pointing out: “There will always be new entrants into a market, that’s capitalism for you. We’ve already seen it with the likes of Alibaba and Apple and there will be a number of new banking licenses given out in the near future, I’m sure.’
As Vooght sees it, it really is nothing new. ‘You saw it in the transition from steam to petrol and there are countless other examples. The only thing that’s really changing now is the accelerating pace of change. Banking became a commodity and now technology affords the opportunity for that commodity to be returned to the people.’
In an assessment of the proportion of established players ‘at risk’ the report cites the impact of technology on video rentals. ‘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, they say, in the internet direct insurance model for car insurance. ‘At present, 50 per cent of the revenue from the traditional agent-based distribution model has been moved to direct insurance providers.’
PwC says the investment industry ‘is also being pulled into the vortex of vast technological developments,’ with the emergence of data analytics in the investment space enabling firms to hone in on investors and deliver tailored products and automated investing. Additionally, innovations in lending and equity crowdfunding are providing access to asset classes formerly unavailable to individual investors, such as commercial real estate.’
Furthermore, as financial services customers are becoming accustomed to the digital experience offered by companies such as Google, Amazon and Apple they increasingly expect the same level of customer convenience and insight from their FS providers.
‘FinTech is riding the waves of disruption with solutions that can better address customer needs by offering enhanced accessibility, convenience and tailored products. In this context, the pursuit of customer centricity has become a main priority and it will help to meet the needs of digital native clientele,’ the report says.
Based on earlier research, PwC says a viable digital approach is now mandatory for lenders wishing to compete across all consumer 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 prioritise 24/7 customer service, often provided through non-traditional methods such as social media,’ the authors say.
Vooght is quick to point out that it’s not just technology that is changing, so too are customers and their expectations and behaviours. Enabled by digital technology, the way in which consumers approach services is changing rapidly, he says.
‘Financial services companies have claimed to be “customer focused” for many years. But the assumption of customer focus is changing now from product push to being genuinely customer-centric. That’s the Holy Grail. But what does customer-centric really mean and how do you achieve it? Those are the important questions now.
‘If you are thinking of getting a loan, for example, nowadays you ask your mates, you go on Google and you inform yourself about exactly what’s available. Only then do you go to the bank. Millennials have a completely different attitude to security and risk and a completely different loyalty index. We spoke of “my bank” 20 years ago, now it’s “the bank”. Milleninals are not loyal.’ This change is occurring at a time of increased urbanisation worldwide, he points out, which is resulting in increased demand for financial services.
Recognising these changing attitudes is fundamental to becoming ‘customer centric,’ Vooght says. Significantly, research shows that these ‘unloyal’ customers are only interested in buying from a recognised and established market leader. ‘People want to buy from a player in the top two or three of any sector. So if you’re not in the top four of your particular market you are not going to survive, certainly not in the long-term. Technology affects transparency - why buy from number five?
‘Today there are banks that have adopted this as a strategy. They must be in the top four of each market segment that they operate in or, if they see this as unattainable, they will relinquish that segment. It also means they must arrive quickly with an intuitive solution, one which will knock out the existing competition before they have time to react.’
Vooght also points out that the concerns about use of private data which are so prevalent in western countries simply do not exist in the same way elsewhere - in the burgeoning Asian markets, for example. Alibaba and other institutions in China now look at social online interactions as part of your credit rating, looking for changes in use. For example, if you have become a late night user might that indicate you have recently lost your job? ‘The Chinese attitude to privacy is completely different. We may well find that other countries develop faster in the FinTech area because their attitudes to privacy are completely different to our own,’ Vooght suggests.
FinTech is by no means confined to banking and payments and also has the potential, for example, to completely revolutionise the insurance sector. Here usage-based risk models and new methods for capturing risk-related data are key trends, while the shift to more self-directed services remains a top priority in order to efficiently meet existing customer expectations. In motor insurance, for example, the telematics-based solution that enables pay-as-you-drive is one of the first models to emerge and is gaining momentum, according to PwC’s report.
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/behavioural variables, but new players see UBI as an opportunity to meet new customers’ needs such as those of low mileage or occasional drivers.
For many people, both within and outside the financial services sector, blockchain is a significant but poorly understood phenomenon. PwC Ireland’s FinTech Leader, John Murphy describes it as ‘a new technology that combines a number of mathematical, cryptographic and economic principles in order 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.’
Murphy believes that blockchain does indeed represent the next evolutionary jump in business process optimisation technology. ‘Just as Enterprise Resource Planning (ERP) software allowed functions and entities within a business to optimise business processes by sharing data and logic within the enterprise, blockchain will allow entire industries to optimise business processes further by sharing data between businesses that have different or competing economic objectives,’ he says.
That said, however, although the technology shows a lot of promise they acknowledge that 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.’ Murphy warns that this lack of understanding ‘may lead market participants to underestimate the potential impact of blockchain on their activities.’
Blockchain is a fascinating way of storing large amounts of transactional data, Vooght says, which is one of the reasons why PwC has acquired a company in Belfast with 15 blockchain specialists focused on creating applications for clients, and why it is also exploring opportunities for using it internally for its own cross-border transactions.
In its recent report PwC says innovation from start-ups in the blockchain space is frenetic. Its own global blockchain team has identified more than 700 companies entering this arena, of which ‘150 are worthy to be tracked and 25 will likely emerge as leaders.’
Vooght says that the biggest problem with blockchain ‘is the lack of understanding that’s out there. There are too many bank CEOs, for example, taking the view that it isn’t going to be a problem in their working lifetime. But they’re wrong. It also requires institutions to work together and Ireland’s FinTech and payments associations are really good at facilitating this kind of thing. So this could be something really powerful here in Ireland. There’s limited usage so far, but there’s more coming and there’s a lot of sandboxing going on.
Murphy says ‘FinTech is more than technology; it is a cultural mind-set. They say 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 digitisation into their corporate DNA. To fully leverage the potential of FinTech, financial institutions should have a top-down approach, embracing new technologies in every aspect of their businesses.’
In overall FinTech terms, how well positioned is Ireland to benefit from future developments? Vooght says ‘As you look at the market around the world you can see China is allowing companies to develop solutions faster. There’s also a lot of activity in Silicon Valley and San Jose, with huge funding available. London, too, simply has huge size in terms of its financial services.’
‘But London is also very expensive, too expensive, and Ireland will be a good base in terms of scaling-up and for reaching into Europe’, concludes Vooght.