Technology-driven transformations have disrupted book publishing, newspapers, music and television. They will, and in an obvious way have already begun to, disrupt the financial industry – faster than most people believe. Indeed, many organizations appear to be unprepared for the breadth and speed of the approaching disruptions.
Yes, technology disruption is coming to finance. In the financial services industry, startups are utilizing Business-to-Business (B2B) distribution channels to quickly access their targeted underserved buyer via white label products and novel partnerships between new and well-known industry players.
Forces aiding disruptive financial startups include an uncertain economy, constantly evolving regulation, how established financial firms are hampered by their own infrastructures, unwieldy financial supply chains, and the fact that consumers are increasingly going digital.
The number of target customers owning a smartphone or a tablet is growing at an astounding rate globally – as of 2013, an estimated 13 billion mobile devices were connected to the Internet – more than one for every man, woman and child on the planet. And online customers now expect feature-rich financial services, especially in banking.
Shift in consumer demand
There is a shift in consumer demand; they are choosing alternate service providers and are finding it attractive, from a pricing or service model standpoint to use digital financial services. For example, according to a recent survey by Fiserv, the number of customers who used their phones to transfer money increased from 25 percent to 32 percent in one year.
Big data and artificial intelligence are creating disruptive financial services companies operating mainly at the low end of the market. The demand for financial services in underserved markets exceeds supply, so a lower price point would unchain substantial growth in that sector. Established companies have a problem cutting costs. In some cases, enterprise technology has plateaued – there is scant room for realizing more efficiency gains.
What does it mean?
So what does this mean for established firms? For example, banking institutions that fail to invest in mobile technology and crowdfunding platforms risk being sidelined by a wave of disruptive innovation, according to economists at US bank BBVA Compass.
Moreover, an Accenture study predicts that by 2020 an estimated 15 percent of traditional banks’ revenues could shift to online-only players, and another 20 percent could move to “retail-driven players with a mass-market focus.”
Thus the financial industry faces its most dramatic makeover in modern history due to increased online and mobile device usage. This will make banks more productive but also heighten competition from nonbanks. This transformation will result in a more efficient financial system that will be in a stronger position to support economic growth and wealth creation.
And that is a good thing. Although lending by U.S. big banks to small business was up significantly from the dark days of the credit crunch in 2009-11, it has not returned to pre-recession levels. In the U.K., non-bank lenders are actually invited to co-finance small business with the government. The idea is that funds and insurance companies are often less levered than banks, so why not tap them for some liquidity for cash-starved businesses?
The good news is that the nature of disruption has changed both quantitatively and qualitatively. Nowadays, when new disruptive products are introduced, they tend to be both cheaper and better simultaneously. Frequently, a disruption that has the potential to topple an organization or an entire industry is the second wave of innovation. The pace of innovation is increasing, and the cost of failure is decreasing. This is called “big bang disruption.”
Technology drives an unrelenting pace of change. Smart financial services firms are taking advantage of it to transform entire markets, putting those companies that are slow to adopt at risk of being left far behind.
The first step is a general realization: Great changes are fast approaching, driven by consumers enabled by new technologies.
Are these changes an existential threat or a metamorphic opportunity? The answer may depend on how effectively an organization comes to grips with technology disruption.
Gregg Anderson is a managing director of VisionQuest Management Services Ltd., a boutique management consulting company that provides business consulting services including governance, risk and compliance.