Financial Services do need innovation advice
There are five key observations that give useful insights into how best to think about, predict and respond to innovation – the results highlighted in the World Economic Forum’s Future of Financial Services report.
Deloitte and the World Economic Forum have spent the past 18 months with global financial services industry leaders, innovators and regulators researching the transformative potential of innovation. The result is the Future of Financial Services report which initially considers disruptive innovation in financial services, highlighting the innovations that will be the most impactful and relevant to the industry.
There were five key observations that give useful insights into how best to think about, predict and respond to innovation:
- Innovation in financial services is deliberate and predictable. Incumbent players are most likely to be attacked 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 intensive and capital light
- New entrants are employing parallel strategies aggressively, competing with incumbents in some areas, while also leveraging their legacy assets to access key infrastructure and services
- Collaboration between regulators, incumbents and new entrants is needed to understand how new innovations alter the risk profile of the industry – positively and negatively
- Not all innovations are customer facing. A quiet band of innovators are modernising incumbent operational practices, delivering new capabilities and unexpected efficiencies.
These insights consider the 11 critical clusters of innovation that are changing financial services across the key sectors of payments, market provisioning, wealth management, capital raising, deposits and lending, and insurance (the sector that will be the most disrupted).
What was missing before the World Economic Forum/Deloitte research?
Before the research, tested recently in Australia, all the innovations could feel very chaotic. Understanding how the transformative innovations all connect was missing; as was a taxonomy for understanding the evolutionary path of emerging innovations.
Which innovations are and will be the most relevant? In this context, in Australia, Deloitte also researched the status quo and called out the points under constant pressure to innovate across six key stakeholders.
For customers, the pressure points are the need to rebuild trust and deliver simplicity and value.
In cyber security, Australia is seen as a soft target and needs to build agility, responsiveness and resilience.
In fintechs, we are doing some good work internally, but need to focus on both internal and external innovations to meet the complexity and speed of change. Fintechs will continue to thrive as global entrants are attracted to the profitability of the Australian financial services industry.
As for regulators, they need to be willing to partner and engage proactively with technology providers and consumers to help formulate products and the rules of the game to the benefit of all.
Enterprise technology vendors need to help financial services meet the pace of change and connect employees across the enterprise, digitise operational processes and reach out to customers.
For the business models of incumbents, the winning play of scale that has historically shaped large institutions will shift to those that manage the transition to the future state that delivers the maximum value to customers. Their models will need to commoditise value, deliver agility, create simplicity and build customer trust.
It’s a balancing act
Managing the pace of this transformation will be a key to success. Each business will need to work out how long it can sustain its current business model and how quickly it can transition effectively to its new state. As customer preferences and behaviours demand innovations, additional risks and considerations will be created.
So through collaboration, the industry response needs to be well thought through, building agile policies and regulatory responses necessary to protect and grow Australia’s prosperity.
Creating the prosperity for Australia
As Australia’s largest economic sector, worth nine per cent of gross value, and contributing more than $130 billion to the GDP each year, the financial services sector has a critical role to play in driving the shift from a “products” to a “services” economy. As the sector feels the heat of disruption the most, it also has the greatest capacity to take advantage of its inherent innovation to facilitate business and protect capital, to provide the necessary liquidity for growth in all sectors of the economy.
As Prime Minister Malcolm Turnbull says: “The Australia of the future has to be a nation that is agile, that is innovative, that is creative… it isn’t about ‘future-proofing the nation’. It is about embracing the future.”
Collaboration is the key
We will only achieve the Prime Minister’s vision if incumbents, fintechs, the government and regulators collaborate. Stated simply, it is critical that we create the right environment for financial services to thrive for benefit of Australia and its citizens.
In Australia, we are in the eye of a perfect storm. As we have seen, the government gets innovation, consumers and customers want what it offers and our financial services sector has the means to deliver it. Together, we will achieve a win:win:win for Australia if we get it right. Also, as a smaller market, we can look at the changes in the UK, US and European markets and closer to home, China and South East Asia, and watch and learn. As we externalise aspects of this knowledge and build R&D, Australian organisations can respond with a bit more runway than the others. In addition, Australian-based multinationals have a chance to run pilots with a smaller and more manageable consumer base and so be an exciting lab for financial services in innovation.
This article was first published in Asia-Pacific Banking & Finance.