The Rise of the Orchestrator
Today, more often than not, it is the primary catalyst of competitive advantage and strategic disruption in financial services. Technology-driven innovations raise customer expectations and transform the competitive landscape for financial services. Although this trend poses a significant threat to existing products and business models, it also opens the door to tremendous new growth opportunities.
Today, more often than not, technology is the primary catalyst of competitive advantage and strategic disruption in financial services. As disruptive challengers offer new sources of financial services, such as Apple Pay, Zopa and Lending Club, and customers also expect ever-increasing levels of reliability and personalisation. Financial services companies aren’t just competing against other financial services companies however, they also are up against the expectations established by the best digital companies in every industry, including Amazon, Apple, Facebook, and Google. And as the World Economic Forum/Deloitte research demonstrates, disruption happens where significant customer friction meets large pools of profit.
So the potential for technology to drive massive structural change and disruption in financial services is most clearly demonstrated by the huge growth in global FinTech investment. In 2015, there were more than 8,000 FinTech companies churning out a continuous stream of breakthrough innovations to improve payment processes, reduce fraud, promote financial planning, and save users money. These fast-moving companies often operate at the edge of the marketplace - where they are relatively unencumbered by regulation and the status quo - enabling them to focus on customer needs and push the financial services industry forward at an unprecedented pace.
Unlike the FinTech start-ups, incumbent institutions have extensive IT infrastructures and systems that enable them to run their existing businesses, with a wide range of products and channels to support. When moving into the future, these existing assets can be an advantage or disadvantage.
The questions to ask include:
- Which established systems provide a competitive advantage?
- Which need to be adapted and leveraged differently?
- Which systems are impediments that need to be replaced or scrapped?
Financial institutions are figuring out how to harness these existing IT assets and capabilities to meet their current needs, while positioning for the future. They need a clear, executable, strategy on how to leverage and integrate FinTech and other emerging market services into their offerings quickly and smoothly; while continuing to meet regulatory and broader stakeholder requirements. At a minimum this strategy will need to consider the following:
1. Isolating the Core
The financial services incumbent will need to implement technology that isolates and controls the system core, while providing a clean and secure gateway to internal asset and innovation teams, as well as chosen third parties.
This will let innovation flourish in those areas it chooses, which is likely to be at the ‘edge’ i.e. where both friction and the exchange of value is the highest. Failing to do so could result in other areas of the business implementing shadow IT functions or covertly moving more and more IT capabilities into the cloud.
2. Be clear on your role
Be clear about the role that the financial institution wants to play in the delivery of services to customers. This should be defined by do-main, where the domain will differ according to strategic, organisational and governance considerations. As an example, some organisations define domains as business capabilities, for example Treasury or Customer Management, while other organisations include technology capabilities like infrastructure in their domain models.
This model is a useful guide when defining the role. A question to ask is does the domain only want to consume services provided by vendors and FinTechs, or orchestrate a range of services provided by a number of providers, FinTechs and vendors? Increasingly financial institutions are defining their end-state roles as ‘consumer only’ where they don’t see competitive advantage, and orchestrate where they do. However, the role/s the domain plays will change over time as the migration from the current state to the future state, which is likely to include all the above roles, could take several years.
3. Foundations for success
The capabilities required for each of these roles will differ and need to be considered across the operating model.
- Sourcing and Procurement: Sourcing market services, especially FinTech services, require a different organisational capability. A traditional RFI/RFP sourcing strategy is likely to be ineffective, especially as the companies you are sourcing don’t fit the normal criteria. In addition, the ‘Test of Value’ is more difficult, especially when procuring innovative, or outcome-based services.
- Governance: Governing the delivery and commercial constructs inherent in services will be different. Governance models need to shift to governing at the service boundary, rather than how that service was previously delivered. This will mean that financial institutions can leverage their market and customer acumen to full advantage, rather than focusing their efforts on the technical architecture of ‘widgets’.
- Culture: It will take a concerted effort to move from a culture of building everything yourself for customers to orchestrating the delivery of services. This needs to be driven from the top as staff members and teams will look to their leaders for guidance during times of uncertainty.
- People: A positive aspect of this shift in model is that the financial institution will increasingly be able to focus their people on those areas that add the most value to the organisation and its customers. This will increase job satisfaction, especially if innovation is encouraged.
- Enabling platforms: The financial institution will need to invest in building the platforms that support technology innovation to flourish. This starts by isolating the core and includes the tools and processes required to succeed.
Rising to the challenge
The financial services marketplace is experiencing unprecedented change, and IT is the driving force. To compete effectively, companies need to embrace and orchestrate the FinTech and IT services ecosystem, while protecting their core assets.
This article was first published in Asia-Pacific Banking & Finance.