future of financial services

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Financial services need innovation to deliver Australia’s future prosperity

New report identifies 11 clusters of innovation that are transforming the structure, provision & consumption of financial services

24 September 2015Deloitte and the World Economic Forum have spent the last 18 months with global financial services industry leaders, innovators and regulators researching the transformative potential of innovation and how best to respond. The result - the Future of Financial Services report - highlights which emerging innovations are the most impactful and relevant to the financial services industry.

It calls out eleven critical clusters of innovation that are changing financial services across the six key functions of the sector: payments, investment/wealth management, insurance, deposits & lending, capital raising, and market provisioning.

Deloitte Financial Services leader Australia Rick Porter said: “It is a critical moment for Australia and the financial services sector as the country reaches a point of inflection, transitioning from a product to a services economy. Financial Services is the economy’s largest sector, worth nine per cent of gross value, and contributing more than $130 billion to the Gross Domestic Product each year. It is the facilitator and protector of capital and provides the liquidity required for driving growth in all other sectors of the economy.

“Stated simply, it is critical that we create the right environment for the financial services sector operating within Australia to thrive for benefit of Australia and its citizens,” Porter said. “As rapid technological change reshapes traditional definitions of value, tears down barriers to entry and undermines the business models of incumbent institutions, forces such as accelerating technology, shifting customer preferences, and a changing regulatory landscape have the potential to dramatically reduce profitability and market share for incumbents.

“But they also represent an opportunity for institutions that are able to harness new innovations. And the Australian financial services sector - one sector that feels the heat of disruption the most - has the capability to take advantage of it.”

As incoming Prime Minister the Hon Malcolm Turnbull has said: ‘The Australia of the future has to be a nation that is agile, that is innovative, that is creative. We have to recognise that the disruption that we see driven by technology, the volatility and change is our friend, if we are agile and smart enough to take advantage of it.’

Porter added: “We will only achieve the Prime Minister’s vision if there is a concerted effort for all financial services’ constituencies - incumbents, fintechs, the government and regulators - to be at the top their game. Deloitte, along with the joint research from the World Economic Forum, will be shaping the conversation in terms of how the collective industry needs to work together and respond to create the greatest prosperity for Australia.”

What was missing?

Lead author of the original 176-page report, the World Economic Forum, Jesse McWaters said: “What was missing before this research was how the transformative innovations all connect. So with Deloitte we have developed a framework for understanding the evolutionary path of emerging innovations, and an understanding of which innovations are and will be the most relevant.”

Deloitte Australia Financial Services Innovation lead Joel Lipman said: “This week Jesse joins us in Australia as we work with Australian financial institutions to consider the pressure points we have identified, their implications and the opportunities, so we can respond and build prosperity for Australia. As the Prime Minister says it isn’t about ‘future-proofing the nation’, it is about embracing the future.

“To do this 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 we need to build our agility and responsiveness as well as resilience. In fintechs we are doing some good work internally, but we need to focus on both internal and external innovations to meet the complexity and speed of change. The indications are that fintechs will continue to thrive and global entrants will be attracted to the profitability of the Australian financial services industry.

“As for regulators, they will need 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.

“Given this is a watershed year for Australian enterprises to rise to the challenges of digital business, the primary challenge for enterprise technology vendors is to help financial services meet the pace of change and connect employees across the enterprise, digitise operational processes and reach out to customers.”

Lipman added: “And finally the business models of incumbents are under the greatest scrutiny for decades. Historically, economies of scale have shaped the designs for large institutions. However, as today’s businesses transform to their future state, the winning organisations will be those that manage the transition from their current business model to the models that deliver the maximum value to customers. Models that can commoditise value, deliver agility, create simplicity, and most importantly build customer trust.

“Managing the pace of this transformation will be the key to success,” Lipman said. “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. It’s a balancing act. It’s critical that Australian financial institutions are ready for the changes.”

Services economy = prosperity

Porter added: “Customer preferences and behaviours demand innovations, and create additional risks and considerations. This means that collaboration is the key. The industry response needs to be well thought through, with agile policies and regulatory responses necessary to protect and grow Australia’s prosperity.”

He said: “Australian financial institutions are gearing to partner and grow their own fintech capability. And when it comes to cybercrime and regulation, increasing digitisation is attracting greater criminal activity, as well as corresponding scrutiny from regulators and government agencies.”

The journey so far …

The original World Economic Forum research was informed by undertaking more than 100 interviews with industry experts, as well as workshops where executives from global financial institutions like UBS, HSBC, Deutsche Bank, Barclays, Visa and MasterCard met with leading global fintech innovators like Zopa, Funding Circle, Transferwise and Ripple to discuss the future of their industry.

Six key insights

  • The key insight is that disruption is not a one-off but a continuous pressure so innovation will shape customer behaviours, business models, and the long-term structure of the industry. 
  • Innovation in financial services is deliberate and predictable. Incumbents are most likely to be attacked where the greatest sources of customer friction meet the largest profit pools.
  • Innovations have the greatest impact where the business models are platform based, modular, data intensive, and capital light.
  • The imminent effects of disruption will be felt in the banking sector; however, the greatest impact is likely to be in the insurance sector.
  • Incumbent institutions will employ parallel strategies. They will aggressively compete with new entrants as well as use their legacy assets to offer entrants the necessary infrastructure and access to services.
  • Collaboration between regulators, incumbents and entrants will be needed to understand how innovations alter the risk profile of the industry.

See more analysis and the original report.

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