Cleared for takeoff

To find out how the financial services world is being challenged and reshaped by disruptive innovations we collaborated on an extensive study with the World Economic Forum, entitled The Future of Financial Services. We conducted over 100 hundred C-suite interviews, a year of analysis, and a global series of workshops where executives from the world’s largest financial institutions met with leading Fintech innovators, Regulators and Academics to debate the future of their industry.

What we discovered and discuss in our new publication, Cleared for takeoff, is that innovation is occurring in clusters and among them is a lot of commonality. For instance, they cross competitive lines – incumbent institutions are supporting new entrants with infrastructure and access to services and in turn are provided with sophisticated new capabilities from the new entrants. We take a magnified look at how these clusters of innovation are affecting business and identified five megatrends in the following areas:

• Primary accounts
• Payments
• Capital markets
• Investment management
• Insurance

And given what we know and assuming certain conditions, how each will fair in this battle ground of new technologies and emerging innovators.

The Future of Financial Services

A World Economic Forum report – prepared in collaboration with Deloitte

Steady yourselves, financial services players. Disruption is well underway. From cryptocurrencies and mobile payment systems, to online crowd-funding and the emergence of the sharing economy - it’s just beginning. In fact, the prevailing view that disruption is a big bang, one-time event, simply isn’t true. The pressure for FSIs to innovate will be unrelenting.

And while this is a message that the entire financial services world needs to hear, we believe it’s a particularly urgent one for the insurance sector. A big storm of change is coming and it will utterly transform the insurance industry, and it will do so quickly – especially the life insurance part of the business, driven by the rise of wearables, increasing connectivity (the “Internet of Things”) and innovative new platforms for aggregating data.

Indeed, Deloitte firmly believes disruptive innovation is here to stay, creating clear threats to the traditional structure of the financial world, but also opportunities for positive change and growth. The challenge: the financial services industry is struggling to understand which innovations will be the most relevant, as well as figuring out the evolutionary path of emerging innovations and the specific implications of those evolutions on existing institutions.

We spent a year working as a project advisor on the World Economic Forum’s new report, an extensive piece of research that examines the impact of innovation on multiple aspects of financial services. Entitled The Future of Financial Services, the report looks at everything from payments, deposits and lending to investment management, market provisions and insurance.

Here’s our perspective on the report’s findings:

1. These aren’t “random acts of innovation” – innovation in financial services is fairly predictable
   There’s a common view that innovation is something that hits us out of nowhere. Someone will devise a brilliant innovation that will totally shake up financial services, and nobody will have seen it coming. Deloitte’s point of view, however, is that there are ways to predict what’s coming. Innovators in the financial space tend to innovate based on two criteria: where the most customer friction is taking place (in other words, what upsets and/or frustrates customers?) and where the greatest potential for profit occurs. So while we may not know specifically what the coming innovations will be, we can generally predict what types of innovation are most likely on the horizon by determining where the greatest sources of customer friction meet the largest profit pools.
2. The innovations having the greatest impact are the ones that employ platform-based, data-intensive and capital-light business models
   Successful innovators typically aren’t going into capital-intensive or highly regulated businesses. They’re often employing platform-based models, and tend to succeed with businesses that are data-intensive, because that provides an analytical edge that they can exploit. Peer-to-peer lending is a good example of this, where innovators are creating a platform rather than an institution. They can design a much more data-intensive model of assessing a person’s credit-worthiness for loans compared to a bank’s traditional methods, and are often able to more effectively satisfy the customers’ needs in this way.
3. While the most imminent effects will be felt in banking, the greatest impact of disruption overall is likely to be in the insurance sector
   Banking is the first segment of financial services to really feel the effects of disruption, as numerous innovations have already begun shaking up the traditional banking world. But we believe the insurance sector is actually poised to experience the greatest impact of disruption overall. One reason for this is the emergence of the new “sharing economy.” People are increasingly sharing assets rather than owning them outright (think Zipcar, bicycle share systems or Airbnb), and this phenomenon will undoubtedly have immense insurance implications. The life insurance sector is also set to experience a major upheaval, with the increasing ability for people to transfer data about themselves (in terms of health and fitness levels, for example) onto platforms that can rate risk more accurately than a traditional insurance company can.
4. Incumbent institutions will need to employ parallel strategies
   Traditional financial institutions will have to figure out ways to aggressively compete with new entrants while simultaneously finding ways to collaborate with them. Furthermore, the same innovative technology can serve as both a threat and an opportunity. As an example, the report points to the use of decentralized systems. On one hand, you could look at a decentralized system like the block chain (the distributed data store that forms the basis of all cryptocurrencies) as it pertains to cryptocurrency and view that as a potential threat to the banks; but on the other hand, you could use similar block chain technology to improve the clearing and settlement operations of the bank. So on one front, it creates competition, but on the other front, the banks can embed the technology in their own businesses to make themselves more efficient.
5. Collaboration between regulators, incumbents and new entrants must happen
   Here’s how the regulatory function has typically worked: regulators determine where the risks are in the system based on years of observable data, and then look at how firms compete in a particular sector and employ regulation to minimize the outliers. But in the world of innovation, regulators don’t understand the coming changes, nor do they understand the impact. As innovation continues to shape the future, we need a more collaborative system where regulators, traditional institutions and new entrants work together to educate each other on what the innovations are and how they will affect financial services. Through this more collaborative structure, regulators will have a better understanding of the likely impacts, the risks, and how we can measure and monitor it all.

In the coming months, we’ll dig deeper into specific innovations and their impact on each sub-sector of financial services, and provide you insights on how to respond to it all. Stay tuned – these will be insights you won’t want to miss.

To read the full report click here.