How Digital Transformation is reshaping competition in financial services
The message is clear and it’s coming at us from all sides: digitalize now. No business unit seems to be immune to the onslaught of cloud-based, AI-driven, real-time, distributed ledger technology harnessed, API based, quantum leaping computers – you get it. A lot is happening, and it’s happening fast. But what lies inside this trojan horse we call the 4th industrial revolution, and more importantly for those in the financial sector, what does it mean for them? In the context of competition, digital transformation must be looked at almost as a separate business discipline in itself – all the moving parts need to come together to make sure your pony crosses the finish line faster, in better form, and with a higher blood oxygen saturation than your competitor’s – no easy feat. Today we explore how the often painful process of digital transformation can lead you to the pot of gold under the rainbow.
The walls are coming down
Financial services were previously rather static – with mainframes ruling the roost since the 70’s and customers coming in to bank tellers – even with the advent of internet banking, not much was different besides a new customer access point. However, the rapid proliferation of the digital highway through broadband infrastructure and near universal access to a smart device, cloud-based services, and the exploitation of this millennia’s most valuable commodity – data – is seeing financial services become susceptible to competitors previously excluded from the market. All of these technologies provide for a completely different distribution landscape – one that was rapidly adopted by younger generations who will consume financial products for decades to come. On to data – a paper trail that was replaced by trillions and trillions of bits and bytes that translate the human experience into binary – a treasure trove of who we are, how we behave and what we want, and new service providers have started to learn how to harness these information sources using technologies like AI and Machine Learning. Banks and traditional financial institutions already have massive amounts of data – which could serve as an advantage if properly exploited – but newer, alternative sources of data give newer service providers an opportunity to appeal to customers in a way which more established FI’s do not. In the words of this BBVA report, “This is why the concentration or distribution of data within the digital economy as a whole and the conditions of its accessibility and usability have a massive bearing on the competitive landscape.”
Unbundled, re-bundled & Spun off
With lowered entry barriers come new services and new players –specialized, agile providers focused on one specific piece in the financial value chain, often free of burdensome regulation (see 1) and much more honed to one specific product that’s offered either plug ‘n play at B2B level or on a handy mobile app if the offering is B2C. By uncoupling products and services from a single provider, i.e. a bank – which sought to satisfy the overall financial needs of customers (see 2). Enter the ecosystem model. In this new set up, banks, service providers and other players compete on certain elements, but remain value chain partners in others. Born are the white-label solutions, enterprise partnerships and 3rd party product offerings. As the traditional financial services industry is busy carving itself up and redefining its new normal, another predator lurks – big tech. We know, we know, you’ve heard it before – for years there have been rumors about the big tech players becoming banks, and some have acquired banking licenses indeed – but so far none have publicly announced their ambition to do so, nor have their actions betrayed their intentions. Big Tech is going in for the kill – unbundled financial services that have a low regulatory burden, which have a lot to gain from enriched data practices and those that rely heavily on Customer Journey and User Experience dimensions. These big techs have understood one thing very clearly about ecosystems– keep them closed. By providing end-to-end services that exactly match customer needs, together with an open-source philosophy which lends itself to interoperability between platforms, the battle for customer adoption and loyalty will be won – unless it is successfully challenged by those already vying for a piece of the financial pie.
Stay in the game
For financial service providers, banks and other FI’s looking to secure their place in the financial future, it is imperative that they harness the power of ecosystems and learn to leverage on a fragmented landscape. One way of doing this is by moving towards platform business models. Instead of deciding that one company needs to provide a host of proprietary services, it would be better off evaluating which services it can provide exceptionally well, and provide a way for clients to access ancillary services on the same platform – which can be sourced from other providers through, for instance, white-label solutions. With the advent of open banking, AI and other analytics that help banks create a holistic overview of a client’s financial health, a platform optimized for different integrations relating to needs and desires will lead to the actionable insights needed to stay ahead of the curve. A new ecosystem means a new modus operandi – but one that could leave you stronger than when you first stumbled into it. When financial services providers take the best of what they have today, use a digital platform to team with others and amplify their combined strengths, they can secure a strong new position in a reconstituted ecosystem (see 3).
1 Arner, D.W., Barberis, J. and Bucley, R.P. (2016). “The evolution of Fintech: A new post-crisis paradigm”. Georgetown Journal of International Law, vol. 47 (4), pp. 1271-1319.
2 Ibid, BBVA report
3 “Master Digital Banking to Succeed in Financial Services.” DXC Technology, www.dxc.technology/business_transformation/insights/135961 master_digital_banking_to_succeed_in_financial_services.
Author: Martijn Bos, Holland FinTech
Biography: Martijn Bos is the Head of Content & Partnerships at Holland FinTech. He is a financial technology enthusiast with a background in corporate and commercial law and has worked around the world in international development with a focus on Financial Inclusion. Want to know more? Connect with him on LinkedIn.