Research on Financial Services Trends and Outlook. Convenience and Security will drive change this year in the Financial Services sector. FinTech startups and large technology firms such as Apple and Google will accelerate the evolution of transaction processes. While in their infancy, these startups have begun to have a substantial impact on some sub-sectors of the financial services industry especially micro-money transfers and credit ratings
While emerging fintech startups are unlikely to impact traditional banking in a substantial way this year, there is evidence that some sub sectors may be transformed rapidly by the emergence of new players offering dramatically easier transactions to customers. While some start ups have begun to emerge with scale, it’s the larger players such as Google and Apple that will make inroads with new services especially in areas that leverage consumer behaviour to reflect the need for added convenience. It appears that the focus over the next decade will be on convenience and heightened security rather that product innovation.
Arcus surveyed 245 senior financial executives in Canada and the US to identify the top five trends in financial services.
- Blockchain will drive change in authentication from shared solutions
- An emerging Fintech ecosystem
- Alignment of alternative lenders and banks.
- Millennials will drive change
- Forward-thinking product disruption
1. Blockchain will drive change in authentication from shared solutions
The wide media coverage of extensive hacking activities that have compromised many organizations will galvanize the migration to more secure authentication technologies. Blockchain is possibly the most significant development for management of transactions over the next decade. It may have a profound impact on how banks manage transactions and also how customers interact with vendors. A behavioural shift will be driven by the increasing demand for added convenience and security. So far companies have had to struggle with the balance between convenience for customers and ensuring better security authentication. For example, while two-step authentication has emerged as a standard for better security authentication, it is still dependent on the end-user adoption the authentication process.
The emerging best practice thinking on security appears to be heading towards decentralized computer networks that could be as effective at authenticating ownership as existing shared solutions – and more cost effective. Some of the world’s leading banks launched the R3 project to develop a common standard for Blockchain use in financial markets. The growing interest in Blockchain from banks is likely to continue in concert with more widespread adoption of Bitcoin, the currency layer on top of the Blockchain platform for a different set of reasons. Geo-political factors are currently driving Bitcoin use in India (due to demonetization of some currency notes) and in China (caps on foreign exchange transactions).
Respondents say that Blockchain infrastructure will increase in areas involving mining, exchanges, wallets and processors. Some examples of innovation in micro transactions include Abra.com and another is Stem which is innovating in how royalty payments are dispersed to content owners such as performing artists. Another area of innovation is in password-free logins – one of the weakest links in security today. A company One Name is building identity tools to enable services like password-free logins. The Blockstack technology is based on decentralized, server-less applications starting with single-page applications built in Javascript that are downloaded onto user devices.
2. An emerging Fintech ecosystem
The ecosystem of start-ups, VCs, accelerators, corporate and investor teams – the network of players will power the transition of new financial technologies evidenced in the growth of Fintech investment from $13B in 2014 to $28B in 2019. There appears to be a growing appetite for IPOs from public market investors indicating a transition to a broader base which may increase the capacity of these companies to accelerate their investment timelines. Recent successful IPO sinclude companies such as Square, TransUnion, Aldermore, Shopify and FirstData. However, the significant influx of capital will result in inflated valuations over the next year resulting in some failures, similar dotcom bubble in 2001 with some significant players emerging just like Amazon which has gone on to change the face of retail commerce over the past decade.
3. Alignment of alternative lenders and banks.
Alternative lenders such as OnDeck and Lending Club that use algorithms to ensure more accurate lending decisions. However, there are likely to be greater integration and strategic alignments such as the partnership between JP Morgan Chase and OnDeck. There are significant opportunities for both parties to benefit – Alternative Lenders can gain from the opportunity to scale operations quickly by harnessing the capital and reach of banks to customers and banks can gain new insight into algorithms to strengthen their lending capabilities and risk. Arcus expects greater collaboration across the ecosystem between banks, online lenders and others across a range of products such as payments, insurance and wealth management.
4. Millennials will drive change
The HENRYs – High Earning, Not Rich Yet are another name for Millennials who have achieved relatively higher earning capacities and are looking for services that align with their needs. These needs are profoundly different from the GenX and GenY consumers. Specifically, they have a much greater need for convenience as a benefit and also less likely to be loyal to a brand if they are dissatisfied with the services and products on offer. Several companies are targeting this segment including Earnest, SoFi, Osper and Number26. The key product experience hinges on this group being very comfortable with financial services delivered online. They have high expectations regarding customer service and also expect some level of education to be part of the brand experience. Also, the product offering is focused on being optimized for smartphones instead of desktops. Interestingly, a recent Arcus survey of millennials and their use of smartphones indicates that 92% of millennials say their phone is with them, 24 hours a day.
5. Forward-thinking product disruption
While the core of innovation is focused on credit services and payments, it is expanding rapidly into other areas such as insurance, wealth management and mortgages. Customers expect an aggregated platform that delivers all their financial services in one place to make the experience efficient. Brand such as Guevara and Lemonade focus on reducing costs and delivering substantially greater convenience. The aggregation process extends the concept of crowdsourcing to pooled funds that can be invested around common goals or insurance premiums being managed within clusters of customers. One example of how innovation can drive change is loans to small businesses through peer to peer platforms. This concept is being expanded to mortgages in some markets. One company in the US (Landbay) facilitates investments in the rental real estate investment market. Legislation is driving change in some markets especially in Europe where a new Payments Services Directive requires banks to provide access to some core tools to provide a dashboard to clients to enable them to view all their accounts in one place.
Action plan for financial services executives
1. Collaborate, collaborate, collaborate. Innovation does not originate in one place with huge R&D budgets anymore. It is extremely fragmented and unpredictable. The only way to stay connected with thousands of innovations in products and services is to join the eco-system. It may take an enormous amount of resources to stay connected and keep tab of the fire hose of innovations, however, to identify and winnow down the most promising concepts, it is important to conduct regular environmental scans (Arcus’s monthly Innovation EnScan service can help). The key is to create parameters that will allow companies to quickly screen third-party technology providers and their ever evolving offerings. For example, Arcus scans over one million apps on Google Play and Crowdsourcing platforms every day to identify new, improved and discontinued applications. These scans are then categorized based on the strategic requirements of clients and provides them with a comprehensive summary of relevant innovations.
2. Coherent integrated product. The evolution of product lifecycles have never been more volatile. The velocity of product evolutions make it nearly impossible to plan more than 6 months out. Hence, it is important to develop a flexible product vision that can be adapted quickly to meet changing market conditions and emerging innovations. The vision has to focus on the core market for your product and build concentric circles of value added innovation. This is easier said than done especially in larger financial organizations where layers of management approvals can alter innovation trajectories significant and weigh down the entire process.
3. Shift in organizational design and culture. This requires a fundamental shift in organizational design and culture. It starts with a distributed leadership and decision making structure and a culture where failure is encouraged within a risk contained environment. Another problem that banks face is dealing with legacy products and services that span departments with their own business line responsibilities. As a result, any change requires buy-in from multiple teams with often conflicting priorities where defending existing products, services, and customer relationships supersedes innovation and change. A culture change strategy is arguably the single most important influencer of success of innovation in the financial services sector. It requires a new way of thinking and seamless teams that are empowered to make rapid investment and product decisions.
4. Invest in innovation education. A key driver of success in Fintech is to start at the grassroots level and facilitate a reset in employee thinking about how innovation works. One example, is a program launched by Arcus called Innovation LaunchPad that was a customized version of the Arcus Innovation Roadmap which allowed employees to working in teams and run through a self-directed 4-stage innovation process – Discovery, Design, Development and Deployment. The value of the process was in the end-to-end process that allowed teams to add discipline and structure to their innovation programs resulting in efficient use of time, team resources and budgets. The end result is a better product and customer experience. The Innovation Environmental Scan is a useful resource that teams can tap into for inspiration and ideas.