Technology Impacts on Financial Services Industry

Financial services sector has been mostly impervious to radical technical and business model changes. They have been able to maintain a relatively stable but profitable business models over the last few decades. Traditional business are now under siege from a whole host of innovators and technology changes that are forcing a re-think on the business models of traditional financial services sector.

According to the World Economic Forum reports the impact is felt across all sectors of the financial services industry.

Courtesy: WEF Report

According to the findings today’s innovators are different from earlier disruptors in this sector for the following reasons:

1.       Today’s innovators are targeting the intersection of highly profitable business and customer’s area of frustrations and pain. Case being example International Money transfers. I have personally experienced it first-hand. In UK, high street banks charged from GBP 17, if done at bank to GBP 12 if done online for International Bank transfers to India and took 4 -5 business days to credit the account in India. In came innovators like Money2India and the same could be done at a fraction of the cost less than GBP 5 per transfer and credited in 1-2 business days to the account in India. This was a huge loss of such profitable business by high street banks to such innovators and the benefits to the customers.

2.  The innovators are also using their technical skills to automate manual processes that are currently very resource intensive. “Robo-advisors” likes of Wealthfront, FutureAdvisor and Nutmeg have automated a full suite of wealth management services including asset allocation, investment advice and even complicated tax minimization strategies, all offered to customers via an online portal. This allows them to offer services to a whole new groups of customers that were once reserved for the elite. You do not need a six figure asset pool to be eligible for such services .As a result, a whole new class of younger, less wealthy individuals are receiving advice and support.

3.   Use of Data and Analytics strategically has been one of the key innovations of the new entrants to banking and insurance. Traditionally Bankers would look at credit scores and insurance providers look at health record or driving records. However, as our devices and social lives are getting more entwined, the innovators are mining the data across devices and social media to provide customized services. Some innovative insurers are providing fitness bands to customers and based on whether you have been hitting the couch or the gym regularly you have option of reducing your insurance premiums. These sort of innovations have added a whole new set of customers. With connected cars and more wearables and social connections, customized products will become the norm.

4.   Inspired by companies like Uber and Airbnb, these innovators have learned to exploit the platform based capital light models to grow revenues exponentially and keep costs nearly flat. The growth of companies like Prosper and Lending Club are such examples having crossed Billion dollars in origination transactions. Without putting their own capital at risk, they have provided a market place for lenders and borrowers to meet and avail the best rates. Similar has been the disruptive effort of crowdfunding platforms that have helped start-up many new businesses that would otherwise been not considered for funding by traditional banks and institutions.

5.   As part of the growth strategy these innovators are co-operating with incumbents in some areas and competing in some areas. They are quick to take advantage of the scale and reach of these companies and for traditional companies it is an easier channel to new markets. Like ApplePay, is not competing with Visa and MasterCard but working with them on the payment networks. Same is evident in India with innovators like paytm, oxigen, etc tying up with traditional network and co-operating as a strategy to increase their reach and growth.

The innovations and these changes can only prove beneficial to end users in terms of better rates, efficient service and customized attention from the providers.

Will Blockchain Technology Transform Payment Transactions and Security?

Blockchain is a method of recording data - a digital ledger of transactions, agreements, contracts - anything that needs to be independently recorded and verified as having happened.

The big difference is that this ledger isn't stored in one place, it's distributed across several, hundreds or even thousands of computers around the world. And everyone in the network can have access to an up-to-date version of the ledger, so it's very transparent.

How it works?

For a simple explanation visit this link : http://www.coindesk.com/bitcoin-explained-five-year-old/

A rough idea of what a block chain may look like, courtesy of Yevgeniy Brikman

Security?

Once updated, the ledger cannot be altered or tampered with, only added to, and it is updated for everyone in the network at the same time. The distributed nature of the blockchain database makes it hard for hackers to manipulate. They need to access every copy simultaneously to have a successful hack.

The encryption process is carried out by different computers and if all computers on the node agree then only the digital signature is added to the block. It is a one way process, any change will result in a different signature.

Benefits?

-         

•     Faster and secure payment transactions for users. There is no need for any clearing houses, all transactions happen online digitally and instantly. Banks save on fees paid to clearing houses.
•        The same policies can be used in trading of gems and diamonds (blood diamonds) so only non-conflict gems are traded with verified records.
•           Keyless Signature Infrastructure to help secure citizen data by government. In India, it can be a boon for the whole Adhaar database and transactions thereof.  
• 
  

Though it is not yet understood fully and still evolving, the impact on our ways of life are likely be profound.

Disruption Trends

“The only constant is change”

                We are going through an age of unprecedented changes. Changes and disruption has always been at the forefront of human history, but the pace of change and disruption has been accelerating over the past few decades. This is mostly driven by the pervasive digital age which has impacted all aspects of our lives.

                The pace of disruption varies from industry to Industry as different forces and maturity level across industry varies. However, disruptions do not happen overnight. They have been in the making and ignored until the disruptors become the driving force themselves. In IT these have slowly moved from IBM (Mainframe), DEC (Minis), Microsoft (PC), Intel (PC) to Apple, Google, Facebook, Amazons of the internet age. The disruption has not been limited to IT industry it has permeated through to all industries – PayPal, Uber, Netflix, skype, WhatsApp…..the list continues.

The disruption across industries has not been uniform.

(Source: LEF)

Few observations:

•          Banking, Healthcare and Manufacturing are ripe for disruption and are currently facing an accelerating winds of change. Banking is going through a fierce battle between traditional incumbents and new age financial technology companies across –payments, currency, fund transfers, lending, origination and documentations. 3D printing, robotics and smart products are disrupting manufacturing.     

•      In Healthcare, intelligent at-home systems, retail and self-administered healthcare services are challenging the traditional healthcare services.  

•      Insurance has been a laggard but since these are annual or long term business events maybe they do not require such frequent changes.

In conclusion, no industry has undergone a complete disruption yet and we still have traditional business in all sector. But for how long is the question.