Three key objectives
Financial metrics first:
The first objective for most financial institutions is to improve the financial metrics:
Capital efficiency: Banks must review loan books, enhance risk models and improve collateral management. In addition, they must implement structural changes, for example by shifting financing off balance sheet.
Revenues: finding new pockets of growth. Banks must go beyond traditional levers and search for structural growth drivers. Smarter pricing and transformation are key levers for revenue growth.
Costs: Banks need to embrace the changes already seen in other industries like automotive, such as business simplification, streamlined operating models, and lean process optimization.
Business Model Change:
Many banks require a fundamental business model transformation.
Retail and private banks need to deal with the main challenges in retail banking: decreasing customer loyalty, technology based nonbank competition, regulation, and a tough macroeconomic situation. The ecosystem of alternative financial services is expanding fast and game changing moves are increasingly possible, exploiting the gap between customer satisfaction and the digital performance of the incumbents.
Banks’ reputations have fallen as they are seen to be primarily responsible for the economic decline. Society is questioning the beliefs, values and culture of banks. Cultural transformation should result in a new mindset in which banks are able to balance the interest of different stakeholders like shareholders, society, customers and employees.
New consumer behaviors
Digital technology is becoming a bigger part of our daily lives and will eventually also play a key role in the finance industry. The extent and speed of penetration depends on the particular segment and services. There is a major shift to technology based delivery of financial services, which will have a dramatic impact on the industry. Innovation in the financial services sector is accelerating. The combination of the financial crisis and the emergence of smartphones has increased the need for speed in financial transactions, with people requiring instant spend visualization and shifting towards mobile account access and mobile payments.
Disruption, as defined by Harvard Business School’s Clayton Christensen, is the creation of products for underserved or unserved markets — typically overlooked by existing enterprises that are too busy chasing the high-margin businesses.
Today, disruption is hitting the financial services sector. One example is crowdfunding, in which startups can bypass banks and venture capitalists to get startup capital. In addition, there is a new wave of startups offering products for financially underserved customers, offerings loans and other new financial services.
A new report out of the Center for Financial Services Innovation (CFSI) and Core Innovation Capital explores this emerging industry of new startups for underbanked customers, which it calls “FinTech.” As the name suggests, they are technology startups offering financial services. The CFSI report draws the parallel between Silicon Valley-style startups and those now entering the financial services space.
The same technologies that are driving the growth of startups from Silicon Valley are reinventing the marketplace of financial services for underserved consumers. Emerging companies are capitalizing on increasingly robust and inexpensive computing power, ubiquitous consumer Internet and mobile access, and the growing demand for comprehensive digital networks. These companies are improving access to effective, high-quality products for underserved consumers while developing technology with broad applications beyond the underbanked market. The underbanked market in the United States is currently estimated at $78 billion in annual revenue, serving 68 million consumers across 22 different financial product types.
Forces favoring disruptive startups include the following:
1) The uncertain economy: The slow and uneven decline of cash usage in the American economy, and the impact of the financial crisis on credit scores, interest rates, and the availability of credit, as well as shifts in the financial needs of underserved consumer segments – such as recent immigrants, recipients of government benefits, and baby boomers with insufficient retirement savings – are stimulating product innovation.
2) Uncertainty over regulation: In the wake of the financial crisis of 2008, the threat of ever-tighter regulation looms over the industry. This may slow established companies down, but tech and social-savvy startups may enjoy a comparative advantage if they can structure products to successfully navigate the regulatory landscape, tolerate the risks associated with still-pending regulations, and stay ahead of the regulatory curve by designing high-quality products with a consumer-focused orientation.
3) Established financial firms are bogged down in their own infrastructures. FinTech startups developing new transaction networks or alternative approaches to credit may prove able to disrupt dominant incumbents in the underbanked market, particularly where the institutional infrastructure of entrenched players hampers their own ability to innovate. In addition, larger players may find it more feasible to partner with more nimble startups who are opening up new markets.
4) Financial ’supply chains’ are unwieldy: The financial services industry features a complex supply chain involving banks, payments networks, clearing systems, processors, distribution partners, and end consumers, among other players. FinTech companies may be nimble enough to insert themselves at particular points in this chain — and in the process, open up greater access to underserved markets.
5) Consumers are drawn to digital: There has been an increasing migration of finance to digital formats backed by muscular computing power. Not that consumers are complaining: Financial technology companies that attract significant business will be those that capitalize on the increasingly digital lifestyles of underserved U.S. consumers with weak attachment to traditional financial institutions but strong affinities to social networks, as well as those who continue to prefer cash for daily transactions but also require electronic payment options.
For many financial institutions immediate survival will remain the first objective. The financial sector, however, must look beyond survival and develop new growth strategies for the future.