If I had to choose just one episode of Barefoot Innovation to introduce listeners to the series, this is it.
My guests are Jesse McWaters of the World Economic Forum and Rob Galasky of Monitor Deloitte, who co-led the WEF's landmark research project on financial technology (executive summary here). Switzerland-based WEF focuses on public/private collaboration and is best known for hosting the annual global forum in Davos.
When I first read news accounts of this report, I reached out immediately to Jesse and (new father) Rob to ask them to join our dialogue. It took some time to get together, but we finally met at the WEF offices in New York. It was more than worth the wait.
They launched their study of the global evolution of fintech at the Davos meeting in 2014. By the summer of 2015, they had crystallized the keys to understanding it. Their work is built on extensive interviews and on the technique I increasingly see as the key to progress -- convening disparate participants. They held six meetings with traditional financial institutions, disruptive innovators, and regulators in the same room, grappling with the coming change.
In their early meetings, the financial industry executives were interested in fintech and wanted to monitor it, but were not worried - Jesse and Rob call them "tepid" about its urgency. By the end, this view had reversed. My guests use words like "bewilderment," "paranoia," "enemies" and "invading the fortress" as they describe the financial industry's rising concern. They also see these concerns starting to give way to hopefulness about the opportunities.
The 193-page study has a global scope, emphasizes the developed world, and looks at eleven areas where innovation is driving transformation.
Here are some of the insights Jesse and Rob share in our conversation:
- While today's banks feel besieged by disruptors on all fronts, the study shows that innovators are actually mainly targeting specific spots where two key factors intersect - that is, where high friction and customer frustration exist in products that are highly profitable. One participant said they are, "skimming the cream." Recognizing these points of vulnerability can guide traditional companies in what to defend and where to allocate capital.
- The emerging models have certain key attributes -- they are platform-based, modular, data-intensive, and "capital-lite."
- The disruptors focus on "shadow" or "fringe" areas, avoiding the heavily regulated core world of deposit-taking financial institutions. They are serious about complying with regulations, but strategically choose the rules to which they will subject their businesses.
- They are using established assets to scale up, a la Uber, rather than investing in a long, expensive process of creating their own products and infrastructures.
- They are actively partnering with established institutions for this leveraging of both existing assets and infrastructure and also "regulatory permissions." (Interestingly, this is drawing some major investment companies into retail markets for the first time.)
- They are focused on controlling the customer experience, using their superior platforms and data analytics.
- A key subset are "mission-oriented" entities creating inclusive and affordable services to consumers and small businesses. Jesse and Rob mentioned Active Hours and LendUp as U.S. examples, in addition to the huge global potential in emerging markets.
Advice to industry:
Jesse and Rob discuss how all this is impacting the traditional industry, including this advice:
- Don't count out banks as an "old world industry."
- Address the twin pressures of having aging legacy operating systems and processes, clashing with the high demands of today's consumers, especially millennials. People increasingly want personalized, bespoke, low-cost services and are ready to trust online providers.
- Review and clean out the accumulation of old policies and procedures that prevent banks from creating a great customer experience.
- Don't make the mistake of viewing fintech as a one-year budget issue. Create a new enterprise-wide, multi-year investment model that is not controlled by the current owners of the business line P&L's.
- Explore merging models for learning, partnering, and "coexistence."
- Evaluate the wisdom, or folly, of essentially "outsourcing R&D" to the venture capital world until it figures out the winners and losers.
- Consider that financial institutions may be major players in shaping what will win and what will lose, especially since they have capital.
- Use their suggestions on how do innovation inside a traditional company.
- Expect upward age migration of fintech adoption - don't expect to retain even older customers to the end of their lives in old-style products.
- Watch for big changes in insurance offering options for bespoke, advisory, concierge models and radically new value propositions (they mention Oscar in the U.S. and Vitality in the UK).
Understand the likely sequence in which products will be forced to change, and why - they explain this in our discussion
Impacts on consumers:
Rob and Jesse predict big changes for consumers, including vastly more choice, hugely better customer experience, better pricing, and much better insight into and control over their own financial lives. They also see rising risks and regulatory needs, including that consumers will be harmed by unsuitable, high risk products.
Advice for regulators:
Jesse and Rob also have insights for and about regulators. Some of the regulators who joined their meetings were among the most thoughtful people they encountered, but they also warn of a very wide delta between the "leaders and laggers" in the regulatory world. They predict likely regulatory arbitrage if that gap does not close quickly. They also emphasize the need for "regulatory sandboxes" (on that point, watch for our upcoming Barefoot Innovation episode on sandbox innovation with Nitish Pandey of BMO Harris).
The project plans to leverage its convening power to tackle further priorities. One is exploring the revolutionary potential of block chain technology and distributed ledgers, including and beyond bitcoin.
Another is seeking innovation in managing digital identity, including expanded roles for banks.
Might our bank someday help us buy a bottle of wine by sending not only the money, but by verifying our age!
Enjoy the episode!
Here are some of the resources and companies we discussed in this episode:
- World Economic Forum
- Full WEF report on The Future of Financial Services
- ActiveHours (accessing pay that's already earned)
- LendUp (online lending)
- Transferwise (payments innovation)
- Oscar (health insurance in U.S.)
- Vitality (health and life insurance in U.K.)
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