Disruption Is Coming For Financial Services, But From Where?

FinTech. Blockchain. Digital transformation. Big data. Cloud. How many of these technology buzzwords can a firm pursue while keeping the lights on, customers happy, and profits coming in? How many parts of the firm—across the front, middle, and back office—can go through radical change without disrupting the secret sauce?

Knowing how to keep up with a rapidly transforming industry where technology is moving faster than the slow, deliberate pace of enterprise IT and the even more glacial pace of regulators is the challenge of the modern day financial services CTO. This must also be done while empowering investors to find new alpha in a deepening sea of data while revolutionizing the customer experience. That’s a tall order.

The challenge of discussing FinTech across financial services is there are so many areas that new entrants—challengers or vendors—are trying to address across traditional asset management, investment, commercial banking, retail banking, active investor brokerage accounts, wealth management, payments, settlements, trading, and even asset servicing and custody. Today, when even smaller firms can operate in multiple segments of the industry, there are multiple fronts where disruptors may be coming for your lunch or where new vendors may be coming for your incumbents.

At the core of the disruption for FinTech is the question—what truly needs disruptions and which areas are being attacked by solutions in search of a problem?

The Hype Cycle Examined

As an example of where the buzz is way out in front of the adoption curve is Bitcoin or more generically distributed ledger technologies. In a great article called The Bitcoin Emperor has Hardly Any Clothes, W. Brennan Carley (Managing Director, Enterprise Business at Refinitiv) walks through all the promises of the cryptocurrency frenzy and why many applications of these technologies are no better than the systems we have today. This is primarily because technologies themselves don’t provide business solutions; it’s how these technologies are adopted by an industry as a standard that really drives change. One need only look at examples of iced tea companies trying to grab onto the coattails of the blockchain frenzy to understand that much of the excitement around these technologies is more buzz than reality.

One area of buzz within asset management has been how to push the kind of digital experiences required in the retail and wealth space in the institutional investment arena. Many firms are focused on developing portals to share reporting and investment analytics with their asset owners to speed the reporting cycle and cut down on headcount costs. This seems great in principle, but during a previous TSAM conference panel focused on asset owners, when several heads of performance and reporting from major U.S. pension funds were asked if they wanted to receive reporting from their investment managers by logging into digital portals, the response was a collective “We don’t want to spend time each month digging through 50+ different portals to receive 50+ different styles of reports from different managers.” A poll of that panel’s audience of asset management leaders found that a large number were developing digital solutions but very few were receiving high levels of engagement from their clients through those solutions.

Back in 1995, Gartner (of the famed Magic Quadrants) came out with the concept of the “Hype Cycle,” which helps to pinpoint where emerging technologies are in terms of excitement, adoption, and disillusionment. Looking at Gartner’s Emerging Technologies from 2018, you can see that many of the technologies that are taking up most of the oxygen in our industry are still on the “Innovation Trigger,” “Peak of Inflated Expectations,” or “Trough of Disillusionment” areas of the curve.

This means that financial services firms and FinTechs, in their rush to be out in front of new technologies, need to be careful about what the longevity of these solutions will be and if they will deliver on the innovation they purport.

A recent story in the Harvard Business Review titled Disruption Starts with Unhappy Customers, Not Technology, discussed a major study showing that it’s not technology that drives change across industries, but rather discontent with the established leaders in a field. If an incumbent is content to lock-in customers and not deliver on better outcomes for its clients, then it can quickly be disrupted in the same way Uber and Lyft disrupted the taxi industry. Technology for technology’s sake is not the answer (to stick with the Uber/Lyft analogy—newer, nicer, cleaner taxis), but technology that drives client outcomes is what will win (an on-demand taxi that comes to you, doesn’t require you to call the taxi company on a phone, doesn’t require you to give directions, is universally available everywhere you travel, seamlessly billed to your credit card).

Moving Past the Hype

So for financial services firms of all sizes, the question becomes—where can I drive differentiation for my firm? Is it enabling my investors with bespoke tools that enhance my investment process? Is it a unique take on risk management that can help protect against downside risk? Is it a digital transformation of how you interact with customers or a new and innovative approach to data science that will help them find alpha in places no one else is looking? Perhaps most importantly—can I make that transformation happen in house? Do I need to find partners? Are there vendors who can augment my staff for me? Do I need to pivot my headcount from front-office folks (PMs, analysts, bankers, traders) to technologists (data scientists, developers, product managers)?

For the last many years, FinTechs have been driving after these new, foundational transformations in the industry, storming the castle with new technology and new approaches. Those who are delivering great solutions, solving real business challenges, and providing great client service are finding longevity in the market. Others whose execution has not been able to live up to the rhetoric find themselves acquired by incumbents or simply shuttered.

However, the FinTech revolution has also started a counter-revolution among financial firms of all sizes to take on a start-up mindset and think differently about how they build products and infrastructure—taking on development methodologies like Agile, DevOps, cloud first, and building development teams to drive the business. We also now find more established enterprise providers such as Amazon, Microsoft, and IBM branching out into solutions specific to financial services and bringing their new technologies to bear on the market (such as AI, natural language processing, and the power of modern cloud services).

Once you’ve considered the questions established in this article, a new one arises—are you willing to disrupt your business model or will you let yourself be disrupted?