Financial Services Industry Viewpoints

There are two sides to technology. In business, it’s both an enabler and a disruptor that creates opportunities and threats. Today, this is acute in the financial services industry, where we see unprecedented change to the value chain. Where regulations are in constant flux. And where consumers expect convenient, time-saving answers. To meet the challenges ahead, banks need to break away from past constraints of legacy IT and get closer to customers. While fintechs need to prove they have a credible, sustainable growth plan.

Digital Disruption and Financial Services

Financial services is an industry that’s changing faster than most.

Technology has brought down the cost barriers for new players to a near-zero entry fee. At a time when banks are still struggling with their cost-to-income ratio, global capital has been flowing into fintech. This has funded many payments-related businesses. However, KPMG research indicates that investor sentiment is becoming more cautious, with the investment volume falling significantly from 2015 to 2016—from 47 billion USD (1,255 deals) to 25 billion USD (1,076 deals) (KPMG International, 2017).

From "The Pulse of Fintech Q4 2016—Global analysis of investment in fintech"

Adding to banks’ difficulties is fintech’s ability to exploit friction between customers and traditional financial systems. While banks are saddled with heavy compliance (much of it introduced since 2008), fintechs are less constrained to provide the convenience today’s customers demand. Then factor in the soaring cost of compliance and conduct settlements. These totaled 306 billion USD (2010-14)—a major drain on reputation, profits, and shareholder value. Legacy IT slows down banks’ regulatory processes, and makes cloud investments more complex.

Blog: 'Big Tech', not fintech, causing greatest disruption to traditional finance

But banks are realizing that it’s ‘disrupt or be disrupted’. So they’re fighting back—with customer-centric services based on a better use of big data and mobile devices. Banks are displaying a typical startup attitude with a sharper, narrower focus on speed to market. As a result, they’re embracing new technologies that can differentiate them in an increasingly crowded marketplace. For instance, 2016 saw many banks begin experimenting with multiple blockchain projects. Chatbots are also soaring in popularity and a great way for legacy banks to engage with new customers. This is just one application of artificial intelligence (AI) which also offers the potential to reduce costs, increase productivity, detect fraud, improve business processes, and root out IT systems problems. And it can even gauge customer sentiment – machine learning techniques can be used to generate the answers customers are looking for, before they’ve even asked.

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Same disruption, different lens.

In the era of digital disruption, banks and fintechs are subject to similar forces. They are both adopting new technologies, like AI and machine learning, and embracing new ways of working. They both want to grow the business, acquire new customers, embrace new technologies, and innovate ways of working to increase efficiency.

However, banks and fintechs have different world views. Many fintech don’t even see themselves as financial institutions (nor are they registered as such). They see themselves as ‘free agents’ when it comes to meeting a customer problem/friction via an agile cloud infrastructure. In addition, a typical fintech workforce is more diverse than a bank’s. So a fintech is more likely to comprise the target audience. This is a natural advantage for a customer-centric financial services business.

Banks and fintech investment models are almost complete opposites, which affects how they embrace change and opportunity. For example, few fintech businesses have any systemic links to the broader financial system, so their cost of failure is limited to the cost of investment.

Conversely, banks tend to be interdependent within financial systems, which increases the risk and cost of experimentation. This can kill opportunities before they even have a chance to succeed.

Perhaps the biggest difference is how quickly banks and fintechs can go to market. Their approaches are fundamental to future success. In other words, speed to market is critical to a bank’s ability to break free from its past. And for fintechs, going to market with a trusted and tested proposition will help them grow into more than startups.

Banks: Keeping Pace with Change

Mind the gap.

There’s a significant gap in awareness between many traditional financial institutions about how rapidly this disruptive cycle is unfolding. In the 1980s, there were over 15,000 FDIC-insured banks in the US. Today, there are about 5,586.

So, almost two-thirds of the industry in the US has either failed or been merged out of existence through market dynamics and regulatory changes. And this process began long before the era of digital disruption. A similar ‘awareness gap’ exists today—specifically, about how fast change is happening and how open financial services markets have become to new, more nimble competitors.

Watch our video for different perspectives on the future of financial services from Next Money Southeast:

1

Optimize for digitalization.

Re-platform legacy. How to modernize IT as a foundation for employee productivity and customer experience. Open applications to new digital channels. How to develop, deploy, and manage new applications faster and cheaper. Simplify organization structure. How to standardize global IT operations and provide each market with the right IT services and solutions. Cut costs. How to reduce CapEx, TCO, and make costs more predictable.

2	Innovate for an API economy.
	Monetize investments more quickly. How to take advantage of market opportunities and increase speed to market through opening up APIs. Scale. How to have an elastic, flexible IT resource that meets demand. Integrate with minimal complexity. How to use APIs to develop new services in a simpler, more timely, and more efficient way.

3

Mitigate risk through regulation.

Risk management. How to automate risk management as far as possible, i.e. how to build risk checks, balances, alerts, and controls into operational systems. Secure by design. How to build-in ‘native’ security to operations rather than ‘security as an afterthought’. Use innovations like blockchain to secure data and transactions. Proven, auditable, and verifiable methodologies. How to increase transparency and trust, while improving business resilience. Regulation awareness How to increase awareness of future regulations and make sure any potential negative impact on risk management is identified early.

Fintech: Building Credibility

Wells Fargo: fallout affects everyone.

Fintechs are currently building trust and credibility. Revelations that thousands of bank workers opened as many as two million accounts for customers without their knowledge could end up costing Wells Fargo over four billion USD. These accounts, which consumers did not authorize or even know about, then triggered various fees, which were charged to consumers. This represents a loss of trust at even the most basic level, which casts a shadow over the sector as a whole—especially in the US.

How can fintechs build trust and credibility?

1	Continual innovation.
	Cloud accelerator. How to embrace the cloud and get the cloud benefits that are right for us. Customer validation. How to focus investment on giving customers what they want, when they want it. Incubator programs. How to harness new, innovative ways of working and collaboration. Open-source development. How to take advantage of innovations from the widest of sources.

2	Regulate to industry standards.
	Regulation. How to comply with regulations within a non-traditional business model. How to be viewed as a credible, compliant organization by regulators and customers. Data security. How to increase transparency, trust and credibility without heavily relying on existing banking systems or institutions. How to handle data with a cutting-edge level of security, such as a permissioned blockchain.

3

Commercialize your offer.

ERP integration. How to provide teams and business units with the tools and technology they need. How to market products. How to communicate your offer clearly and differentiate your brand. Banking platforms. How to get the most out of partner arrangements with banking systems, financial instruments, and technology providers that enable fintech services/products. Cloud options. How to invest wisely in cloud and ensure we have the right cloud capabilities.

Cloud is the Destination

The future is uncertain, but financial services IT will be cloud-enabled. So, it’s imperative to have a cloud strategy to take advantage of opportunities to create new services, meet customers’ expectations and respond to change.

Identity crisis.

Digital disruption is rewriting rules, relationships and regulations.

For example, when is a bank not a bank? When it’s a technology platform.

What is a shop? Retail now offers a frictionless experience and the payment process is part of that.

What is money? Access to money and how we manage it is changing rapidly—on the road to full bank disintermediation. Imagine if a crypto currency based on a public blockchain is accepted by major regulators. This could move from one virtual wallet to another and bypass banks. Today’s technology makes that possible.

Thinking about transactions—from the bank to the app to the customer’s retail experience—everything on this continuum is in a process of redefinition.

The answer is customer experience.

The customer rules. Convenience is now a non-negotiable part of customer experience. And the capabilities, scalability, and flexibility that cloud can offer will give customers the experience they want. In terms of designing and deploying new services, banks are trying to operate more like startups, and fintechs are looking to commercialize and scale opportunities without getting bogged down in traditional banking systems.

Some of the principles that apply are:

• Understand precisely how the new services will be used, and what great customer experience looks like in the financial services industry.

• Make it quick—fail fast, learn from everything.

• Test before going into full launch/production.

• Mitigate risk and integrate security at every opportunity.

Video: Mark Hurd Oracle Industry Connect 2017 Keynote Highlights

Article: Why Your Bank Isn't (Is) Changing, and Why You Will (Won't) Change Too

Conclusion

Change is impacting the financial services sector in different ways.

Banks and fintechs both want to grow, but the former must break free from its past and appeal to new customers while the latter must learn to commercialize its offer and build credibility.

Cloud capabilities—the scalability, flexibility (to integrate new technologies), agility (to develop new services), and cost-effectiveness—will help create a modern platform that’s ready for the future, whatever it brings.

Video: Calypso Cloud Services Powered by Oracle Cloud Platform

Customer Story

Freedom to Innovate

JourneyCoin is a virtual currency for travelers. Early in its development, the creators realized that they’d chosen the wrong platform to build it on—it had too many limitations. They needed the freedom to innovate, without having to depend on their cloud infrastructure provider.

The solution? Oracle Bare Metal. It allows JourneyCoin to control 100% of its infrastructure, without losing the benefits of the cloud. So, it can implement changes quickly—and keep innovating.

"Its clear Oracle is becoming a platform of choice for Fintech companies and joining Hyperledger was the logical step. It also confirms to me that my bet on Oracle was the right one!"
— Jiri Kram, Chief Architect, JourneyCoin

Read the full case study here