We now hold these truths to be self-evident, that fintech startups (especially of the d2c variety) do not pose an existential threat to finserv incumbents, that finserv incumbents are endowed by their regulators with certain unassailable defensible rights and duties embodied by licenses and are saddled by history with obsolete technologies that hinder their effectiveness in a changing world, thereby creating material barriers to a stable Life, Liberty and the pursuit of Financial Stability.
We are still exploring whether the following are also truths, that the existential threat to finserv incumbents lies with GAFAA, that fintech startups can help finserv incumbents counter such existential threat.
Some do not believe technology giants are a real threat, arguing none of the GAFAA (Google, Amazon, Facebook, Apple, Alibaba and their smaller brethren) are interested in obtaining licenses and directly competing against banks or insurers. Although I do not know with certainty that Apple or Amazon are thinking of owning and operating a bank, I do know the real question we should ask ourselves is “Can and how would GAFAA or other similar companies cripple financial services firms?”
It is evident we, individually or as businesses, engage with the world via our smartphones and tablets. We spend time on these devices interacting with a variety of apps (social messaging for example) or platforms (Facebook for example), reading, creating, sharing, consuming, purchasing. The more time we spend on these devices, with these apps and platforms, the less time we engage directly with the manufacturers of the products or services we ultimately consume. This state of affairs may not pose an existential threat with a brand like Nike for example. It is easy to engage emotionally and mentally with simple concepts whether physical or digital, ones where we have a meaningful bond that helps define who we are. It is not so easy for a provider of a checking account, a loan or an insurance policy. We do engage with money in completely different ways.
To me, this means there is a potential catastrophic scenario in the making whereby financial services providers would be relegated to being “dumb” providers of products and services without having any meaningful control or tie to the end user – retail or enterprise even though it is arguably more difficult to visualize for the latter.
Finserv incumbents are now fully engaged, having woken up to the initial threat of fintech startups and realizing they do need to reform the way they do business. Innovation is the name of the game – a dual mandate to be sure where both technology and culture need to be upgraded. For the purposes of this post, I only focus on the technology part of the innovation equation.
The technology part of the innovation drive is multifaceted. Legacy rails, core systems, market infrastructures need to be upgraded. These “basic” upgrades a necessary but not sufficient. New technologies also need to be acquired. I view Artificial Intelligence (AI), Augmented Reality (AR), Blockchain/Consensus Ledgers, Quantum Computing (QC), Internet of Things (IoT) to be the main enabling technologies the financial services industry needs to acquire in order to close the gap and compete effectively.
One does not acquire technologies in a vacuum and there is a competitive battle in the marketplace for the hottest assets. As this post from CB Insights shows, tech companies are hard at work acquiring the best AI startups. Try as I might, I could not find any finserv incumbents on the list of acquirers, nor could I find finserv service providers.
How does a bank or insurer close to gap in AI if tech giants have first dib at the best assets? I do not know how things are developing in QC or AR but I would not be surprised if the same narrative were to be present. To be fair, the insurance industry is present and active in the IoT field and the banking industry is very active in the blockchain/consensus ledger field which shows a bank or insurance company can take the lead in a strategic technology field. Gaps are indeed being addressed, but not systemically.
To be fair, there are many ways to bridge a technology gap other than through acquiring.
– Finserv incumbents could partner with tech giants, indeed such examples exist. Some tech giants are better at partnering than others. The risk of losing direct ownership of the customer still exists though.
– Finserv incumbents could develop their own technology solutions via internal R&D (such a strategy has not paid hefty dividends in the past, even if one is able to attract top talent)
– Finserv incumbents could develop partnerships and commercial agreements with independent startups. There will be AI, QC or AR startups that will decline selling to tech giants and pursue their own destiny. Let’s assume some of these startups will be up to par with what giant tech companies are concocting within their walls, the question therefore is which type of independent startups are most appropriate to partner with. The AI, QC or AR startups specialized in the financial services, or those that have a horizontal “go to market strategy” approach. Startup xyz that only sells to banks or IBM Watson? Which will be most optimal?
With every arms race one needs to play to one’s strengths. A finserv incumbent’s strength is twofold in my opinion: a) deep knowledge and mastery of arcane work flows and processes specific to money/data flows, b) mastery of licensing and AML/KYC peculiarities.
Extending these strengths to enabling technologies (AI, AR, QC, blockchain, IoT) thereby ensuring optimal customization and applicability is therefore key. Choosing the right strategy, best fitted to this goal while at the same time ensuring one does not lose the arms race is paramount.
Regulators should play a role in facilitating their wards technology arms race battle. We know banks now have a difficult time making equity investments, and rightly so if these equity investments are made with a speculative and casino-like financial bent, from a proprietary trading point of view. Could strategic and technology based investments be viewed differently? Especially as the industry wakes up to the fact that financial services incumbents need and have to behave more like technology companies? After all, it is not too far fetched to picture an insurance company acquiring a cybersecurity consultant or service provider to hone its skills at underwriting cybersecurity risk. From the same token, a bank could (or should?) operate via a mix of acquisition/build a data analytics or AI startup. Such a move may actually be central to a strategy of delivering superior products or managing a client’s identity or data.
Building resiliency into a bank or insurer business model will require different approaches, and competing effectively in the technology arms race we are currently witnessing will have to play a part in a portfolio approach.
Finally and clearly, a rising interest rate environment would greatly help finserv incumbents. Fire power in the form of an increase in operating earnings has a tendency to solve many a problem. This leads me to fire a parting question: What if the next 20 years will deliver continued low interest rates environments across the world? In this environment, financial services firms, and their regulators, will have to come up with drastically different approaches, else the technology arms race may be lost permanently.