The Digital Disruption in Financial Services
“There was never a moment of greatest expectation, or greater danger like today. It is necessary to develop a comprehensive vision and globally shared how technology is affecting our lives and reshape our economic, social and cultural environments and humans. ”
Klaus Schwab – CEO of World Economic Forum
The digital revolution began as an option but evolved into a necessity and today is part of the agenda of all financial institutions focused on the client end. With the entry into the labor market and consumption of the digitally enlightened generations, the manifestations of the institutions evolve quickly in the digital area, in conjunction with the new dominant financial environment, there are opportunities and threats that could result in a fascinating disruption with the past financial services, as such we know.
In the past, and in general, financial institutions have focused on improving existing solutions internally. This internal focus may not be today, enough to meet the demand of the final customers’ requirement for the digital features. A very fast change in the client’s growing demand for technological capabilities offered, non-financial institutions emerging alternatives are also starting to turn the financial sector by revamping the offers and solutions in the new digital scenario. Some creating sustainable models of rupture, while others allow customers to do more with less cost.
It is inevitable that financial institutions must increase investment in your PDA. The bank transaction space has great potential. While financial institutions can take some comfort in their incumbent advantage, not technologically enabled financial institutions were increasing their capabilities at a rate significantly faster and are remarkably stronger today, challenging the privileged access of financial institutions in traditional transactions and the relationship with their customers. The result may be: financial institutions may try to gain an advantage in their field and are natural leaders, or stay on the sidelines of the change and be forced to play “Follow the Leader”, which will increase the likelihood of digital disruption of the participants in the financial system.
If the last growth cycle in global financial activity was defined by an expansion of credit, the current cycle will be set for the digital expansion. This will include the customer’s knowledge, branding, origination, engagement and, but also a quick payment systems innovation and the transformation of systems enabled by digital technologies. It is expected that revenues and profits will migrate in large scale for financial institutions that use digital technologies to successfully automate processes, create new products, improve regulatory compliance, transforming experiences of their customers, and improve the main components of the value chain. Financial institutions that resist digital innovation will be penalized by the customers, financial markets, and, sometimes, by regulators.
However, digital innovation, financial services will bring opportunities and threats to financial institutions.
The threats, the most visible is the reduction of individual commissions, with potential impact on gross margin, via increased competition. Also, the operating margin could suffer from an increase in investment in development and innovation. Last but not least, the increased operational risk will lead to a significant cost increase in computer security, enterprise risk management, and compliance.
The opportunities, which are expected to have a much higher magnitude threat, the most significant is the reduction of operating costs via digitalization and automation of processes. The disruption creates for herself the opportunity of creating new models of financial business, which could complement, suffocate or live in parallel with existing models. Another opportunity lies in new origination opportunities in new markets, creating new products, customized products, the use of new distribution channels, more in-depth knowledge of customers and the ability to respond quickly to the needs of a client, a customer segment, or the market.
As happened in other industries, financial institutions have awakened to the reality that they are not protected from the need to rethink their business models, as well as the experience and engagement of its customers. So far, there has been technology-driven developments in financial services, such as online banking and more simplified forms of business, but these ultimately were made incrementally, often with only cosmetic improvements. The financial services market has been able to survive with incremental changes because the industry has been living in a walled environment, protected by regulatory considerations and scale of key institutions. Potential competitors were deterred by high barriers to entry, and consumers often remain restrained by high costs. Currently, the walled environment is increasingly exposed to market forces in fast motion. There is a new force disruptive business, as well as new offerings of digital natives, outside the financial sector, threaten the traditional institutions in the whole spectrum of customer knowledge, products, payment systems, and asset management. These new competitors are able to deliver intuitive, customized, on-demand, causing the experience and the confidence that consumers expect. In addition, their ability to quickly scale the business means that they can move in an agile and efficient.