Our global report Financial services technology 2020 and beyond: Embracing disruption examines the forces that are disrupting the role, structure, and competitive environment for financial institutions and the markets and societies in which they operate. The post-crisis regulatory frameworks have been gradually settling into place, and financial institutions have been adjusting their business models accordingly. It is now becoming obvious that the accelerating pace of technological change is the most creative force—and also, the most destructive one—in the financial services ecosystem today. In this paper, we set out to capture the real world implications of these technological advances on the financial services industry and those who must supervise and use it.
For a long time, new market entrants found it difficult to break into the financial services industry.
Well, not any more. FinTech disruptors have been finding a way in. Disruptors are fast-moving companies, often start-ups, focused on a particular innovative technology or process in everything from mobile payments to insurance. And, they have been attacking some of the most profitable elements of the financial services value chain. This has been particularly damaging to the incumbents who have historically subsidized important but less profitable service offerings. In our recent PwC Global FinTech Survey, industry respondents told us that a quarter of their business, or more, could be at risk of being lost to standalone FinTech companies within 5 years.
Global investments in FinTech more than tripled in 2014, reaching more than $12 billion. In comparison, banks spent an estimated $215 billion on IT worldwide in 2014, including hardware, software, and internal and external services. This is a material number, and because it is so highly targeted, the FinTech spending will really make an impact.
By 2020, consumers will need banking services, but they may not turn to a bank to get them. Or, at least, maybe not what we think of as a bank today. The so-called sharing economy may have started with cars, taxis, and hotel rooms, but financial services will follow soon enough. In this case, the sharing economy refers to decentralized asset ownership and using information technology to find efficient matches between providers and users of capital, rather than automatically turning to a bank as an intermediary.
Several industry groups have come together to commercialise technology and apply it to real financial services scenarios. We expect this surge in funding and innovation to continue as blockchain and FinTech move from a largely retail focus to include more institutional use. And while many of these companies may not survive the next three to five years, we believe the use of the blockchain “public ledger” will go on to become an integral part of financial institutions’ technology and operational infrastructure.
Two decades ago, many large financial institutions built “e-business” units to ride a wave of e-commerce interest. Eventually, the initial “e” went away, and this became the new normal. Internet development, and large technology investments, drove unprecedented advances in efficiency. Today’s “digital” wave has the same markers: separate teams, budgets, and resources to advance a digital agenda. This agenda extends from customer experience and operational efficiency to big data and analytics. In financial services, we have seen this approach applied to payments, retail banking, insurance, and wealth management, and migrating toward institutional areas such as capital markets and commercial banking.
Do you know what your customers value? Are you sure? Once, customer intelligence was based on some relatively simple heuristics, built from focus groups and surveys. These were proxies for real, individualised data about consumer behaviour, and the results were pretty hazy. Now, technology advances have given businesses access to exponentially more data about what users do and want. It is an amazing opportunity for whomever can use analytics to unlock the information inside, to give customers what they really want.
We are already seeing alliances between leading incumbent financial services and technology companies, using robotics and AI to address key pressure points, reduce costs, and mitigate risks. They are targeting a specific combination of capabilities such as social and emotional intelligence, natural language processing, logical reasoning, identification of patterns and self-supervised learning, physical sensors, mobility, navigation, and more. And they are looking far beyond replacing the bank teller.
Already, some robots can sense the details of their environments, recognize objects, and respond to information and objects with safe, useful behaviours. (Sceptical? You shouldn’t be. Self-driving cars have performed very well in real-world tests.) Over time, they will be able to perform not only more tasks, but more complex tasks. Service robots are in the early stages of a long development cycle, and they still face some big technological hurdles. In the next three to five years, we expect modest, evolutionary gains. After that, though, we anticipate rapid gains, as new models combine increasingly powerful and standard modular platforms with the ability to learn.
As significant as the shift toward cloud-based computing has been, it is just getting started. Today, many financial institutions use cloud-based software-as-a-service (SaaS) applications for business processes that might be considered non-core, such as CRM, HR, and financial accounting. They also turn to SaaS for ‘point solutions’ on the fringes of their operations, including security analytics and KYC verification. But as application offerings improve and as COOs and CIOs get comfortable with the arrangements, the technology is rapidly becoming the way that core activity is processed. By 2020, core service infrastructures in areas such as consumer payments, credit scoring, and statements and billings for asset managers’ basic current account functions will be well on the way to becoming utilities.
Financial services executives are already depressingly familiar with the impact that cyber-threats have had on their industry. In our 2016 global CEO survey, 69% of financial services’ CEOs reported that they are either somewhat or extremely concerned about cyber-threats, compared to 61% of CEOs across all sectors. Unfortunately, it is not likely to change for the better in the coming years, due to the following forces:
Around the world, the middle class is projected to grow by 180% between 2010 and 2040; Asia’s middle class is already larger than Europe’s. By 2020, the majority share of the population considered “middle class” is expected to shift from North America and Europe to Asia-Pacific. And over the next 30 years, some 1.8 billion people will move into cities, mostly in Africa and Asia, creating one of the most important new opportunities for financial institutions.
These trends are directly linked to technology-driven innovation. Initially, as developments in agricultural technology improved labour productivity, rural workers began migrating to cities in search of better opportunities. At first, they found jobs in capital-intensive industries like manufacturing for the local market—and then, as technology drove quality improvements, for the global market. Meanwhile, advances in computing and telecommunications made it possible for Western companies to offshore certain support functions to places like the Philippines and India, creating relatively well-paying jobs. Over time, the trend has become self-reinforcing: more jobs in cities have led to better technology infrastructures in cities, which has attracted employers who can now serve global markets. The result: more urbanisation, and a growing middle class across the emerging markets.
The use of technology and its implications are not limited to financial institutions. Regulators are rapidly adopting a wide range of data gathering and analytical tools, too. They are trying to learn more about individual institutions’ activities and overall systemic activity. They also hope to monitor the industry more effectively and to predict potential problems instead of regulating after the fact. Examples of this include the supervisory procedures and data requests tied to ‘stress tests’, asset quality reviews and enhanced reporting requirements coming out of Washington, London, and Basel. Using sophisticated analytical tools on large volumes of data, regulators can compare scenarios and address potential issues before they become full-scale market problems.
By 2020, your operating model is probably going to look quite stale, even if it is serving you well today. That is because what your financial institution offers to your customers is almost certain to change, in ways both large and small. This will require important changes across, and around, the entire IT stack.
The overriding principle is that financial institutions and their IT organizations must be prepared for a world where change is constant—and where digital comes first. For this to happen, it is time to really put legacy assumptions on the table. It may appear logical to continue to support core mainframe systems, given the potential disruption and perceived cost of transition to something different. But if the existing platform could be replicated at half the cost, would the logic still apply? Or at one tenth the cost?
One of the starkest differences between a legacy financial services institution and a FinTech upstart comes down to fixed assets. Incumbents carry a huge burden of IT operating costs, stemming from layer upon layer of systems and code. They have bolted on a range of one-time regulatory fixes, fraud prevention, and cyber-security efforts, too. The ever-spreading cost base leaves less budget available for capital investment into new technology, driving a vicious cycle of increased operating costs. This is in clear contrast to the would-be disruptors, who typically have far lower operating costs, only buying what they need when they need it.
It doesn’t have to be that way. In fact, from our experience working with a wide variety of clients in banking and capital markets, insurance, and asset management, we think many financial institutions are spending up to twice as much as they need to on IT.
Customer intelligence—and the ability to act in real-time on that intelligence—is one of the key trends affecting the financial services industry, and it will drive revenue and profitability more directly in the future. As this happens, many of the attributes that drive today's brands, from design to delivery, could become less important. By 2020, we expect that the ‘new normal’ operating model will be customer- and context-cantered. That is, companies will change the way they interact with their customers based on the context of the exchange. They will offer a seamless omnichannel experience, through a smart balance of human and machines.
Here are just a few of the endpoints that will need to coexist and cooperate:
The systems are diverse, and they are getting more complex by the week. Now, financial institutions will need to layer on a more sophisticated view of federated identity management, because companies will be dealing with new classes of users. Systems architecture can be the key to balancing control and accessibility. That is, the way you assemble the technical building blocks can protect your institution against cyber-threats without adding needless barriers to discourage interaction.
Financial institutions have been addressing information security and technology risks for decades. But a growing number of cybersecurity “events” in recent years has shown that the traditional approach is no longer good enough. In fact, in PwC’s Global State of Information Security Survey 2016, we found that there were 38% more security incidents detected in 2015 than the year before. Many financial institutions still rely on the same information security model that they have used for years: one that is controls- and compliance-based, perimeter-oriented, and aimed at securing data and the back office. But information security risks have evolved dramatically over the past few decades, and the approach that financial institutions use to manage them has not kept pace.
As financial institutions look to the future, one of the biggest hurdles will have nothing at all to do with technology. For years, traditional financial institutions have designed their offerings from the inside out: “this is what we will offer,” rather than “what do our customers want?” But this model no longer works. And the skills and interests of today’s IT team members and third-party talent may not be up to the challenges of tomorrow’s technical environment, where partnering with customers will be essential.
Global FS Advisory Leader, PwC United States
Tel: (646) 471-4771
Marcus von Engel
Partner, PwC Malaysia
Tel: +60 12 822 8101
Tel: +44 (0) 20 7212 5071