Strategic Shifts in the Global Financial Services Industry
Leaders in financial services institutions (FSIs) face a future in which, on a global scale, industry overcapacity and product and service commoditization in established markets result in zero-sum competition. Yet there are significant opportunities for FSIs to recognize and manage both existing and emerging markets efficiently and effectively. In studying the trends in financial services, technology, and marketplace behavior, TowerGroup believes the future belongs to those most adept at embracing and leading three major shifts in the industry:
More than grand pronouncements, these are actionable concepts demanding marketplace savvy, effective operational leverage, and a superior technology strategy. Moreover, they will place greater demands on the people in financial services.
Senior leaders must rethink the strategic drivers of their firms in terms of global trends and emerging risks while redefining markets along new and innovative lines. Strategy-minded chief information officers must foster technology initiatives that demonstrate a clear business value on multiple business fronts while maintaining agility to leverage the coming convergence of business and information technology. Treasury and finance officers, risk managers, and executives across the spectrum must increase their ability to contribute both within and outside their domain expertise. Each player will need to demonstrate fundamental innovation at a level not seen in the industry for a long time.
Reinventing financial services means designing a business from a clean slate. Rather than thinking about what changes to make given the current state of the operation, the market and competition, successful firms will be those that start over in building a financial services strategy.
Creating unique, one-to-one customer relationships while growing product and service offerings will require fundamental innovation throughout the customer-facing parts of the business. At the same time, FSIs must find operational leverage in every department, system and technology so that the value of each investment can be recaptured over and over. Risk management becomes more of a concern with globalization, and the ability to integrate risk management across the enterprise will be challenged while the importance of doing so increases along with management accountability.
As one example of front-end channel changes, business mobility is rapidly moving to the mainstream. In developed nations, tech-savvy consumers are maturing into target age brackets for traditional financial services. However, they are demanding non-traditional ‘anytime, anywhere’ access. In fact, a growing number of consumers expect real-time connectivity in everyday life. More than two-thirds of people in the US are now cellular subscribers, and researchers forecast that nearly half of the global population will be connected via mobile devices by the end of 2008.
The growth of online social networking has also been phenomenal. MySpace.com boasts more than 140 million users. Massive multiplayer online role-playing games (MMORPGs) have expanded beyond fantasy and adventure offerings such as World of War Craft to include more genteel ‘virtual social worlds’ (VSWs), in which the main activity is social interaction through avatars. While still on the cutting edge of consumerism, VSWs reflect a 36.5% compound annual growth rate (CAGR) that will lead to 40 million regular online participants by 2010. With nearly 40% female participants and an overall average age of 23, social networks can no longer be ignored as both delivery channels and an approach to customer segmentation. In fact, Wells Fargo already created a MMORPG known as Stagecoach Island that serves as a financial education and training game. In one example of the new and emerging global business alliance, ABN AMRO has taken the next step and partnered with the VSW Second Life to offer many of the same features. Thus, instead of launching a proprietary system, ABN AMRO allied with a non-financial and uniquely positioned VSW.
Creating robust capabilities to meet growing expectations is fundamental. Linking social networks with a wide array of consumer services while maintaining security will tax every traditional IT organization.
This future means that channel diversity will increase while the proprietary nature of channel delivery will decrease. The demand for speed and ubiquitous access will continue growing and ultimately push financial institutions not only to embrace mobile touchless and one-click banking and payment services but also to offer consumers investment advice and execution as well as insurance comparisons and bidding. In short, the delivery of financial services will no longer be a distinct set of channels but will be woven into the fabric of life itself.
Rapid growth in mobility touch points and functionality will also exacerbate the challenges created by legacy core systems and the need for integration between silos of data. This is true whether the lack of integration is due to a plate of legacy leftovers, caused by legislative or regulatory firewalls, or even driven by customers’ dual demands for privacy and immediacy.
Technologically, either service-oriented architecture (SOA) must finally move to the mainstream or legacy replacement must be taken seriously in the enterprise and technology architecture to enable not only current but also future demands for new levels of integration. The changes needed are fundamental for every FSI that wants to thrive in this new environment.
Repurposing financial services for global diversity does not mean ignoring traditional financial goals, objectives, and stockholder value. Instead, repurposing will provide a fresh image and improved reception throughout an expanding global marketplace.
Paradoxically, emerging nations and markets share a great deal in common with people embracing the mobility lifestyle. Nokia’s recent success in emerging markets, albeit only in basic devices, heralds the future. Even small farmers in remote areas are accessing technology for information on farm commodity prices. As a result, they are becoming price makers rather than simply price takers when they deliver produce to market. Emerging countries are also rapidly modernizing through growth in new services and outsourcing capability. Beyond IT outsourcing and manufacturing, more of these economies are successfully competing in technology and services requiring domain expertise that was previously never outsourced.
Obvious implications include a growing global middle class of new proportions. Its financial service needs, however, will still be more modest than those in more developed nations, and FSIs will need to offer existing products at lower cost to profitably serve customers in a mixed world of less developed economies but burgeoning opportunity. Micro loans will be needed at an expanded rate and will change over time as needs increase and business opportunities bring expansion. Payments and funds transfer opportunities will expand as well. Life insurance and casualty and property insurance will become critical and require insurers to properly and affordably price small policies in areas of the world with more challenging actuarial outcomes. Although mass participation in the global mutual fund industry may be some time off, commodity brokerage, including options and forward pricing services, will foster familiarity with real-world application of such derivatives. All of these needs will require further extension of predictive analytics technologies. Failure to become early, viable providers will relegate FSIs to ‘me too’ competition.
In more developed economies, an ageing population does not mean that investment opportunities will diminish. As people live into their 90s, new strategies for diverse investment approaches are increasingly in demand. Lifestyle changes abound as well. Education, opportunity, and wealth have led to new diversity among the elderly. Participating in activities as varied as buying motorcycles and getting PhDs, the next generation of retirees will not simply sit at home and draw down savings until they die. The norm will include expanding horizons, as people perhaps work part time and live in several places around the globe throughout retirement.
At the same time, increased longevity will tax the social systems as once-fatal illnesses and conditions of aging are held in abeyance by new developments in medicine. Diverse opportunities will result, such as expanded health insurance approaches mingled with investment options, long-term care insurance, and an increase in the viability of reverse mortgages. New lifestyle and real estate opportunities could also emerge. Finally, the global shift of retirement investment risk from the employer, the insurance company, or the pension fund to the consumer will raise the bar on the knowledge, quality of service, and people that FSIs employ in building market share.
Developed nations continue to see increases in immigration, which, although controversial, is unlikely to stop soon. In the US, diversity grows across the small towns, villages, and rural areas of the Midwest and South as immigrants willingly take jobs in slaughterhouses and other core industries. FSIs have just scratched the surface in serving this diverse marketplace. For example, automated teller machines that offer multiple language choices will need to better recognize customers and offer their preferred language without requiring them to sort through the entire menu of options with each interaction. The fact that diversity can be found nearly everywhere demands that the industry rethink how to serve the marketplace while providing adequate returns to stakeholders.
Restoring confidence to an uncertain world means more than just increasing security to avoid system and information breaches. Improving consumers’ and investors’ confidence will spread economic well-being around the globe. Challenges include the simultaneous creation of new delivery channels as global threats continue to proliferate. FSIs secure in siloed approaches to risk management will need to consider integrated risk management across their far-flung enterprises as global standards continue to be developed. The single euro payments area (SEPA) in Europe, Basel II requirements, SWIFT standardization and the rapid development of the International Organization for Standardization (ISO) and other standards will replace the point and proprietary solutions many FSIs depend on today. Standardization is also a form of commoditization that will force FSIs to seek new means of differentiation.
Credit risk, fraud risk, and identity theft are close cousins and growing closer as criminals become more sophisticated and move from causing inconvenience and individual menace to targeting global financial disruption. Finance and treasury experts need strong alliances with IT to address risk holistically. At the same time, internal risks will require renewed attention when not only employees but also outsourcers, business partners, and new industry relationships expand to access more diverse and yet deeper domain expertise. In addition, credit, financial, operational, and reputation risk cannot be relegated to departments or special groups alone when the survival of the institution is at stake. CEOs and boards of directors need complete visibility into the risk management strategies and mitigation results of the organization.
Some studies indicate that online customers have begun to limit their use of the Internet for key business transactions because of their concerns about safety issues and identity theft. Conquering the growing distrust of consumers and business customers globally can be a marketplace differentiator.
Although traditional online security has improved, the mobile wave of malware, worms, and viruses will again require FSIs to secure data and information. Delivery channels that merge with customer lifestyles and other non-financial institution providers and partnerships must address security and meet regulations while simplifying customers’ experience.
In the end, security is more than technology. The risks involved with social engineering, such as the infamous ChoicePoint release of more than 160,000 records on individuals, the rogue trading that destroyed Barings Bank, and the continuing news of lost laptops with hundreds of thousands of consumer records on them, are all under the umbrella of enterprise security. To expand their channels and gain the trust of the customers who access them will require FSIs to think of compliance, risk management, and security as just different views of the same strategic issue: restoring confidence.
This article focused on just a few of the many drivers of success in tomorrow’s financial services industry. The ability of banks, brokerage firms and insurance companies to sustain long-term success will depend on the visionary actions of leaders who take a fresh look at the environments in which they operate. They must also uncover and take advantage of emerging opportunities. Reinventing services, repurposing the industry, and restoring confidence form a three-pronged strategy for global success. These visionary changes will ultimately result in better value for stakeholders through improved profits. And some things, like improving profits, should not change.