In the course of digital players like Alibaba, Apple and Google prominently leading the global market capitalisation ranks against industrial heavy-weights like Siemens or General Electric, one of the oldest and yet most important backbones of business - the finance and insurance sector - has just started to undergo massive change in the past year.
Finance was an untouchable and immune business for decades. However, nowadays large banks are losing market share and stock market value against rising fintech players. New business models and technologies create unforeseen advances that tend to disrupt stable and trusted customer relations, and lead consumers to seek new partners to manage their financial assets. Here lies a chance for the European economy to quickly gain pace and place a foothold in the future global digital technology market. We met EIT Digital CEO Willem Jonker to discuss this development and the impact of digital innovations on the finance sector.
What does digitisation bring to the banking and insurance sector?
The banking industry is simply based on bytes. Banks neither manufacture nor sell physical goods, and even the commercial channels are moving to become digital. When we speak about money we think of coins or notes from habit, yet 90% of it is just records in a digital banking system. The entire business is under pressure, because almost all the processes in a bank can be digitised. It is a strongly regulated industry, which is necessary in order to protect the economic stability; but this regulatory barrier makes it difficult for newcomers to enter the market.
Also, the insurance industry is heavily impacted. The core business of insurance companies is managing risks. Emerging technologies like Big Data or Artificial Intelligence can deeply change the current models for evaluating risks. The Internet of Things allows pre-emptive models not just to evaluate but to avoid risks, and solve problems before they happen.
How do banks and insurance companies react to these changes?
At the beginning of this decade, it seemed that financial companies ignored digitalisation, only very few of them took the emerging trend seriously. At that time, many people thought either new agile startups or internet giants were going to disrupt the industry. This would probably have happened if it wasn’t for the complexity of entering a regulated market. But banks and insurers have woken up in the past year. They have started to embrace digitalisation with an open mind and willingness to change - for example by collaborating with emerging Fintech startups. They are now ready for the battle. And they are strong in their field.
Who are the new players in the financial sector?
Investor interest in Digital Finance has been huge. In fact, this success has shaped the concept of “FINTECH”, which means new technologies operating in the area of financial services, and its impact on our lives will be huge.
One of the most interesting groups of players is the ‘neoBanks’, because they compete with traditional banks in their own field. They strive to provide a much better service to customers based on digital technologies, and build a modern digital infrastructure, without the heavy legacy of the past. Or they provide the customer experience, supported by a traditional bank that takes on the ‘regulatory paperwork’. In future this might become a more fragmented value chain, with some players dealing with customers and others specialising in the regulatory processes.
So, the markets are becoming more diverse?
Yes, many people expect the large platforms like Amazon, Apple (GAFA), Facebook, Google, to make strides when they enter the market. They have experimented on the surface, especially around payments, but have not had a serious impact on the industry yet. These players benefit from a great deal of customer trust because of their excellent service delivery and brand authority, but it is not yet known if this trust extends to keeping your money safe, or offering competing financial products. So now we must ensure we bring European values to the digital world, not just through regulations like GDPR, but by building digital global businesses that can compete in this space. We need to further address market fragmentation to speed up the Digital Single Market initiative, that paves the way to building larger companies. We need to raise more R&D investments in digital technologies, notably in software. On top of this, we need to strongly increase innovation investment and adapt our European education systems to the digital reality. Only then can we foster strong innovation growth and better compete with new technologies in other regions.
One of the most discussed technologies over the past two years is blockchain. Do you think it is overhyped?
It is really overhyped. The original blockchain in the Bitcoin system is a bright idea to solve an actual problem: how to control a largely decentralised system without a central authority. Many people have taken this brilliant idea and have tried to apply it to many kinds of business problems, when most of them can be solved in a much simpler way. The complexity of many business models derives from human interactions, not from technical architectures.
That said, blockchain, and in general distributed ledgers, are excellent technologies to solve some specific business problems with decentralisation as a key driver. EIT Digital is supporting several innovation activities where blockchain can provide value to business. But the key is to look first at the problem and then at the tool to solve it. The reverse approach of ‘a solution looking for problems to solve’ is not the ideal one. Yet a great part of blockchain research is in this mode.
Does AI play a role in the financial sector?
Absolutely. The financial industry is actually a data-based business. There are a lot of models to evaluate the risk of bad debt and calculate prices for financial instruments. All of them try to simplify the extremely complex reality that is the economic system. AI will allow the financial sector to discover the underlying models that shape the behaviours of people and businesses making economic decisions. By delivering new customer insights, the financial industry will also learn more about its clients. AI has the ability to increase trust in the financial sector by unveiling frauds and risks, and adding an extra layer of security to identities and financial assets. So, we identify Digital Finance as an area where AI will have a particularly transformational impact on the industry.
What are the main innovation areas the financial services industry should focus on in the coming years?
Banks are substantially improving the tools they provide to their customers for managing their finances. Nowadays, people don’t need to go to a branch to open accounts or transfer money. On the other hand, banks have been offering the same products (saving accounts, loans, mortgages) for decades. Despite them being digital, the products are still the same. A bank’s main task is to solve its customers’ financial problems. For that, it is not enough to provide self-service products - a renewed customer orientation needs banks to embrace a wider vision and move beyond the traditional frontiers. In order to introduce new finance technologies successfully, they must meet the four Ds: they must be Disruptive enough to destroy existing models. They must be Deceptive to come up with surprises. They must be Delocalised, which means they need to be mobile and not locally dependent. And they must be Democratised, meaning widely accessible across the globe.