Anybusinessinanyeramustbeabletorapidlyadjusttotheebb

andflowofcurrentsinitsindustryor,betterstill,toanticipate
andstayaheadofthem.Thisisdoublytrueinthedigitalage,
sincethepaceoftransformationissuchthatanyserviceprovider
standingstillrisksbeingsweptawaybythechangingtidesof
customerpreferences.
Anyoneinterestedinfinancialserviceswillrecognizethepopularnarrativeofdisruptiveinnovatorsenteringthe
marketplaceanderodingthepreviouslyrocksolidpositionsofincumbentinstitutions.Everybodylovesagood
storyandfewholdmoreenduringappealthanthetriumphofDavidoverGoliath.
Butthisstoryisonlyoflimitedrelevancetothefutureoffinancialservicesandtheyearsaheadarelikelyto
defythenotionofaclearseparationbetweenwinnersandlosers.Instead,wereseeingevidenceofagreat
appetiteforcollaborationbetweenthesesupposedlyswornenemiesanappetitethatcouldsoonexpand
muchfurther.

Publicantipathytowardsbanksaddtothetailwinds
helpingtopropelnewentrantsforwardsapace.
Hownewentrantslooktogetahead
First,letsconsidersomeofthekeyfactorsthatgaverisetothenotionthatnewentrantscoulddefytheodds
tousurptheirestablishedrivals:
TechcompanieslikeGoogleandAmazonraisedcustomerexpectationsfordigitalexperiences,posinga
newchallengefortraditionalfinancialinstitutions
Publicantipathytowardsbanksandinsurers,combinedwithhighlevelsoftrustenjoyedbymanytechfirms,
addedtothetailwindspropellingnewentrantsforwardsapace
Anexplosioninthenumberofnewentrants,eachtypicallyofferinganinnovativesolutiontoaparticular
areaofinefficiency(unlikethedirectbanksofthe1990sthatwantedtoprovideafullserviceratherthana
nicheone)
Useofconstantconnectivity,automation,disintermediationandnewdatasourcesbyemergingplayersto
swiftlyresolvecustomerpainpoints
Mostsuccessfulnewentrantshavegainedmarketsharefromestablishedrivalsnotbyofferingendtoend
alternativesbutbyhelpingconsumersovercomeparticularobstacles.Concentratingonnicheareashas
allowedthemtobenimbleandflexibleincuttingcostsandcreatingseamlessuserexperiences.
Ifweconsidermobilepayments,weseetherewasaninfluxofnewentrantsthreeorfouryearsagothat
wantedtoprovidenovelalternativestotheentirepaymentssystem.Buttheinnovativeofferingthatlookstobe
standingthetestoftimeisApplePaystillrunningontheexistingecosystembutwithimproved
interoperabilityandpointofsalesimplicity.

Manyinnovatorshaveexploitedpointsoffrictioninaccessibility,increasedregulatoryburden,reducedappetite
forriskandissueswithuserexperienceandcost(thelatteroftencausedbyincumbentslegacysystems).In
doingso,theyhavewidenedaccesstofinancialservicesinunderservednicheareas.Alternativelendershave
grownrapidlybyleveragingdigitaltoolsandleanprocessestoradicallystreamlinetheloanadjudication
processsoitcanbedoneindaysratherthanweeks.Thischangehasopenedthedoortolendingfor
thousandsofsmallbusinesseswithcashflowneeds.
Furthermore,becausetheyaremanyinnumberandworkinparallel,theycaniterateandtestpotential
solutionsataratethattraditionalinstitutionssimplycannothopetocompetewith.Forinstance,agreat
numberofstartupsareexperimentingwithroboadvisorsthatusealgorithmstoautomaticallymanage
customerswealth.ThisencompasseseverythingfromfullyautomatedETFbasedmodelslikeWealthfront,to
emphasizingvirtualhumaninteractionsasPersonalCapitaldoes,tosuggestingstockpickslikeMotifInvesting.

Whytheseinnovationsmatterthreatsandopportunitiesfor
traditionalinstitutions
Manynewentrantshaveshowntheycanharnesstheirfocusedinnovationstoskimthecreamfromfinancial
institutionsoperationsintheshortterm.Whilethisisclearlyareasonforconcernamongtraditionalplayers,it
doesntnecessarilyrepresentaterminalthreat.
Asnewentrantsgrow,theywillfacethekindofchallengesthatareencounteredbyanysuccessfulinnovators:
acrowdedmarket,lackofscopetogobeyondtheirinitialtargetnicheandtheconstantriskofsinkingbefore
theycanswim.Theywillalsohavetofaceuptothechallengesthatinhibittraditionalinstitutionstoday,from
increasedregulatoryscrutinytoincreasedoperationalcomplexity.
Theseinnovationsmustthereforebeassessedfortheirlongtermimpactonfinancialservicesfirmsandtheir
potentialtogeneratenotjustthreatsbutalsoopportunities.
Firstly,letslookatthethreatstotraditionalfinancialinsitutions,notallofwhichrelatetodirectcompetition:
Blurringsubsectorboundariesinnovationswidenaccessibilitytonewproducts,creatingcompetitive
pressureacrosssubsectors.Highmargin,massmarketproductsthensufferasseenwithalternative
lending,crowdfundingandroboadvisorstakingcustomersawayfromretailbanksdepositandmoney
marketproducts
Lossofcustomerownershiptraditionalinstitutionsoftenrelyonbundlingservicestogetherandcross
subsidization.Buttheproliferationofnicheprovidersencouragescustomerstoshoparound,sothatevery
productneedstobecompetitiveinitsownright.Techfirmsofferingattractivedigitalexperiencesmay
furthererodetraditionalcustomerownership.
Changingcustomerbehaviorawidermixofproductstochoosefromasnewcashlesspaymentmethods
emerge.Youngadultsarealsobeingencouragedtotakemorecontroloftheirfinanceswiththeadventof
roboadvisorsortoactasexpertsthemselvesbyusingemergingdigitaltoolssuchasalgorithmictrading
platforms
ButwhileDavidsslingshotposedonlyaclearandpresentdangertoGoliath,manyoftheinnovationswelook
atinthisreportalsoofferopportunitiesforbiggerplayers,including:
potentialtoobtainsophisticatedcapabilitiesatlowcostbylearningfromoracquiringcuttingedgesolutions
(e.g.anewgenerationofplatformsandmanagedserviceprovidersfocusingonspecificoperational
processes)

modernizinginefficientfinancialservicesinfrastructure(e.g.potentialtorevolutionizetransferofvalue
throughdecentralizedtechnologiesbehindcryptocurrencies)
creationofnewchannelstogivefinancialinstitutionsamorecentralplaceintheircustomersdailylives
(e.g.connectedinsurance)fulfillingcustomersdiversedemandswithouttakingonalltherisksinvolvedand
rapidlyscalingupbyleveragingdigitalplatforms(e.g.mutualfundsdistributedviaroboadvisors)
Thisbalanceofthreatsandopportunitiesmeansthefuturelandscapeinfinancialservicesisunlikelytobe
populatedbymanyoutrightwinnersorlosers.Rather,companiesmustadaptandbewillingtocompromise
andcollaborate.Theycanhelpthemselvesbyclearlydefiningwhethertheywishtofocusprimarilyon
customerrelationshipsordevelopingproducts.
Strivingtoofferbestinkindserviceswillbeessentialamidintensecompetitionandevergreatercustomer
choice.Successwillalsodependonleveraginginnovationstoenhanceefficiencyandtransparencyinworking
withoutsideinstitutions(suchaswithdecentralizedsystemsandmarketplatforms,forexample).

Whytheimpetustocollaborateisatwowaystreet
Thetendencyfornewentrantstoskimthecreamasdescribedearliermaybenefitconsumersbyincreasing
choiceandstimulatinggreatercompetition.Butitalsohasanaturallimit,asdoeffortstocapturecustomers
thathavebeenunderservedorsimplynotservedatallinthepast.Olderinstitutionscouldstilllargelyretain
controlofthecrucialmassmarket.
Ifnewentrantswishtocontinuegrowing,manyoftheirearlyadvantagesmayerodeovertimeastheyattempt
toscaleacrosscustomersegmentsandfacegreaterregulatoryscrutiny.Atthesametime,incumbentsare
beingchallengedbyconsumerdemandsforgreaterchoiceandtransparency,outdatedITsystemsand
regulatorycompliancedrivingcostshigher.Theygenerallyrecognizethattheinnovationimperativeisstronger
thaneverbutalsoknowitmaynotbefeasibletosolvealltheseproblemsactingalone.

Whatdoesallthisuncertaintymean?Putverysimply,itmeansapowerfulimpetustocollaborateexistswithin
bothestablishedinstitutionsandinnovators.Incumbentsshouldaskwhetherthisgreatwaveofnewentrants
wouldbebestviewedasanexternalR&Dfunctionratherthanathreat.Innovatorscanusepartnershipswith
biggerrivalstoensuretheirideasareimplementedatscaleandbecomewidelyaccessibletoconsumers
somealreadyhave.
ThebankingasplatformmovementseekstoprevailuponlargefinancialinstitutionstoexposetheirAPIsina
standardizedway.Thiswouldsupportthegrowthofaninnovativecommunityofdevelopersinamanner
comparabletothatusedbyGoogleandAppletomeettheircustomersdemands.Alreadywehaveseen
innovationbyRippleLabshelpfinancialinstitutionsmodernizetheirinternalsettlementprocesseswith
decentralizedprotocols,thuspavingthewayforastreamliningofhowvalueistransferredinthefuture.
Newentrantscanusecollaborationwithestablishedfirmstointegratethemselvesintotheexistingvaluechain,
whilemajorplayersgainthroughslicker,streamlinedprocessesandpotentiallythroughreputationalbenefits.
Collaborationsmustgobeyondsuperficialcustomerreferralorvendorclientrelationshipsandinsteadhelp
seedanecosystemthatnurturesinnovationswithoutcompromisingsystemicstability.
Forinstance,Pandai,aP2PlendingplatforminChina,isworkingwithanumberoflargebanksandinsurers
andnotonlybysharingcustomers.Itisalsocreatingnewinvestmentopportunities,sharingriskadjudication
capabilitiesandsupplementingtheusualproductofferings(withdefaultinsurance,forexample).
Itshouldbecleartoincumbentsthatrefusingtorethinktheirroleinthewiderfinancialecosystemcouldresult
inbusinessfailure.Thisfatewillinevitablybefallasmallnumberoffirms,justasacertainnumberoffailures
mustbeexpectedinanyefficientmarketplace.Butitsamistaketothinkthatmosttraditionalfinancial
institutionsaretoointransigenttosurviveoreventothriveintheirfutureenvirons.

Whyculturaldifferencesdontprecludecollectivegains
Inshort,thedisruptionandevolutionoffinancialservicesisnotazerosumgame.Notallinnovations
introducedbynewentrantsareexistentialthreatstotraditionalfinancialinstitutions.Manyaretoogeared
towardsaspecificnichetobeanythingofthekind.Furthermore,incumbentsrealizethatnewentrantsalready
havestrongincentivestoinnovateandthatthebenefitsofinnovationsoftenstretchfarbeyondthecompany
responsibleforthem.
Lookedatfromthisperspective,itsnotsosurprisingthatdeeprootedculturaldifferencesbetweeninnovators
andincumbentsarenotprovingabartocollaboration.Caricaturesthroughwhicheachsidemaysometimes
viewtheotherrecklessinnovatorswhoignoretherulesorselfservingbankerswithregulatorsintheir
pocketsmustbeputaside.
Whensharedinthespiritofcooperation,radicallydifferentperspectivescanhelpallpartiesbetterunderstand
acomplexenvironmentandchartawayforward.Suchpartnershipscanofferincumbentsmanybenefits,such
asimplementingcuttingedgeinnovationsatscale,modernizinginfrastructureandenhancingdigital
experiencesforcustomers.
ItsonlynaturalthatnewentrantswillalwaysunleashafewslingshotsatGoliath.Butinthefutureoffinancial
services,manycouldendupreinforcinghisarmorandhelpingtomakehimlessvulnerable.