Throughout most of history, banks and insurers have used the same relatively static, highly profitable business models. Yet today, they are at odds with innovators who are trying to disrupt their businesses from all sides.
There is no end to the innovative “fintech” companies offering crowdfunding, peer-to-peer lending, mobile payments, bitcoin, or robo-advisors. This industry is analyzed in a new report by the World Economic Forum. The report draws upon over 100 interviews with industry experts and a series of workshops that brought strategy officers from global financial institutions together with high-flying fintech innovators to discuss the topic.
Their research suggests that a new round of innovation could have potential to rethink fundamentally how major players in financial services conduct their business.
- They Are Deploying Highly Focused Products And Services
Innovative companies in the past sought to replicate the entire bank, thus creating business models like digital banking making the banking solutions more simple and hassle free. . Innovation today is targeting the intersection between high frustration rates among customers and high profitability for incumbents, allowing innovators to “skim the cream” by taking competitive advantage of their most valuable products.
- They Are Automating And Commoditizing High-margin Processes
Additionally, innovators use their technical skills to streamline processes that are inefficient for established players. As a result, they can now offer services to whole new groups of customers that were once exclusive.
- They Are Using Data Strategically
Banking and insurance companies have always relied heavily on customer data to make decisions, such as looking at your credit score or requiring a medical exam before issuing a policy to you. Nevertheless, as people and their devices become more connected, new streams of granular, real-time data are emerging, along with innovators who use this data to support financial decision-making.
- They Are Platform-based And Capital-light
Marketplace companies, which connect buyers and sellers, have shown that they can grow revenue exponentially while keeping costs more or less flat. Similarly, crowdfunding platforms have become a significant source of funding for many seed-stage businesses. The platforms connect individuals interested in small investments with a wide array of potential investment targets and allow the “wisdom of the crowd” to decide which companies will and will not be funded (while taking a cut from successful companies).
- They Are Collaborating With Incumbents
The view is oversimplified. Investors are smart enough to realize that they can employ bifurcated strategies to compete with incumbents in the arenas of their choosing, while reaping the benefits of their scale and infrastructure where they cannot compete.
On their part, incumbents have realized that collaborating with newcomers can help them gain a fresh perspective on their industry, identify their industry’s strategic advantages, and even externalize some of their research and development. The result is an increased number of collaborations between innovators and incumbents. Thus, they ensure that their customers’ needs are met while minimizing the risk that they will leave for another financial institution.
Convenience, reliability, and security in banking are inextricably linked to technology. A nimble AI-based system can improve transactional fluidity while maintaining high customer satisfaction. Those banks that embrace the change will, in turn, generate more revenue.