Are disruptive innovations transforming the financial services landscape, or are we simply in the middle of a new technology cycle?
The premise of Thursday’s big issue debate in Geneva, on disruptive innovation’s impact on financial services, mirrored discussions earlier in 2016 at the World Economic Forum (WEF) in Davos. At last year’s forum, policy-makers, business leaders and opinion formers focused on the coming ‘fourth industrial revolution’ – a culmination of the ongoing electronics-driven revolution of the second half of the last century that will transform the role of technology in our daily life and the workplace.
According to Klaus Schwab, WEF founder and executive chairman, the scale, scope and complexity of this revolution means that, “the transformation will be unlike anything humankind has experienced before. We do not yet know just how it will unfold, but one thing is clear: the response to it must be integrated and comprehensive, involving all stakeholders of the global polity, from the public and private sectors to academia and civil society.”
It was in this context that Sibos 2016 delegates in Geneva were asked whether we were in the midst of a quantum shift in innovative technology or merely experiencing the latest in a series of technology cycles. Before the three speakers put their case, 63% of the audience polled said they were convinced it was a shift.
We are witnessing a “technology acceleration”, said Sanoke Viswanathan, chief administrative officer at JP Morgan’s corporate and investment bank. Why now? he asked. Three conjoined forces are at work. First, there has been a fundamental change in the way we interact with technology. “We all have supercomputers in our hand today,” he observed. Secondly, there has been an explosion in the availability of capital to innovators with venture capitalists, angel investors and corporate venture funds targeting FinTech startups. And finally, banks are under pressure to find new growth and efficiency opportunities.
The conclusion was simple. “We are witnessing disruption at work,” said Viswanathan, who then outlined five areas of technology-led disruption – big data, robotics, APIs, the cloud, and distributed ledger technologies (DLT) – on which JP Morgan is focused. Agreeing with an observation made earlier in the week that “data is the new oil”, Viswanathan said JP Morgan had doubled the number of its big data nodes over the past 12 months.
He also cited use of algorithms to assist equity markets bankers in identifying prospects as an example of the potential benefits. In robotics, JP Morgan is using software bots to explore opportunities for ‘process automation’ and assist with repetitive tasks in areas such as sales, research and operations.
“In the future we will be able to integrate more machine learning,” he predicted. APIs are already changing the way businesses interact in terms of information exchange and the ability to utilise each other’s platforms, noted Viswanathan, explaining, “A FinTech startup can plug-in and build an app on our platform.” Although it grabs fewer headlines these days, Viswanathan said he considered use of the cloud as the most important change, because of its removal of the high entry costs to business. “In the past, it took a long time to build products and services and move from one platform to another,” he remarked. DLT would become increasingly influential, Viswanathan added, as momentum grew, with individual firms contributing intelligence from their own projects, helping to promote standards convergence and accelerate adoption through open-sourcing of software, thus
driving value creation.
“Technology is now a business activity,” said Viswanathan. “The silos that existed between different business areas are disappearing in the interest of serving the client.” This is the biggest change of all. Technology is taking business to another level and leading to a fundamental cultural change within banks and across the industry. “The boundaries are shifting,” he said, with banks becoming more agnostic as to whether they develop and distribute all products themselves or source them from specialist providers in order to deliver best value to clients.
Fellow speaker Eric Pradier, general manager, consulting, EMEA at Hewlett Packard Enterprise, is in little doubt as to the transformative nature of disruptive innovation.
“We are in a window of disruption, where computing and data storage technologies are at a peak in terms of innovation,” he said. The key impact of this will be a change in human behaviour, explained Pradier.
“We are in a fantastic moment,” he declared, where large innovative ecosystems – most focused on digitalisation – will create disruption and boundary shifts. “Either we manage the paradigm shift or we will be disrupted,” he cautioned. “There is a revolution around people and digitalisation.”
In an environment in which there is a growing move toward use of digital assets, how we protect those assets will become key. And it is here that regulation in its current shape and direction threatens to have a negative impact on innovation, Pradier warned. He used the example of Uber, a ‘machine-to-machine’ service that has revolutionised the way people travel and has seriously disrupted the licenced taxi industry. In some jurisdictions, lawmakers have ruled against Uber to protect the regulated taxi sector. “Should regulation be protecting the incumbent provider of service or the user?” queried Pradier. “Regulation should set out to protect the beneficiary, not the system.”
Call for collaboration
As a venture capitalist and partner at Passion Capital, Eileen Burbidge invests in FinTech startups. She is also special envoy for the FinTech sector at HM Treasury. In answer to the question – is this a shift or a cycle – Burbidge diplomatically declared for “both”. It is commonplace for business to go through cycles, she pointed out. The present cycle is different because it comprises two marked shifts, not only in technology but in the culture surrounding the use of technology. Take the example of blockchain, she said, “the big shift is cultural, with banks talking about the use of distributed ledger technologies.” It shows that the mindset has changed away from the purely proprietary to a wider acceptance of collaborative approaches.
Burbidge confirmed that we are in the midst of a fourth Industrial Revolution and predicts that its impact would be bigger than the changes wrought so far by the development of the internet. “This is much more holistic and affects all of society,” she said. “The nature of this revolution will have a profound and far-reaching effect on the way people relate to money.”
A ‘call to action’ to collaborate is needed, said Burbidge, not just between startups and amongst institutions but also at the level of the regulatory system. And while a lot of innovation today takes place outside of the financial services sector, SWIFT and the companies it serves share a long history of being at the forefront of change, she observed. Innovators in the Fintech sector still rely upon banks, as trusted partners, to perform the final mile of a transaction: “FinTechs and financial services can’t be separated.” As for regulation, Burbidge agreed with Pradier that it must protect consumers as well as underlying industry with the intention of promoting innovation.
When speakers were asked to advance their near-term vision for the business world of 2020, Viswanathan repeated his conviction about the impact of the cloud. But he also said that the concept of open sourcing of software and APIs was a game changer. “It changes the way we do everything.” The real disruption will be come from the banking industry embracing digitalisation and moving towards the customer, said Pradier, who also called for “regulation for a real purpose”. Technology will continue to accelerate along with customer expectations, said Burbidge. “If financial institutions can’t adapt quickly enough they face becoming obsolete,” she warned. They all agreed that a cultural change is key, with banks and regulators adopting a ‘consumer-centric’ approach. “In the future, people will demand access to everything about their own finances,” said Pradier.
At the end of the session, the audience were asked to revisit the question they had been asked at the beginning. The 71% vote in favour of a ‘shift’ suggests the speakers’ arguments had been persuasive. Geneva and Davos might be located on opposite sides of Switzerland, but on this point at least they would appear to be united.