How Financial Services Can Adapt in ‘The Great Convergence’
The financial services sector is evolving before our eyes. What we might consider to be a traditional financial services market is shifting and it is not always clear who players are, or who the next players will be.
The so-called “Big Tech” companies, for example are entrenching into avenues such as payments, loans and micro-credit facilities that enable them, through rich data collection, to enhance and deepen their view of their customer – allowing them to do more for the customer and therefore sell more to them.
Technology companies have long understood the value of data, especially financial and transactional data. Financial Services has this data in abundance so is well placed to harness the data and ‘fight back’ in terms of gaining technical supremacy – and brand recognition – in the eyes of customers.
How do you perceive a bank?
A noticeable development in recent years has been how the likes of Apple, Google and Facebook, the biggest and most powerful companies in the world, have moved into financial services without actually being a bank. These companies know that the data they’ve been gathering for decades – via search, social networks, hardware etc – gives them an immense competitive edge over incumbents.
Technology companies are using that edge to sell us banking products, payments services, credit cards and more. Where does it end?
The acceleration of tech companies beyond their core markets has been surprising. There is seemingly no industry exempt from the glares of innovative eyes and the speed and scale of tech firms is remarkable.
But this view overlooks how financial services companies are responding.
Financial services ‘fighting back’
In early 2017, the Goldman Sachs CEO, Lloyd Blankfein, stated:
“We are a technology firm. We are a platform.”
This declaration was a fascinating statement of intent coming from the head of one of the world’s most well-known financial institutions. It would have been hard to imagine such a situation even a decade earlier, and it proved the pace of the evolution taking place in the sector.
It was a declaration of determination, notifying Big Tech that their presence had been noted and that the financial services sector wasn’t going to be an easy win. By stating ‘we are a platform’ Blankfein noted what the technology companies have known for some time – that ‘core markets’ are no longer what they were once perceived to be. Perception is key and the platformitisation of services is replacing the ‘bank’ as a standalone institution.
Blankfein’s statement sums up The Great Convergence.
In short, it is a coming together of tech and financial services to fight for the developed world’s banking customers, but also to provide banking services to billions of ‘unbanked’ customers in emerging markets. The prize is enormous, hence why tech companies are interested.
The Devil’s in the detail – and the detail is in the data
Financial services companies shouldn’t be alarmed by technology’s entrenchment into their ‘backyard yard’ they just need to adapt. The phrase ‘we don’t want to be Uber’d’ is often mentioned in modern business circles. The meaning of this is clear, that incumbents, regardless of industry, are concerned that the ‘Blue Ocean’ thinking and technological expertise by new players render the previous way of doing things obsolete.
The fact that this scenario has been recognised is an important step in doing something about it.
Most financial services organisation are well-capitalised with increasingly large and adept technology divisions. What’s more, they also have massive amounts of customer data at their disposal – it’s just a case of them doing a better job of using it.
Payments as a microcosm
What’s happening in the payments sector perfectly demonstrates The Great Convergence. We talked about this on the blog recently, exploring how payments in financial services (both standalone platforms and part of larger organisations) are being overpowered by the Apples and Facebooks who harnessing data to provide better, smoother, cheaper services for customers.
Traditional financial services firms are falling behind because they aren’t harnessing the data they have on file. Even if they are using it, they aren’t sure how to monetise it, which is what technology companies do better than anyone. Financial services organisations must both adopt a better approach to using data and use everything in their power to fight back, using their smarts, data and the help of regulation.
Regulation as a weapon
Financial services incumbents should seek to embrace regulation, acting as the torch-bearers for safety and transparency in consumer finance. This will become an even more powerful tool if the calls to clamp down upon and break up Big Tech continues. By driving higher standards, financial services can stand above the murky world of Big Tech.
One example is the way they embrace new regulatory releases, such as ISO20022, a globally developed infrastructure protocol that sets out rules for transmitting data, creating messaging standards for the payments sector. The Bank of England expects the adoption of ISO20022 to benefit financial services firms by enriching the data carried in payments, improving compatibility across platforms and creating opportunities for collaboration and innovation.
Firms already hold a mountain of data about their customers and prospects – ISO20022 will let them do more with that data. If financial services incumbents implement ISO20022 and maximise its potential, technology companies may struggle to keep up.
Important next steps
The Great Convergence may be upon us, but the good news is that ‘convergence’ implies a meeting point rather than one side being overcome. It’s not just technology companies pushing up against financial services – financial services can push back against tech too.
And with some awareness, a willingness to embrace change, innovation and collaboration and an openness to harness the power of data and regulation, hope is not lost. In fact, as Lloyd Blankfein said, all financial services companies now have the power to become technology companies. And that’s an exciting thought.
These next steps will be important ones in determining the future of financial services.