Tapestry Networks and Ernst & Young (EY) published a report this month focused on global revolutionary changes that will affect the financial services sector. The full version of the report is below.
The report is a result of the October 5-6, 2016 Financial Services Leadership Summit in London, during which more than 75 financial institutions executives, senior regulators, and entrepreneurs met to discuss fintech, traditional financial institutions, and regulation.
Highlights from the report include the following themes:
- TECHNOLOGY’S DISRUPTION — “Technology-fueled transformation is changing the competitive landscape. Many large financial institutions are in the early stages of transforming themselves into more agile, digital-age companies.” As one participant described, “Technology is lowering barriers to entry that have protected large financial institutions from new competition.”
- INFLUENCE OF ECONOMICS AND POLITICS — “Unprecedented economic and political risks are challenging global strategies. Financial institutions are operating in an unprecedented monetary- and fiscal-policy environment, and that environment may be with us for some time, as the underlying causes of slow growth are largely structural, not cyclical. At the same time, the political will and leadership to address these issues seems largely absent, with constructive engagement between financial institutions and governments threatened by populist politics.”
- REGULATION’S INTERFERENCE — “Regulatory and supervisory approaches will continue to evolve. [A]s the landscape continues to change, regulation must continue to adapt to a new world. But regulation will always lag behind market developments. The revolutionary change in the financial services landscape is likely to be met with a more gradual process of regulatory evolution.”
The bottom-line is that financial institutions all over the world have faced and will continue to face a number of external disruptions, from technology to macroeconomic policies to populist politics to regulators’ lagging but undoubtedly increasing red tape.
Rather than resist such upheavals and risk obsolescence, financial institutions will have to adapt in the following ways:
- “Incumbents must transform into digital-age companies.” As one executive participant said, “The only opportunity to progress is technology… It is the only way we have to survive.” In particular, institutions will have to embrace new, popular technologies, such as open-source APIs, data analytics, robotic process automation, and blockchain.
- Incumbents will have to embrace and collaborate with rather than resist fintech competitors. A director said, “I don’t see an Uber moment within financial services, but I do see fintech companies having an impact.”
- Internally, institutions must simplify structures and focus on core businesses. One participant explained, “As banks have evolved, they have added and added and added complexity without taking anything away. You can’t run a technology industry like that.”
- “[C]urrent macroeconomic and geopolitical challenges must be better integrated into their strategic risk discussions, given the threat that they pose to the sustainability of financial institutions.” One director said that institutions have to consider short-term microeconomic changes (like low to negative interest rates that have persisted for longer than expected) and long-term macroeconomic forces that no longer appear to be temporary, cyclical but are becoming structural, the new norm.
- Rigid institutions must become increasingly agile and become comfortable with discomfort. “Political uncertainty, including questions about the direction of regulatory, trade, and other economic policies, may limit strategic growth options.” Questions that participants asked are difficult to answer, and institutions must have different game plans — not just one plan — on how to react. “How do plans perform in a world where globalization is under threat? Where capital doesn’t flow as easily? Where there are significant changes in external environments?” There is no one right answer. As the report described,
“Participants suggested boards need to consider a broader range of scenarios… Boards should be vigorously questioning the assumptions built into their planning processes.”
- Institutions will have to adapt to broad changes in the regulatory reform program, which will switch from the protection of the largest and most complex financial institutions over the past eight years to consumerism protection.
- Institutions will also have to balance adhering to and challenging conflicting regulation — namely, regulations that aim to keep the economy safe while also allowing room for innovation. According to one policymaker, “I suspect the supervisory changes will be evolutionary, but it may require a revolution to do it well.” Furthermore, private sector institutions must understand that
“[Public sector] regulators feel absolutely uncomfortable dealing with the technological environment. They are trying to learn, but they are not ready… Regulators absolutely know that technology is a key component, and it will differentiate the industry. They get that, but have no idea how to supervise it. They have the wrong skill set as regulators. … Supervisors are competing for the same pool of experts as the fintech firms and financial institutions. … It is a heavy burden, competing [for] talent with the industry.”
- Overall, fintech companies must be prepared for regulation, perhaps even overregulation, period — it is coming, whether or not they like it. The report described, “A compliance attorney described the attitude toward regulation among some in the fintech community as ‘willful ignorance'” while another participant said, “Many companies want to be compliant, but they don’t know how.”
Who is responsible for such changes within financial institutions? According to one summit participant:
“It is the role of the chairman to create an agenda where people understand that dramatic change is needed to survive. The opposite happens at many board meetings. We can do better.”
With all of these recommendations of changes for institutions to implement though, it is important for executives to remember that innovations should not be implemented for the sake of simply having them, but “to make life better for customers” and to bring costs down.
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