Over the past 16 years, the financial services industry has undergone lots of changes. While 2000–2009 saw disruption due to outsourcing and offshoring, years (2009–2015) following the global financial crisis, witnessed a stricter global regulatory environment. We now see many players evaluating which businesses to retain or shut. I expect the role of technology and a generation of millennials entering the workforce to trigger further changes in business models, but probably on a more profound scale than ever.
Earlier this month, I attended the Asia Pacific Financial Information Conference event, organized by the Financial Information Services Division of the Software & Information Industry Association (SIIA) in Hong Kong. Many speakers discussed the important trends shaping the financial services industry. I am summarizing the most important takeaways from day 1 of the event.
- New Data Sources: There is an increasing use and role of alternative data (social, satellite, e-commerce, video, etc.,) in financial services. The key question and debate point was how to use the alternative data avalanche to gain insight and make investment, business, and marketing decisions. To bring this point to life, after the event, we witnessed the unexpected victory of Donald Trump in the US elections and how traditional data sources such as polls and the mainstream media got the election result wrong. However, a little known Mumbai-based Artificial Intelligence start-up, MogIA, correctly called the result two days before the election, using a proprietary algorithm to analyze the conversation and interaction of 20 million data points (Twitter, Google, Facebook, etc.,). Will we be relying more on these alternative data sources and platforms to make decisions and less on traditional market data providers and fundamental research methodologies?
- Shared Utilities: A key message from the attending banks was that for the right activity they are very open to utilities run by third parties, especially for data cleaning and activities that provide no internal competitive advantage. An interesting case study was presented by SmartStream, which now runs a reference data utility for various banks, including Goldman Sachs, JP Morgan, and Morgan Stanley. Earlier, each bank would have about 200 employees doing exactly the same data cleaning work. This work is now done once by a utility employing 200 people but for all the banks. Although having shared utilities run by third parties would seem like a no-brainer cost and efficiency reduction move, it remains to be seen whether we will see actually more utilities being set up.
- New Competitors: According to me the most interesting panel / debate was the “Looking Into the Current Fintech Scene in Asia: What’s Next?.” The panel explored the future of financial services and the role of Fintech in APAC. It covered several topics, and if the audience were listening, the discussions was a wake-up call to start reshaping their APAC business models and strategies for the future. Wake-up call no.1 was the mention of a recent report published by PwC that predicts 30% of all current banking jobs will disappear by 2030 in Hong Kong – mainly in the back office and middle office due to automation. Wake-up call no.2 was that competition for financial services firms in APAC will come from large technology companies such as Alibaba and Tencent, which are now entering the industry (e.g., Ant Financial) and will remain balance sheet lite. One of the interesting future scenarios painted by the panel was that banks will become outsourced vendors to these large technology companies. Technology companies have a treasure trove of data to design and build customized and targeted financial services products in areas such as retail banking, asset management, and wealth management. Many financial services firms rely on the fat margins of their APAC wealth management businesses. If technology companies start entering the wealth management space aggressively, incumbents will see their margins erode over the next 10 years. It remains to be seen whether technology firms such as the ones mentioned above will enter the capital markets space.
The overall theme was that change and disruption is rapidly entering the financial services industry. Some of the new areas that can be explored for staying relevant are building and managing utilities, risk, and analytics; becoming an automation expert; and owning lots of unstructured / alternative data – data is the new oil!
If banks become outsourcing vendors to large technology companies we could see outsourcing companies, such as Accenture, TCS, and Cognizant, acquire a bank to gain new customers. Wouldn’t that be interesting?