Navigating disruption in financial services
What makes you excited about the impact that fintech is having on financial services?
Peter Brady: One of the ways of looking at financial technology, or fintech, and why I get particularly excited about it, is that it's like electricity at the end of the 19th century. We all know what it is—it's there, it's changing things, but we don't think it's reached anything like its potential to disrupt the entire financial services landscape. We will be using fintech to make things easier. And that's terrifically exciting.
What are some good examples of fintech challenging and disrupting incumbent institutions in financial services?
Brady: In the banking and capital markets, there's an enormous portion of the world that today is completely under-banked. Many people in emerging markets can’t go into a bank branch and do their business. But they have a cellphone. So, companies are innovating to provide full-suite banking over a cellphone. In the asset management space, while algorithmic trading has been around for a while, it is starting to go mainstream in how people manage their accounts automatically. In the insurance space, there's been automation around claims processing. And, with the internet of things, you can now have a device in your car that helps your insurer monitor risk.
What is a commonality of the disruption affecting the many subsectors within financial services?
Brady: Incumbent institutions like banks and large insurance companies have this enormous infrastructure and have to worry about managing the cost associated with that. But very nimble entrepreneurial companies with good ideas can completely disrupt that space by leveraging those ideas infrastructure-free. There is also a commonality in the ability of these fintech startups to cater to today's consumers and the premium they place on instant access, instant execution of transactions, always-on availability and portability.
Are the leaders of these legacy institutions concerned about existential threats from fintech entrepreneurs?
Brady: They don't have their heads in the proverbial sand. If you were to do a survey of CEOs of some of the major banks, for instance, the vast majority of them would say they're worried about their revenue streams being eaten away by some of these fintechs.
How are they responding?
Brady: Their options are fairly simple. They can just carry on as normal and ignore the threat and hope that their heft as an organization is enough to carry the day. Or they can gobble up the startup entrepreneurial companies that threaten them—offer them enormous amounts of money, take them off the market, maybe use some of the intellectual property they have. Another option is to replicate the disruptive technology within their own institutions. The last option is to partner with the fintechs to join forces through collaborative arrangements.
By contrast, what are the concerns of the CEOs of fintech insurgents?
Brady: Their first concern is how to protect the intellectual capital that's really the substance of their organizations. The intellectual capital probably sits in some code, so is that vulnerable to cyberattack? Will a few of the programmers walk out the door and take the code with them? On the growth side, the concern is, how do you scale from an idea through to an organization with people and then turn that into a meaningful company that's able to wound some of the incumbents? They are also concerned about what the liquidation strategy might be.
The term “disintermediation” gets thrown around a lot where fintech meets financial services. How is that concept unfolding in reality?
Brady: Some fintechs are successful at removing the middle man from a transaction, but some fintechs, frankly, are actually concentrating on the intermediary and making it much more efficient. For instance, those fintechs that are employing blockchain technology are broadening the scope of the intermediary and covering it much more efficiently and effectively.
More broadly, what is the impact that blockchain technology will have on legacy business processes?
Brady: If you look at financial services today, it has multiple players, multiple intermediaries, multiple processes and lots of people making sure that the engine keeps on running. What blockchain does effectively is to remove the need for a lot of those intermediaries and, frankly, people. It provides a seamless platform over which transactions can happen without a third party managing it. Any change made in one location appears in all the others. So, you don't need settlement and checking and third-party validation. It's a much more efficient way of carrying out business as a whole. Blockchain will affect functions like trade, settlement and payments