Beyond Fintech - A Pragmatic Assessment of Disruptive Potential in Financial Services
Beyond Fintech - A Pragmatic Assessment of Disruptive Potential in Financial Services
Beyond Fintech - A Pragmatic Assessment of Disruptive Potential in Financial Services
FinancialServices
PartoftheFutureofFinancialServicesseries|PreparedincollaborationwithDeloitte
August2017
Foreword
ConsistentwiththeWorldEconomicForumsmissionofapplyingamultistakeholderapproachtoaddressissuesofglobalimpact,
creatingthisreportinvolvedextensiveoutreachanddialoguewithnumerousorganizationsandindividuals.TheyincludedtheForum's
FinancialServices,InnovationandTechnologycommunities,professionalsfromacademiaandthepublicsector.Theoutreachinvolved
over150interviewsand10internationalworkshopsessions,encouragingcollaborativedialoguetodiscussinsightsandopportunities
concerningfintechdisruptionwithinthefinancialservicesindustry.
Theholisticandglobalperspectiveofthisreportwouldnotbeasenrichedwithoutthesupportandcontributionsfromthesubjectmatter
expertswhoassistedindrivingourthoughtsforwardaboutthefutureofthefinancialservicesindustry.Inparticular,wethankthis
projectsSteeringCommitteeandWorkingGroup,introducedintheAcknowledgementssection,which playedaninvaluablerolewith
theirexpertiseandpatientmentorship.Alsocriticalhasbeentheongoinginstitutionalsupportforthisinitiativefromthe Forumandthe
leadershipofourchairman,whosevisionoftheFourthIndustrialRevolutionhasbeeninspirationaltothiswork.
Finally,wearegratefultoDeloitteConsultingLLPintheUnitedStates,anentitywithintheDeloitte1 network,foritsgenerous
commitmentandsupportinitscapacityastheofficialprofessionalservicesadvisertotheForumforthisproject.
Forfeedbackorquestions,contact:
R.JesseMcWaters WorldEconomicForum
[email protected]
RobGalaski Deloitte
[email protected]
1DeloittereferstooneormoreofDeloitteToucheTohmatsuLimited(aUKprivatecompanylimitedbyguarantee[DTTL]),itsnetworkofmemberfirmsandtheirrelatedentities.DTTLandeachofits
memberfirmsarelegallyseparateandindependententities.DTTL,alsoreferredtoasDeloitteGlobal,doesnotprovideservicestoclients.Pleaseseewww.deloitte.com/about foramoredetailed
descriptionofDTTLanditsmemberfirms.Pleaseseewww.deloitte.com/us/about foradetaileddescriptionofthelegalstructureofDeloitteLLPanditssubsidiaries.Certainservicesmaynotbeavailable
toattestclientsundertherulesandregulationsofpublicaccounting.
ThispublicationcontainsgeneralinformationonlyandDeloitteisnot,bymeansofthispublication,renderingaccounting,business,financial,investment,legal,tax orotherprofessionaladviceorservices.
Thispublicationisnotasubstituteforsuchprofessionaladviceorservices,norshoulditbeusedasabasisforanydecision oractionthatmayaffectyourbusiness.Beforemakinganydecisionortakingany
actionthatmayaffectyourbusiness,youshouldconsultaqualifiedprofessionaladviser.Deloitteshallnotberesponsiblefor anylosssustainedbyanypersonwhoreliesonthispublication.
2
MembersoftheSteeringCommittee
Thefollowingseniorleadersfromglobalfinancialinstitutionsprovidedguidance,oversightandthoughtleadershiptotheFutureofFinancialServices
seriesasitsSteeringCommittee:
3
MembersoftheWorkingGroup
Theprojectteamwouldalsoliketoacknowledgethefollowingexecutivesofglobalfinancialinstitutionswhohelpeddefinetheprojectframeworkand
shapestrategicanalysesasitsWorkingGroup:
DorothyHillenius JPRangaswami
Director,CorporateStrategy, ChiefDataOfficer,
ING Bank DeutscheBank
4
EditorsNote
TheDisruptiveInnovationinFinancialServicesprojectwaslaunchedattheWorldEconomicForumAnnualMeeting2014inDavos
Klosters, inaworldstillconsumedwithnavigatingtheaftershocksoftheglobalfinancialcrisis.Butinthewings,anewchallengefor the
financialsystemwasgrowingintheformoffintech newentrantsthatpromisedtorapidlyreshapehowfinancialproductswere
structured,provisionedandconsumed.
Nearlyfouryearslater,asthisinitiativedrawstoaclose,wetaketheopportunitytoreflectonthechangestothefinancial system
takingstockoftheimpactsthatfintechshavehadandconsideringtheirevolvingrelationshipswithbothincumbentsandregulators.
Moreimportantly,itpresentsanopportunitytoconsiderwhatliesbeyondthehorizonforfinancialservices.Thetechnologiesofthe
FourthIndustrialRevolutionhavetriggeredaseismicshiftinthefinancialsystem,theimplicationsofwhichwillextendfarbeyondthe
fintechsthatpioneeredtheiruseinfinancialservices.Valuechainsthathavecharacterizedtheindustryfordecadesarebeing disrupted
andreshapedwithimplicationsforcustomers,regulators,incumbentsandeveryotherstakeholderinthefinancialsystem.
InthisfourthreportoftheFutureofFinancialServicesseries,wehopetobuilduponourpreviousworkandprovidethemany
stakeholdersofthefinancialsystemwithabetterunderstandingoftheforcestransformingfinancialservices,aswellasan outlookforits
future.
R.JesseMcWaters RobGalaski
ProjectLead,DisruptiveInnovationinFinancialServices AmericasFinancialServicesLeader
WorldEconomicForum Deloitte
5
Contents
1.ContextandApproach..... 7
2.KeyFindingsandUncertainties... 11
3.Sector DeepDives
3.1Payments.. 35
3.2Insurance.. 59
3.3DigitalBanking.. 84
3.4Lending 105
3.5InvestmentManagement.. 126
3.6EquityCrowdfunding 147
3.7MarketInfrastructure.. 168
Acknowledgements.. 189
ContactDetails............................................................................................................................................................................................ 195
6
Section1
ContextandApproach
WORLDECONOMICFORUM|2017 7
CONTEXTANDAPPROACH|PASTREPORTS
Thisreportrepresentstheculminationofthreephasesofresearchintothe
transformativeroleoffintechsonthefinancialservicesecosystem
SinceDecember2014,theWorldEconomicForumhasstrivedtounderstandtheimpactofinnovationsonthefinancialservices
ecosystem,andtodeterminehowallstakeholderswouldbeaffected
PHASE1
Phase1laidoutafoundationforunderstandingthetransformativepotentialofnew
entrantsandinnovationsonbusinessmodelsinfinancialservices.Itfocusedon:
Establishing a clear taxonomy for understanding whichfintech innovations are
the most relevant
Mapping possiblefutures for the evolutionary paths of emergingfintech innovations
Exploring the implications of fintech on key stakeholders(consumers, incumbents,
regulators, etc.)
Phase1 outcomesare captured in thereport,The Future ofFinancial Services
PHASE2
Phase2 aimedtoillustratethe roleof financialinfrastructure in enabling thefuture of
financial services.Itfocusedon:
Understandingthetransformativepowerofblockchainonshapingthefuture
capabilitiesandcharacteristicsoffinancialinfrastructure
Definingahighlevelblueprintforfullydigitalidentityprotocols that
simultaneously empowers users, andsimplifiesandderisks identity transactions
Phase2 culminated in the release of two reports, Thefutureoffinancial
infrastructure and A Blueprint for DigitalIdentity
WhatisaFintech?Inthisdocumentwedefineafintechtobeasmall,technologyenabled,newentranttofinancialservices.Thisdefinitiondoesnotinclude
largetechnologyfirmsthatenterfinancialservices(e.g.ApplewithApplePay),orincumbentfinancialinstitutionswhoincreasetheirfocusontechnology
Thefinalphasereturnstothestructureofthe2015report,conductingabroad
explorationoftheforcesreshapingthefinancialservicesecosystem
Thisreportbuildsontheworkofthepreviousreports,exploringtheforcesreshapingthestructureofthefinancialsystem. It also
considersevolutionarypathsforthefutureofthesystem,aswellastheirimplicationsforstakeholders
REPORTQUESTIONS
Whataretheinnovationsthathavemadethemost
1 impactonthefinancialecosystemsincethe2015
report,andwhataretheideasthathavefailedto B2B
produceimpact? Partnerships
Emerging
Howwilltheseinnovationsimpactthewaysinwhich Ecosystems
2 financialservicesarestructured,provisionedand
consumedinthefuture?
Whatwillbetheimplicationsoftheseinnovationson
3
thebroaderfinancialsystem?
9
Context&Approach KeyFindings KeyUncertainties 9
CONTEXTANDAPPROACH|PROJECTCONTEXT
Overthelast10months,theprojectteamengagedwithover150expertsandheld10
workshopsinordertoanswerpivotalquestions
IndustryLeaders Innovators
Gainedoversight,guidanceandthoughtleadershipfromCsuiteexecutives, Heldinpersonandphoneinterviewswithover100innovativenewentrants
operatingunitleadersofglobalfinancialinstitutions, andindustryregulators and subjectmatterexperts
GlobalWorkshops
Facilitated10multistakeholderworkshopsatsixglobalfinancialhubswithover300totalparticipants,including
industryleaders,innovators,subjectmatterexperts, andregulators
WORLDECONOMICFORUM|2017 10
Context&Approach KeyFindings KeyUncertainties 10
Section2
KeyFindingsandUncertainties
WORLDECONOMICFORUM|2017 11
KEYFINDINGS|OVERVIEW
Fintechshavechangedhowfinancialservicesarestructured,provisionedand
consumed,buthavenotsuccessfullyestablishedthemselvesasdominantplayers
Manyfintechs(small,technologyenablednewentrants)cameintoexistencewiththegoalofovertakingincumbentsasthenew
dominantplayersinfinancialservices buthaveshiftedtobuildingpartnershipsastheystrugglewithscaleandcustomeradoption
WHEREFINTECHSHAVESUCCEEDED WHEREFINTECHSHAVEFALLENSHORT
Fintechshavemateriallychangedthebasisofcompetitioninfinancialservices,buthavenotyetmaterially
changedthecompetitivelandscape
*Caveat:Ingeographieswhereincumbentserviceprovidersdidnotexistandinsegmentswhereincumbentswherenotmeetingcustomersegmentsneeds,
newentrantstofinancialserviceshavebeenabletobuildsignificantscale
12
Context&Approach KeyFindings KeyUncertainties 12
KEYFINDINGS|OVERVIEW
Althoughfintechshavefailedtodisruptthecompetitivelandscape,theyhavelaidthe
foundationforfuturedisruption
Thesuccessoffintechsinchangingthebasisofcompetition,aswellastheincreasingpaceoftechnology,meansthatwhilefinancial
institutionshavethepotentialtoimproverapidly,theyfacerapiddisruptionbothnowandinthefuture
SOMEFINANCIALINSTITUTIONSHAVETURNEDTHETHREATOFFINTECHSINTOANOPPORTUNITY
Therapidgrowthofthefintechecosystemallowsfirmsto Theproliferationoffintechsprovidesfinancialinstitutionswith
externalizepartsoftheirinnovationfunction,astheywaitand asupermarketforcapabilities,allowingthemtouse
seewhichnewofferingsgaintractionbeforedeployingtheir acquisitionsandpartnershipstorapidlydeploynewofferings
ownsolutions
BUTTHEACCELERATINGRATEOFCHANGEREPRESENTSASERIOUSTHREAT
Theacceleratingtempooftheinnovationcycleinfinancial Theabilitytoshopthefintechlandscapeforcapabilitiesisnot
servicesmeansthatafinancialinstitution'ssuccessis limitedtoincumbentinstitutions;today,newentrantsface
predicatedonbusinessmodelagilityandtheabilitytorapidly significantlylowertechnologicalbarrierstoenteringfinancial
deploypartnerships,neitherofwhicharetraditionalcore services, withpotentiallongtermimplicationsforthe
competenciesoftheseinstitutions competitivelandscape
13
Context&Approach KeyFindings KeyUncertainties 13
KEYFINDINGS|OVERVIEW
Theprojectteamhasidentifiedeightforcesthathavethepotentialtoshiftthe
competitivelandscapeofthefinancialecosystem
DISRUPTIVEFORCES
CostCommoditization:Financialinstitutionswillacceleratethecommoditizationoftheircostbases,removingthemas
1 pointsofcompetitionandcreatingnewgroundsfordifferentiation
ProfitRedistribution:Technologyandnewpartnershipswillenableorganizationstobypasstraditionalvaluechains,thereby
2 redistributingprofitpools
ExperienceOwnership:Powerwilltransfertotheownerofthecustomerinterface;puremanufacturersmusttherefore
3 becomehyperscaledorhyperfocused
PlatformsRising:Platformsthatoffertheabilitytoengagewithdifferentfinancialinstitutionsfromasinglechannelwill
4 becomethedominantmodelforthedeliveryoffinancialservices
DataMonetization:Datawillbecomeincreasinglyimportantfordifferentiation,butstaticdatasetswillbeenrichedby
5 flowsofdatafrommultiplesourcescombinedandusedinrealtime
BionicWorkforce:Astheabilityofmachinestoreplicatethebehavioursofhumanscontinuestoevolve,financial
6 institutionswillneedtomanagelabourandcapitalasasinglesetofcapabilities
SystemicallyImportantTechs:Financialinstitutionsincreasinglyresemble,andaredependenton,largetechfirmsto
7 acquirecriticalinfrastructureanddifferentiatingtechnologies
FinancialRegionalization:Divergingregulatoryprioritiesandcustomerneedswillleadfinancialservicesindifferentregions
8 oftheworlddowndistinctpaths
Context&Approach KeyFindings 1 2 3 4 5 6 7 8 KeyUncertainties 14
KEYFINDINGS|COSTCOMMODITIZATION
Financialinstitutionswillacceleratethecommoditizationoftheircostbases,
removingthemaspointsofcompetitionandcreatingnewgroundsfordifferentiation
Facingenormouspressuretoreducetheircostbase,incumbentfinancialinstitutionsareembracingnewtechnologies,aswellasworking
withlongtimecompetitorsandnewentrantsalike,tocommoditizecostdriversthatdonotprovidecompetitivedifferentiation
ARCHETYPES
Sharingcostsamongpeersandutilizingindustrystandardautomationtoolswill
deverticalizethevaluechain
ImplicationsforFintechs
TheriseofcostsharingutilitiesandB2B ImplicationsforRegulators
providerslowersthebarrierstoentry Regulatorsneedtomonitorthegrowth
fornewentrants ofutilitiesandbusinesstobusiness
(B2B)serviceproviders,andconsider
theirpotentialsystemicrisks
Fintechs Regulators
ImplicationsforAll
FinancialInstitutions
Organizationsmustviewpartnerships
andecosystemmanagementasa
companywidestrategicfocus
Organizationswillhavetostart
thinkingofsecurityandpermissionsas Incumbents
ajigsaw eachpiecewillhavetobe
treatedseparatelytominimizethe
threatfromanynewexternal
connection
Organizationswillneedtoimprove
trackingofdataflowstoprotectusers,
asinformationissharedwithexternal ImplicationsforIncumbents
companies Incumbentswillneedtodifferentiate
theircustomerfacingprocesses,as
middleandbackofficesbecome
commoditized
Technologyandnewpartnershipswillenableorganizationstobypasstraditional
valuechains,therebyredistributingprofitpools
Thelocationofprofitpoolswithinandbetweenvaluechainswillshiftastechnologicalcatalystsenablecompaniestochange their
positionsandrelationships
ARCHETYPES
Asprofitpoolsshiftduetovaluechainmovements,intermediarieswillface
competitivepressurefromallsides
ARCHETYPES(CONTINUED)
ImplicationsforFintechs ImplicationsforRegulators
Thepoolofpotentialpartnersthat Regulatorsmustmonitortheshiftin
canprovidescale,capitaland profitpoolsinordertoidentifythenew
customerreachwillexpandbeyond valuechain,aslongregulated
traditionaladjacencies companiesbecomelessrelevantand
newcompaniesgrowinimportance
RegulatoryDisruption
Regulatorsarecurtailingfinancial
institutionscontroloveraccessto
infrastructure,loweringmarketpower Fintechs Regulators
andshiftingprofitsawayfromfirmsthat
overseeinfrastructure
Incumbents
ImplicationsforAllFinancial
Institutions
Technologywillreducethecostof
bypassingvaluechainintermediaries ImplicationsforIncumbents
Example:TheEuropeanUnion'srevised andreachingtheendcustomer
PaymentServicesDirective(PSD2) Intermediariesthatderivevalue
threatenstodisintermediatepayment Companieswillneedtomonitortheir fromtheirpositiononthevalue
networksbymandatingthatbanksallow adjacenciesforpotential chainwillstruggletobeprofitable
open,secureconnectionsbetween pressures/shiftsfrompartners scalewillbenecessaryforsurvival
merchantsanduseraccounts
Powerwilltransfertotheownerofthecustomerexperience;puremanufacturers
mustthereforebecomehyperscaledorhyperfocused
Theriseofplatformsmeansincumbentscannolongerrelyoncontrollingbothproductmanufacturinganddistribution,allowingproduct
distributorstoleveragecontroloftheircustomerexperienceandplacepressureonmanufacturers
ARCHETYPES
Customerswillinteractwithfewerandfewerdistributorsinthefuture,asthe
marketconsolidatesandmajorfirmsgainmarketshare
Fintechs Regulators
ImplicationsforAll
FinancialInstitutions
Allfirmswillseektobedistributors ImplicationsforIncumbents
ofboththeirproductsandthoseof Incumbents Incumbentswillhaveadvantagesin
others;theirsuccesswilldependon theracetobecomedistributorsdue
theexistingmarketandwhether totheirexistingcustomerbase
theycancapturemindshare
However,incumbentsthatfailto
Productdistributorsmaystruggleto becomeproductdistributorswillsee
achieveubiquityandconsistencyof adeclineinproductprofitmargins
experienceacrossanincreasingly duetocostcommoditization
fragmenteduniverseofconnected
devices
Platformsthatoffertheabilitytoengagewithdifferentfinancialinstitutionsfroma
singlechannelwillbecomethedominantmodelforthedeliveryoffinancialservices
Theshifttomultipleproviderplatformsasachanneltodistributeandtradeisgraduallyemergingacrossgeographiesandthroughouta
widerangeoffinancialproducts herearejustafewexamplesofwhathasbeendeveloped
ARCHETYPES
Theriseofcustomerchoicewillhaveprofoundimplicationsonthedesignand
distributionofproducts,andwillforcecompaniestoshiftroles
ImplicationsforFintechs
Platformsallowproductfocused ImplicationsforRegulators
fintechstheopportunitytoscalequickly Uncertaintiesaroundwhoisthe
responsiblepartywillneedtobe
resolvedinbothB2CandB2Bmarkets
forissuessuchasproductsuitabilityand
liability
Fintechs Regulators
ImplicationsforAll
FinancialInstitutions
Productdifferentiationwillbecome
criticalwhereinstitutionsdonot
controlthesales/distributionchannel
Platformownerswillneedtobecome
capableecosystemmanagers,
balancingtheneedsoftheproduct Incumbents
manufacturerswithcustomerdemand
Platformswillnaturallycapturemarket
datafromallparticipants,addingto ImplicationsforIncumbents
theplatformowner'smarketpower
Productswillneedtobestandalone
Platformownersandproductowners
profitabletobesustainableinaplatform
willneedtoaddressopenquestions
environment(nomorelossleaders)
abouttheliabilityofproductsplaced
onplatforms Improvedpricecomparabilitywillfavour
largeincumbentswhereproduct
economiesofscaleexist
Datawillbecomeincreasinglyimportantfordifferentiation,butstaticdatasetswill
beenrichedbyflowsofdatafrommultiplesourcescombinedandusedinrealtime
Organizationswillhavetouseacombinationofdatastrategiestocollectthedepthandbreadthofdataneededtofollowthe leadof
techfirmsindatamonetization
ARCHETYPES
Asfinancialinstitutionsseektoincreasetheamountandvarietyofdatathey
collect,ownershipandcontrolofdatawillbecomeakeyissueforallstakeholders
ImplicationsforFintechs ImplicationsforRegulators
Incumbentswillneedhelptomanage, Regulatorsmustcarefullymonitorthe
useandsecuretheirdata,creatinga sharingofdatatoensurethattheriskof
newbusinesslineforfintechs hackingisaslowaspossible
Regulatorsmustalsobeawareofhow
banksusetheadditionaldatathey
Fintechs Regulators
collect,andwhethercustomers
understandtheimpactofsharingtheir
information
Regulatorsmustdecidehowmuch
consumerscancontroltheirown
informationthattheyhavesharedwith
institutions
Incumbents
ImplicationsforAll
FinancialInstitutions
ImplicationsforIncumbents
Datasecuritywillbecrucialin
establishingandmaintainingtrustwith Incumbentswillhavetodecideonthe
thecustomer valueofmigratingexistingdatainlegacy
systemstoenvironmentswhereitcan
Newpartnershipsbasedondatawill
bemoreeffectivelymaintained,versus
createanimperativeforacompany
implementingtoolsandstrategiesfor
widepartnershipstrategy
collectingnewdata
Nationaldataregulatorswillplaya
largerroleinfinancialservices
Context&Approach KeyFindings 1 2 3 4 5 6 7 8 KeyUncertainties 24
KEYFINDINGS| BIONICWORKFORCE
Thearrivalofnewtechnologies,suchasartificialintelligence,willmeanmajorshiftsin
financialinstitutionsworkforcesasthedefinitionoftalentevolves
Organizationswillneedtomanagetalentasacollectivesetofemployeesandmachineenabledsolutions,especiallyascognitive
technologiescontinuetodevelopandincreaseinrelativeimportance
ARCHETYPES
Sources:1.HBR2.MITSloanManagementReview
Theevolutionoftalentwillfundamentallyshifttheroleofhumancapitalwithin
financialinstitutions
ImplicationsforFintechs ImplicationsforRegulators
AIandautomationfocusedfintechs Regulatorswillneedtodevelopnew
willbeindemandascompaniesseek strategiesfordealingwithAI,including
toquicklygainexpertise enforcementandpunishmentofnon
compliantactionsbyAI
Fintechs Regulators
ImplicationsforAll
FinancialInstitutions
AIriskmanagementwillbeapriority Incumbents
AIrepresentsasinglepointoffailure
Technologicalimprovementsarelikely
tocomeinwaves,meaningthat ImplicationsforIncumbents
changesfromAIwillimpactsomeparts
oftheorganizationatdifferentrates Incumbentswillhavetofigureouthow
thanothers tocommunicatetheirculturethrough
customerfacingAI
Companieswillneedtomanagethe
balancebetweenhumanAI Incumbentswillneedtohaveastrategy
interactions,andtraintheiremployees onhowtoacquireAIexpertise
toeffectivelycoexistwithAI
Financialinstitutionsincreasinglyresemble,andaredependenton,largetechfirmsto
acquirecriticalinfrastructureanddifferentiatingtechnologies
Theriseofdigitalinterfacesanddatainfinancialinstitutionsmeansthatthoseinstitutionsincreasinglyfocusondeveloping largetech
capabilities,whichisaccompaniedbyanincreasedrelianceonlargetechfirms
ARCHETYPES
Thecomingcollisionbetweenfinancialinstitutionsandlargetechsleadstotough
choicesforallfirms:becomedependentonlargetechsorriskfallingbehind
ImplicationsforFintechs ImplicationsforRegulators
Fintechsmayhaveopportunitiesto Howlargetechsaretreatedunder
workwithlargetechstobroadentheir traditionalregulatoryframeworkswill
reach,whilealsohelpinglargetechs havealargeimpactontheirinteractions
enterfinancialmarkets withfinancialinstitutions
Fintechsmaybeattractivetargetsfor
incumbentsseekingtoacquire Fintechs Regulators
technicaltalent
Incumbents
ImplicationsforAll
FinancialInstitutions ImplicationsforIncumbents
Allfinancialinstitutionswillneedto Incumbentswillhavetocompetewith
findwaystopartnerwithlargetechs largetechsfortalent,drivingupthecost
withoutlosingtheircorevalue oftechnologytalent
proposition
Incumbentsriskfallingfarbehindon
Allfirmsriskbecomingdependenton technologicalofferingsiftheyminimize
largetechs,whichnecessitatestheloss engagementwithlargetechstoprotect
ofsomecontroloverbothcostsand independence
data
Context&Approach KeyFindings 1 2 3 4 5 6 7 8 KeyUncertainties 28
KEYFINDINGS| FINANCIALREGIONALIZATION
Differingregulatorypriorities,technologicalcapabilitiesandcustomerconditions
arechallengingthenarrativeofincreasingfinancialglobalization
Thetrendtowardsfinancialglobalizationisgivingwaytoregionalmodelsoffinancialservicessuitedtolocalconditions,led bythe
complexityofdifferingcustomerneedsanddifferencesinsolutionsaroundtheworld
ARCHETYPES
Increasinglydivergentregionalfinancialsystemsmeanthatlocalplayerscould
quicklygainmarketshare,butinternationalgrowthisdifficult
ImplicationsforFintechs ImplicationsforRegulators
Fintechswillfaceseriousobstaclesto Regulatorswillfacetwoopposed
establishingthemselvesinmultiple pressures:largeincumbentswillpush
jurisdictions,evenastechnology forglobalconvergence,andlocalfirms
theoreticallylowersbarrierstoentry willpressforlocalizedregulations
Fintechs Regulators
ImplicationsforAll
FinancialInstitutions
Incumbents
Thebreedinggroundforfintech
innovationmaybecomeevenmore
multipolar,asfirmswithofferings
specializedtotheirlocalewill ImplicationsforIncumbents
strengthenregionalfintechhubs
Globalfirmswillneeddistinctstrategies
Newideascanbetestedinone tocultivateregionalcompetitive
geographyandintroducedtoother advantagesandintegratewithlocal
areasonceconditionschange ecosystems
Regionalizationofemerging Incumbentsmaybecomeattractive
capabilitieswillforcethecreationof partnersforfintechsseekingtoenter
differentsolutionstosimilarproblems newmarketsastheylookfor
opportunitiestorapidlyscale
Context&Approach KeyFindings 1 2 3 4 5 6 7 8 KeyUncertainties 30
KEYFINDINGS|CROSSCUTTINGUNCERTAINTIES
Inadditiontothekeyfindings,thefollowingopenquestionswillshapethe
industry'sdevelopment thepathforward,however,isuncertain
Thesequestionswillinfluencethefutureofallfinancialservicessectors,andarethusoftensubjectsofdiscussion butthe current
discussionholdsmorequestionsthananswers
UNCERTAINTIES
SystemicTransparency CooperationProblems
Howwillthetransparencybuiltintonew Canfinancialservicesfirmsusetechnology
systemsimpacttheirdesign,participants tosolvelongrunningpartnershipand
rolesortheirprofitmodels? collaborationissuesthatlieattheheartof
theindustry?
References
1. HowArtificialIntelligenceWillRedefineManagement.HarvardBusinessReview(HBR).Retrievedfromhttps://hbr.org/2016/11/howartificialintelligencewillredefine
management
2. AreYouReadyforRobotColleagues?.MITSloanManagementReview. Retrievedfromhttp://sloanreview.mit.edu/article/areyoureadyforrobotcolleagues/
3. JPMorganChaseinpushtominecustomerdata.FinancialTimes(FT).Retrievedfromhttps://www.ft.com/content/1eaf6436e4a211e69645c9357a75844a
4. CDOinterview:MacquarieBankingGroupsdigitalleaderondeliveringcustomertrust.CMOfromIDG. Retrievedfromhttps://www.cmo.com.au/article/609962/cdo
interviewmacquariebankinggroupdigitalleaderdeliveringcustomertrust/?pp=2
WORLDECONOMICFORUM|2017 33
SECTORDEEPDIVES|READINGGUIDE
ReadingGuideforSectorDeepDives
Eachsectordeepdiveisorganizedaccordingtoacommonstructure:contextonthesectorandrecentinnovations,ananalysis of key
trendsanduncertainties,andseveralpotentialendstatesillustratingevolutionsofthesectorincomingyears
Atrackeroneachpageillustratesthereaderspositioninthesectordeepdive
WORLDECONOMICFORUM|2017 35
PAYMENTS|INTRODUCTION
Paymentshavegreatlyevolvedinthelastseveralyears.Thissectionexaminesthe
keytrendsshapingtheindustryandtheuncertainpathforward
Thefirsthalfofthisdecadesawrapidchangeinthepaymentslandscape,withtheglobalentryofseveralinnovativeforcesthatraised
fundamentalquestionsaboutthefutureofpayments
CIRCA2015,THEMAJORFORCESIMPACTINGPAYMENTSWERE
CIRCA2015,THEBIGUNCERTAINTIESABOUTTHEFUTUREOFPAYMENTSWERE
Note:Forthepurposesofdistinguishingonlineandinpersonbrickandmortarshopping,allinstancesofretailrefertobrickandmortar
shopping
Paymentshavecontinuedtheirmigrationtodigitalchannelsinthefaceof
geographicallyvariedadoptionofmobilepaymentanddecliningprofitability
WHEREDIDDISRUPTIONOCCUR?
Paymentshavecontinuedtomigrateawayfromcashandbecomelessvisibletothecustomeras
A consumersshiftpurchasestoonlineandmobilechannels
Paymentsbusinessesareexperiencingintensepressureonmarginsinthefaceofcompetitionanda
B challengingregulatoryenvironment
Regionaldistinctionsbetweenpaymentsecosystemsaregrowing,asbothcustomerbehaviourand
C regulatoryenvironmentsdiverge
WHEREHASDISRUPTIONNOTOCCURRED?
Mobilepaymentsolutionshavenotsufficientlyexceededthefunctionalityofpreexistingsolutionsin
D cardbasedmarkets,thuslimitingtheiradoption
Customeracceptanceofnontraditionalpaymentschemes(e.g.alternativecurrencies)remainsalmost
E nonexistent
Paymentshavecontinuedtomigrateawayfromcashandbecomelessvisibletothe
customerasconsumersshiftpurchasestoonlineandmobilechannels
Onthebackofglobalshiftsincommercepatternsfrominpersontoonline,paymentvolumesandchannelshavenaturallyshiftedaway
fromcashtowardssimple,frictionlesssolutions,whichareoftenoperatedbylargetechfirms
SUPPORTINGEVIDENCE
Dominanceof Theglobalonlineshoppingmarketisgrowingquicklyattheexpenseofinpersonshopping,andtherefore
OnlineSales onlinebased(cashless)solutionswilldominatetheoveralltransactionlandscape
Especiallyinemergingeconomies,thenearubiquityofmobilephonescombinedwiththelackof
IncreaseinMobile
developmentintraditionalfinancialsolutionsisdrivingthedevelopmentoftechnologicallyadvanced,
Connectedness
mobilebasedsolutionsforpayments
Largetechfirmsaredrivingthedevelopmentofonlinepaymentplatformsinecommerce,causing
GrowingRoleof
paymentstobecomelessvisibletothecustomer;theactionofloggingintoanonlineplatformissufficient
OnlinePlatforms
toenableatransaction,withactualpaymentdetailsstoredinthebackground
Paymentshavecontinuedtomigrateawayfromcashandbecomelessvisibletothe
customerasconsumersshiftpurchasestoonlineandmobilechannels(continued)
CASESTUDIES QUANTITATIVEEVIDENCE
ChangeinUSBlackFridayShoppersby
Channel,20142015(million)4
8
Growthofonlinepaymentplatform Shifttoonlinesales 6
6
Amazonsonlinestoregrowth ThegrowthofChinasinpersonretail
represented53%ofoverallUSe shoppingmarketslowedto10%in
4
commercegrowthin2016,1 drivenby November2016,2 itslowestlevelof 2
thesuccessofAmazonPrime,which growthinoveradecade,ascustomers Inperson
nowhas80millionsubscribers.Amazon shiftedtheirshoppingfromretailto 0 1 2
Online
isalsocreatinganecosystemaroundits onlinechannels.SalesonSingles'Day, 2
oneclickpaymentservicebyrollingit whichrepresentsthebiggestoneday
outtoothermerchants(indirect saleinChinasonlineshoppingmarket, 4 3
competitionwithPayPal,forexample). grewmorethan32%in2016.3
Shiftfromretailtoonlineshopping
KEYUNCERTAINTIES
Theincompatibilitybetweencashanddigitalmarketplacesmeansthatpaymentswillonlycontinuetomovetowardscashlesssolutions
Sources:1.SliceIntelligence2.FT3.CNBC4.Fortune.com
Paymentsbusinessesareexperiencingintensepressureonmarginsinthefaceof
competitionandachallengingregulatoryenvironment
Increasingcompetition,coupledwithregulatoryforcesandtheriseofnewsolutionsontopofthetraditionalecosystem,meansthat
paymentprofitabilitywilldeclineinthefuture
SUPPORTINGEVIDENCE
Severaljurisdictions,includingEurope,CanadaandAustralia,haveeitherpassedorarepassinglegislation
limitingthefeeschargedontransactions,thuslimitingprofitabilityforallintermediaries.Europe,
InterchangeCaps specifically,isimplementingtheEUInterchangeFeeRegulation(IFR),andweakeninghonourallcards
rules(whichforbidmerchantsfromselectivecardacceptance),makinghighfeecreditcardsunattractive
formerchantstoaccept
Thedevelopmentofnationallevelfasterpaymentschemeswillleadtoadecreaseinrevenuesfromother
FasterPayment paymentsources(wiretransfers,cheques,etc.)ascustomersmovetonewplatforms.Also,where
Schemes nationallevel fasterpaymentschemesexist,feestotheendconsumerarenonexistent,conditioning
customerstoexpectlowfeepaymentsinalltransactions
NewForeign TechnologicallyadvancedfintechsaremovingintoboththeretailandB2Bareas,loweringrevenuesthat
Exchange financialinstitutionscanearnonforeignexchange(FX).Severalbankshavedecidedtopartnerwitha
Solutions fintechsolutiontoofferFXservicesinsteadofoperatingtheirown,forgoingthatincomeentirely
Paymentsbusinessesareexperiencingintensepressureonmarginsinthefaceof
competitionandachallengingregulatoryenvironment(continued)
CASESTUDIES QUANTITATIVEEVIDENCE
EvolutionofCreditCardFeesinAustralia
3
MerchantFee(%)
2
TransferWise,aretailFXplatform, LendingClub,aswellasmanyofits
1.5
originallybrandeditselfasan competitorsinthealternativelending
alternativetohighbankfees,butin sector,haslongadvertisedtothe 1
recentyearshasbeguntoworkwith revolvingcreditmarket highlighting 0.5
selectbankstoexpanditscustomer lowerinterestrates,theabsenceof
0
base.Ithasannouncedpartnerships additionalfeesandtheabilitytoraise 2003 2005 2007 2009 2011 2013 2015
withN26inGermany,Starlinginthe creditscores.Asof2017,LendingClub VISA/MC AMEX
UnitedKingdomandLHVinEstonia(the claimsithasalreadyconvertedover
country'slargestbank). 300,000revolvers.5 Decliningcreditcardaveragemerchantfees6
KEYUNCERTAINTIES
Thedeclineinpaymentprofitabilitywillforceincumbentstolookelsewhere,includingatpaymentsdata,tobridgetheprofitgap
Sources:5.LendingClub.com6.Finder.com.au
Regionaldistinctionsbetweenpaymentsecosystemsaregrowing,asbothcustomer
behaviourandregulatoryenvironmentsdiverge
Standardizedglobalpaymentssystemsremainelusiveaslocationspecificpainpointsandregulationsleadtolocalized
improvementsinpaymentssystems
SUPPORTINGEVIDENCE
Levelof Countrieswithoutmodernpaymentssystemsbenefittedgreatlyfrommobilepaymenttechnology,
UnmetNeeds whereasthebenefitsaremoremarginalincountrieswithmodernpaymentssystems.Asaresult,adoption
hasdifferedconsiderablybyregion,dependingonthedegreeofunmetneeds
Whethernewpaymenttechnologyisubiquitousalsogreatlyaffectstheadoptionofpaymentsolutions.The
Ubiquityof
Technology adoptionofmobilepaymentsolutionshasbeenmuchhigherinAfricaandAsia(wheremerchantshave
supportednewtechnologies)comparedtotheUnitedStates,wheremerchantshaveresistedadoption
ThecomingrolloutofPSD2willadvancethedevelopmentofnewpaymentschemesinEurope(andother
OpenPayments
jurisdictionsthatadoptsimilarlegislation,suchasAustralia),butitishighlyunlikelythatchangesto
Regulation
EuropeanpaymentswillinfluencetheregulationofUSmarkets
Countriesthatembracedemonetizationwillforcetheadoptionofmobilewallets,whichhastheeffectof
Demonetization givingmobilebasedsolutionstheneededcriticalmasstosucceed acriticalmassthatmaybealongtime
incomingincountrieswhereregulatorsdonotactasinnovationdrivers
Regionaldistinctionsbetweenpaymentsecosystemsaregrowing,asbothcustomer
behaviourandregulatoryenvironmentsdiverge(continued)
CASESTUDIES QUANTITATIVEEVIDENCE
TransactionsbyTypeinDifferent
Countries(%)
85
77
Demonetizationby Similarmarkets 68
53
theIndiangovernment differentadoptionrates
47
Attheendof2016,Indias Paymentexperiencescandiffer 32
demonetizationof500and1,000rupee significantlyeveninsimilarmarkets.In 23
15
notesledtomassadoptionofmobile Canada,regulationdrovemuchearlier
walletsinrecordtime thecompound adoptionofEMV(smart,orchip,cards)
annualgrowthrate(CAGR)for2016 comparedtointheUnitedSateswhere Australia France Germany US
wasexpectedtoreach160%,andthe retailerpressureslowedrollout.Asa Cash Card/Other
shareoftotaltransactionsisexpected result,only18.6%of2016USpointof
toreach57%by2022,upfromabout salestransactionsusedEMVincompared Varyingimportanceofcashindifferentcountries9
20%in2016.7 to90.7%inCanada.8
KEYUNCERTAINTIES
Theregionalizationofpaymentsecosystemswilllikelyaccelerateaslegislationandtechnologycontinuetodiverge
Sources:7.Technavio8.TSYS9.InternationalJournalofCentralBanking
ThecomingapplicationoftheEuropeanUnion'srevisedPaymentServicesDirective
(PSD2)byJanuary2018willgreatlyshiftthepaymentslandscapeinEurope
PSD2representsahostofchangestotheoriginalPaymentsServicesDirective(PSD)passedin2009,focusingonfourbroadthemes:
marketefficiency,consumerprotection,competitionandchoice,andsecurity
KEYCHANGES EFFECTONPAYMENTS
ThemainchangetotheoriginalPSDconsistsoftwonewentities,
Paymentinitiationservicesallowmerchantsto
withbankscreatingamodelofsimpleandsecureaccess:
linkdirectlytothecustomersbankaccount,
bypassingaseriesoftraditionalintermediariesto
lowercosts
Accountinformationserviceswillallowservices
PaymentInitiation AccountInformation thataredependentoncustomerinfo,suchas
Services Services accountaggregationserviceslikeMintandYodlee,
tooperatewithoutbankaccountpasswords,
Theseallowuserstoinitiate Theseallowuserstoauthorize increasingsecurity
paymentsdirectlyfromtheir servicestoaccesstheirbank
bankaccountstomerchants accountinformation KEYUNCERTAINTIES
Concurrently,theEuropeanUnionisrollingouttwomajor WhatwillthePSD2implementationtimelinebe,and
paymentsrelatedchangesaspartofIFR(InterchangeFee 1
howwillbanksreact?
Regulation):
Interchangefeesarecappedat0.20.3%oftransactionvaluefor HowwillEUregulatorsmonitorandenforcethe
debitandcredit,respectively
2 degreeofinstitutionalcompliancewithPSD2,andwill
thisdifferbycountry?
Thehonourallcardsrule(forbiddingmerchantsfromselective
cardacceptance)nolongerapplies;instead,cardsarenowsorted Willthisdriveinnovationatthemerchant/intermediary
3
bycategory,andretailerscanchoosewhichcategoryofcardsto level,andwillcustomersadapt?
accept
44
PAYMENTS| FINDINGD
Mobilepaymentsolutionshavenotsufficientlyexceededthefunctionalityofpre
existingsolutionsincardbasedmarkets,thuslimitingtheiradoption
MobilepaymentsolutionshavenotbecomeaspervasiveintheUnitedStatesandEuropeasinotherpartsoftheworld,duetothe
overwhelmingdominanceofcardbasedsolutions
SUPPORTINGEVIDENCE
Customersarereluctanttotryanewmethodofpayment(mobile)withoutaclear,demonstrated
SwitchingCostsvs
IncrementalValue improvement.Ingrainedbehavioursmeanthatthelesssignificantofanimprovementanewsolution
represents,thelesspatiencecustomerswillhavewithit
Lackof Theubiquityofcardbasedtechnologieshasmeantthatmanyvendorssimplydonotsupportmobile
Ecosystem payments,anditisoftendifficulttoidentifyvendorsthatdo.Thiscreatesanegativelooparoundthe
Support technology thelesssupport,thelesscustomerswillwanttoadopt,whichleadstolesssupport
Manycardbasedmarketsalsolackoneconsistentmobilepaymentstandard,meaningthatevenifstores
Lackof
acceptmobilepayments,itisoftenunclearwhichoneofseveralsolutionswillwork/notwork,further
SingleStandard
cloudingtheseamlesscustomerexperience
Mobilepaymentsolutionshavenotsufficientlyexceededthefunctionalityofpre
existingsolutionsincardbasedmarkets,thuslimitingtheiradoption(continued)
CASESTUDIES QUANTITATIVEEVIDENCE
ApplePayUsersvsAlipayUsers
asof2016(million)12
Gradualgrowth,butlowusage Failureofretailerbackedsolution
ApplePayhasgrownsinceits CurrentC,amobilepaymentappbacked
introduction,withApple'sChief byretailersincludingWalmart,Target
450
ExecutiveOfficerTimCookannouncing andWendys,shutdownmid2016asa
thattheworldwidenumberof resultoflowadoptionandretailers 12
transactionsroseby450%yearover pullingoutofitsservice.11 Fracturesin
year.However,thirdpartyadoption theretailergroupduetodifferent
studiespaintamoremixedpicture, loyaltyprogrammes,aswellaslow
withdecreasingsameuserusageand adoptionandusage,ultimatelyledtoits
frequencysinceApplePaywas demise. Mobilepaymentsolutionadoptionin
launchedin2014.10 differentmarkets
KEYUNCERTAINTIES
Untilmobilebasedsolutionscandemonstratesustainableadvantagesovercards,theiradoptionincardbasedmarketswillremain gradual
Sources:10.PYMNTS.com11.ArsTechnica12.Forbes
Customeracceptanceofnontraditionalpaymentschemes(e.g.alternativecurrencies)
remainsalmostnonexistent
Despiterisinginvalue,noalternativecurrencyorpaymentschemehasmadeinroadsintothetraditionalpaymentsecosystemorsetup
analternativeecosystem,especiallyastraditionalpaymentsolutionsarequicklybeingmodernized
SUPPORTINGEVIDENCE
Concernsaroundtheinherentinsecurityofalternativecurrencytransactionshaveonlybeenmagnifiedby
Security
Concerns anumberofnegativeshocks,includinghacks,freezesandtheiruseasatoolforcapitalflight,allofwhich
reducetrust
Lackof Alternativerailshavebeendifficultforregulatorstotrack/oversee,whichhasheldbackbuyinandthus
Central limitedadoptionrates.Ontheotherhand,traditionalrailreplacementtechnologieshavereceived
Oversight regulatorybuyin
RealTime CountriesaroundtheworldarefollowingtheleadoftheUnitedKingdom'sfasterpaymentssystemand
Becoming modernizingtheirdomesticpaymentssystemstomovetorealtime(orcloseto)processing,improvingthe
Reality valuepropositionoftraditionalpaymentschemescomparedtoalternatives
MoreToolsfor Newfeatures,suchasexpandeddatatransmissionandmessaging(ISO20022),transactiontrackingand
Traditional transparency,andflexibility(bothforaddonsandcrossborderconvenience)arebeingaddedto
Payments traditionalpaymentssystems,minimizingtheneedforanalternative
Customeracceptanceofnontraditionalpaymentschemes(e.g.alternativecurrencies)
remainsalmostnonexistent(continued)
CASESTUDIES QUANTITATIVEEVIDENCE
TransactionsperDay,April2017
(million)14,15
Expansionofrealtime
Bitcoinexchangehacks 4.2
systemforbusinesses
TheUnitedKingdom'sFasterPayments Concernsregardingthesecurityof
systemwasdevelopedtoallowmoney exchangesandwalletsarepervasive
transferstomovecheaplybetween amongusersofbitcoinandotherdigital
accountsinamatterofhours, currencies.In2016,Bitfinex,theworlds
0.35
considerablyfasterthanprevious secondlargestcoinexchange,was
solutions.Recently,thelimitfor hackedtothevalueofover$60million;
processinghasbeenraisedto250,000 torecover,allcustomersweresubject FasterPayments(UK) Bitcoin(Global)
forbusinesspayments,allowingthe toamorethan30%haircut.13
Popularityoftraditionalvsalternative
systemtohandlethevastmajorityof paymentssystems
businesstransactions.
KEYUNCERTAINTIES
Thetechnologybehindalternativepaymentschemesmaybeaddedtotraditionalschemes,butasignificantmarketshiftwouldneed tooccur
fortruepaymentalternativestogaintraction
Sources:13.TheWallStreetJournal14.FasterPayments15.Blockchain.info
Uncertaintiesaroundpaymentslargelyconcernthemovetodigitalandonline,with
theeffectsofregionalizationalsoplayingarole
1 WHATWEKNOW Thefivepaymentfindingsillustratethemassivepressuresonthepaymentsindustry.Ontheonehand,heightened
competitionandachallengingregulatoryenvironmentareleadingtosteadilydecliningprofits.Ontheother,
customersarereluctanttoswitchtonontraditionalpaymentschemeswithoutseeingsignificantbenefits,thereby
limitingadoptionofnewtechnologies.
Throughthesefindings,thefollowingkeyuncertaintiesaboutthefutureofpaymentsemerged:
2 UNCERTAINTIES
3 POSSIBLEFUTURES
Theresolutionofthesefivekeyuncertaintiespaintsthreediverging picturesofthefutureofthepaymentsindustry:
Dependingonhowthekeyuncertaintiesareresolved,thepotentialendstateshave
verydifferentevolutionarypathsandimplicationsforallfirms
TWOECOSYSTEMS INCREASING
LOSSLEADER POSTPSD2 FRAGMENTATION
Aspaymentsmovefrombeingacashcowtoalossleader,marketleaders
lookfornewstrategies,andtherestlookforpartnerships
Additionally,the
developmentofnew Somemarketleaderssee
1 paymentprocessing 3 thisasanopportunityto
createnewrevenue
systemsallowsmuch
greatercustomeraccessto streamsviadata
realtimepayments,with monetization,oruse
Incumbentcreditcard theexpectationoflowfees paymentstolockcustomers
Manymarketincumbents
issuerrevenuesdecline intoanecosystem
andnewchallengersadopt
precipitouslyasinterchange apartnershipmodelfor
shrinksandalternativesto payments,seekingto
revolvingcreditgaineven minimizelosseswhilestill
morepopularity 2 offeringbestofbrand 4
solutionstotheircustomers
CRITICALCONDITIONS EARLYSIGNS
Theworldwidetrendofgovernmentslimitinginterchangeratesand Merchantspushbanksandcreditcardstooffermore(i.e.data
weakeningthepowerofhonourallcardsrulescontinues sharing)fortheirfees,andholdoutifnoagreementisreached
Lowinterestratesandaneasymoneymonetarypolicymeans Banksstarttoreevaluatetheirrewardsandloyaltyofferingson
thatalternativestorevolversremaineasilyavailabletomost cards,offeringcustomersless
consumers
Banksstarttopartnerwithfintechsthatofferpaymentservices
Realtimefasterpaymentssystemsaresuccessfullydeployedin
variouskeygeographiesaroundtheworld
Merchantsbenefitthemostfromthisworld,andcustomersmaybenefit,while
intermediarieswilllikelysufferthemost
Implications
ImplicationsforCustomers forIntermediaries
Fewerissuersmeansfewercreditcard Lessinterchangemeanslessprofitper
choices transaction
Theremainingchoicesoftenrepresent Intermediarieshavetheopportunityto
bettervalueformoney solutionswill gainmarketshareasbankswithdraw
increasinglybefreeofcharge frompaymentrelatedactivitiesin
favourofpartnerships
Whereallowedbylaw,datamaybe
sharedwithmultiplepartiesasan
alternativerevenuestream
LossLeader
ImplicationsforMerchants ImplicationsforCardIssuers
Morebargainingpowermeanslessfees Regulationsandtheappearanceof
paidtocardissuersandintermediaries alternativesmeanthatrevenues
associatedwiththeissuingofcardswill
Theopportunityexiststonegotiatefor
decline
moredata/otherbenefitsinreturnfor
fees Anopportunitytogainmarketshare
arisesassomecardissuerswillstop
issuingcards
Dataincreasesinimportanceasaprofit
driver
PostPSD2,theworldofonlineandretailpaymentscoulddiverge
significantly,creatingtwodistinctecosystems
Merchants(largeonline
onesinparticular)expand Customersfundamentally
1 theircurrentonlinesystems 3 moveawayfromcard
basedonlinepayment
toeasilytapintothose
APIs,movingtrafficaway schemes,whereaspointof
fromtraditionalcards salebehavioursareslower
toadapt,creatingtwo
Banksarerequiredto Largetechsdesigntheir distinctecosystems
developopenAPIsthat systems(e.g.ApplePay,
allowtrustedthirdparties AmazonOneClick)with
toeasilyandsecurely directbankconnections
builtin,andoffertheseto
accesscustomeraccounts 2 otheronlineretailersto 4
capturepaymentsdata
CRITICALCONDITIONS EARLYSIGNS
HardPSD2orotherregulationsexistthatforcebankstodevelop BankscomplywithPSD2inEuropeontime,toEUspecifications
simple,secureandeffectiveAPIsopentothirdparties
Partiesfromanytwoofthreegroups(merchants,banksandlarge
LargetechsolutionsaredevelopedthateasilytieintotheseAPIsand techs)formpartnershipstodevelopsolutionsthatalloweasy
allowforsomeinformationsharing consumeradoption
Thecontinuedabsenceofacomprehensivedigitalidentityscheme PostPSD2creditcardusageholdssteadyinretailstores
preventstheonlineecosystemfromeasilyintegratingwithretail
payments
Theimplicationsforcustomersareunclear,butmerchantsbenefitgreatlyontheback
ofshrinkingprofitsforintermediaries
Implications
ImplicationsforCustomers forIntermediaries
Directconnectionswithbanksforonline Volumesandmarginsdeclineassome
purchasesmeanlessjustificationfor retailersandbanksbypasstraditional
creditcardfees intermediaries
Adoptionofonlinesolutionsmaymean Consolidationisthereforelikely,as
customersaremoredeeplyentrenched playersfightforalargershareofa
inlargetechecosystems smallerpoolofprofit
Lackofonlinebusinessforcesashiftof
focustoretailshoppingtoretainprofits
TwoEcosystems
PostPSD2
ImplicationsforMerchants ImplicationsforCardIssuers
Lessfeesarepaidtocardissuersand Useofrevolversmaydeclinesomewhat
intermediariesasmorecustomersuse ascustomerschargelesstothecard
directsolutions
Issuersmayallywithpartnerstopush
Theopportunityexiststochoose theuseoftheircreditcards,drivingup
partnershipswithissuers/intermediaries usage
ifbenefitsalign
Insteadofconvergenceinpayments,thefieldofpaymentsmayfragmentas
merchants,intermediariesandschemesallseektodifferentiate
Asallsolutionsarebased
aroundcreditcardusage, Asaresult,data
1 customersfinditrelatively 3 aggregationand
monetizationschemes
easytojugglemultiple
differentpaymentappsand mostlyfailtogetoffthe
tools,andarerewarded ground,presentingbanks
withincentives withaquandaryregarding
Evenmorefintechand Marketincumbentsand paymentsrevenue
othernonbankpayment creditcardissuerscontinue
solutionsstartappearingin totaketheirshareof
themarketplace,further revenues,buthave
difficultypiecingtogethera
fragmentingthepayment
experienceforcustomers
2 customersspending 4
patterns
CRITICALCONDITIONS EARLYSIGNS
Retailers,bothinstoreandonline,continuetodevelopcustomized Thenumberofretailappsonatypicalcustomerssmartphone
paymentsolutionsandinvestinreward/loyaltyschemestoget continuestoincrease
customerstousethosesolutions
Creditcardusageonlinedoesnotdecline
BanksfailtobridgetheSKUleveldatagap
Nopredominantpaymentchannelappearsoutofthecompetitive
landscape
Customersenjoyindividuallytailoredexperiencesbutmaylosetrackofspending,
whilebanksgainpowerastheytrackacustomersentirepaymentprofile
Implications
ImplicationsforCustomers forIntermediaries
Morebespokesolutionsleadto Creditcardfeescontinueorevenrise,
individuallytailoredpayment asmorecreditcardusagegetsbuiltinto
experiences apps
However,morefragmentationmaylead However,nascentdatamonetization
todifficultytrackingspendingdueto platformslargelyfailduetoalackof
manysourcesofpayments informationsharing
Asaresult,consolidationmayoccur,as
itisrequiredtocollect/makesenseof
Increasing customerdata
Fragmentation Ascustomersstruggletomanage
spendinghabits,toolsthatoffertracking
andadvicecouldthrive
ImplicationsforMerchants ImplicationsforCardIssuers
Tailoredpaymentexperienceswith Thebaseactofcardissuingdoesnot
loyaltyrewardsencourageappusage, largelydeclineinrevenue cards
andmayleadtomorecustomer continuetocompeteonrewards
adoption
Bankshavetheonlycompletepictureof
thecustomersspending,thusretaining
controloverdata
Keytakeawaysforfinancialinstitutions
DATAMONETIZATION
1
Newcompetitionandincreasedregulationwillcontinuetomakecorepaymentactivitieslessprofitable,
pushingpaymentproviderstofocusondatamonetizationasanimportantsourceofrevenue.Data
streamswillbesignificantlymorevaluablewheretheyaregranular(e.g.productleveldata)and
multidimensional(e.g.locationdata),makingdatacooperationandpartnershipscriticaltosuccessful
monetization
LOCALPAYMENTNEEDS
2
Insteadofdesigningpaymentsolutionsbasedontechnology,institutionswillfocusonhowtheir
customersprefertopay,anddesignpaymentsolutionsthatfittheircustomers'lives whichwillleadto
regionalsolutions.Furthermore,emergingcountrieswithoutamaturepaymentsecosystemwilllikelytake
theleadindevelopingpaymentsolutions
POWEROFLARGEMERCHANTS
3
Astheabilityoflargemerchantstoinfluencetheircustomers'paymentchoicesgrows(particularlyin
onlinetransactions),theirnegotiatingpowerwithinthepaymentsecosystemwillgrowaccordingly.
Combinedwiththeincreasedimportanceofproductlevelpaymentsdata,merchantswillbeabletowield
thispowertolowerfeesandinfluencethebroaderevolutionofpaymentsecosystems
References
1. EchoturnsupthevolumeonAmazonsambitionsasaudaciousbetspayoff.SliceIntelligence.Retrievedfromhttps://intelligence.slice.com/echoturns
volumeamazonsambitionsaudaciousbetspayoff/
2. Chinaretail,investmentandindustrialproductiongrowthsofteninApril.FinancialTimes. Retrievedfromhttps://www.ft.com/content/d9f71364e2bf345d
a4e9a61c9a9058a7?mhq5j=e3
3. Singles'Day:Alibabasmashesrecordsatworld'slargestonlineshoppingevent.CNBC.Retrievedfromhttp://www.cnbc.com/2016/11/11/singlesdaynews
alibabapoisedtosmashrecordsatworldslargestonlineshoppingevent.html
4. About10MillionMoreAmericansShoppedOnlineThanInStoresOverBlackFridayWeekend.Fortune.com.Retrievedfrom
http://fortune.com/2016/11/27/blackfridaynrfshopping/
5. StatisticaccordingtoLendingClub.com
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feesexplained
7. HowtheDemonetizationofIndianCurrencyHasLedtoIncreasedUseofMobileWallets.Technavio.Retrievedfromhttps://www.technavio.com/blog/how
demonetizationindiancurrencyhasledincreasedusemobilewallets
8. WorldwideEMVDeploymentStatistics.EMVCo.Retrievedfromhttps://www.emvco.com/about_emvco.aspx?id=202
9. ConsumerCashUsage:ACrossCountryComparisonwithPaymentDiarySurveyData.JohnBagnalletal,publishedinInternationalJournalofCentral
Banking.Retrievedfromhttp://www.ijcb.org/journal/ijcb16q4a1.pdf
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11. CurrentC retailersdefiantanswertoApplePay willdeactivateitsuseraccounts.ArsTechnica.Retrievedfrom
https://arstechnica.com/business/2016/06/currentcretailersdefiantanswertoapplepaywilldeactivateitsuseraccounts/
12. AlipayTakesOnApplePayAndPayPalOnTheirHomeTurf.Forbes.Retrievedfromhttps://www.forbes.com/sites/helenwang/2016/10/30/willalipay
dominateglobalmobilepayments/
13. BitcoinExchangetoSpreadLossesofHack.TheWallStreetJournal.Retrievedfromhttps://www.wsj.com/articles/bitfinextospreadlossesfromcybertheft
amongallusers1470559865
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15. ConfirmedTransactionsPerDay.Blockchain.info. Retrievedfromhttps://blockchain.info/charts/ntransactions
WORLDECONOMICFORUM|2017 59
INSURANCE| INTRODUCTION
Insurancehasgreatlyevolvedinthelastseveralyears.Thissectionexaminesthe
keytrendsshapingtheindustryandtheuncertainpathforward
Thefirsthalfofthisdecadesignaledthestartofmajordisruptionininsurance,andtheglobalentryofseveralinnovative forceswiththe
potentialtodramaticallychangeitsfuture
CIRCA2015,THEMAJORFORCESIMPACTINGINSURANCEWERE
CIRCA2015,THEBIGUNCERTAINTIESABOUTTHEFUTUREOFINSURANCEWERE
Note:Forthepurposesofdistinguishingbetweenpropertyandcasualty(P&C)insuranceandlifeinsurance,allfindingsandpotentialendstateswill
specifytheirrelevantsector,oriftheyareequallyapplicabletobothsectors
Insurersarechallengedbytheriseof"insurtechs"andastructuraltransformation
oftheircustomerbase,forcingthemtoadopttonewtechnologiesmorequickly
WHEREDISRUPTIONOCCURRED
Increasedmodularityintheinsurancevaluechainisenablingnewcombinationsofplayersand
A
threateningthepositionofincumbents
Usagebased,ondemandandobjectspecificinsuranceproductsareemerginginresponsetoshifting
B customerlifestyles
Lifeinsurersfacepressuretoreinventtheirproductstrategiestomeettheneedsoftheirnext
C generationofcustomers
D Thedevelopmentofproductstoinsureemergingrisksisbecomingcriticaltocarrierprofitability,
particularlyasmarginsintraditionalproductserode
WHEREDISRUPTIONDIDNOTOCCUR
Connecteddevicesareproliferating,butinsurershavefailedtoconvincecustomersthatconnected
E insuranceservestheirinterests
Increasedmodularityintheinsurancevaluechainisenablingnewcombinations
ofplayersandthreateningthepositionofincumbents(P&C/Life)
Ariseinthenumberofinsurtechs,coupledwithexternalforces,isdrivingthedisaggregationofinsurancevaluechains forcinginsurers
toadapttothenewworldbypartneringandinvestingininnovation
SUPPORTINGEVIDENCE
Changing Customersarepurchasinginsuranceinnewways.Somecustomersarechoosingdifferentchannels,such
Purchasing asonlineandmobile,whileothersarechangingtheirpurchaseoccasions,includingpurchasing
Patterns microinsuranceproductsasneededandpurchasinginsurancedirectlytiedtoaproduct
Thecontinueddevelopmentofselfdrivingcarsandthesharingeconomyhasstartedtoshiftthe
Shifting responsibilityofinsuranceawayfromtheinsurertobothdistributionplatformsandproduct
Underwriting
manufacturers(e.g.Uber,AirbnborTesla),creatingnewengagementmodelsforinsurersand
Responsibilities
necessitatingashiftininsuranceproductdesign
Theinsuranceindustryisovercapitalizedasawhole,leadingtolowerreturns.Thus,therecentgrowthof
noncatastropheinsurancelinkedsecurities(ILS),aswellaspartnershipsbetweenILSandrisk
Overcapitalization
underwriters/productdesigners,willleadtoadditionalreturndepression,forcingfirmstofindotherways
ofunlockingprofit
Withtheriseofexternalforces,insurersandreinsurersareincreasinglypartneringwithoutside
Riseof
organizations(suchasinsurtechsandlargetechfirms)toacquireexpertiseandhedgeagainstdisruption,
Partnerships
withoutriskingdirectproductcannibalizationbyinnovatinginternally
Increasedmodularityintheinsurancevaluechainisenablingnewcombinations
ofplayersandthreateningthepositionofincumbents(P&C/Life)(continued)
CASESTUDIES QUANTITATIVEEVIDENCE
OutstandingCatBondand
ILSRiskCapital($M)3
30000
Partnershipwithinsurtech Lifetimeautoinsurance
25000
BoughtbyMany,aninsurtechfocused Teslahasquietlyrolledoutlifetime
20000
onusingthewebtomeetpreviously autoinsuranceforthemajorityofits
underservedaffinityneeds,recently carssoldinAsia.2 Theinsuranceis 15000
partneredwithMunichRetooffer providedbyathirdpartyinsurer 10000
insuranceproductsdirectly.Thisgives (variesbygeography),andthelifetime
5000
BoughtbyManythebalancesheetof costisincludedaspartofthevehicle
MunichReforsupport,andprovides priceatpointofsale.Teslabelieves 0
MunichReexposuretoproducts thatwithitsimprovingautopilotand 2005 2007 2009 2011 2013 2015
withoutatraditionalcarrier safetyfeatures,theriskprofileofits
Theriseofalternativecapitalininsurance
intermediary.1 carswillonlyimproveovertime.
KEYUNCERTAINTIES
Theriseofinsurtechandthetransformationaleffectoftechnologyshiftswillforceinsurerstoredefinetheirproductdesignand
distributionstrategy
Sources:1.FT2.Mashable3.SwissRe
Usagebased,ondemandandobjectspecificinsuranceproductsareemergingin
responsetoshiftingcustomerlifestyles(P&C)
Insurersaredesigningnewproductsaroundtheircustomerschangingneeds,especiallyaspeoplefromallwalksoflifechangetheir
workandconsumptionpatterns.However,questionsremainabouthowneedswillbemeasuredandrisksassessed
SUPPORTINGEVIDENCE
Thelinebetweentheconsumerandabusinessisblurring,withtheriseoftheprosumermeaningthat
Riseofthe
consumersneeddifferentcoveragesdependingonwhattheyredoing.Asaresult,insurersmustshift
Prosumer
theirdelineationbetweenpersonalandcommercialinsuranceinordertomeetcustomerneeds
Insurtechstartupsareofferingeversmallerslicesofinsuranceforindividualproducts(e.g.customers
MicroInsurance mobilephones),orforsmalleramountsoftimethatcustomerscanchoose(e.g.forapotentiallydelayed
flight).Thiswilltestthelimitsofinsuranceproductdesignandnecessitateondemandsales
Consumersaredemandingmodularityfortheirinsuranceindifferentlocations,fordifferentusecases
Adaptable (e.g.coverageforhighvalueitems),andfordifferentusagepatterns(e.g.coveragesthatcaneasilybe
Insurance turnedonandoff).Asaresult,incumbentswillhavetoadapttheironesizefitsallproductstoremain
competitive
Usagebased,ondemandandobjectspecificinsuranceproductsareemergingin
responsetoshiftingcustomerlifestyles(P&C)(continued)
CASESTUDIES QUANTITATIVEEVIDENCE
SizeoftheUKSharingEconomy
(billion)
7.4
+92%
Blurringlinesforall Servingtheprosumer
KEYUNCERTAINTIES
Customerspurchasingbehaviours areinfluencedbytheblurredlinesbetweenworkandpersonaltime,andthesubsequentdemandfor
flexibilityandindividuality
Sources:4.Airbnb5.InsuranceJournal6.PwC
Lifeinsurersfacepressuretoreinventtheirproductstrategiestomeettheneedsof
theirnextgenerationofcustomers(Life)
Thelifeinsurancemarketisgrowingfastestinareaswherethepopulationismuchyoungerasawhole,whichleadstochanges in
productdemandsandcustomerpurchasingbehaviourthatinsurersmusttakeintoaccount
SUPPORTINGEVIDENCE
Emerging Thevastmajorityofgrowthinlifemarketsisinemergingmarkets,suchasSouthEastAsia,theMiddleEast
Markets orAfrica,andthoseyoungercustomersseektopurchasetermcoveragemorethanretirementrelated
Growth products
Inmanyemergingmarkets,thetraditionalagentnetworkisweakandthepopulationismuchmore
Comfortwith
investedindigital(includingmobile)technologies,asopposedtomaturemarketswheretraditionallife
DigitalChannels
insurancedependsoninpersoninteractionswithbothanagentandadoctor
Severalplatformsstartedin2017sellsimplelifeproductsonline,usingavailableinformationtobypassthe
RiseofDigital
medicalcheck;thisrepresentsthestartofashiftofrigid,fixedtermpoliciestowardsmoreflexible,
Distribution
consumablechunksforeasydigitalconsumption
Lifeinsurersfacepressuretoreinventtheirproductstrategiestomeettheneedsof
theirnextgenerationofcustomers(Life)(continued)
CASESTUDIES QUANTITATIVEEVIDENCE
PopulationDistributioninthe
USvsVietnam,2016(%)9
Emergingmarketlifeinsurance Onlinebasedlifeproducts
Age40+ 47.8 35.1
Bimaisacompanydeliveringawide LadderandHavenLifeareUSinsurers
rangeofmobilehealthcoveragesto thathaverecentlystartedtooffer Age2039 27.2 34.6
customersintheemergingworld,using termlifeproductswithoutamedical
amodelwhereconsumerscanpayfor checkforthemajorityofapplicants.8 19.2 22.1
Age519
insuranceusingprepaidmobilecredit.7 Ladderisaninsurtechstartup,
Theystillrequireverificationbyan whereasHavenLifeisawhollyowned
Age04 6.1 8.2
agent,buttargetlowincomeindividuals subsidiaryofMassMutual.Asaresult,
(typicallynotatargetoflifeinsurance) theyrepresenttwopathsforthelife USA Veitnam
Vietnam
inseveralmarketsinAfrica. insuranceindustrytoofferdigital Differentdemographics,differentneeds
products.
KEYUNCERTAINTIES
LifeinsurancecompanieswillhavetoadoptP&Cinsurancetraits,suchasdigitalplatformsandautomatedprocesses omnichannel,simple
experienceswillbeadifferentiatingfactorincustomerdecisionmaking
1 Willemergingmarketpatterns 2 Howwillinsurersacquirethe 3 Howwilltraditionalinsurers
spilloverintodevelopedmarkets informationtheyneedtobypass managetheshifttosimplerterm
withatraditionalunderstanding themedicalcheck,andhowwill productsintheircorebusinesses,
oflifeinsurance? thisdifferbyregion? withoutcannibalization?
Sources:7.BusinessInsider8.NerdWallet9.PopulationPyramid.net
Thedevelopmentofproductstoinsureemergingrisksisbecomingcriticaltocarrier
profitability,particularlyasmarginsintraditionalproductserode (P&C)
Whileriskhomogenizationhaspushedmarginsdownfortraditionalinsurancecoverage,thisdeclineisbalancedbygrowthinemerging
markets,valueaddedconnectedservicesandnewproductstoaddressemergingrisks
SUPPORTINGEVIDENCE
P&Cinsurancepremiumsinthedevelopedworldhaveflatlinedordeclinedduetothehomogenizationof
GlobalMarket
risk.Thishasbeenoffsetbygrowthoftraditionalinsuranceproductsinemergingmarkets,where
asSeesaw
penetrationratesforinsuranceremainlow
Theinsurancemarketisstartingtobuildproductsthatprotectagainstemergingtechrelatedrisks,suchas
NewRisksEqual cyberinsurance,AIandselfdrivingcars.Cyberinsuranceisalreadya$2.5billionmarketintheUnited
NewProducts Statesandisprojectedtogrowquickly;thefinancialservicessectoritselfrepresentsasignificantdriverof
growthfortheseproducts
Inthecommerciallinesspace,insurersarestartingtoshifttoofferingproductsthatincludesensorbased
ChangeofRole coverage,whichreduceclaimsbymonitoringforchanges24/7.Theriseofconnectedinsuranceand
sensortechnologywillleadtoanincreasingshareofbusinessfocusedonprevention
Thedevelopmentofproductstoinsureemergingrisksisbecomingcriticaltocarrier
profitability,particularlyasmarginsintraditionalproductserode (P&C)(continued)
CASESTUDIES QUANTITATIVEEVIDENCE
GrowthinTotalCyberInsurancelimits
PurchasedforMarshClients,Q1/201512
180
Jointcyberaggregationmodel 155%
Connectedmonitoringforchurches 160
140
GuyCarpenter,oneoftheworlds Acommercialinsurancecompany
120 100%
largestreinsurers,recentlyestablished recentlylaunchedaproductwith 100
apartnershipwithSymantectocreatea ChurchMutualtoprotectchurches 80
cyberaggregationmodel.10 Guy againstfrozenpipeleaks(churches 60 42%
Carpenterishopingthatbypartnering 33%
areespeciallyvulnerableduetolow 40
withSymantec,itwillbeabletomodel occupancy).Theinitialpilotsaved 20
extremecybereventsmoreaccurately customerscloseto$1millionin 0
Communication, Financial Power
anddeliverbetterpricingandrisk claims,andtheproducthasbeen Media&Technology Education
Institution &Utilities
managementforitscustomers. rolledoutinover1,500churches Fastandbroadgrowthofcyberinsurance
acrosstheUnitedStates.11 products
KEYUNCERTAINTIES
Whiletraditionalproductsremainprofitableinemergingmarkets,findingnewsourcesofrevenuesisincreasinglyimportantinthedevelopedworld
Sources:10.InsuranceJournal11.YahooFinance12.RiskManagementMonitor/MarshAnalysis
Connecteddevicesareproliferating,butinsurershavefailedtoconvincecustomers
thatconnectedinsuranceservestheirinterests (P&C/Life)
Thenumberofconnectionsbetweentheconsumerandtheinsurerhasrisen,butconsumersdonotfeelcomfortablevolunteeringtheir
informationasinsurershavenotconvincedthecustomerofthebenefitsofconnectedness
SUPPORTINGEVIDENCE
Astheamountofdatafromconnectedinsurancerises,regulatorybodieshavestartedtomandate
CustomerData
consumerdataprotectionpolicies,whichputcontrolofdatainthecustomer'shands.Moreover,
Ownership
regulatorsinsomelocalesareworkingdirectlywithcompaniesinordertoensuredatasecurity
TheRiseof Traditionally,insuranceproductshaveworkedonafixedtimebasis,wherethepricewouldbedirectly
TimeMeasured linkedtothecustomer'sriskprofile.Astechnologyadvances,connectedinsuranceproductscanmeasure
Insurance bothariskandatimevariable,makingmoretargetedandaccuratepricingpossible
Tosimplifytheprocessofconnectedinsuranceandtoreachouttosometimeshesitantconsumers,
Easeof
insurerscanworkwithproductmanufacturerstobuildtheconnectionintotheproduct.Inmostinstances,
Connection
however,thatconnectionrequirescustomeragreement
WithincreasinguseofvirtualassistantsbyAmazon,GoogleandMicrosoft,andassuchassistantscollect
Roleof
moreinformationabouttheirowners,theymaybecomeavirtualinsuranceagentforhouseholds.
Assistants
However,insurerswouldhavetobuildrelationshipswithlargetechfirmstousethosechannelseffectively
Connecteddevicesareproliferating,butinsurershavefailedtoconvincecustomers
thatconnectedinsuranceservestheirinterests (P&C/Life)(continued)
CASESTUDIES QUANTITATIVEEVIDENCE
DeploymentofIntegratedvsTethered
(StandAlone)Telematics(inmillion
vehicles)15
Lifestylerewards Integratedtelematics 150
TheJohnHancockVitalityprogramme AtLibertyMutual,customerscan
rewardscustomerswithpremium receiveafreeNestProtectsmoke 100
savingsandretaildiscountsforlivinga detectoranddiscountedinsurance
50
healthylifestyle.Customershavethe premiumsuponinstallationand
choicetooptintotheprogramme, verification.14 NestnotifiesLiberty 0
earningvitalitypointsbytracking Mutualofthedevicesbatterylevels 2010 2013 2016 2019 2022 2025
daily,healthrelatedactivities. andworkingsensors noadditional
Customersbenefitbecausetheyreceive Integrated Tethered
effortrequired.Customerssavejust
savingsbygoingabouttheirdaily byhavingarequiredhomesafety
Riseofintegratedtelematicsvsoptintelematics
activities nolifestylechange device,makingadoptionpainfree.
required.13
KEYUNCERTAINTIES
Beforecustomersarewillingtoadoptconnectedproducts,adequatedatasharingagreementsandpremiumincentivesneedtobeinplace
Sources:13.JohnHancock14.Nest15.EY
Theresolutionoftheseuncertaintieswillshapethefuturedevelopmentofinsurance
andtherolesofinsurers
1 WHATWEKNOW Theinsurancefindingsillustratethescaleofthechallengesfacinginsurers.Thevaluechainisunderenormous
pressure,andchangesinpurchasingpatternsareforcinginsurerstomoveawayfromthetraditionalonesizefitsall
modeltowardsaflexible,customizablerangeofproducts.Atthesametime,insurersmustchangefrombeingreactive
tobeingproactive,withtheriseofconnectedinsuranceandtheneedtomonitorcustomerriskonanongoingbasis.
Throughthesefindings,thefollowingkeyuncertaintiesaroundthefutureofinsuranceemerged:
2 UNCERTAINTIES
3 POSSIBLEFUTURES
Theresolutionofthesefivekeyuncertaintiespaintsfourdivergingpicturesofthefutureoftheinsuranceindustry:
ChallengingtheChannel UnderwritingbyMachine
RiseoftheFlexibleProduct EZLifeInsurance
Dependingonhowthekeyuncertaintiesareresolved,thepotentialendstates
haveverydifferentevolutionarypathsandimplicationsforallfirms
UNDERWRITING RISEOFTHE
CHANGINGTHECHANNEL BYMACHINE FLEXIBLEPRODUCT EZLIFEINSURANCE
Ascustomerpurchasingpatternsstarttoshift,insurersemphasize
benefits,digitalchannelsandintegrationatpointofsale(P&C)
Incumbentinsurersarethus
1 forcedtochangetheir 3 Customersfocusmuch
productstoallowformore lessonmindsharewhen
customization,andbuild makingapurchase,
purchaseprocessesthatare insteadselecting
Insurtechs(backedby Bothincumbentsand
bothsimpleand productsthatbestfit
reinsurers)capturea insurtechsalsoseekto
customizable theirworkandlifestyle
noticeableshareofthe capturecustomersatthe
propertyandcasualty pointofsale,focusingon
insurancemarketbyfocusing partnershipswithproduct
onbenefitstotheir
customersandbyoffering 2 makersanddistributorsby
integratinginsuranceinto
4
superioronboardingand products
claimsprocesses
CRITICALCONDITIONS EARLYSIGNS
Digitalchannelsforpurchasecontinuetoriseinpopularity,led AvarietyofinsurtechsthatofferdifferenttypesofP&Cinsurance
especiallybyinsurtechs appear,drivingcompetition
Amajorityofcustomersovercomeapathytoconsiderswitching Incumbentsstartofferingmodularproductsonmorelinesof
insuranceprovidersmoreactively business
Significantdemandexistsforinsurancetiedtospecificproducts
Asaresult,productdesignandmarketingwillshiftconsiderably,andcustomers
willbenefitfromhavingproductsmoretiedtotheirneeds
Implicationsfor
IncumbentInsurers ImplicationsforInsurtechs
Insurtechswillsetcustomer Themainstreamingofinsurtechs
expectationsondigitalpurchaseand focusedoncustomerspecific
claimsexperiences experienceswillbenefitcustomer
Tieinswithproductscreate choice,butmayforcetheinsurtechs
opportunitiesforlucrativepartnerships intoniches
forleadinginsurersinthisarea Mainstreamingwillalsoattractwilling
Asproductsbecometargetedto partnersandcreateopportunitiesto
customerneeds,usingadvertisingto whitelabelproducts
securemindsharewillbecomeless Changingthe
importanttocustomeracquisition Channel
ImplicationsforRegulators ImplicationsforCustomers
Theriseofinsurancetiedtoproduct Customerswillbenefitfromproducts
salescompelsregulatorstoanswer tailoredtotheirneeds
questionsaboutwhetherexclusive Customerswhoareheavyusersand
partnershipsaregoodforcustomers thusbenefitfromonesizefitsall
insurancemayhavetopaymore
InsurersfindithardtokeepupwithrapiddevelopmentsinAI,andthus
outsourceunderwriting,causingabifurcationofthemarket(P&C)
Tomanagethetechnology,
1 insurerspartnerwitha
wideselectionofvendors
3 Alternatively,someinsurers
seektopursuespecialized
fortheirexpertisein
slicesofthemarket,
underwritinganalytics,
Theamountof Asunderwritingbecomes offeringaffinityproducts
effectivelyoutsourcing
technological outsourced,itlosesits thatappealtoanarrow
underwriting
sophisticationneededto valueasadifferentiator, rangeofconsumers
runaninsurance andinsurersfocuson
companyrisesas differentiatingthemselves
algorithmstakeover basedoncustomer
underwriting 2 serviceandscale 4
CRITICALCONDITIONS EARLYSIGNS
AIdevelopmentinunderwritingadvancessignificantly Insurersstartcuttingstaffinunderwritingdepartmentsasthey
outsource/dependonvendors
InsurersworkwithB2Bvendors/utilitiesinsteadofinhouse,
especiallytodriveadvancementsinunderwriting Insurersstartofferingaffinitypolicies
Customersbenefit,butnewentrants(especiallyaffinityplayers)maysufferfromlack
ofscale;inaddition,insurershavetofindnewwaystodifferentiatethemselves
Implicationsfor
IncumbentInsurers ImplicationsforInsurtechs
Distributionandscalearemore Insurtechscateringtoaffinitycustomers
importantthanever,increasingthe facecompetitionfrominsurersthat
likelihoodofconsolidation seektospecialize
Poolingofrisksceasestoexistaspricing Someinsurtechsmayevolvetobecome
sophisticationleadstoindividualized, B2Bunderwritingandclaimsprocessing
riskbasedpricing providers
Nonscaleincumbentsmustfindwaysof
differentiatingthemselves
Underwritingby
Machine
ImplicationsforRegulators ImplicationsforCustomers
Theexternalizationofunderwriting Customerseitherbenefitbypayingless
couldmeanfewermodelstomonitor, orbybeingservedbetterunderan
butitalsocreatestheriskofasingle affinity
pointoffailure
Theriseofinsurancethatcoverschangesinbehaviour,roleandriskprofile
overtimemeansinsurersmustsolvehowtomonitorproducts(P&C,Life)
Asaresult,insurers
Theriseofparttimersand
1 prosumersmeansthat
3 introducetimeflexibleand
eventdrivenpolicies,
insurershavetointroduce engagingwithcustomersto
flexiblecoverage,forcing findthebestwaystocontrol
Consumersinsuranceneeds themtoconnecttheir Theriseofproductspecific
arebecomingmorespecific wheninsurancecoverageis
businessandpersonallines insurance(e.g.forabikeor
astheirjobsandactivities turnedonandoff
phone)alsomeansthat
drivefrequentchangesto insurershavetobesmarter
theirriskprofileand aboutmeasuringand
coverageneeds trackingproductusage
2 4
CRITICALCONDITIONS EARLYSIGNS
Theshifttowardsselfemploymentcontinuesaroundtheworld Insurersstartenteringintopartnershipsoracquisitionswith
prosumerfocusedinsurtechs
Connectedproductsthatallowmonitoringofturnon,turnoff
insurancegrowinpopularity Insurersandgigeconomyfirmslaunchpartnershipstocover
workers
Insurersworktobuildincoverageforinternetenabledproducts
Incumbentsandinsurtechswouldhavetoinvestintrackinganddigitalsolutions
toprotectagainstcustomermistakesthatleadtomiscoverage
Implicationsfor
IncumbentInsurers ImplicationsforInsurtechs
Theincreaseinmonitoringsignalsa Theriseofflexibleinsurancemeansthat
fundamentalshiftintheroleofinsurers insurtechsspecializinginprosumersor
fromrisktransfertoriskmonitoringand connectedproductswillhavemany
management partnershipopportunities
Turnon,turnoffinsurancemeans Insurtechswillhavetocarefully
insurerswillhavetoinvestinmonitoring measureclaimsratesforfraud
technologies detection
Riseofthe
FlexibleProduct
ImplicationsforRegulators ImplicationsforCustomers
Usingconnectedtoolsformonitoring Customerswillbenefitfromflexible
customerswillcreatenewdata insuranceproductsthatcanbemodified
concernsforregulatorsfocusedon tosuittheirneeds
consumerprotection
Insurancethatcanbeturnedonandoff
mayleadcustomerstostrugglewith
inadvertentcoveragegaps
Demographicsandmarketmaturitymeanemergingmarketswillprovide
thebulkoflifeinsurancegrowth,anddigitaldistributioniskey(Life)
However,currentmodelsof
1 growthinthesemarkets 3 Theriseoftermproducts
meansinsurersalsofocus
revolvearoundhiringmore
moreondigitalchannelsof
agentstosellontheground,
distribution,whichaligns
Growthinlifeinsurance addingtocostsandmissing Leadinginsurersshifttheir
withshoppingpatternsin
comesfromyounger anopportunitytodeploy focusawayfromretirement
manyemergingmarkets
customerbasesinemerging digitaltools toshortterm,increasingly
marketsthathavedifferent flexibleproducts,matching
needsandafamiliaritywith theneedsofpeoplein
digitalchannels emergingmarkets
2 4
CRITICALCONDITIONS EARLYSIGNS
IncreasingdemandforlifeinsuranceinAfrica,SouthEastAsiaand Insurtechspushincumbentsbyofferingdigitallifeinsurance
SouthAmericadriveslifeinsurersprofits productsinkeylocales
Thelackofknowledgeaboutcomplicatedlifeinsuranceproducts Agloballifeinsurerundergoesmajorrestructuring(i.e.de
persists emphasizingagents)inkeylocales
Currentdemographicpatternscontinue "Simpletermproductsbecomeincreasinglypopular
Insurersthatcanofferdigitaldistributionwithoutcompromisingunderwriting
standtocapturemarketshare,andprovidecustomerswithadditionalcoverage
Implicationsfor
IncumbentInsurers ImplicationsforInsurtechs
Theshifttotermproductsanddigital Insurtechswillhaveacompetitive
distributionmeanslifeinsurerswillstart advantageinemergingmarketsdueto
lookingmuchlikeP&Cinsurersintheir theirlocalnature,andcouldrepresent
structure goodtargetsforacquisition
Thisshiftwillfosterindustry Theycanbeausefultoolforspreading
consolidationascompaniesseekscale innovationsbetweenborders,either
todriveprofitsfromlowermarginterm organicallyorwithapartner'shelp
products
EZLifeinsurance
ImplicationsforRegulators ImplicationsforCustomers
Theriseofdigitalchannelsmaymeana Customerswillbenefitfromproducts
moreattractivetargetfordatatheft thatbettersuittheiragedemographic
regulatorswillhavetoensureadequate (e.g.termlifeproducts)
dataprotection
Keytakeawaysforfinancialinstitutions
VALUECHAINSHIFT
1
Oncetightlyverticallyintegrated,theinsurancevaluechainisrapidlybeingmodularizedbynew
technologiesthatallowforsplittingactivitiesacrossmanydifferentplayers.Leadingorganizationsare
usingthismodularitytotheiradvantage,pursingflexiblepartnershipsthatallowthemtoaggressively
competeforadjacentprofitpools
COMPLEXPRODUCTS,SIMPLYDISTRIBUTED
2
Toremaincompetitive,insurersneedtosimultaneouslyachievetwoseeminglycontradictoryobjectives:
ontheonehand,theymustdevelopcomplexandhighlypersonalizedproductstomeetcustomersneeds;
ontheother,theywillneedtosignificantlysimplifytheoriginationprocess,enablingevenhighlycomplex
productstobesolddirectlythroughonlineandmobilechannels
CONNECTIONSCHANGINGTHEINSURER
3
Connectedinsurancewillfundamentallychangethewayinsurersoperate,shiftingtheirfocusfromrisk
assessmenttoriskpreventionandcreatingtheimperativetoworkwithoriginalequipmentmanufacturers
tobuildinconnections.Toachievethis,however,insurersmustovercomeexistingperceptionsof
connectedinsuranceproducts,convincingcustomersthattheyrepresentanimprovementovercurrent
products
References
1. BoughtbyManyexpandsnicheinsurancerole.FT.Retrievedfromhttps://www.ft.com/content/a0d04746d9bc11e6944be7eb37a6aa8e?mhq5j=e3
2. Teslaissosureitscarsaresafethatitnowoffersinsuranceforlife.Mashable. Retrievedfromhttp://mashable.com/2017/02/23/elonmuskteslalifetime
insurance/#uYPLmBieTkq3
3. InsuranceLinkedSecuritiesmarketupdate:VolumeXXVI,February2017.SwissRe.Retrievedfrom
http://www.swissre.com/library/ILS_market_update_February_2017.html
4. AirbnbsGrowingCommunityof60+WomenHosts.Airbnb.Retrievedfromhttps://www.airbnbaction.com/wp
content/uploads/2016/03/Airbnb_60_Plus_Women_Report.pdf
5. SliceLabsTestingPayPerUseInsuranceAppwithRideshareDrivers.InsuranceJournal.Retrievedfrom
http://www.insurancejournal.com/news/national/2017/04/03/446575.htm
6. Thesharingeconomygrowsup:HowtheUKhasembracedthesharingeconomy.PwC. Retrievedfrom
https://www.pwc.co.uk/issues/megatrends/collisions/sharingeconomy/outlookforthesharingeconomyintheuk2016.html
7. ThisSwedishstartupbringsinsuranceto24millionpeopleinthedevelopingworldthroughtheirmobiles.BusinessInsider.Retrievedfrom
http://www.businessinsider.com/bimabringsmicroinsurancetoafricaasiaandlatinamericaviaphones201610
8. WheretoFindOnlineInstantApprovalTermLifeInsurance.NerdWallet.Retrievedfromhttps://www.nerdwallet.com/blog/insurance/instantlifeinsurance/
9. RetrievedfromPopulationPyramid.net.
10. CarpenterFormsPartnershipwithSymantectoCreateCyberAggregationModel.InsuranceJournal.Retrievedfrom
http://www.insurancejournal.com/news/international/2016/05/18/409001.htm
11. ChurchMutualrecognizedasaCelentModelInsurerinInnovationandEmergingTechnologies.YahooFinance.Retrievedfromhttps://finance.yahoo.com/news/church
mutualrecognizedcelentmodel190000478.html
12. CyberInsurancePurchasingUp,ButBreachesFeltinPricesandLimits.RiskManagementMonitor fromMarshanalysis.Retrievedfrom:
http://www.riskmanagementmonitor.com/cyberinsurancepurchasingupbutbreachesfeltinpricesandlimits/
13. TheJohnHancockVitalityProgram.JohnHancock.Retrievedfrom:https://www.jhrewardslife.com/howitworks.html
14. StaysafeandsavemoneywithNestandLiberty Mutual.Nest.Retrievedhttps://nest.com/insurancepartners/libertymutual/
15. Thequestfortelematics4.0:Creatingsustainablevaluepropositionsforconnectedcar.EY. Retrievedfrom
http://www.ey.com/Publication/vwLUAssets/Key_telematics_considerations_for_the_telecoms_sector/$FILE/The_quest_for_telematics_EF0120.pdf
WORLDECONOMICFORUM|2017 84
DIGITALBANKING|INTRODUCTION
Digitalbankinghasgreatlyevolvedinthelastseveralyears.Thissectionexamines
thekeytrendsshapingtheindustryandtheuncertainpathforward
Thefirsthalfofthisdecadesawthestartofashiftindigitalbanking,withtheentryofseveralnewforcesthatchangedthe onlineand
mobilebankingecosystemandhadthepotentialtochangethewaycustomersbank
CIRCA2015,THEMAJORFORCESIMPACTINGDIGITALBANKINGWERE
CIRCA2015,THEBIGUNCERTAINTIESABOUTTHEFUTUREOFDIGITALBANKINGWERE
Howwouldthe
Howwouldbanksbe
Wouldvirtualbanksbe emergenceofbanking
abletodeploydigital
abletocapturemarket platformsaffect
solutionswithlegacy
sharefromincumbents? developmentsindigital
architecture?
banking?
Bankingisonthecuspofsignificantdisruptionasregulationsandtechnology
begintolaythefoundationsofafundamentalshiftinthebusinessmodel
WHEREDIDDISRUPTIONOCCUR?
A Traditionalbankdistributionmodelsandeconomicsareatriskofbeingdeeplydisruptedbythedrive
towardsplatformmodelsofbanking
Banksnolongerdefinecustomerexpectationsofthebankingexperience;instead,fintechsandlarge
B technologycompaniessetthestandard
Incumbentsarestartingtomigratecoresystemstothecloud,aslegacyinfrastructurecreates
C challengesinmeetingcustomerneeds
WHEREHASDISRUPTIONNOTOCCURRED?
Fewcustomershavemovedawayfromtraditionaldepositaccountsdespitesignificanteffortsfrom
D
onlineandmobilechallengerbanks
Traditionalbankdistributionmodelsandeconomicsareatriskofbeingdeeply
disruptedbythedrivetowardsplatformmodelsofbanking
Catalysedbyregulatorsanddrivenbyadesiretomoreefficientlysatisfycustomerneeds,platformbankingbusinessmodels where
banksofferconnectionswithotherfirmsinadditiontotheirown aregainingmomentum
SUPPORTINGEVIDENCE
APIs,assoftwareintermediariesthatallowprogrammestoconnectandinteract,provideexposurespecific
Increasing
Technology functionalitywhileprotectingtherestoftheapplication.Thistechnology,whichhasachievedbroad
Capacity adoptioninrecentyears,allowsbankstoseamlesslyintegratewiththirdpartiesandisnecessaryfor
developingplatformmodelsofbanking
Regulatorsinanumberofjurisdictionshavebegunmandatingthatbankssharedataandaccesswiththird
Increasing partyorganizationsviaopenAPIs.Theseopenbankingstandards,suchasPSD2inEurope,areexpectedto
Regulatory
weakenbankscontrolovercustomerdataandallowcustomersmuchgreatercontroloverthirdparty
Pressure
accesstotheiraccounts
Marginsonbankingproductsaredecliningduetoincreasedcompetition,loweringtheprofitabilityof
Shrinking
Margins productmanufacturing.Thisincentivizesbankstorefocusondistributionandseekpartnershipswith
specializedproductandserviceproviders ineffect,creatingplatformsfortheircustomers
CAVEATS
Platformbankingbusinessmodelsarenascent,andlittleisunderstoodaboutwhatthemodeland
Uncertain economicswillultimatelylooklike.Theuncertaintyhasdiscouragedincumbentsandfinancialservices
Economics softwareprovidersfrominvestinginplatformbankingsolutions,particularlyastheincrementalscale
requiredtooffsetpotentialcannibalizationisunclear
Traditionalbankdistributionmodelsandeconomicsareatriskofbeingdeeply
disruptedbythedrivetowardsplatformmodelsofbanking(continued)
CASESTUDIES QUANTITATIVEEVIDENCE
TotalNumberofPubliclyAvailableAPIson
theProgrammableWebDirectory3
16000
Curatedplatformnewentrant Openplatformincumbent 14000
12000
AGermandigitalonlybank,N26has CrditAgricole,Europesthirdlargest 10000
clearlyidentifieditsusercentreddigital bankbyassets,providesanappstorefor 8000
experienceasitskeydifferentiator.The itscustomerstodownloadawiderange 6000
bankengagesbestofbreed offunctionalitieswhichcomplement 4000
providers,fromAllianzto coreproducts.Todothis,thebank 2000
TransferWise,1 toofferproductsthat exposesitsAPItoallexternaldevelopers 0
N26itselfdoesnotfocuson,thus andcultivatesacommunitythat
creatingahighlycuratedplatform. encouragescustomerstosuggestideas.2
RiseofAPIsinfinancialservices
KEYUNCERTAINTIES
Thedegreeofplatformopennesswilldependonhowmanyregulatorsenforceopenbankingstandardsandhowstronglytheydoso
Sources:1.TheInvestmentObserver2.AmericanBanker3.NordicsAPIs
Banksnolongerdefinecustomerexpectationsofthebankingexperience;
instead,fintechsandlargetechnologycompaniessetthestandard
Experienceswithnonincumbentsareraisingthebarforbanks,ascustomersexpectmorevaluedriven,personalizedandseamless
servicethaneverbefore.Incumbentbanks,focusedonrecapitalizingtheirpostcrisisbalancesheets,areplayingcatchup
SUPPORTINGEVIDENCE
ClientComfortwith Customersuseofdigitalchannelsforbankinghasrisen,asadoptionofsmartphonesandotherinternet
DigitalChannels enableddevicesincreasesworldwide.Customersarealsobecomingmoretrustingofdigitalchannelswhen
conductingmonetarytransactions,asillustratedbytheglobalriseofonlineshopping
Experiences Customersnowdemandthesameimmediateaccess,frictionlessexperienceandlowfeeorfreeofferings
withNon fromtheirmobilebankingappsastheyreceivefromUber,Starbucksandotherleadingmobile
FinancialFirms applications,forcingbankstolearnlessonsfromoutsidethebankingecosystem
Asrevenuesplateau,incumbentbankshavesoughttolowertheircostsbyeliminatinginpersonservices,
RealWorld drivingcustomerstolowercostchannelsandjettisoningunprofitablecustomersegments.Theseefforts,
CostCutting whilenecessarytomaintainprofitability,havemeantthatbankshavehadtolearnalternativemethodsof
customerengagementwherevertheycan,includingfromfintechsandlargetechnologyfirms
Banksnolongerdefinecustomerexpectationsofthebankingexperience;
instead,fintechsandlargetechnologycompaniessetthestandard(continued)
CASESTUDIES QUANTITATIVEEVIDENCE
ShareofMostCommonBankingChannels(US)6
Online
Bank/fintechtradeoffdeal SimpledigitalP2Ppayments 40% 37%
48%
JPMorganandWellsFargorecently FintechfirmVenmoallowsusersto
signedagreementswithIntuitthatwill makeP2Ppaymentsatnocost,and
givethelattereasyaccesstobanking sharetheirtransactionswithintheir 10% 26% 32%
Mobile
customersdatainexchangefornew socialnetwork.Ithasbeensosuccessful
limitsonhowIntuitusesthedata.The (transferringover$5billioninthelast 26%
ATM
bankshaveindicatedtheywantthe threemonthsof2016)thatmajorUS 24%
22%
agreementtobeamodelforcontracts bankshavelaunchedZelle,acompetitor 3% CallCentre
3% 2%
13% Branch
withothertechfirms,asthefightfor offeringfreepaymenttransfersand 8% 7%
datamonetizationrampsup.4 linksdirectlywithbankaccounts,inthe 2013 2014 2015
hopeoftakingbackmarketshare.5
Dominanceofdigitalchannels
KEYUNCERTAINTIES
Banksareinvestingheavilyindirectdigitalsalesandservicechannelstolowertheircostsandbettermeetcustomerexpectations
Sources:4.TheNewYorkTimes5.TheVerge6.TheBostonConsultingGroup
Incumbentsarestartingtomigratecoresystemstothecloud,aslegacy
infrastructurecreateschallengesinmeetingcustomerneeds
Bankshaveundertakensignificanteffortstomovetoanewer,cloudbasedarchitecture,butstillstrugglewithlegacyinfrastructurethat
weighsdownprofitsandlimitsbanksabilitytomeetcustomerneeds
SUPPORTINGEVIDENCE
Coretechnologicalsystemsoffinancialinstitutionsarelargelybuiltondecadesoldinfrastructure(using
Infrastructure extinctlanguages,e.g.COBOL)andareriddledwithinefficiencies.Asaresult,manyincumbentsare
Issues investingin"integrationlayers"tobridgetheneedsofclientfacingsystemswiththeircoresystem.While
theselayershaveprovenvaluable,banksarealsoawareoftheneedtomigrateawayfromlegacycores
Startupsareabletobeginwiththeclientexperienceandbuildaninfrastructurespeciallydesignedforthe
Patchwork client.Incontrast,incumbentfinancialinstitutionsmustoftenbuildadhocsolutionstomeetspecific
Solutions needs,providingashorttermsolutionbutaddingtothecomplexityofsubsequentchangesandthe
eventualmodernizationoftheirsystems
Incumbentfinancialinstitutionsareshiftingawayfromstrategiestoripandreplacelegacysystems
GradualShiftto towardsagradualmigrationoffunctionstothecloud,inordertoimproveflexibilityandreducecosts.
Modernization However,theprocessofmigratingawayfromlegacysystemswilltakeyearsandlargeamountsofcapital,
andmaypromptreliabilityissues
Incumbentsarestartingtomigratecoresystemstothecloud,aslegacy
infrastructurecreateschallengesinmeetingcustomerneeds(continued)
CASESTUDIES QUANTITATIVEEVIDENCE
BankITSpendinUSbyFocus
(%)
B2Bfintechfocused Migrationtothecloud 22
oninfrastructure
MXprovidesmodern,externalsolutions CapitalOnehasbeenaleaderin
toincumbentsfordatacollection, migratingitscoresystemstothecloud.
enrichment,analysisandmoney Itadoptedacloudbasedinfrastructure
managementtools.MXpartneredwith approachforallnewapplicationsby
BBVAtodevelopBBVAsCompass 2015,andinrecentyearshasbeen
78
FinancialTools,7asuiteoffinancial focusedonmigratingitscoresystemsto
Maintenance Improvements
managementandaccountaggregation AmazonsAWSplatform,withtheaim
tools. ofcuttingover50%ofitsdatacentres Maintenanceofcoreinformationtechnology
by2018.8 (IT)systemsinfinancialinstitutions
represents78%ofallITspending9
KEYUNCERTAINTIES
Defininganoveralllongtermdigitalstrategyrequiresincumbentstocreatecompatibilityandefficiencyfromthefronttoback end
Sources:7.PRNewswire8.AmazonWebServices9.TheFinancialBrand
Fewcustomershavemovedawayfromtraditionaldepositaccountsdespite
significanteffortsfromonlineandmobilechallengerbanks
Anumberofthesebankshaveappearedinrecentyears;however,thesechallengerbankshavelargelyfailedtogainmarketshare,
especiallywithmoreprofitablecustomersegments
SUPPORTINGEVIDENCE
Customerspreferencesarequicklyshiftingtodigitalchannels,butphysicalbranchesremainacritical
Valueof componentofthebankingexperience.Manycustomershavebankingneedswhichonlyphysicallocations
Physical
cancurrentlyfulfill(e.g.gettingasamedaywiretransferforahomepurchase),whileothercustomers
Presence
preferachannelbasedonhumaninteraction
Becausechallengerbanksareunabletomeetmorecomplexneeds,theytendtobeusedassecondary
PoorChallenger bankaccountsbymostcustomers,causingthemtoloseoutonalargeshareofrevenue.Also,toattract
BankEconomics customers,theyoftenprovideeitherlowerfeesorhigherreturnsondepositsthanincumbents,bothof
whichlowerprofitability
Incumbents Theprofitabilityofmanycustomersegmentsdeclinedfollowingthefinancialcrisis,aswealthlevelsfell
Targeting andinterestratesapproachedzero.Inresponse,incumbentsrefocusedtheireffortsonoptimizingtheir
Attractive
clientbase retainingtheirmostprofitablecustomersegments,andensuringthatonlylessprofitable
Customers
customerswouldbetemptedtoswitchtochallengerbanks
Veryfewtechnologicalbarrierstoentryaffectthedevelopmentofanonlineormobilechallengerbank
Abilityto (themajorityofthebarriersconcernregulation).Thus,ifcustomerdefectionstochallengerbanks
FastFollow accelerate,incumbentscanquicklyfollowwithvisuallyappealingfrontendofferingsoranonlinebankof
theirown
Fewcustomershavemovedawayfromtraditionaldepositaccountsdespite
significanteffortsfromonlineandmobilechallengerbanks(continued)
CASESTUDIES QUANTITATIVEEVIDENCE
5 AverageNumberofRoutineBranchInteractions
(perrespondent)12
4
Minirobobranch Guidetodigitalbanking
BankofAmericarecentlytestedthe SantandersnewWalkOutWorking 3
ideaofautomatedbranchesbyopening (WOW)initiativeallowscustomerswho
2
threeminibankbranchesthathave openanaccountataSantanderbranch
ATMsandvideoconferencing,butno tosetuptheirdigitalbankingtoolson 1
employees.InadditiontotheATMs,the site.11 Bankemployeesensurethat
newrobobanks calledautomated clientsmobileandonlineaccountsare 0
centres allowcustomerstomakea fullyactivatedandaccessibleonthe 2012 2013 2014 2015 2016
videoconferencecalltoaBankof firstday,sotheycanwalkout
US Canada UK Australia Netherlands
Americaemployeeatanother workingandarenottemptedto
location.10 switch. Useofbranchesisdeclining butslowly
KEYUNCERTAINTIES
Incumbentsarestartingtoembracetheneweraofdigitizationwhilebuildingontheircorecompetitiveadvantages
Sources:10.TheWashingtonPost11.PRNewswire12.Bain&Company
Thefutureofdigitalbankingwillbeimpactedbytheunravellingofuncertainties
aroundregulation,increasingdigitizationandthebehaviouroftechnologygiants
1 WHATWEKNOW Fintechsarenowsettingthelevelofexpectationsthatcustomershaveforbanks.Withtheemergenceofplatform
bankingmodels,banksaretryingtoevolve,butareweigheddownbylegacysystems.However,thoughfintechsmay
offersuperiordigitalexperiences,consumershaveyettoshiftawayfromincumbentbankstoonlineandmobile
challengerbanks.
Throughthesefindings,thefollowinguncertaintiesarounddigitalbankingemerged:
2 UNCERTAINTIES
3 POSSIBLEFUTURES
Theresolutionofthesefivekeyuncertaintiespaintsthreedivergingpicturesofthefutureofthedigitalbanking
industry:
Dependingonhowthekeyuncertaintiesareresolved,thepotentialendstates
haveverydifferentevolutionarypathsandimplicationsforallfirms
Asbanksfocusoncostcutting,theystartembracingcontrolled,curated
platformsasacosteffectivewayofofferingservices
1 Tofilltheresultinggap, 3 Customersbenefitfrom
banksapproachfintechs accesstobestofbreed
andotherserviceproviders offeringswithouthavingto
Asbanksfacemargin toformpartnershipsbased switchbanks,butlackthe
Overtime,banksforma
pressures,theymakethe onproducts choicetheywouldhavein
small,highlycurated
decisiontocutless anopenplatform
ecosystemofproductsand
profitableproductsand services basedon
servicesinordertofocuson partnershipswithother
differentiatedofferings organizations whichthey
2 canthenoffertheir 4
customers
CRITICALCONDITIONS EARLYSIGNS
Banksarenotforcedtodevelopopendatasolutionsbyregulators Banksformproductlevelpartnershipswithfintechstousethe
bankasaplatform
Banksmakethedecisiontoofferoutsideproductstotheir
customersinsteadofbuildinginhouse Opendataregulationsarenotbroadlyadoptedorareweakly
enforced
Productdesignersarewillingtomakepartnershipswithbanksfor
greateraccesstocustomers
Controlled,curatedplatformsgivemuchgreaterpowertothecurator,atthe
expenseofcustomerchoice
ImplicationsforBanks ImplicationsforRegulators
Banksgettochoosetheareasof Regulatorsmustcloselyconsiderthe
bankingtheywanttospecializein,and marketpowerofplatformownersto
canofferotherfeaturestotheir ensuretheyarenotusingtheirposition
customersviapartnerships todistortmarketforces
Bankswillneedtoensurethattheyand Regulatorsmustalsotrackthespreadof
theirpartners,whetherplatformsor customerdatabetweenplatform
manufacturers,provideaunified ownersandproductmanufacturersto
experienceforcustomers ensurethedataishandledandstored
properly
Controlled,Curated
Platforms
ImplicationsforCustomers ImplicationsforFintechs
Customersbenefitfrombestofbreed Fintechscanpartnerwithbanksto
products,buthavelesschoicethanin extendtheirreach,butloseouton
otherplatformendstates controloverdistribution
Customersfacehigherswitchingcosts Fintechscanalsousepartnershipsto
betweenproductecosystems broadentheirsuiteofofferingsand
competedirectlywithbanksmore
effectively
Asfintechsandbanksseekpartnerstooptimizetheirvaluechain,large
techfirmsstarthostingsignificantdistributionplatforms
Seeingthepopularityof
Fintechsandsmallerbanks theseplatforms,large
1 (especiallythosethatfocus 3 bankshaveadifficult
onniches)formdistribution choicetomake:giveup
partnershipswithtech theirexclusivedistribution
Customers,alreadyusedto
platforms,allowingthose networksandjoin,orrisk
Largetechfirmsenterthe interactingwiththetech
bankstomaximizetheir missingoutonagrowing
digitalbankingsectornotas firm,embracethose
potentialcustomerbase setofcustomers
productowners,butas aggregationplatforms,
productdistributorsusing makingthemabestof
theirpreexistingplatform breedandmoreagile
2 alternativetothe
traditionalfullservice
4
bankingmodel
CRITICALCONDITIONS EARLYSIGNS
Bigtechplayerschoosetoenterthedistributionsideoffinancial Largetechplayersmoveupstreamfrominfrastructuretoproviding
services software
Bigtechplayersarenotplaguedbyamajorscandalordatabreach, Moreregulatorysandboxesbegintodevelopandallowfirmslike
andremaintrustworthytoengagewith Facebooktooperateinthefinancialarea
Regulatorsacceptamoreoligopolisticdistributionoffinancial Techfirms(e.g.Facebook)begintooffersimplefinancialservices
servicesproductsbytechfirms products,backedbyoneortwopartners
Largetechsexpandintothefinancialservicesarea,intensifyingtheircustomer
relationshipsandchallengingregulatorsinpreservingcompetition
ImplicationsforCustomers ImplicationsforBanks
Buyingfinancialproductsfromthetech Bankswouldfacearetailcompetitor
providerofchoiceincreasesconvenience withpotentiallybroaderreachand
forcustomers moreresources,meaningtheywould
havetofindcompetitiveadvantages
Astheaggregationplatformsrepresenta
shelfofcrossentityproducts, Productsandservicespreviously
comparabilityand,thus,productquality bundledunderthebankingumbrella
maydecrease wouldbecomeunbundled,withonlythe
regulatedpiecesstayingwiththebank
TechAggregation
Platforms
ImplicationsforRegulators ImplicationsforLargeTechFirms
Asthedominanceoflargetechfirms Largetechfirmswouldsignificantly
extendsintofinance,regulatorsneedto increasetheiraccesstocustomerdata
considertheriskofmarketdominance sets
evenmorestrongly
Pressuresforceanopenenvironment,increasingcompetitionand
compellingincumbentinstitutionstofocusonthemostvaluablesegments
Forthefirsttime,many Financialinstitutionsmust
1 thirdpartiescancompete 3 choosetobecomea
platformoperatoror
directlyagainstbanksona
levelplayingfield, productmanufacturer,as
deployingproductsonthe Customersloyaltytoa owningtheentirebanking
Banksareforcedtodevelop sameplatformsas productproviderfallsas experiencefromproductto
andsellonopenplatforms banksdo theyshifttothebanking distributionbecomes
asaresultofopenbanking productthatsuitsthem, difficult
regulation,orasconsumers aidedbytheplatforms
movetolargetech guidance
platforms
2 4
CRITICALCONDITIONS EARLYSIGNS
Regulationsforcethedevelopmentofopenplatforms;newly Regulatorspushbackagainsttheformationofclosed,curated
createdopenplatformsgainenoughcustomersupporttoforce platforms
incumbentstoparticipate
Customersflocktothedevelopmentofopendistribution
Banksdevelopdigitalidentitysolutionsandconsistentlydeliver platforms,perhapscreatedbylargetechfirms
them
Fintechsappearthatareonlyfocusedonproductdesign
Customersembraceplatformbanking,overcomingtheirstickiness
tooneprovider
Powerdynamicsareshiftingduetoamorefragmentedvaluechain,ascustomers
arebenefittingsignificantlyfromincreasingcompetition
ImplicationsforBanks ImplicationsforRegulators
Bankswouldbepushedtodecidewhat Aslegislationsopenuptheplayingfield,
roletheywantedtoplayinthevalue regulatorsneedtoclarifyregulations
chain:productdistributororplatform for,andgrowcomfortablewith,a
manager materiallydifferentbusinessmodel
Bankswouldlosetheabilitytocross Theshifttoopenplatformsraisesthe
subsidizeanyoftheirproductsandthus questionofwhoisliable the
wouldhavetoensureprofitability,product distributorortheproductowner
byproduct
Openplatformswouldmeanthatbrand
imagebecomesevenmoreimportantthan
before,andbankswouldhavean
advantage OpenPlatform
World
ImplicationsforCustomers ImplicationsforNewEntrants
Asthemarketbecomesmore Openplatformsallowfintechstobypass
competitiveandclientcentric, theproblemofscale,asplatformscan
customerswouldbethemain provideaccesstomanycustomers
beneficiaries
Newentrantswithoutstrongbranding
However,customersmaybeconfused mustfindwaysfortheirproductsto
andoverwhelmedbythechoiceof standout
products
Keytakeawaysforfinancialinstitutions
DISTRIBUTORSORMANUFACTURERS?
1
Theriseofproductplatformsindigitalbankingwillforcemarketparticipantstomakeachoicebetweena
strategicfocusonproductdistribution(i.e.becomingtheplatform)orafocusonproductmanufacturing.
Thischoicewillhavefarreachingimplicationsfortheirbusinessesandcustomerinteractionmodels,as
wellasfortheircompetitivelandscape
FEWER,BIGGERWINNERS
2
Theadvantageofbeingthemarketleaderwillincreasesignificantlyforbothproductmanufacturersand
productdistributors.Platformswilloffercustomersimprovedtransparencyintoproducts,significantly
increasingtheadvantageforthebestproducts.Fordistributors,significanteconomiesofscaleinaccessto
dataandcustomerawarenesswillfeedavirtuouscycleofgrowth
ECOSYSTEMIMPERATIVES
3
Underallpossibleendstates,digitalbankinginstitutionswillforgemorerelationshipswithotherfinancial
servicesand,increasingly,nonfinancialservicesfirms meaningthatwithinthedigitalbanking
ecosystem,aproficiencyforestablishingpartnershipsandawillingnesstocreatewinwin,symbiotic
relationshipswillleadtomorepartners
References
1. EuropeanchallengerbankN26:thefutureoffinancialservices.TheInvestmentObserver.Retrievedfrom
https://www.theinvestmentobserver.co.uk/tech/2017/05/11/europeanchallengerbankn26390hoia2/
2. OpenAPIforBankApps:CanCreditAgricole'sModelWorkHere?.AmericanBanker. Retrievedfromhttps://www.americanbanker.com/news/openapiforbankapps
cancreditagricolesmodelworkhere
3. TrackingtheGrowthoftheAPIEconomy.NordicsAPIs.Retrievedfromhttp://nordicapis.com/trackingthegrowthoftheapieconomy/
4. BanksandTechFirmsBattleOverSomethingAkintoGold:YourData".TheNewYorkTimes.Retrievedfrom
https://www.nytimes.com/2017/03/23/business/dealbook/banksandtechfirmsbattleoversomethingakintogoldyourdata.html?_r=0
5. ThebiggestUSbanksarelaunchingtheirown,fasterVenmo.TheVerge.Retrievedfromhttps://www.theverge.com/2017/6/12/15782328/zelleusbanksinstant
paymentprocessingappvenmosquarecash
6. RetailBankOperationalandDigitalLeadersReaptheRewards.TheBostonConsultingGroup.Retrievedfrom
https://www.bcgperspectives.com/content/articles/financialinstitutionstechnologydigitalretailbankoperationaldigitalleadersreaprewards/
7. BBVACompassranksintopgroupin2016JavelinOnlineBankingLeaderawards".PRNewswire.Retrievedfromhttp://www.prnewswire.com/newsreleases/bbva
compassranksintopgroupin2016javelinonlinebankingleaderawards300364391.html
8. CapitalOnesCloudJourneyThroughtheStagesofAdoption.StephenOrban,atAmazonWebServices.Retrievedfromhttps://medium.com/awsenterprise
collection/capitalonescloudjourneythroughthestagesofadoptionbb0895d7772c
9. CoreBankingSystems:TheIndustrysAchillesHeel.TheFinancialBrand.Retrievedfromhttps://thefinancialbrand.com/58786/corebankinglegacysystemsmarketing/
10. Banktellersarethenextblacksmiths.TheWashingtonPost.Retrievedfromhttps://www.washingtonpost.com/business/economy/banktellersarethenext
blacksmiths/2017/02/08/fdf78618ee1c11e696626eedf1627882_story.html?utm_term=.60a9e8ce7881
11. SantanderBankEmpowersNewCustomersWithTheWOWFactor.PRNewswire.Retrievedfromhttp://www.prnewswire.com/newsreleases/santanderbank
empowersnewcustomerswiththewowfactor300463961.html
12. CustomerLoyaltyinRetailBanking:GlobalEdition2016.Bain&Company.Retrievedfromhttp://www.bain.com/publications/articles/customerloyaltyinretailbanking
2016.aspx
WORLDECONOMICFORUM|2017 105
LENDING| INTRODUCTION
Lendinghasgreatlyevolvedinthelastseveralyears.Thissectionexaminesthe
keytrendsshapingtheindustryandtheuncertainpathforward
Thefirsthalfofthisdecadesawrapiddevelopmentsinlending,withtheentryofseveralnewforcesthatthreatenedtochangethe
lendinglandscapeandthefuturecentresofpower
CIRCA2015,THEMAJORFORCESIMPACTINGLENDINGWERE
LeanandAutomated
MassP2PLending AlternativeAdjudication
Processes
CIRCA2015,THEBIGUNCERTAINTIESABOUTTHEFUTUREOFLENDINGWERE
Howwouldlowcreditor
Wouldincumbent WouldP2Plendingbe
thinfilecustomers
lendersreactto abletogrowand
aroundtheworld
fintechsspeedand competewith
benefitfromalternative
digitalprowess? traditionalbanks?
adjudication?
Newentrantsaresignificantlydisruptingthelendingmarket,butdonotappear
poisedtobringinnovationstoscale
WHEREDIDDISRUPTIONOCCUR?
Newadjudicationtechniqueshavesignificantlyexpandedaccesstocreditforunderbanked,"thinfile"
A andsubprimecustomers
Individualandsmallbusinessborrowersexpecttheirlendertodelivertheseamlessdigitalorigination
B andrapidadjudicationpioneeredbyleadingfintechs
Nonfinancialplatformsareemergingasanimportantsourceofunderwritingdataandapointof
C
distributionforcredit
WHEREHASDISRUPTIONNOTOCCURRED?
Fundingeconomicsputmarketplacelendersatacostdisadvantagecomparedtotraditionalbanks,
D raisingquestionsaboutthemodel'ssustainability
Newadjudicationtechniqueshavesignificantlyexpandedaccesstocreditfor
underbanked,"thinfile"andsubprimecustomers
Newdataandanalyticaltechniqueshaveprovenvaluableinadjudicatingcredit,especiallyforthinfilecustomerswithinsufficient
creditbureauhistorytoqualifyformostloans,drivingarapidexpansionofcredittounderservedmarkets
SUPPORTINGEVIDENCE
Newsourcesofdatahaveemergedforuseinadjudicatingcredit,suchassocialandmobiledatafor
NewSources individuals,andpaymentsoraccountingdataforbusinesses.Whilethisdatahashadlimitedeffectiveness
ofData inimprovingtheunderwritingofestablishedcustomers,ithasproventobevaluableforthinfile
borrowers(withinsufficientcreditbureauhistory)andsmallbusinesses
Incumbentlendersarelookingtotheirexistingstoresofdatatobolstertheirunderwritingmodels,
UsingData especiallyforunderbankedcustomers.However,thatdataisoftenunstructuredandsiloed,makingit
More
difficulttobeputtouse.Toaddressthesechallenges,incumbentsareinvestingheavilyindata
Effectively
transformation,automationandnewanalytics
Newentrantsimproveontheircreditmodelsusingshortiterationcycles,whileincumbentsare
MoreAgile constrainedtomakingadjustmentsmuchmoreslowly.Thislaginimplementingbestinclass
CreditModels methodologiesprovidesnewentrantsatemporarycompetitiveadvantageinunderstandingthecreditrisk
ofunderbankedandthinfilecustomers,especiallyasnewsourcesofdatabecomeavailable
CAVEATS
Whilecreditmodelshaveimprovedsincethefinancialcrisis,manyalternativeapproachesweredeveloped
Lackof
followingthecrisis,makingitunclearhowalternativemodelsforsubprimecustomerswillfareoverthe
CreditCycles
fulllifeofthenextmacrocreditcycle
Newadjudicationtechniqueshavesignificantlyexpandedaccesstocreditfor
underbanked,"thinfile"andsubprimecustomers(continued)
CASESTUDIES QUANTITATIVEEVIDENCE
ApprovalRatesofUSSmallBusinessLenders,
2016(%ofapplications)2
70% 63.3%
59.2%
Paydayloanalternative Artificialintelligenceforunderwriting 60%
48.8%
50% 41.1%
LendUp,aUSdirectonlinelenderand ZestFinanceprovidesmachinelearning 40%
financialeducationcompany,offersa underwritingtechnologytofinancial
30% 23.7%
proprietaryunderwritingmodelto institutionsthatassistswithanalysing
20%
servesubprimeborrowerswholost andprocessingcomplex,disparatedata
10%
accesstocreditfollowingthefinancial toimprovepricingdecisions.Following
0%
crisis.Thecompanyoffersloansat aninvestmentfromChineseinternet BigBanks CreditUnions SmallBanks Alternative Institutional
searchgiantBaiduin2016,itis Lenders
lowerratesthanpaydaylendersand
progressivelylowerratesasborrowers developingacreditscoringplatformfor
repay. Chineseborrowers,basedonBaidus Increasedlendingtosmallbusinessesthrough
searchdata.1 alternativelenders
KEYUNCERTAINTIES
Newcreditadjudicationtechniqueshaveproventobeeffective,demonstratingstrongapprovalandlossrates
Sources:1.YahooFinance2.Deloitte
Individualandsmallbusinessborrowersexpecttheirlendertodelivertheseamless
digitaloriginationandrapidadjudicationpioneeredbyleadingfintechs
Newfintechsabilitytodeliverfasterandlessonerousapplicationprocessesisplacingpressureonincumbentstodeliversimilarly
streamlinedexperiences
SUPPORTINGEVIDENCE
Newonlinelendershavecutloanadjudicationtimestominutes,forcingincumbentlenderstoimprove
Improved andautomateinternalloanprocessesinordertocompete.Asaresult,manyloanprocessesthat
Processes previouslyneededhumaninterventionarenowautoadjudicated,allowingincumbentstoofferdigital
originationandrapidloanorigination
Legacy Constrainedbydecadesoldmainframes,incumbentsmustaddtechnologicalbridgestoconnectlegacy
Technology infrastructurewiththedigitalfrontendsdemandedbycustomers.Thisadditionaleffortincreases
IncreasingCosts developmenttimeandcostscomparedtofintechs,butisnecessaryforincumbentstocompete
Improvingprocessesandbuildingmiddlewarehavebothproventoberelativelyexpensive.Incumbents
Partnershipsas
havethuslookedatpartnershipswithmarketplacelenders,allowingthemtoaccessfintechdriven
CostSaver
technologicalsolutionswithoutfullyoverhaulingtheirinfrastructure
Individualandsmallbusinessborrowersexpecttheirlendertodelivertheseamless
digitaloriginationandrapidadjudicationpioneeredbyleadingfintechs(continued)
CASESTUDIES QUANTITATIVEEVIDENCE
AverageNetPromoterScorebyLender5
80
digitalhomeloanoriginationservice originationtothebanksroughly4
20
whereuserscanviewtheircredit millionsmallbusinesscustomers.The
reportsonline;digitallyverifyasset, partnership,anditsnearterm 5
propertyandincomeinformation;and profitability,hasdrivenOnDeckto
Marketplace Credit Community Regional National
receivefullapprovalinminutes.Rocket reorientitsstrategytofocuson lenders unions banks banks banks
Mortgageusesalgorithmstoanalysea deliveringahighlyscalableOnDeck
borrowerscreditworthiness,reducing asaServicemodel.4
Superiorcustomersatisfactionfrom
latencyandhumanerrors.3
marketplacelenders
KEYUNCERTAINTIES
Newdistributionchannelsandmoredemandingcustomerexpectationsareraisingthebarforincumbentlenders,necessitatingsignificant
investment
Sources:3.Money4.TheWallStreetJournal5.EY
Nonfinancialplatformsareemergingasanimportantsourceofunderwriting
dataandapointofdistributionforcredit
Newdistributionchannelsarebeingcreatedasfinancialinstitutionsembedlendingproductsintothirdpartyonlineplatforms.Asthey
seektocapturecustomersinmomentsofneed,nonfinancialinstitutionsarealsojumpingintothefray
SUPPORTINGEVIDENCE
Increasing Lendersaretargetingnonfinancialplatformsbecausetheyprovideaccesstotheexactmomentswhen
Customer customersneedcreditthemost,suchasduringsupplychainmanagementorthesettlementofaccounts
Engagement receivable.Thus,lenderscanpreemptivelyunderwriteloansatdecisionmoments
Lendersarealsoturningtononfinancialplatformsasdistributionchannelpartnersbecauseofthe
IncreasingData particulardatasetsmanyoftheseplatformshold.Thisdatacanprovidevaluableforwardlookinginsights
Collection intoacompanysperformance,aswellasenabledetailedcomparisonsbetweensimilarbusinessesand
individuals.Assuch,thisdatahelpstolowerbothunderwritingriskandthecostofunderwriting
Nonfinancialplatformshavealsobeguntheirownexplorationintoprovidinglendingproductsdirectlyto
RiskofNew theirusersasanewlineofbusiness.Whethertheseloansarefundeddirectlyfromtheplatformsbalance
Entrants sheetorviaafundingpartner,theyrepresentdirectcompetitionwithfinancialinstitutionsforcredit
distribution
Nonfinancialplatformsareemergingasanimportantsourceofunderwriting
dataandapointofdistributionforcredit(continued)
CASESTUDIES QUANTITATIVEEVIDENCE
LoansthroughAmazonLending
($billion)
Nonfinancialplayer Platformbased 3.5
offeringloans tradefinancing
3
Amazonofferscredittomerchantsthat TradeshiftsB2Bsupplychainplatform
2.5
sellonitsplatform,usingsalesdatato connectsfinancialinstitutionswith
2
measurerisk.Ifamerchantdefaultson supplierstooffertradefinancingdirectly
theloan,Amazoncanchooseto throughitsplatform.Onceaborrower
1.5
withholdsalesonitsplatform.The requeststheloan,incumbentlenders 1
companyhasalreadymadeloansworth receiveaccesstogranulardatathat 0.5
over$3billionusingthisplatform,andis enablesthemtounderwritetheloan. 0
expandingtheofferingtoreacheven Tradeshiftbenefitsfromimprovedclient 2011 2013 2015 2017
moremerchants.6 serviceandoriginationfees.7
AcceleratinggrowthinAmazonLending6
KEYUNCERTAINTIES
Lendingatthesource(i.e.theplatform)hasthepotentialtodramaticallyshiftthebalanceofpowertowardscustomerplatforms
Sources:6.TechSpot 7.CityA.M.
Fundingeconomicsputmarketplacelendersatacostdisadvantagecomparedto
traditionalbanks,raisingquestionsaboutthemodel'ssustainability
Despiteoperatingcostadvantages,marketplacelenderssufferfromhigherfundingcosts,creatingchallengesinpricesensitivesegments
andforcingthemtoexploreothermodels
SUPPORTINGEVIDENCE
Buildingaclientbasefromscratchhasprovedtobeexpensivefornewentrants,particularlywherethey
HighCustomer havereliedonhighcostanalogchannelssuchasdirectmail.Thesehighercustomeracquisitioncostshave
AcquisitionCosts createdparticularchallengesinsegmentswhereincumbentsarewellestablishedandmarginsarelow,as
incumbentsalreadyhaveawelldefinedclientbaseandthereforealargecostadvantage
Whiletheabsenceofabranchnetworkcreatescertaincostadvantagesfornewentrants,theyaremore
HighFunding
thanoffsetbysignificantlyhigherfundingcoststhanforbanks.Whileincumbentbanksareabletodeploy
Costsfor
Marketplaces lowcostdeposits,newentrantshavereliedonprivateinvestors,whodemandhigherpremiumstoreflect
ahighercreditrisk(perceivedorotherwise)andalesserknownbrand
Maintainingliquidityinatwosidedmarketplacehasprovedtobedifficult.Marketplacesinitiallysought
Funding hedgefundcapitaltofundgrowth,butfoundthiscapitaltobeunstableashedgefundspulledbackdueto
Instability broadermarketvolatility.Inresponse,marketplacesarenowexploringalternatives,includingacquiring
bankinglicences,whichwouldgivethemaccesstolowercostfundingsourcessuchasdemanddeposits
Fundingeconomicsputmarketplacelendersatacostdisadvantagecomparedto
traditionalbanks,raisingquestionsaboutthemodel'ssustainability(continued)
CASESTUDIES QUANTITATIVEEVIDENCE
TotalCostofAttractingFundsin UK
CurrentvsNormalized,inBasisPoints(bps)
(200bpsbaserate)10
Astrategyoffundingdiversificationandcostoptimizationiscriticaltomarketplacelenders,butitblursthelinewithtraditionalbanking
Sources:8.TheWallStreetJournal9.TechCrunch10.CNBC11.Deloitte
Fivekeyuncertaintiesarisefromthelendingfindingswhichwillshapethis
industry'sdirection
1 WHATWEKNOW Thelendingfindingsillustratehowfintechshavealteredcustomerperceptionofthelendingexperience.Fintechsare
usingdatatoprovidecustomerswithpainfreelendingservices,andcustomerswantthesameefficient,seamless
experiencewiththeirbanks.Additionally,consumerscanchoosefromamultitudeoffinancialandnonfinancial
providers.However,fintechsarestrugglingtofindasustainablebusinessmodelinthefaceoffundinginstability.
Throughthesefindings,thefollowinguncertaintiesaroundlendingemerged:
2 UNCERTAINTIES
3 POSSIBLEFUTURES
Theresolutionofthesefivekeyuncertaintiespaintsthreedivergingpicturesofthefutureofthelendingindustry:
Dependingonhowthekeyuncertaintiesareresolved,thepotentialendstates
haveverydifferentevolutionarypathsandimplicationsforallfirms
DIFFERENT SHARED
EVOLUTIONARYPATHS SERVICEPROVIDERS DISTRIBUTION2.0
Marketplacelendershavetofurtherdevelopsophisticatedcapabilities
orcompeteonpricewithestablishedbanks
1 3 Asaresult,the
Somemarketplacelenders marketplacelending
shifttheirfocustoniche modelevolvesitselfaway,
Marketplacelendersare productsandtoclients Othermarketplacelenders asfirmseitherchaseniche
challengedintheirattempts currentlyunderservedby choosetocompetehead markets,becomebanksor
toscaleup,astheirformer largebanks onwithestablishedbanks, gooutofbusinessentirely
competitiveadvantagesof acquiringbankinglicences
speed,serviceand andretaildepositsto
underwritingaccuracyare lowerandstabilizetheir
commoditized 2 fundingcosts 4
CRITICALCONDITIONS EARLYSIGNS
Marketplacelendersfailtoemergeasdominantplayersinnon Thegrowthofmarketplacelenderscontinuestobeweak
nichemarkets
Somemarketplacelendersexpandintonewproductsand
Incumbentbanksareabletosufficientlyloweroperatingcosts customersegments
quicklyenoughtooutperformmarketplacelenders
Othermarketplacelendersshifttoacquirebankinglicences
Clientswillbenefitfrommoresophisticatednichelendingandincreased
competitionasthelendinglandscapebecomesmorefragmented
Implicationsfor
ImplicationsforIncumbents AlternativeLenders
Competitionincreasesfornicheareas,but Alternativelendershaveaccesstomuch
overallcompetitiondecreasesas smallersectionsofthemarketasthey
marketplacelendersbecomeless cedemarketsharetobanks
competitive
Convergencewithdigitalbanking
Marketplacelendersbecomearegular fintechscouldleadtoincreased
venueforbankstodeployexcesscapital competition
Significantgrowthoccursacrossnew
Different nichemarkets
EvolutionaryPaths
ImplicationsforRegulators ImplicationsforCustomers
Awarenessisrequiredofrisksstemming Customersbenefitfromexpanded
fromincreasedconsolidationas availabilityofcredittounderserved
incumbentsgainmarketshare markets
Regulatorsmustdefinetherulesfor
edgecasesaslendingfirmstrytoadapt
theirbusinessmodel,becomingmore
likeabank
ThedesireforcostcommoditizationdrivesgrowthinB2Bservice
providers,astwoneedscometogetherinonesolution
Asaresult,some
However,marketplace marketplacelenderschoose
1 lenderslargelyfailtogain
3 toworkwithbanksasB2B
sufficientscaletoovercome serviceproviders,and
theirconsiderable banksoutsourcethe
Offeringfasterloansand disadvantagesinfunding Meanwhile,banks majorityoftheirlending
leveragingnontraditional costs,andstruggleto operatingonexpensive technologytomarketplace
underwritingmethods, remainviable legacycostbaseswith lenders
marketplacelendersshift limitedcapabilitiesfind
customerexpectationson partnershipswithservice
whattoexpectfromthe providerstobethebest
loanexperience 2 deliveryapproach 4
CRITICALCONDITIONS EARLYSIGNS
Regulatorsbuyintosharedservicemodelsbetweencompetitors Lendingmarginscontinuetoerode
Acriticalmassoffinancialinstitutionsusingsharedserviceand Specializedcapabilityprovidersthatsuccessfullydeliverabsolute
externalprovidersisreached costadvantagesproliferate
Connectivitybetweencapabilityprovidersandbanksbecomes Businessesdevelopadjacenttosharedservices(e.g.rating
standardized agenciesforvendors)
Increasingexternalizationimprovesindustrycostbases,butcreatespotential
newpointsofsystemicrisk
Implicationsfor
ImplicationsforIncumbents AlternativeLenders
Externalizationleadstosignificant Aslendersbusinessmodelsmovefrom
reductionsofinhousemiddleandback B2CtoB2B,thecapabilitiesrequiredfor
officefunctions successshiftsignificantly
Manyinhousecapabilitiesthathaveset Nonfinancialfirmsexpandintolending
apartbanksfromcompetitionareno asbarrierstoentryfall,potentially
longerdifferentiators leadingtoareturntotheeraof
personalcreditissuedbyretailers
Increasedcapacityfromsoftwareasa
serviceprovidersmakesITexpenditures
moreofavariablecost,decreasingthe SharedService
benefitsofscale Providers
ImplicationsforRegulators ImplicationsforCustomers
TheriseinB2Bproviderspotentially Morecompetitiononserviceandcosts
increasesthesystemicriskofasingle ashighqualityexecutionbecomes
pointoffailure commoditized
Granularityincreases,andservice Lowerloancostsasbankoperating
providersfacemoreintenseregulatory expensesdecrease
scrutiny
Marketfragmentationdrivesanintense
battleformindshare
Nonfinancialfirmsmovehorizontallyintofinancialservicesand
disintermediatethetraditionalbrokerchannel
1 Lendersform
3 Nonfinancialplatforms
effectivelyreplacethe
partnershipswithnon
traditionalbrokerchannel,
financialplatformstouse Lendersimprovethe
Aslendingbecomes andderiveadditional
theirdataandofferloans sophisticationoftheir
commoditized,lenders customerloyaltyfrom
throughtheiruser underwriting,usingtheir
lookfornewopportunities havingcustomerslockedin
interfaces partners'datatomake
toacquirepotential totheirecosystem
customersandhigh highlytargetedoffersthat
qualitydataontheir anticipatecustomer
currentcustomers 2 needs
4
CRITICALCONDITIONS EARLYSIGNS
Connectivitybetweenthenonfinancialfirmandthebankallows Smallandmediumsizedbusinessesincreasinglyadoptcloudbased
bankstoreceivedatafrom,andtoofferloansthrough,theplatform softwaresolutions
Dataprovidedbynonfinancialfirmsisconsideredbetterthanfrom Morenonfinancialfirmsbegintomoveintothefinancialservices
othersourcesinadjudicatingcredit area,eitherontheirownorthroughpartnershipswithexisting
lenders
Aspartnershipsbetweenbanksandnonfinancialfirmsproliferate,customers
experienceimprovesandchoicesbecomenumerous
Implicationsfor
ImplicationsforIncumbents NonFinancialFirms
Theriseofplatformsasintermediaries Suchfirmsdevelopanewsourceof
meansincumbentsmovefurtheraway revenue,asplatformsreceivefeesin
fromtheircustomers exchangeforaccessanddata
Someplatformsmayactasaggregators Theyproactivelyprovidefundingto
andallowforcomparisons,thereby clientsdirectlyinapp,thereby
increasingpricecompetition increasingcustomerinteractionand
providingmorepullintotheplatform
Incumbentsacquireabetter
understandingofclientsastheygain Thefirmshaveadeeperrelationship
accesstoanewanddeeperpoolofnon Distribution2.0 withtheirbanksandmorebargaining
financialdata powerinnegotiations
ImplicationsforRegulators ImplicationsforCustomers
Regulatorsneedtomonitornewnon Customersbenefitfromanimproved
financialdistributionchannelsand experience:loansareavailabledirectly
potentiallyregulatepreviously inapp,andcustomersknowin
unregulatedparties advancedwhethertheyareapproved
Customershaveimprovedcomparability
offinancialproducts andaccessto
multipleproviders
Keytakeawaysforfinancialinstitutions
THELOWESTFUNDINGCOSTSWIN
1
Despiteinnovationsinoriginationandadjudication,theonlinelendingmodelisfundamentallylimitedby
highandunstablefundingcostsinitsabilitytocompetewithbanks.Theneedforaconsistentfunding
sourceatacostsimilartothatofdepositsforbankswilldriveonlinelenderstoacquirebankinglicences
unlessanalternativefundingsourcecanbefound
LENDINGGOESDIGITAL
2
Marketplacelendersandtechnologyfirmshavereorientedcustomerexpectations.Leadinglendersare
expectedtooffersimplecreditoriginationexperiences,whereacombinationofdesignandautomation
providescustomerswithafrictionlessapplicationexperienceandaswiftresponse
LENDERSUSEDATAEFFECTIVELY
3
Leadinglendersareusingdatatoimproveboththeeffectivenessandtheefficiencyoftheiradjudication
processes.Theyemploynewsourcesofdatatounderwriteapplicationswhoseriskscouldnotpreviously
beassessed(e.g.thinfilecustomers),andreduceunderwritingcostsbyautomatingthecollectionand
analysisofkeydata(e.g.usingdatacollecteddirectlyfromasmallbusinessaccountingplatform).Moving
forward,lenderswillincreasinglylookfornewsignals/datatoinformlendingdecisions
References
1. ZestFinanceIntroducesMachineLearningPlatformtoUnderwriteMillennialsandOtherConsumerswithLimitedCreditHistory.YahooFinance.Retrievedfrom
https://finance.yahoo.com/news/zestfinanceintroducesmachinelearningplatform150000764.html
2. Marketplacelending2.0:Bringingonthenextstageinlending.Deloitte.Retrievedfromhttps://www2.deloitte.com/content/dam/Deloitte/us/Documents/financial
services/usfsimarkeplacelending2.pdf
3. YouCanNowBeApprovedforaMortgagein8Minutes.Money.Retrievedfromhttp://time.com/money/4129146/quickenloans8minutemortgage/
4. InsideJ.P.MorgansDealWithOnDeckCapital. TheWallStreetJournal.Retrievedfromhttps://www.wsj.com/articles/insidejpmorgansdealwithondeckcapital
1451519092
5. AlternativeLending.EY.Retrievedfromhttp://www.ey.com/Publication/vwLUAssets/eyunderstandingalternativelending/$File/eyunderstandingalternative
lending.pdf
6. Amazonhaslentover$3billiontomerchantssince2011.TechSpot. Retrievedfromhttp://www.techspot.com/news/69665amazonhaslentover3billionmerchants
since.html
7. HSBC'spartneringwithfintechstartupTradeshifttooffertradefinancingandhelpbusinessesincreasetheirworkingcapital. CityA.M.Retrievedfrom
http://www.cityam.com/262044/hsbcspartneringfintechstartuptradeshiftoffertrade
8. ProsperInks$5BillionLoanBuyingDealWithInvestorsIncludingSoros,Jefferies.TheWallStreetJournal.Retrievedfromhttps://www.wsj.com/articles/prosperinks5
billionloanbuyingdealwithinvestorsincludingsorosjefferies1488222470
9. SoFihasappliedforabankcharter.TechCrunch.Retrievedfromhttps://techcrunch.com/2017/06/12/sofiappliestobeabank/
10. Zoparaises$41.2millionforchallengerbanklaunch.CNBC. Retrievedfromhttp://www.cnbc.com/2017/06/02/zoparaises41point2millionforchallengerbank
launch.html
11. Atemporaryphenomenon?Marketplacelending:AnanalysisoftheUKmarket".Deloitte.Retrievedfrom
https://www2.deloitte.com/content/dam/Deloitte/uk/Documents/financialservices/deloitteukfsmarketplacelending.pdf
WORLDECONOMICFORUM|2017 126
INVESTMENTMANAGEMENT| INTRODUCTION
Investmentmanagementhasgreatlyevolvedinthelastseveralyears.Thissection
examinesthekeytrendsshapingtheindustryandtheuncertainpathforward
Thefirsthalfofthisdecadewasmarkedbyprofoundchangestotheinvestmentmanagementindustry,includingtheentryofseveral
majorforcesthatheldthepotentialtofundamentallyshifttheindustry'scourse
CIRCA2015,THEMAJORFORCESIMPACTINGINVESTMENTMANAGEMENTWERE
IncreasingB2B
TheRiseofRoboAdvisors BigDataDrivenAnalysis Externalization
CIRCA2015,THEBIGUNCERTAINTIESABOUTTHEFUTUREOFINVESTMENTMANAGEMENTWERE
Wasroboadvisoryservice Howwouldcompanies
Wouldmonolinefintechs
trulytherightanswerfor lookatB2B
beabletocapture
thevastmajorityof externalizationasmargins
significantmarketshare?
customers? continuedtodecline?
Note:Wealthmanagersaredefinedasorganizationsthatprovideadviceanddistributeproductstocustomersininvestment
management.AssetManagersarecompaniesthatmanufacturethefinancialproductitself,whichformsthebasisfortheinvestment
Fourtrendsintheinvestmentmanagementindustryhaveshapeditsfuture,and
incumbents,notinnovators,lookpoisedtobenefit
WHEREDIDDISRUPTIONOCCUR?
Asindividualsbecomemoreresponsiblefortheirinvestments,robodistributionhasbecomethemost
A compellingtoolforcustomerengagement
Scalingthedeliveryofinvestmentadvicerequiresfewerresources,asmiddleandbackofficefunctions
B areincreasinglybeingautomatedorexternalized
Thegrowthoflowcostproductshasincreasedtheimportanceofscaleinproductmanufacturing,
C drivingpressuresforconsolidation
WHEREHASDISRUPTIONNOTOCCURRED?
Newentrantstoinvestmentmanagementhavestruggledtogainmarketshareinthefaceofcustomer
D stickinessandhighcustomeracquisitioncosts
Asindividualsbecomemoreresponsiblefortheirinvestments,robodistribution
hasbecomethemostcompellingtoolforcustomerengagement
Asemployersabandontraditionaldefinedbenefit(DB)plansinfavourofdefinedcontribution(DC)plans,individualsarebecomingmore
responsibleformanagingtheirowninvestments,drivinganeedforlowcostinvestmentsandadviceonassetallocation
SUPPORTINGEVIDENCE
Babyboomersaredrawingdownondefinedbenefitplans(guaranteedbenefits),whileyoungerworkers
Shiftfrom arepredominantlylimitedtodefinedcontributioninvestmentplans(benefitsbasedoninvestment
Institutionalto returns).Thesetrendsareincreasingtheshareoftotalinvestmentsthatareselfmanaged,drivingdemand
Individual forproductsandservicestargetedtoindividualsasopposedtoinstitutionalinvestors
Regulatorshavesteppedupeffortstoprotectretailinvestors,citingmissellingscandals,risinginvestor
Increasing
dissatisfactionandtheshiftingofretirementburdensfrominstitutionstoindividuals.Anunintended
Regulation
consequenceofthesepoliceshasbeentoincreasethecostofprovidingcustomerswithindividualized
RaisingCosts
offeringsthroughtraditionalchannels,makingroboadvisorsacompellingsolution
Customershavebecomeaccustomedtocustomercentricofferingsandserviceinnonfinancialsettings,
RisingClient andexpecttheirfinancialservicesexperiences,includingwealthmanagement,toexhibitsimilar
Expectations characteristics.Roboadvisoryproductsofferadigitalandcustomercentricexperienceatalowcostand
arethusattractive,particularlyforyoungercustomers
Asindividualsbecomemoreresponsiblefortheirinvestments,robodistribution
hasbecomethemostcompellingtoolforcustomerengagement(continued)
CASESTUDIES QUANTITATIVEEVIDENCE
GlobalAssetManagementIndustryNetNew
FlowsbyInvestorType(%)4
Roboadvisoryproductforthemasses Newstandardsforadvice
36
CharlesSchwabhasrolledoutits TheUSDepartmentofLaborFiduciary Retail/DC
IntelligentPortfolioroboadvisory Rulewillelevateallfinancial
productfocusedonmassandmass professionalswhoprovideretirement 103
Sources:1.CharlesSchwab2.Investopedia3.Forbes4.Deloitte(CaseyQuirk)
Scalingthedeliveryofinvestmentadvicerequiresfewerresources,asmiddleand
backofficefunctionsareincreasinglybeingautomatedorexternalized
Assetandwealthmanagersareseeingmarginsdeclineandareturningtoexternalizationandautomationtolowercosts.Asnoncore
functionsbecomeexternalizedandcommoditized,theindustryvaluechainthreatenstoshiftconsiderably
SUPPORTINGEVIDENCE
Margin Manufacturingmarginsaredecliningasdemandshiftsfromhighcosttolowcostproducts,and
Compression distributionmarginsarefallingasroboadvisorsgainpopularity.Thispressureisdrivingincumbentsto
Forcing searchforsavings,especiallyintheareasofthevaluechainthataddtheleastvalue themiddleandback
CostCutting office
Enabledbytechnologicaladvancements,externalserviceprovidersaregrowingandbuildingatrackrecord
Growthin
ExternalService ofsuccessindrivingefficiency.Asthesefirmsproliferateandallowassetmanagerstofocusonthe
Providers strategicaspectsofinvesting,theywillbetrustedwithmoreandmorefunctionsthatarecentraltothe
assetmanagersoperations
Automationand AutomationandAIarebecomingmorecapableandmaysoonbeabletoreplacecomplexhumanactivities
AIReplacing
acrossthefront,middleandbackoffice.Astheydoso,competitiveadvantagesderivedfromexcellencein
Processes
processexecutionwilldeteriorate,leadingtoevenmoreprocessexternalization
Scalingthedeliveryofinvestmentadvicerequiresfewerresources,asmiddleand
backofficefunctionsareincreasinglybeingautomatedorexternalized(continued)
CASESTUDIES QUANTITATIVEEVIDENCE
GrowthinAddepar's*AssetsonPlatform
($billion)7
Realtimeanalytics Zerocommissiondiscount 700 650
broker 600
Kenshodrasticallyreducesthemanual Robinhoodisadigitaldiscountbrokerage 500
analyticsrequiredtoexplorefuturesfor thatallowsuserstotradesecuritieswith 400 300
capitalmarketsandallowsusersto zerocommissions.6 Recently,itannounced 300
expressthosefuturesusingnatural partnershipswithotherwealth 200
language.MedianetworkCNBCused managementinnovators,suchas 100
Kenshostooltoanalysetheimpactof Quantopian,OpenFolioandStockTwits,to 0
recentpoliticalevents(e.g.WannaCry providecustomersofthoseonlinetools Jan16 Jun17
cyberattack)onstockprices.5 accesstoadditionalservicesthroughits *Externalwealthmanager
platform.
Massivegrowthinexternalserviceplatforms
KEYUNCERTAINTIES
Asinnovativevendorsprovideeconomicalaccesstosophisticatedcapabilities,highqualityprocessexecutionisbecomingacommodity
Sources:5.CNBC6.Robinhood7.Finextra
Thegrowthoflowcostproductshasincreasedtheimportanceofscalein
productmanufacturing,drivingpressuresforconsolidation
Asthedemandforlowcostinvestmentsgrows,utilizingeconomiesofscaletolowerproductcostsandofferingdifferentiatedproducts
atlowcostbecomemajorcompetitivepriorities
SUPPORTINGEVIDENCE
Forassetmanagers,excessreturnsoverthemarket(alpha)haveprovenelusivetogenerateinthepost
AlphaBecoming
crisisenvironment,makingitdifficultformanagerstojustifytheirhigherfeesanddiminishingtheirappeal
MoreElusive
infavouroflowcostproducts
LowFees,High Asthepopularityoflowcostproductshasgrown,providershaveprimarilycompetedonthebasisofprice,
Economies withthelowestcostUSequityETFchargingjustthreebasispoints.Thissignificantadvantageofscalein
ofScale theproductionoflowcostproductsmeansindustryconsolidationisinevitable
ThegrowthoflowcostETFproductshascreatedagapinthemarketforinvestorsthatareattractedto
Riseof activestrategiesbutarealsolookingforlowcosts.Asaresult,smartbetaproductsthatemployactive
SmartBeta strategiesbutuselowcostbetaproductshaveriseninpopularity,andarealsohelpingtodrivethepush
foradditionalscaletolowercosts
Thegrowthoflowcostproductshasincreasedtheimportanceofscalein
productmanufacturing,drivingpressuresforconsolidation(continued)
CASESTUDIES QUANTITATIVEEVIDENCE
InvestorAverageFeeBudget
(inbasispoints)10
179 bps
Passiveproductsas Consolidationof 165 bps
competitiveadvantage humanmanagedfunds 43
46 Advice
Asanearlyproponentofindexfunds, Continuing30yearsofR&Dandstrong
36
Vanguardhasbenefitedgreatlyfrom investmentperformanceofits 35 Intermediary
theongoingshifttolowcost quantitativeinvestingteam,BlackRock
investmentswhileitscompetition laidoutanambitiousplantoconsolidate 57
46 Administrative
grappleswithdecliningmargins. alargenumberofhumanmanaged
Vanguardattractednetmutualfund mutualfundsthatrelyonalgorithms Asset
43 38
flowsof$823billionoverthelast andmodelstopickstocks.Thesefunds Management
threeyears,8.5timesasmuchasits focusonquantitativeandother 2013 2015
competitorscombined.8 strategiesthatadoptamorerulesbased
Significantdeclineinfeesdueto
approachtoinvesting.9 lowcostproducts
KEYUNCERTAINTIES
Astheassetmanagementindustryconsolidates,largemanufacturersarecapturingthevastmajorityofnewflows
Sources:8.TheNewYorkTimes9.TheNewYorkTimes10.CaseyQuirk
Newentrantstoinvestmentmanagementhavestruggledtogainmarketsharein
thefaceofcustomerstickinessandhighcustomeracquisitioncosts
Incumbentshavequicklycooptedtheroboadvisorymodel,drivingmonolineroboadvisorstoexplorenewbusinessmodels,suchas
licensingtheirtechnologytoincumbents
SUPPORTINGEVIDENCE
Monolineroboadvisorshaveprimarilyattractedmassormassaffluentcustomers.Coupledwiththeirlow
Challenging
fees,theseclientsgeneraterelativelylowpercustomerrevenue.Theseeconomicshaveproven
PerCustomer
challenging,ascustomeracquisitioncostsarehighrelativetoeachcustomer'svalue,makingitdifficultto
Economics
beprofitable
Roboadvisoryofferingshaveproventoberelativelyquickandeconomicaltodevelop.Thelowcostof
LowBarriers entryhasallowedincumbentwealthmanagerstofastfollownewentrantsandbuildtheirownofferings,
toEntry
whichtheycanthenoffertotheirexistingcustomerbasetokeepcustomeracquisitioncostslow
Traditionalwealthmanagementservicesarebecomingcommoditizedasnewentrantsautomateadvice
ValueAdded andcashflowmanagementservices.However,thiscommoditizationhasunderscoredthatclientsvalue
Services highlyintangible"human"capabilitiesandbespokeservices,especiallyastheyincreaseinnetworth.
Incumbentsabilitytoprovidetheseservicescanfostercustomerstickiness
Newentrantstoinvestmentmanagementhavestruggledtogainmarketsharein
thefaceofcustomerstickinessandhighcustomeracquisitioncosts(continued)
CASESTUDIES QUANTITATIVEEVIDENCE
TopRoboAdvisorsby
AssetsunderManagement,2016($billion)13,14,15,16,17,18
Incumbents NewEntrants
InAugust2015,FutureAdvisorwasthe Macquarie,aleadingassetmanagement
firstmajorcustomerfacingrobo andinvestmentbankingfirmfrom $12.3
advisoryproductboughtbyoneofthe Australia,launchedOwnersAdvisoryin $6.7 $4.4 $2.9
leadingglobalassetmanagers 2015,offeringflatfeedigitalinvestment
(BlackRock).11FutureAdvisornow adviceservicethatempowersself Vanguard Schwab Betterment Wealthfront Personal
Personal Intelligent Capital
providestechenableddigitaladvicefor directedinvestorsacrossvariousasset
Advisor Portfolio
investorsthroughbanksandwealth classes.12
managersinanopenarchitecture Rapidconsolidationofthe
platform. marketbyincumbents
KEYUNCERTAINTIES
Benefittingfromtheirstrongbrands,bothdistributorsandmanufacturersarequicklyandsuccessfullycooptingtheroboadvisorymodel
Sources:11.Forbes12.Macquarie13.CharlesSchwab14.BusinessInsider15.BusinessInsider16.Forbes17.Bloomberg18.Investopedia
Uncertaintiesininvestmentmanagementlargelyrevolvearoundthenatureof
futureinvestmentproductsandthecompositionoftherelatedvaluechain
1 WHATWEKNOW Thesefindingsillustrateincreasingclientexpectationsandtheimportanceofapersonalizedcustomerexperience.As
middleandbackofficefunctionsareautomatedorexternalized,firmsareforcedtodifferentiateonhighquality
processexecutionanddistinct,tailoredadvice.Customerstickinessandthehighcostofnewcustomeracquisition
allowincumbentstobenefit,assuccessfulfintechofferings,suchasroboadvisors,arequickandeasytoreplicate.
Throughthesefindings,thefollowinguncertaintiesaroundinvestmentmanagementemerged:
2 UNCERTAINTIES
3 POSSIBLEFUTURES
Theresolutionofthesefivekeyuncertaintiespaintsthreedivergingpicturesofthefutureoftheinvestment
managementindustry:
Dependingonhowthekeyuncertaintiesareresolved,thepotentialendstates
haveverydifferentevolutionarypathsandimplicationsforallfirms
Growingprofitpoolsinretailwealthleadtoarenaissanceofproducts
guaranteeingapredefinedoutcome
Employersshifttodefined
contributionprogrammes,
1 combinedwiththegrowthof 3 Wealthmanagerscompete
theselfemployment bydeliveringguaranteed
economy,meansmore orsemiguaranteed
Becauseofcompetitionand peoplelackcertaintyabout Whilecalculatorsand productsdesignedtooffer
ashifttolowcostproducts, theirretirement visualizationsmaycreate increasedcertaintyto
lowermarginsonthe theperceptionofcertainty customers
institutionalsidedrivethe inthecustomer'smind,
industrytoincreaseits traditionalproductsstill
focusonindividualinvestors dependonmarket
2 conditionsandthuslack 4
certainty
CRITICALCONDITIONS EARLYSIGNS
Improvementsinanalyticsandriskmanagementprovidemore Theshiftofpensionsfromdefinedbenefittodefinedcontribution
granularinsightsintotheliabilitiesassociatedwithguaranteed continues
products
Partnershipsformbetweenproductmanufacturers,insurersand
Institutionsandmanufacturerswouldneedtobecomfortabletaking gigeconomyfirms
riskonsomebalancesheetsandholdingcapitalagainstit
Anoperatingmodelforbreakingdownbarriersbetweeninsurance
andwealthmanagement/bankingisacceptedbyregulators
Customerswillprofitfromproductsofferingincreasedcertainty,butstrong
partnershipsareneededtomanagerisks
Implicationsfor
ImplicationsforCustomers AssetManagers
Productsthatofferguaranteedoutcomes Individualdemandsallowproduct
increasecustomercertaintyabout developmentandbrandtobecome
retirement moreimportant
Predefinedandguaranteedoutcomes Theofferingofguaranteebased
preventseverelossesandarethusbetter productsmakesproprietaryrisk
optionsforriskaverseindividuals managementpracticesakey
differentiator
Thedualityofgoalbasedandvaluebased
propositionscreatesdifferentsegmentsof Increasedriskrequiresstronger
clients CertaintyBased collaborationwithwealthmanagers
Offerings (distribution)andinsurers(risk
management)
Implicationsfor
WealthManagers ImplicationsforRegulators
Theincreasingimportanceofindividual Theofferingofguaranteebased
clientsrequiressignificantinvestmentto productsrequirescorresponding
distributeviamobile/onlinechannels regulationandsupervision
Humanfactors(e.g.synthesis,decision Moreindividualdecisionmaking
making)arebecomingmoreimportant requiresmorecomprehensivefinancial
education
Basedonsignificantimprovementsinroboadvice,investmentadvice
becomestheprimarydriverofaclientschoiceofinstitution
Wealthmanagerslookto
1 differentiatetheirrobo
3 Asaresult,theenhanced
automatedadviser
advisorstocaptureadditional becomestheprimarypoint
marketshare,including ofinteractionforaclient,
Astheentireindustry offeringmoresophisticated Enhancedroboadvisors
touchallaspectsofan andtheprimarydriverofa
embracesroboadvisors, services,suchascashflow clientschoiceofinstitution
firmsincreasinglyfindit management individualsfinancial
difficulttodifferentiate health,fromloan
theirofferings startupsin repaymentstoinsurance
particularstruggledueto productselection
thelackofastrongbrand 2 4
CRITICALCONDITIONS EARLYSIGNS
Thecapabilitiesofroboadvisors(e.g.cashflowmanagement)are Corebankingmarginsnarrow,increasingtherelativeimportanceof
significantlyimproved wealthmanagementbusinessunitsasaprofitdriveranda
differentiator
Interoperabilityisestablishedbetweenproductsandservicesto
allowformanagingthemthroughasingleenhancedroboadvisory Thenumberofpartnershipsandacquisitionsbetweenincumbent
system institutionsandroboadvisors,orothertechnologyproviders,
increasesfurther
Advisersareabletosecureaccesstoafullviewofrelevant
customerdata,includingexternaldata
Investmentserviceswillbecomemoreconvenientbutalsolesstransparentfor
customers,whiletheroleofwealthmanagersbecomesmorecritical
Implicationsfor
ImplicationsforCustomers AssetManagers
Sophisticatedroboadvisors,coupledwith Powerdynamicsshiftawayfrom
customizedadviceandservices,improve manufacturersandtowardsdistributors,
experiencesandoutcomesfordigitally astheycontrolthecustomer
savvycustomers relationshipandmindshare
Therelationshipwithfinancialinstitutions
becomesservicebasedinsteadofproduct
based
Adviceasa
Differentiator
Implicationsfor
WealthManagers ImplicationsforRegulators
Highlyautomated,AIdrivenadvice Theneedtointerpretandregulate
requiressignificantinvestmentin behaviourofalgorithmsandAIinthe
systemintegrationforinformation retailareaincreases,especially
regardingrecommendations
Corecompetenciesshiftfromprocess
executiontomorehumanfactors(e.g.
synthesis,decisionmaking)
Theimportanceofdatawillleadtoa
focusonthirdpartydatasharing
agreements
Increasingcostpressuresforcefirmstoeitherrelyonexternalservice
providersorgainthescaletoinvestindifferentiatedtechnology
Theindustrybifurcatesinto
1 3 smallfirmsthataggressively
Externalserviceproviders pursueniches,andgiants
quicklyproliferateasthey thatleveragedifferentiated
Investordemandforlow demonstratesuccessin Externalserviceproviders technologytooffersuperior
costadviceandproducts loweringcostsand meansmallandlarge productsandexperiencesto
accelerates,drivingdown improvingcapabilities playershaveaccesstothe themassmarket
averagerevenueratesand samecapabilities.This
incentivizingassetand erodesthebenefitsofscale
wealthmanagerstolower exceptfortheverylargest
operatingcosts 2 firms,whocaninvestin 4
differentiatedtechnology
CRITICALCONDITIONS EARLYSIGNS
Capabilityprovidersdemonstratetheabilitytooffersimilarlevelsof Incumbentsarecomfortablewithcloud/platformasaservice
serviceatsubstantiallylowercost solutions
Regulatorsarecomfortablewithincreasedoutsourcingofcore IncreasingnumbersofutilitiesorB2Bcapabilityprovidersemerge
businessfunctions
Incumbentspartnerwithcapabilityprovidersasopposedto
Capabilityprovidersexhibitthenecessarylevelofinteroperabilityto acquiringthem
makeexternalizationefficient
Increasingstandardizationandindustrybifurcationcreatenewopportunitiesas
wellasnewthreatsforallindustrystakeholders
Implicationsfor
ImplicationsforCustomers AssetManagers
Theemergenceofsophisticatedcapability Humancapitalneedsandorganizational
providersincreasesthespeedofand structurewillchangeinorderto
reduceserrorsinclientonboarding manageaportfolioofcapabilitiesas
Assetmanagementproducts,aswellas opposedtoaportfoliooftalent
interactionswithdistributors,become Theuseofcapabilityprovidersmakes
undifferentiatedfromacustomer middleandbackofficefunctionsmore
perspective efficient
Theabilitytodifferentiatebasedon
processisreduced,asexternalization
becomesanimperative
Quality
Externalization
Implicationsfor
WealthManagers ImplicationsforRegulators
Theuseofcapabilityprovidersmakes Visibilityincreasesduetonatural
middleandbackofficefunctionsmore standardizationcreatedby
efficient externalization
Thereducedabilitytodifferentiate Thepotentialforsystemicrisk,created
basedonprocessmeansscalebecomes bysinglepointsoffailure,needstobe
amajordifferentiator contained
Keytakeawaysforfinancialinstitutions
DIFFERENTIATIONOFOFFERING
1
Theongoingindustrywideautomationandexternalizationofmiddleandbackoffices,combinedwiththe
ubiquityofroboadvisoryofferings,arecommoditizingtheinvestmentadvisoryvalueproposition.
Consequently,leadingfirmswillseektoidentifyandinvestinotherwaysofdifferentiatingthemselvesto
standapartfromcompetition,inparticularthroughdeeperpersonalizationofcustomerofferings
ADVICEDRIVENCUSTOMERGUIDANCE
2
Asroboadvisorsbecomemoreubiquitousandmoresophisticated,leadinginvestmentmanagement
companieswilllooktousethesecapabilitiestodeepentheirengagementwithroboadvisorycustomers,
drawingonnewsourcesofdatatodeliveradviceonallaspectsoftheirfinanciallives.Thiswillmarkthe
startofachangeintheirrolefromroboinvestorstotrueroboadvisors
ROLEOFHUMANADVISERS
3
Thehumanadviserwillstillbecrucialwhendifferentiatingproducts,especiallyforhighnetwealth
customers,buttheroleofsuchadviserswillshiftinleadingcompaniesfromproductselectiontoafocus
oncustomerengagement,emotionalintelligenceanddecisionsupport
References
1. SchwabIntelligentPortfolios".CharlesSchwab.Retrievedfromhttps://intelligent.schwab.com/
2. DOLFiduciaryRuleExplainedasofJuly5th,2017.Investopedia.Retrievedfromhttp://www.investopedia.com/updates/dolfiduciaryrule/#ixzz4eohksXqf
3. LaborSecretaryAcostaConcedesFiduciaryRuleCannotBeLegallyStoppedBeforeJune9th.Forbes.Retrievedfrom
https://www.forbes.com/sites/jamiehopkins/2017/05/23/laborsecretaryacostaconcedesfiduciaryrulecannotbelegallystoppedbeforejune9th/#74d3e7f41e82
4. CaseyQuirkanalysis.Deloitte
5. Cybersecuritystocksjumpaftermajor'WannaCry'attack.CNBC.Retrievedfromhttp://www.cnbc.com/2017/05/15/cybersecuritystockssurgeonfearswannacry
cyberattackisntover.html
6. NewIntegrations.Robinhood.Retrievedfromhttp://blog.robinhood.com/news/2015/11/20/newintegrations
7. Addeparraises$140million.Finextra.Retrievedfromhttps://www.finextra.com/pressarticle/69579/addeparraises140million
8. VanguardIsGrowingFasterThanEverybodyElseCombined.TheNewYorkTimes.Retrievedfromhttps://www.nytimes.com/2017/04/14/business/mutfund/vanguard
mutualindexfundsgrowth.html
9. AtBlackRock,MachinesAreRisingOverManagerstoPickStocks.TheNewYorkTimes.Retrievedfrom
https://www.nytimes.com/2017/03/28/business/dealbook/blackrockactivelymanagedfundscomputer
models.html?hp&action=click&pgtype=Homepage&clickSource=storyheading&module=firstcolumnregion®ion=topnews&WT.nav=topnews&_r=1
10. SurvivaloftheFittest:DefiningFutureLeadersinAssetManagement.CaseyQuirk.Retrievedfromhttp://www.caseyquirk.com/whitepapers.html
11. BlackRockToBuyFutureAdvisor,SignalingRoboAdviceIsHereToStay.Forbes.Retrievedfromhttps://www.forbes.com/sites/samanthasharf/2015/08/26/blackrockto
buyfutureadvisorsignalingroboadviceisheretostay/#7328c3603023
12. OwnersAdvisorybyMacquarietoprovidecustominvestmentadviceonline.Macquarie.Retrievedfrom
http://www.macquarie.com/ph/about/newsroom/2016/ownersadvisorybymacquarietoprovidecustominvestmentadviceonline
13. 2016AnnualReport.CharlesSchwab.Retrievedfromhttps://www.aboutschwab.com/investorrelations/annualreport
14. WealthfrontReview2017:Fees,Returns,InvestingServices&Competitors.BusinessInsider. Retrievedfromhttp://www.businessinsider.com/wealthfrontreview
15. BettermentReview2017:Fees,Returns,InvestingServices&Competitors.BusinessInsider. Retrievedfromhttp://www.businessinsider.com/bettermentreview
16. VanguardRollsOutNewRoboHybridAdvisorServiceWith$17BillionInAssets.Forbes.Retrievedfrom
https://www.forbes.com/sites/janetnovack/2015/05/05/vanguardrollsoutnewrobohybridadvisorservicewith17billioninassets/#142e01d545c0
17. TheVanguardCyborgTakeover.Bloomberg.Retrievedfromhttps://www.bloomberg.com/news/articles/20160324/thevanguardcyborgtakeover
18. Top5RoboAdvisorsin2017.Investopedia.Retrievedfromhttp://www.investopedia.com/tech/toproboadvisors/
WORLDECONOMICFORUM|2017 147
EQUITYCROWDFUNDING| INTRODUCTION
Equitycrowdfundinghasgreatlyevolvedinthelastseveralyears.Thissection
examinesthekeytrendsshapingtheindustryandtheuncertainpathforward
Thefirsthalfofthisdecadesawachangeinhowstartupbusinessesraisecapital,withtheentryofnewforcesthatcouldpotentially
changethefutureofventurefundraising
CIRCA2015,THEMAJORFORCESIMPACTINGEQUITYCROWDFUNDINGWERE
CIRCA2015,THEBIGUNCERTAINTIESABOUTTHEFUTUREOFEQUITYCROWDFUNDINGWERE
Couldcrowdfunding
Couldcrowdfunding Howcouldcrowdfunding
platformsprovethat
platformscontinueto platformsattractlarger(i.e.
thewisdomofthe
growabsentsuccessful institutional)investors?
crowdissuperiorto
companyexits?
individualinvestors?
Note:Inthischapter,EquityCrowdfundingisconsideredtobeearlystage/seedinvestmentsinunlistedcompanies.Itdoesnotinclude
crowdfundingmodelssuchaspresalesortherelativelyrecentappearanceofinitialcoinofferings(ICOs)
Equitycrowdfundingisgrowing,buttheindustryisstillinitsinfancyand
regulationwilldramaticallyshapeitsfuture
WHEREDIDDISRUPTIONOCCUR?
A Crowdfundingplatformshavegrownrapidly,drivenbystrongdemandfrombothinvestorsand
entrepreneurs
B Thequalityofregulationhasbeenadefiningfactorinthesuccessoftheequitycrowdfunding
ecosystem
WHEREHASDISRUPTIONNOTOCCURRED?
Thecrowdhasprovenlesswisethanexpected,highlightingtheneedforfurthereducationand
C commercialduediligencetoolstoassistinvestors
Equitycrowdfundingremainsdisconnectedfromthebroaderfinancialsystem,limitingitslongterm
D
scalability
Crowdfundingplatformshavegrownrapidly,drivenbystrongdemandfromboth
investorsandentrepreneurs
Theventurefundraisingmarketismorecompetitivethanever,drivenbyagrowingnumberofstartupsandprivatemarketinvestors
seekingalternativestoventurecapital
SUPPORTINGEVIDENCE
Establishedstartups,findingamoreliquidventurecapitalmarket,arechoosingtoremainprivatefor
StrongPrivate
longertoavoidburdensomedisclosuresandmarketscrutiny.Thisdelayhasresultedingreaterreturns
MarketReturns
flowingtoprivateinvestors,ultimatelydrivingotherstolookforopportunitiestoparticipateinthearea
LowSeedStage Venturecapitalistsarepayingmoreattentiontothegrowingpoolofprivatecompanieswithvaluations
FundingRates above$1billion,andoverlookingsmallerfirms,creatingastrongneedforseedcapitalfromindividuals
Shiftingattitudestowardsentrepreneurshipandtheavailabilityofnewtechnologiesthatlowerbarriersto
Risein
entryforstartupshaveresultedinanexplosioninthenumberoftechbasedstartups,drivingtheneed
Entrepreneurship
foradditionalsourcesoffunding
Crowdfundingplatformshavegrownrapidly,drivenbystrongdemandfromboth
investorsandentrepreneurs(continued)
CASESTUDIES QUANTITATIVEEVIDENCE
GrowthofEquityCrowdfunding
AssetClass 3YearCAGR3 %(20122015) %ofAssets
FixedIncome 6 27
Participationof Investalongside
unaccreditedinvestors prominentinvestors
Solutions 12 11
AUKplatformlaunchedin2012,Seedrs Foundedin2010,AngelListisaUS HedgeFund/
13 7
allowsalltypesofinvestorstoinvestas platformforaccreditedinvestors RealEstate
littleas10inastartup.Firmslistedon investingalongsideprominentangel
Equity 15 30
Seedrsraised85millionin2016(up investors.AngelListraised$190million
33%vsthepreviousyear),funding159 in2016(up17%vsthepreviousyear)
PrivateEquity 29 2
dealswith45,000individual andinvestedin460startupswithfunds
investments.1 Theaverageinvestor fromover3,500investors.2 Equity
249 <0.1
demonstratedstrongplatform Crowdfunding
engagementwithnineinvestments. Equitycrowdfundingisgrowingrapidly,butisstill
averysmallmarket
KEYUNCERTAINTIES
Theindustryismaturing,albeitslowly,asindividualinvestorsembracepreviouslyinaccessibleinvestmentopportunities
Sources:1.SeedrsBlog2.AngelList3.CaseyQuirkanalysis
Thequalityofregulationhasbeenadefiningfactorinthesuccessoftheequity
crowdfundingecosystem
Newregulationsaroundtheglobearehelpingtostructureandaddtransparencytothecrowdfundingindustry,as regulatorsattemptto
balanceinvestorprotectionwithadesiretomakeplatformsanattractiveandaccessiblesourceofcapital
SUPPORTINGEVIDENCE
Relaxed Manyregulatorsareencouragingtheindustrybyrelaxingprivatemarketsuitabilityrequirementstoallow
Suitability nonaccreditedinvestorstoparticipate.Thisensuresthatlimitsagainstinvestmentsizesandwealthlevels
Requirements donotunreasonablylimitthepoolofpotentialcapital
Regulatorshavegenerallytakenalighttouchapproachwithrespecttodisclosurerequirements,allowing
Differing
foraprocesssignificantlylessonerousthanforpublicfirms.However,certainjurisdictionshaveimposed
Disclosure
harsherrules,deterioratingthecaliberofstartupsonplatformsasonlythosetrulydesperateforcapital
Requirements
putthemselvesthroughsuchaprocess
Crowdfundingregulationshavedivergedgloballyasdifferentjurisdictionsviewequitycrowdfundingvery
Regulatory
Divergence differently,andthustreatitsriskprofiledifferently.Thishamperstheabilityofplatformstoexpandand
operateinternationally
Limited RegulatorshavecappeddealsizestoallowplatformstoleadSeedandArounds.Ifsettoolow,theserisks
DealSize significantlyreducecrowdfundingsvaluetoentrepreneursseekinglargerfundingrounds
Thequalityofregulationhasbeenadefiningfactorinthesuccessoftheequity
crowdfundingecosystem(continued)
CASESTUDIES QUANTITATIVEEVIDENCE
EquityRegulationsbyCountry6
Crowdfundingenthusiast Crowdfundingcomplianceutility
turnedtoalternatives
Nonqualifiedinvestors
Suitability mayinvestupto10%of Accredited
Pebbleisasmartwatchstartupthat CrowdEngineprovideswhitelabel
Requirements theirnetassets investorsonly
raisedover$10millioninnonequity compliancetoolstostreamlineinvestor
crowdfundingonKickstarter(funding accreditation,duediligenceandcore
Startups Platforms
wasraisedonapresaleratherthan backofficeprocessesforcrowdfunding must needto
equitybasis).4Pointingtoburdensome websites.Theplatformincorporates Disclosure release certifythat No
disclosures,Pebblechosetoraiseits cloudbasedautomationtechnologyto Requirements audited disclosures regulation
nextroundof$15millionfrom maketheprocess100%digital, financial are
statements accurate
traditionalinvestorsasopposedto increasingthequalityofduediligence
equitycrowdfunding. andthusinvestorstrustinplatforms.5 Fundraising
$1M 5M Nolimit
Limit
KEYUNCERTAINTIES
Crowdfundinghasbeenmostsuccessfulinmarketsthatbalanceearlymarketgrowthwithinvestorprotections
Sources:4.NationalBureauofEconomicResearch5.CrowdFundingBeat6.EuropeanCommission,TheAsianBusinessLawyer
Thecrowdhasprovenlesswisethanexpected,highlightingtheneedforfurther
educationandcommercialduediligencetoolstoassistinvestors
Thecrowdhasdrivenvaluationshigherthanthoseseeninventurecapitalmarkets,creatingtheriskthatinvestorsbecomedisillusioned
duetodisappointingreturnsinthefuture
SUPPORTINGEVIDENCE
Unlikeangelandventurecapitalinvestors,crowdfundingplatformsdonothavetheinstitutional
LackofResources
knowledgeandtimetoinvestasizeableamountofeffortinduediligence,insteadperformingsimpler
andTime
diligenceandrelyingonthewisdomofthecrowd
Manylargeplatformsallownonaccreditedinvestorstoparticipateinequityfundraising.Those
Inexperienced
inexperiencedinvestorsdrivevaluationshighinearlyroundsandaremorelikelytoinvestinlessviable
Investors
startups,creatingproblemsinlaterrounds.Moreover,investorspersonalaffiliationswithbrandscan
oftenplayanoutsizedroleintheirinvestmentdecisions
ThereisstronginterestinleveragingnewformsofdataandthepowersofautomationandAItoperform
AIandCognitive
commercialduediligence,analogoustothecreditanalysisperformedbylendingmarketplaces
Solutions
Thecrowdhasprovenlesswisethanexpected,highlightingtheneedforfurther
educationandcommercialduediligencetoolstoassistinvestors(continued)
CASESTUDIES QUANTITATIVEEVIDENCE
RevenuesvsValuationsforThree
UKBreweries(million)9
305 Revenue Valuation
Overvaluedbrewery? Investorledduediligence
oncrowdfunding
BrewDog,aScottishcraftbrewery, SyndicateRoompioneeredtheinvestor
leveragedbrandadvocatestohavethe ledmodel,whereinvestmentrounds
mostsuccessfulequitycrowdfunding areledbyprofessionalswhovalidate 66
campaigntodate(raisingover15 theinvestmentopportunitybyleading 50
30 32
9
millionin2016).However,itsvaluation thefundingroundwiththeirown
wasalmost10timeshigherthansimilar money.Onlineinvestorsthenjoinin
Brewdog Camden Adnam's(Public)
breweries,andconcernshavebeen underthesameeconomicterms.8 (Crowdfunded) (Crowdfunded)
raisedaboutinaccuraciesin
promotionalmaterials.7 Fundedstartupspricedmuchhigherthan
publiclytradedstartups
KEYUNCERTAINTIES
Startupsareraisingcapitalatmuchhighervaluationsoncrowdfundingplatformsthanthroughtraditionalsources,raisingconcernsaboutthe
accuracyofcrowdfundingvaluations
Sources:7.TheTelegraph8.SyndicateRoom9.Forbes
Equitycrowdfundingremainsdisconnectedfromthebroaderfinancialsystem,
limitingitslongtermscalability
AlthoughcrowdfundingisanincreasinglymeaningfulpartoftheSMEfundinglandscape,itsmomentumhasrecentlyslowed.Tosustain
growth,platformsneedtobroadentheirdistributionstrategiestoinstitutionalfunding
SUPPORTINGEVIDENCE
Duetotheimmaturityoftheplatformsandthelackofanestablishedtrackrecord,investorshavelimited
Limited
abilitytogaugetherisksandreturnexpectationsoftheirinvestments.Thus,theyarereluctanttoinvest
TrackRecords
or,inmanyjurisdictions,arelimitedbyinvestorprotectionlaws
Earlystageventurecapitalinvestmentsarehighlyilliquid,withinvestorsunabletorealizeareturnuntil
LackofLiquid thecompanygoespublicorissold oftenyearsaftertheinitialinvestment.Aliquidsecondarymarket
Secondary
wouldallowinvestorsanopportunitytoexit;italsocreatessignalingissuesforthestartups,asstock
Markets
temporarilytradingdowncouldimpactthebusinesssprospectofraisingfutureroundsofinvestment
Researchingandinvestinginindividualstocksislargelyacottageindustryforretailinvestors,asthe
Demandfor
PooledProducts majorityofindividualsdesirethesimplicityandaccessibilityofpooledproducts.Platformshavenotyet
developedmoreaccessibleproducts,andcouldworkwithassetmanagerstodoso
Wider Themajorityofwealthisinvestedthroughfinancialadvisers(bothautomatedandhuman)andnot
Distribution throughdirectchannels.Equitycrowdfundingplatformshavenotyetaccessedwealthmanagement
Networks distributionchannels
Equitycrowdfundingremainsdisconnectedfromthebroaderfinancialsystem,
limitingitslongtermscalability(continued)
CASESTUDIES QUANTITATIVEEVIDENCE
EquityCrowdfundingTrackRecord(20112016)12
NumberofFirms Description
KEYUNCERTAINTIES
Whiletheequitycrowdfundingmodelhasprovenworkable,theindustryneedstodemonstratescaleandperformanceinordertobeviable
Sources:10.Forbes11.BusinessWire12.AltFiData
Fiveuncertaintieswilldeterminetowhatdegreetheindustrycandemonstrate
stabilityandlegitimacywhilecontinuingtogrow
1 WHATWEKNOW Thefourequitycrowdfundingfindingsillustratetheriseindemandforcrowdfundingplatforms,theimperativeroleof
regulationoncrowdfundingsuccess,thechallengesfacedwiththelackofinvestorknowledge,andthedifficultyof
equitycrowdfundingtointegrateintothebroaderfinancialecosystem.
Throughthesefindings,thefollowingkeyuncertaintiesaroundthefutureofequitycrowdfundingemerged:
2 UNCERTAINTIES
Theresolutionofthesefivekeyuncertaintiespaintsthreedivergingpicturesofthefutureoftheequitycrowdfunding
industry:
Dependingonhowthekeyuncertaintiesareresolved,thepotentialendstates
haveverydifferentevolutionarypathsandimplicationsforallfirms
INTERNATIONAL
SOCIALDRIVER EXPANSION SHOOTINGSTAR
Platformsfailtoscaleinprofitorientedindustries,butcatchonas
vehiclestodeliversocialimpact
1 3
Unabletoscale,platforms
neverbecomeprofitable, Socialprojectsgetvaluable
butgetgovernment communitysupportand
Equitycrowdfundingfor supportthroughgrantsand Platformsdifferentiate feedback,allowingthe
profitorientedcompanies taxprogrammes themselvesbasedon ecosystemtoflourish
neverrivalsventurecapital degreesofsocialand
andangelinvestors; financialreturnsandtheir
however,itcatchesonasa affinitygroup,aswellason
wayofinvestinginequity customerengagementand
forsociallyworthwhile 2 degreeofduediligence 4
causes
CRITICALCONDITIONS EARLYSIGNS
Venturecapitalfundsremainthedominantsourceofearlystage Highvaluationsand/orpoortrackrecordsstifleplatformgrowth
startupfunding anddriveinvestorsawayfromtheindustry
Thenumberofinvestorsinterestedinprovidingequitytosocial Poorequitycrowdfundingregulationsarenotfixed
enterprisesgrows
Qualitystartupsturnawayfromthecrowdfundingplatformand
Governmentsupportforplatformscontinuesthroughgrantsand optforventurecapitalfundinginstead
taxadvantages
Socialenterprisesattractmorefundingandaremoreimpactfulastheecosystem
becomesdevelopedanddedicated
SocialDriver
Regulatorconvergenceallowsforcrossborderinvestmentand
crowdfundingplatformgrowth
Platformsstartexpanding
1 internationally,allowing 3 Withthemarket'sgrowth,
investorsinonejurisdiction anascentsecondary
toinvestinothers,thereby marketcanevenbe
Obviousmarketsuccessin increasingthepoolof Platformsinvestin establishedforthemost
certainjurisdictionsdriven potentialinvestorsforthe technologiesthatallowfor successfulcrowdfunded
byregulationdrives topstartups interplatformconnectivity firms
regulatorsinother andsaferecordkeeping,in
jurisdictionstofollowsuit ordertoencouragecross
andstandardizeequity platforminvestments
crowdfundingrules
2 4
CRITICALCONDITIONS EARLYSIGNS
Increasedcollaborationbetweencrowdfundingplatformsand Increasedpressuretoregulatetheindustryresultsinnew
regulatorsacrossjurisdictionswillhelpcreatestandardized regulationsandimprovedinvestorconfidenceinplatforms
regulationforequitycrowdfunding
Interestgrowsforfirmsinemergingmarketstousecrowdfunding
Investmentintechnologyleadstobuildinginterplatform becauseoflimitedventurecapitalopportunities,andforinvestors
connectivityandduediligencetoolsforinvestors inmaturemarketstoinvestinthem
Newtoolsemergethatallowinvestorstoconductduediligence
Internationalexpansionbycrowdfundingplatformslevelsaccesstoventure
capitalacrossgeographies
International
Expansion
Crowdfundingplatformsforgepartnershipsandgainscaletosuccessfully
leadlatestageofferingstraditionallydonebyventurecapitalfirms
Platformsinvestin Platformsgrow
1 automationandAItoassist
startupswithpreparing
3 considerably,especiallyfor
earlystageinvestments,
disclosures,andmake andevencompetewith
commercialduediligence venturecapitalfirmsin
Acontinuinglowyield availabletoinvestorsat PlatformsfocusontheB2B
severalmarkets especially
environmentdriveswealth lowcost marketandrelegatethe
whereventurecapitalis
managerstopartnerwith B2Cchanneltoprototyping
weak
platforms.Theecosystem newfeatures.Platforms
developsnewproductsand growandimproveliquidity,
accessesestablished allowingthemtolead
distributionchannels 2 largerofferings 4
(includingroboadvisors)
CRITICALCONDITIONS EARLYSIGNS
Aprolongedlowreturnenvironmentleadswealthmanagersto Earlytentativepartnershipsbetweenwealthmanagersand
lookforotherhigheryieldopportunities platformsaresuccessful
Technologystartupsdevelopadvancedanalyticstoolsthathelp Technologystartupsemergethatfocusonimprovingtheearly
wealthmanagersperformduediligence stageduediligenceprocess
Platformsdemonstratesomeearlysuccessesandbuildtrack
records
Regulatorsacceptpartnershipswithwealthmanagers
Crowdfundingplaysanincreasinglylargeroleforseedstagefunding,butindividual
investorsonlyinteractwithcrowdfundingthroughtheirwealthmanagers
ShootingStar
Keytakeawaysforfinancialinstitutions
IMPROVEDLIQUIDITYATSEEDSTAGE
1
Leadingcrowdfundingplatformswillincreasetheamountofseedstagefundingavailableto
entrepreneurs,thusfillingavaluablenicheinthefundraisingecosystem,especiallyinpartsoftheworld
withlessventurecapitalinvestment
REGULATORBALANCE
2
Regulationplaysasignificantroleinshapingtheequitycrowdfundingindustryacrossallpossibleend
states,whethercrowdfundingplatformsgodirecttoconsumersorpartnerwithincumbents.Regulators
mustbalanceencouragingcrowdfundingandensuringadequateduediligence
INTEGRATIONWITHBROADERFINANCIALECOSYSTEM
3
Inordertoachieveasustainablelevelofscale,equitycrowdfundingplatformswillneedtogrowtheir
scopeoffundingthroughintegrationwiththebroaderfinancialecosystem(e.g.incorporationintowealth
managementplatforms)andwillneedtoestablishsecondarymarketswithsufficientliquidity
Note:Duetotheirrelativerecency,ICOswerenotinthescopeofthisinitiative,buttheyrepresentanewmechanismforcrowdfundingthat
warrantsfurtherresearch
References
1. Crowdfundingtopsprivateequityinvestmentsfor2016,withSeedrsleadingthecharge.SeedrsBlog.Retrievedfromhttps://www.seedrs.com/learn/blog/crowdfunding
topsprivateequityinvestmentsfor2016withseedrsleadingthecharge
2. "AngelListFAQ".AngelList. Retrievedfromhttps://angel.co/help
3. ProprietaryanalysisbyCaseyQuirk
4. SomeSimpleEconomicsofCrowdfunding.AjayAgrawal,ChristianCataliniandAviGoldfarb,inInnovationPolicyandtheEconomy,Vol.14,fromtheNationalBureauof
EconomicResearch.Retrievedfromhttp://www.nber.org/chapters/c12946.pdf
5. CrowdEngineFirsttoOfferRegulationCFCrowdfundingSoftware.CrowdFundingBeat.Retrievedfromhttp://crowdfundbeat.com/2016/05/14/crowdenginefirstto
offerregulationcfcrowdfundingsoftware/
6. UnderstandingCrowdfundinganditsRegulations.EuropeanCommission.Retrievedfrom
http://publications.jrc.ec.europa.eu/repository/bitstream/JRC92482/lbna26992enn.pdf;EquityCrowdfundinginChina:CurrentPracticeandImportantLegalIssues.The
AsianBusinessLawyer,Vol.18.Retrievedfromhttps://papers.ssrn.com/sol3/papers.cfm?abstract_id=2842752
7. WillinvestinginBrewDogevermakeyoumoney?.TheTelegraph.http://www.telegraph.co.uk/business/2016/04/09/willinvestinginbrewdogevermakeyoumoney/
8. SyndicateRoomFAQ.SyndicateRoom.Retrievedfromhttps://www.syndicateroom.com/faqs
9. ValuationsInCrowdfunding:AreWeAllBarkingMad?".Forbes. Retrievedfromhttps://www.forbes.com/sites/goncalodevasconcelos/2015/05/27/valuationsin
crowdfundingareweallbarkingmad/#47d493665424
10. CrowdcubePlansSecondaryMarketForEquityCrowdfunding.Forbes. Retrievedfromhttps://www.forbes.com/sites/davidprosser/2016/07/21/crowdcubeplans
secondarymarketforequitycrowdfunding/#6885227e2991
11. BlackRocktoInvestiniCapitalNetwork.BusinessWire.Retrievedfrom:http://www.businesswire.com/news/home/20161215006121/en/BlackRockInvest
iCapital%C2%AENetwork
12. Wherearetheynow2016.AltFiData.Retrievedfromhttp://www.altfi.com/download/Where_are_they_now_2016
WORLDECONOMICFORUM|2017 168
MARKETINFRASTRUCTURE| INTRODUCTION
Marketinfrastructurehasgreatlyevolvedinthelastseveralyears.Thissection
examinesthekeytrendsshapingtheindustryandtheuncertainpathforward
Thefirsthalfofthisdecadesawthebeginningofrapidchangeintheinfrastructureunderlyingcapitalmarkets,withtheglobalentryof
severalinnovativeforcesthathadthepotentialtochangehowtransactionswereconducted
CIRCA2015,THEMAJORFORCESIMPACTINGMARKETINFRASTRUCTUREWERE
CIRCA2015,THEBIGUNCERTAINTIESABOUTTHEFUTUREOFMARKETINFRASTRUCTUREWERE
Note:Inthischapter,a"platform"isanelectronicenvironmentthatfacilitatestradingoffinancialproductsbyofferingoneormore
servicesalongthecontinuumfrompricediscoverytoposttradesettlement
Theroleofplatformsincapitalmarketsisgrowing,ifunevenly,butregulatory
changesandnewtechnologywillinfluencetheiradoptionandcapabilities
WHEREDISRUPTIONOCCURRED
A Traditionaloverthecounter(OTC)productscontinuetheirjourneytowardselectronification,drivenby
regulationandthepromiseofimprovedeconomiesofscale
B Theeffortsofelectronicplatformstoscaleuparecomplicatedbyanuncertainandregionally
fragmentedregulatoryenvironmentandpoliticalinstability
C Marketinfrastructureprovidersaredisruptingthemselvestopreserveapivotalroleinfutureprocesses
andunlocknewrevenuestreams
WHEREDISRUPTIONDIDNOTOCCUR
D Newmarketplatformshaverarelychallengedincumbents,andinsteadseejointventuresand
partnershipsasthemostsuccessfulpathtoscalingup
TraditionalOTCproductscontinuetheirjourneytowardselectronification,drivenby
regulationandthepromiseofimprovedeconomiesofscale
TheelectronificationoftraditionalOTCassetclasses(e.g.fixedincome),hascontinuedinrecentyears,followingthepathofequity
markets.However,thisprocesshasbeenunevenwithsomeproducttypesmovingawayfromOTCfasterthanothers
SUPPORTINGEVIDENCE
Platformsarecollectingdemand/supplydatatocreateanaggregatedmarketviewandaiddiscoveryof
Dataand suitablecounterparties,andareevenprovidingadditionalmarketanalyticstobetterinformbuyers,sellers
Standardization andintermediaries.However,securingdatastandardsandcrossplatforminteroperabilityremainskeyto
avoidfragmentationandsecureliquidityduringtheelectrificationprocess
Somepostfinancialcrisisregulationshaverequiredparticularassetclassestomovetheirtradeandpost
tradeprocessestotradingplatforms(e.g.interestrateswaps).Otherregulationshaveprovidedindirect
RegulatoryPush
nudgestowardstradingplatforms,suchastheEuropeanUnionsSecondMarketsinFinancialInstruments
Directive(MiFIDII),increasingthecostoftraditionalOTCtradingunderthebestexecutionimperative
Certainassetclasseshavecharacteristicsthatnaturallymakethembettersuitedfortradingplatforms.
AssetClass Productsthatarerelativelyhomogenousandhavelowtradesizesareparticularlygoodfitsfortrading
Characteristics platforms,andhavemigratedquickly.Assetclassesthatlackthosecharacteristicshavestruggledtoreach
acriticalmassofsupplyanddemandonthemarketplacelevel
TraditionalOTCproductscontinuetheirjourneytowardselectronification,drivenby
regulationandthepromiseofimprovedeconomiesofscale(continued)
CASESTUDIES QUANTITATIVEEVIDENCE
ElectronificationofVarious
AssetClasses(%)3
80%
Betonbondelectronification Moveintoregulatedtradeexecution 80% 50% 70% 70%
60%
60%
InJuly2017,DeutscheBrseGroup Bloombergisinthefinalstageof 2015
40%
hasboughta$10mstakeinTrumid,a shiftingtradingincashbondsand 25% 2012
youngbondtradingplatform.Trumids derivativesfromitsexistingAllQ 20%
platformfocusesonbringing platformtotheBloombergTrading 0%
electronictradingtocorporatedebt, Facility,whichlaunchedin2015and
anassetclasswheremosttrading isthecompanysfirstregulated
todayisstillconductedoverthe Europeanvenue.2 TheAllQplatform
phone1. accountedfor37%ofEuropean
governmentbondtradesinlate2016.
Thelevelandgrowthofelectronificationacross
assetclassesvariesconsiderably
KEYUNCERTAINTIES
Whilethemovetoelectronicplatformshasbeenuneven,itwilllikelycontinueinthepushfortransparencyandliquidity
Sources:1.FinancialTimes2.FinancialNews3.BIS
Theeffortsofelectronicplatformstoscaleuparecomplicatedbyanuncertainand
regionallyfragmentedregulatoryenvironmentandpoliticalinstability
Postfinancialcrisisregulationhasgenerallyupheldthethemesofcrossborderequivalence,transparencyandcapitalefficiency,allof
whichsupporttheelectronificationoftrading;however,recenteventsarecallingthistrendintoquestion
SUPPORTINGEVIDENCE
Platformshavebeenabletoachievescalequicklyinthelastfewyearsbytakingadvantageofregulatory
PostCrisis reforms(suchasMiFID,orDoddFrankintheUnitedStates)thatwereenactedinresponsetothefinancial
Regulation crisis.Asthecrisisbecomesarelicofthepast,regulatorybodiesaroundtheworldarestartingtorevisit
financialcrisiserapolicies
Thewidespreadpoliticaluncertaintythatenvelopedmanydevelopedmarketspost2016hasintroduced
Political
newriskstocapitalmarkets,slowinginvestmentsasfinancialinstitutionswaitforclearsignalsonthe
Instability
prioritiesofnewlyformedgovernments
Theglobalregulatorytrendoverthelastfewdecadeshasbeenoneofincreasingglobalinterconnectivity
Regionalization andstandardization,whichbenefittedplatformsjourneystoscale.However,duetogeopoliticalfactors
andtheregionalizationoffinancialecosystems,thetrendforthefutureislikelytoberegionalizationof
regulatorypolicies
Theeffortsofelectronicplatformstoscaleuparecomplicatedbyanuncertainand
regionallyfragmentedregulatoryenvironmentandpoliticalinstability(continued)
CASESTUDIES QUANTITATIVEEVIDENCE
NumberofBrexitRelatedRisksin
MajorCompanyDisclosures,20166
Newregulatorypath Politicalderiveduncertainty 600
Atthe2017AnnualInternationalFutures TheimpactofBrexitoncapitalmarkets
IndustryConference,J.Christopher isstillunclear.SeveralEUregulators 400
Giancarlo,ActingChairmanoftheUS haveindicated5 theywillnotallow
CommodityFuturesTradingCommission, brokersbasedoutsidetheEuropean
laidoutthefutureagendaofthe EconomicArea(includingapostBrexit
regulatorybodybyemphasizingtheneed UnitedKingdom)toofferthirdcountry
torightsizetheregulatoryfootprint, enduserselectronicaccesstoexchanges
particularlywithrespecttotheDodd residingundertheEuropeanUnion's
FrankAct.4 Helaidoutthemain jurisdiction. 10Q(Quarterly) 10K(Endofyear)
objectiveasthereductionofexcessive Growthofpoliticalinstabilityasamajorissue
regulatoryburdens.
KEYUNCERTAINTIES
Theexactimpactofaregulatorypivotoncapitalmarketeconomicsisverydifficulttopredict,butwilllikelyhavealarge (iflocalized)effect
Sources:4.CFTC5.Risk.net6.SkaddenArpsSlateMeagher&Flom
Marketinfrastructureprovidersaredisruptingthemselvestopreserveapivotal
roleinfutureprocessesandunlocknewrevenuestreams
Theindustryhaslongknownthepotentialbenefitsofdisruptivetechnologies,suchasAIanddistributedledgertechnology(DLT),and
hasstartedtoinvestinthedevelopmentofnewbusinessmodelsaroundthosetechnologies
SUPPORTINGEVIDENCE
Astechnologicalimprovementslowereconomiesofscale,theprofitabilityofoperatingautilityis
Erosionof
declining.Additionally,utilitiesareunderpressurefromaprevailinglowinterestrateenvironmentand
Margins
increasingcapitalcosts,causingthemtoexplorenewprofitopportunities
Asprofitabilityincorebusinesseserodes,thedataflowsofincumbentmarketinfrastructureproviders
DataandDataFlow couldcreatenewsourcesofrevenue.However,doingsowillrequireextensiveindustrycooperation
asKeyResources
betweendifferentdataproviders,includingcomplementaryinfrastructureanddatasharingagreements
ValueChain Newtechnologycouldleadtosignificantchangesinthearchitectureofcapitalmarketsbyenablingreal
Disruption timeprocessesandmoredirectconnectivity.Thiscoulddrivetheeliminationofmanyexistingrolesand
Capabilities thecreationofnewones,upendingthetraditionalvaluechain
Marketinfrastructureprovidersaredisruptingthemselvestopreserveapivotal
roleinfutureprocessesandunlocknewrevenuestreams(continued)
CASESTUDIES QUANTITATIVEEVIDENCE
RevenueGrowthforMajor
USExchanges,20092015(%)9
60
Infrastructureimprovements Bettingonblockchain
TheDepositoryTrust&Clearing InJune2017ThomsonReuterslaunched
Corporation(DTCC)isusingblockchain BlockOneIQ,asmartoraclethat
technologytorebuilditsplatform providesuserswithcryptographicproofof
responsibleforprocessing$11trillion thesourceofexternalsecuritiespricing
worthofcreditdefaultswaps.Thenew data aperquisiteformanysmart 5
platformwillaimtoalignprocessing contractusecasesofblockchainin
includingexecutionandrisk financialservices.Theproductisoneina TransactionalRevenue Information&Technology
managementalongthetradelifecycle, suiteofpotentialopportunitiescurrently Revenue
soastomakeusageandreconciliationof beingexploredtoprovideenabling
multipledatabasesobsolete.7 servicesforthoseusecases8 Growthininformationrelatedrevenues
KEYUNCERTAINTIES
Sources:7.Forbes8.ThomsonReuters9.BusinessInsider
Newmarketplatformshaverarelychallengedincumbents,andinsteadseejoint
venturesandpartnershipsasthemostsuccessfulpathtoscalingup
Manyfintechshaveenteredthetradingplatformarea(23newcorporatebondplatformsalonebetween2010and2015),butareview of
thesurvivorssuggeststhatamixoffintechtechnologicalinnovationandincumbentscaleisthewinningbet
SUPPORTINGEVIDENCE
Monoline Tradingplatformswithanarrowassetclassorvaluechainfocus(i.e.moststartups)arestrugglingtomeet
Challenges theneedsofincumbents,whooperateinmanydifferentiatedmarketsandthuslookforefficiencyand
crossproductsynergiesfromtheirplatforms
Incumbentbanks,brokersandplatformproviderscanuseavailableresources(bothtalentandfinancial)
Incumbent andtheindustry'shighswitchingcoststotheiradvantage.Ratherthanadoptfintechsolutions,theycan
Adaptation
eitherdeveloptheirownoracquirepromisingstartupstobridgethegap
Evenwhensignificantefficienciesexistonnewtradingplatforms,twofactorshavecreatedastrong
stickinessfortraditionaltradingmethods:thedesireofincumbentstolimittheintegrationofnew
Stickiness
technologyplatformsduetoswitchingcosts,andareluctancetodisturbthecomplexnetworkofindividual
andinstitutionalrelationshipscharacterizingcapitalmarkets
Ongoing Incumbentswhoprovidemarketaccesstoinvestorsremainslowatimprovingcustomerfriendlyandcost
Needfor efficient,technologydrivenrelationshipmodelsduetoinertiaandalackofexpertise.Therefore,fintechs
Improvement representanidealpartnerforenrichingandimprovingcoretechnology,aswellascontinuouslyimproving
customerinterfaces
Newmarketplatformshaverarelychallengedincumbents,andinsteadseejoint
venturesandpartnershipsasthemostsuccessfulpathtoscalingup(continued)
CASESTUDIES QUANTITATIVEEVIDENCE
DevelopmentofUS FintechRun
SwapExecutionFacilities(SEFs)12
Thepopularityofjointventuresandpartnershipsmaymeanthatfuturemarketinfrastructuredevelopmentisslower,albeitmorepredictable
Sources:10.Algomi11.Bloomberg12.FIA
Uncertaintiesaroundmarketinfrastructurelargelyconcernthefuturedirection
ofregulation,andtheimpactofnewtechnologiesontheindustry
1 WHATWEKNOW Thefourmarketinfrastructurefindingsillustratetheincreasingroleofplatformsincapitalmarkets.TraditionalOTC
productsarebecomingmoreandmoreelectronified,butarehinderedintheireffortstoscaleupduetofragmented
regulatoryandtechnologicalenvironments.Inordertoscaleupandgarnersuccess,jointventuresandpartnerships
betweenfintechsandincumbentsarekey.
Throughthesefindings,thefollowingkeyuncertaintiesaroundthefutureofmarketinfrastructureemerged:
2 UNCERTAINTIES
Theresolutionofthesefivekeyuncertaintiespaintsthreedivergingpicturesofthefutureofthemarket
infrastructureindustry:
Dependingonhowthekeyuncertaintiesareresolved,thepotentialendstates
haveverydifferentevolutionarypathsandimplicationsforallfirms
DATAINFRASTRUCTURE NEWPOSTTRADE
PLATFORMSUCCESS COLLISION VALUECHAINS
Newplatformcapabilities,includingpre andposttradeprocesses,will
acceleratetheiradoptionacrossassetclasses
Atthesametime,
technologicaladvancements
1 makeconnectingbuyside 3 Themovetoplatform
firmseasierandimproves adoptionaccelerates,
matchingofproductsto withsomesurprising
Marketplatformsenhance customers,makingsellside Asaresult,platforms
assetclasses
theirtoolsandstandardize firmslessrelevant becomecheaperandmore
successfullymoving
languagestoprovidemore convenienttotradeon,
ontoplatforms
intuitivetradingworkflows, heighteningtheir
streamlinepre andpost attractivenessfor
tradeprocesses,and participants
improveinteroperability 2 4
CRITICALCONDITIONS EARLYSIGNS
Astableregulatoryenvironmentisfavourableformarketproviders Buysidefirmsstarttopartnerdirectlywithplatformproviders
Buysideclientsadoptanduseplatformsonasignificantlylarger Increasinglymoreplatformscreatesignificantliquidityin
scale production,asvolumesoftransactionsexecutedviaplatforms
growfurtherandformoreassetclasses
Theriseofadditionalplatformstofacilitatetradingincreasespressureon
incumbentstocontinuetoimprove,benefitingthebuyside
ImplicationsforIncumbent Implicationsfor
InfrastructureProviders NewEntrants
Moreplatformusagemeansincumbents Higherplatformusagewoulddirect
mustfurtherdeveloptheirexisting traffictoinnovativenewentrants,
platformsolutionstoprotectmarketshare allowingthemtogainmarketshare
Alternatively,theycouldpartnerwith Moreplatformusagewouldalso
emergingplatformsoracquirethem contributetoplatforminteroperability
andmultilateralrelationships,
benefittingnewentrants
Platform
Success
Implicationsfor
ImplicationsforRegulators BuySideCustomers
Regulatorswouldincreasetheirvisibility Platformswouldallowcustomersto
intothemarketasplatformusage becomelessdependentonsellside
grows,allowingforgreatertracingof participantsinthelongerterm
activities
Asinfrastructureanddataprovidersencroachontheotherscore
businesses,customerswilllikelyhavetochoosebetweenthem
Thecompetitioncreatesboth
1 Meanwhile,asmarginsin 3 incentivesandpressuresfor
theircorebusinesseserode, customerstoreducethe
traditionalmarket numberofpartners,astheir
infrastructureproviders Withdataplatforms dataproviderwouldlikely
Traditionalprovidersof deepentheirfocuson operatetheplatforms
dataplatforms(e.g. andmarket
monetizingtheirdataflows infrastructure theyuse
Bloomberg)continuetheir
expansionintoexecution providersonacollision
andposttradeprocessing, course,newpointsof
deployingplatformsfor competitionwill
newassetclasses 2 appearbetweenthem 4
CRITICALCONDITIONS EARLYSIGNS
Thetrendtowardselectronificationofassettradingcontinues,and Platforminfrastructureprovidersstartfocusingonhiring
evenincreasesinpace employeeswithadatabackground
Theplatformenvironmentremainshighlycompetitive,andpure Dataand/orplatformprovidersstartofferingcustomersincentives
accesstostandardproductsrepresentsacommoditizedservice tousetheircompanyfortradinganddata
Newtechnologiescanbeappliedinenhanceddatascience(e.g.AI)
andarecoupledwithrobustmonetizationstrategies
Customersmayhaveadditionalchoiceregardingpartnerships,leadingtolower
costs,andwilllikelyworkwithfewerpartners
ImplicationsforIncumbent Implicationsfor
InfrastructureProviders IncumbentDataProviders
Expansionmaymeanmorepartnerships Movingintotheinfrastructurefieldmay
withoracquisitionsofdataheavyfintechs meannewinfrastructureswithdataat
toacquirecompetencies theircore
Regulatoryquestionsmaymeanmore Additionalcompetitionmaymeanmore
partnershipstoensureeasierrisk partnershipswithoracquisitionsof
management platformfintechstogaincompetencies
DataInfrastructure
Collision
Implicationsfor
ImplicationsforRegulators BuySideCustomers
Additionaldatameansmore Additionalserviceprovidersmaymean
opportunitiestomonitorthemarket lowerpricesandadditionalbenefits,but
oneproviderforbothinfrastructureand
However,regulatorswillhavetobuild
data
connectionswithdataproviders,an
entirelynewsetofconstituents However,theriseofdatameanssome
levelofacceptanceisneededthattheir
dataisnolongersolelytheirstouse
Asincumbentsinvestinmarketinfrastructureimprovements,thevalue
chainwillnaturallyshift,leadingtoconsolidationandrolechanges
Theseimprovements,such Additionally,
asrealtimesettlement, improvementstothe
1 allowinfrastructure 3 posttradestructurefrees
providerstodisrupt upadditionalresources
traditionalcapitalmarket forcapitalmarket
Incumbentmarket valuechainsbyoffering Asaresult,intermediaries
incumbents,asless
infrastructureleadersstart moreservices,andtaking focusingononlyone
capitalhastobeheldfor
toinvestinnew onlargerroles servicegetpushedout,and
riskmanagement
infrastructurethroughout posttradefacilities(such
posttradeprocesses(e.g. ascentralsecurities
shifttorealtime depositories)movefrom
settlement) 2 settlementtowards 4
oversightandtrusted
guarantor
CRITICALCONDITIONS EARLYSIGNS
Significantinvestmentinnewtechnologybymarketinfrastructure Investmentshareinnewinfrastructuretechnologiesrises
providersmovesmarketstowardsrealtimeandflexiblesettlement constantlyoverthenextfiveyears
Regulatorsacceptnewtechnologybasedbusinessmodelsoreven CooperativemodelsonDLTecosystemsembracegrowingnumbers
ecosystems,embedthemintoexistingregulatoryframeworksand ofindustrystakeholders
definethenatureoftherelationshiptoexistingecosystems
Thefirstdistributedledgersystemislaunchedinproductionbya
Newecosystemsarecomplementaryonaninternationalscaleto bankoranexchangeorganizationandlinkedtoposttradeactivity
reflecttheglobalnatureofcapitalmarkets
Theseimprovementstothevaluechainwillleadtosignificantsavingsforbuy
sideinvestors,ascashflowmanagementandriskmanagementcostsdecline
ImplicationsforIncumbent
InfrastructureProviders ImplicationsforFintechs
Newtechnologiesallowincumbent Thechangestoinfrastructuremeanthat
providerstorevampexistingbusiness blockchainrelatedorotherrealtime
models,playingabiggerroleinthevalue focusedfirmswillfindmanypartners
chain
However,incumbentsabilitytoown
Theneedtooffermoreservices(asthey moreofthevaluechainmaymakeit
playabiggerroleinthevaluechain)may harderforfintechstogainmarketshare
meanconsolidationtoacquireexpertise
Ongoingconsolidationislikelytoresultin NewPostTrade
anincreasingnumberofutilitiesand
consortia,aimedatcostmutualizationfor ValueChains
nondifferentiatingandcommoditized
activities(e.g.KYCorRiskCompliance)
Implicationsfor
ImplicationsforRegulators BuySideCustomers
Improvements,suchasrealtime Improvementstoposttradesettlement
settlement,maymeanamoredifficult willallowforsimplecashflow
roleforregulators,asthereislesstime managementandstreamlined
forreview operations,increasingprofitsinthelong
run
Keytakeawaysforfinancialinstitutions
INSUFFICIENCYOFTECHNOLOGYALONE
1
Newtechnologicalsolutionsaloneareinsufficienttoenablethecreationofnewmarketinfrastructureor
todrivesignificantchangesinexistinginfrastructure;thiswillmakeminimumviableecosystemsof
cooperatingstakeholderscriticaltodevelopment.Leadingplayersfromboththepublicandprivatesphere
willseektoactivelyparticipateinandshapethedirectionofthesestakeholdergroups
NAVIGATINGREGULATORYUNCERTAINTY
2
Differingregulatorydirectionaroundtheworldwilllikelyleadtobothregionalizationanduncertaintyin
theshortandmediumterm.Financialinstitutionswillneedtodeveloptheflexibilitytorapidlyadaptto
bothlargescaleregulatorychangesandregionallydivergentregulatorytreatmentofemergingmarket
infrastructuretechnologies
NEWVALUECHAINPRESSURESANDOPPORTUNITIES
3
Regulationandtechnologicaladvancementsaredrivingefficiencies,whichwillputpressureonincumbents
toconsolidatetheirpositionsandthusshortenthevaluechain.Forwardlookingfirmswillseektoposition
themselvesinareasthatwillcontinuetoaddvalue,includingareascurrentlyoccupiedbyotherfirms
References
1. DeutscheBrsebuysintoSorosbackedbondtradingplatform.FinancialTimes.Retrievedfromhttps://www.ft.com/content/d32a786a635a11e78814
0ac7eb84e5f1?mhq5j=e2
2. BestFixedIncomeTradingPlatform.FinancialNews.Retrievedfromhttp://tt.efnevents.com/shortlist/bestfixedincometradingplatform/
3. Electronictradinginfixedincomemarkets.BankforInternationalSettlements(BIS).Retrievedfromhttp://www.bis.org/publ/mktc07.pdf
4. CFTC:ANewDirectionForward.USCommodityFuturesTradingCommission.RemarksofActingChairmanJ.ChristopherGiancarlobeforethe42ndAnnualInternational
FuturesIndustryConferenceinBocaRaton,Florida(USA).Retrievedfromhttp://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo20
5. EUregulatorsconsiderMifidelectronictradinglockout.Risk.net.Retrievedfrom https://www.risk.net/regulation/mifid/4778566/euregulatorsconsidermifid
electronictradinglockout
6. SECDisclosureTrendsRelatedtoBrexitandtheTrumpAdministration.SkaddenArpsSlateMeagher&FlomLLP,publishedonLexology.com.Retrievedfrom
http://www.lexology.com/library/detail.aspx?g=3573f703ddec483fa53d9cba0201634f
7. DTCCPartnersWithIBM,StartupsForBlockchainBasedCreditDefaultSwapsSolution.Forbes.Retrievedfrom
https://www.forbes.com/sites/laurashin/2017/01/09/dtccselectspartnersforblockchainsolutionforcreditdefaultswaps/#28c877395061
8. ThomsonReutersReleasesBlockOneIQintoBlockchainDeveloperCommunity.ThomsonReuters.Retrievedfromhttps://www.thomsonreuters.com/en/press
releases/2017/june/thomsonreutersreleasesblockoneiqintoblockchaindevelopercommunity.html
9. There'sanew'hotbutton'issueonWallStreet,andbattlelinesarebeingdrawn.BusinessInsider.Retrievedfromhttp://www.businessinsider.com/stockexchanges
marketdatacostbecomingbigissue201610
10. EuronextInvestsinAlgomiandExpandsJV".Algomi.Retrievedfromhttp://www.algomi.com/companynews/euronextinvestsinalgomiandexpandsjv1
11. AuctionBackupsandBoringRegulation.Bloomberg.Retrievedfromhttps://www.bloomberg.com/view/articles/20150723/auctionbackupsandboringregulation
12. InformationretrievedfromtheFIASwapExecutionFacility(SEF)Trackerhttps://fia.org/seftracker
WORLDECONOMICFORUM|2017 189
ACKNOWLEDGEMENTS |PROJECTTEAM
ProjectTeam
ProjectLeadership ProjectAuthors
TheDisruptiveInnovationinFinancialServicesprojectleadershipteam TheWorldEconomicForumexpressesitsgratitudetothefollowing
includesthefollowingindividuals: individualsontheprojectteam:
ProfessionalServicesLeadershipfromDeloitte Specialthanksforcontributionsfrom:
RobGalaski,CoAuthor,ProjectAdviser DominikHermann,DeutscheBrse
Additionalthanks
Theprojectteamexpressesgratitudetothefollowingindividualsfortheircontributionsandsupport:
Andto:
DeloitteDigitalUK(Facilities)
TheBarclaysAcceleratoratRiseNewYork
VisaOneMarketCenter
AIGGlobalInnovationCenter
PekingUniversity,HSBCSchoolofBusiness
190
ACKNOWLEDGEMENTS | SUBJECTMATTEREXPERTS
ContributingSubjectMatterExperts(1of4)
Theprojectteamwouldalsoliketoexpressitsgratitudetothefollowingsubjectmatterexpertswhocontributedtheirvaluableperspectivesthrough
interviewsandbyparticipatinginworkshopandroundtablediscussions(inalphabeticalorder):
191
ACKNOWLEDGEMENTS | SUBJECTMATTEREXPERTS
ContributingSubjectMatterExperts(2of4)
Theprojectteamwouldalsoliketoexpressitsgratitudetothefollowingsubjectmatterexpertswhocontributedtheirvaluable perspectivesthrough
interviewsandbyparticipatinginworkshopandroundtablediscussions(inalphabeticalorder):
192
ACKNOWLEDGEMENTS | SUBJECTMATTEREXPERTS
ContributingSubjectMatterExperts(3of4)
Theprojectteamwouldalsoliketoexpressitsgratitudetothefollowingsubjectmatterexpertswhocontributedtheirvaluable perspectivesthrough
interviewsandbyparticipatinginworkshopandroundtablediscussions(inalphabeticalorder):
193
ACKNOWLEDGEMENTS | SUBJECTMATTEREXPERTS
ContributingSubjectMatterExperts(4of4)
Theprojectteamwouldalsoliketoexpressitsgratitudetothefollowingsubjectmatterexpertswhocontributedtheirvaluable perspectivesthrough
interviewsandbyparticipatinginworkshopandroundtablediscussions(inalphabeticalorder):
PaulWan StandardChartered
Harry WangWei LinearVentures
AndrewWhite FundApps
DarrylWhite BMO
IvarWiersma ING
GrantWilson etradingSoftware
JamesWise BaldertonCapital
RayYang MarathonVentures
BradYankiver MotivePartners
JasonYoung PayPalCanada
AlexYpsilanti Quantifeed
NinaZhou CreditEase
JenniferZhuScott RadianPartners
194
ContactDetails
WORLDECONOMICFORUM|2017 195
CONTACTDETAILS
ForAdditionalQuestions,PleaseContact:
WORLDECONOMICFORUMPROJECTTEAM PROFESSIONALSERVICESSUPPORTFROMDELOITTE
R.JesseMcWaters RobGalaski
ProjectLead,FinancialServices AmericasFinancialServicesLeader
WorldEconomicForum Deloitte
[email protected] [email protected]
GiancarloBruno
SeniorDirector,HeadofFinancialServicesIndustries
WorldEconomicForum
[email protected]
196