The Future of Financial Services
The Future of Financial Services
The Future of Financial Services
Sincere thanks are extended to the industry experts and emerging disruptors who contributed
their unique insights to this report. In particular, the members of the Projects Steering
Committee and Working Group, who are introduced in the following pages, played an invaluable
role as experts and patient mentors.
We are also very grateful for the generous commitment and support to Deloitte Consulting LLP
in the U.S., an entity within the Deloitte1 network, in its capacity as the official professional
services advisor to the World Economic Forum for this project.
Contact
For feedback or questions,
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please contact: Deloitte Global) does not provide services to clients. Please see www.deloitte.com/about for a more detailed description of DTTL and its
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R. Jesse McWaters This report contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or their related entities
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1
Table of Contents
Acknowledgements... 4
Executive Summary.. 10
Reading Guide.. 24
Detailed Research Modules... 27
Payments:
How will customer needs and behaviours change in an increasingly cashless payments landscape?.......................................................................................... 28
How will the evolution of decentralised or non-traditional payment schemes change the role of traditional financial institutions? .. 43
Insurance:
How will disaggregating forces across the value chain transform the insurance industry? ........................................................................................................ 58
How will an ever more connected world impact the value delivered by insurance providers? .................................................................................................... 72
Deposits and Lending:
How will emerging alternative models of lending change the market dynamics of traditional lenders? .................................................................................... 86
What will be the future role of financial institutions in response to continually shifting customer preferences? ....................................................................... 100
Capital Raising:
How will the evolution of distributed capital raising impact the role of traditional intermediaries? .......................................................................................... 112
Investment Management:
How will the empowerment of individuals through automated systems and social networks transform the business of investment management?............... 127
How will the externalisation of key processes transform the financial ecosystem? .................................................................................................................... 139
Market Provisioning
How will smarter and faster machines transform capital markets? ............................................................................................................................................ 153
What impact will better connected buyers and sellers have on capital markets? ....................................................................................................................... 163
Contact Details................................................................................. .......................................................................................................... 178
2
Acknowledgements
3
Acknowledgements
Members of the Steering Group
The following senior leaders of global financial institutions have provided guidance, oversight and thought leadership to the Disruptive Innovation in Financial Services
project as its Steering Group:
4
Acknowledgements
Members of the Working Group
The project team would also like to acknowledge the following executives of global financial institutions who helped define the project framework and shape strategic
analyses as its Working Group:
Bo Lu CEO, Future Advisor Yin Rong Deputy Director, IT, Bank of China
Jeff Lynn CEO, Seedrs Jeff Rosenberger VP, Research & Customer Development, Wealthfront
John Macdonald Director, Risk Analytics & Customer Solutions, IBM Kevin Sara Chairman, Batan Limited
Kevin Mak Managing Director, IronFly Technologies Arjan Schutte Managing Partner, Core Innovation Capital
Paul Makin Head of Mobile Money, Consult Hyperion Vasuki Shastry Group Head of Public Affairs, Standard Chartered
Demetrios Marantis Head, International Policy and Regulatory Affairs, Square Hyunwook Shin CEO, Popfunding
Emmanuel Marot Co-Founder & President, Lending Robot Barry Shrier Founder & CEO, Liquity
Kevin Martin Head of Retail Banking and Wealth Management, Asia Pacific, HSBC
Barry Silbert Founder, Second Market
Mike Massaro CEO, peerTransfer
Brian Sin Former Head of Innovation, Cigna
Mike Mathias Deloitte China
Gurjeet Singh CEO, Ayasdi
Steve Mendel Co-Founder & CEO, Bought by Many
Balvinder Singh CEO, TootPay
Douglas Merrill Founder & CEO, Zest Finance
Siddarth Singh Head of Programme, Pivotal Innovations
Liao Min Director-General, Shanghai Office, China Banking Regulatory
Commission Maria Sit Regional Managing Director, Asia, Health Wallace
Rory Moloney CEO, Aon Global Risk Consulting, Aon Paul Sonderegger Big Data Strategist, Oracle
Daniel Nadler CEO, Kensho Stan Stalnaker CEO, Hub Culture
Mas Nakachi CEO, Open Gamma Jeff Stewart CEO, Lenddo
Mike Naughton Managing Director of Asia for Strategic Customers & Solutions, Ron Suber CEO, Prosper
Thomson Reuters
Stu Talyor Co-Founder & CEO, Algomi
Christian Nentwich CEO, DuCo
Matin Tamizi Co-Founder & CEO, Balanced Payments
Zhu Ning Deputy Director and Professor of Finance, Shanghai Advanced
Institute of Finance Donald Tang CEO, China, D.E. Shaw & Co. LP
Michael Nugent CEO, Bison Spiros Theodossiou VP Product Strategy, Skrill
Stephen Pair CEO, bitpay James Tickner VP, Corporate Solutions, Nasdaq
Kyung Yang Park CEO, UbiPay Don Trotta Global Head of Banking, SAP
Kitty Parry CEO, Templars Eric Van der Kleij Head, Level39
Loren Pastore Business Development Manager, UpSlide Mark Wales Deloitte China
Andy Patton VP, EMEA International Business Development, AMEX Karen Webster Managing Director, Market Platform Dynamics
Leslie Payne Director of Public Affairs, Lendup Karsten Wenzlaff Leader, German Crowdfunding Network
Sandy Peng CEO, UCAN Darren Westlake CEO, Crowdcube
Anthony Pereira Founder & CEO, Percentile
Paul Wilkins Chairman & CEO, Marsh (MMCo), Hong Kong SAR
Claudine Perlet Head of COO Office, Allianz
Jeremy Wilson Vice Chairman, Corporate Banking, Barclays
Jonas Piela Founder, Avuba
Andrew White CEO, FundApps
Basil Qunibi CEO, Novus
Edan Yago CEO, Epiphyte
Simon Redfern CEO, Open Bank Project
Roger Ying Co-Founder & CEO, Pandai
Josh Reich CEO, Simple
Selma Ribica Principal Product Development Manager, Mobile Payments, Vodafone Joyce Zhang VP, Oriental Patron
Christoph Rieche Co-Founder & CEO, iwoca Giuseppe Zocco Co-Founder, Index Ventures
Antonia Rofagha Communications Manager, Transferwise
7
Acknowledgements
Project Team and Additional Thanks
Project Team Additional Thanks
The Disruptive Innovation in Financial Services project team includes the following In addition, the project team expresses its gratitude to the following individuals for their
individuals contribution and support throughout the project (in alphabetical order):
8
Executive Summary
9
The mandate of this project was to explore the transformative potential of new
entrants and innovations on business models in financial services
Project Context
We set out to address three major problems that have prevented a comprehensive understanding of the state of disruptive innovation in the industry:
There is no common taxonomy or understanding of which innovations are the most relevant
There is no clear understanding of the evolutionary path of emerging innovations
The implications of those evolutions on incumbent business models are unclear, creating significant uncertainty for traditional players as they strive to
react to growing competitive pressures
Project Approach
We structured our research around three main questions, each requiring distinct actions:
1 Which emerging innovations are the most impactful and relevant to the financial services industry?
Action: We identified 11 key clusters of innovations based on how they impact the core functions of financial services
2 How will these innovations impact the ways in which financial services are structured, provisioned and consumed in the future?
Action: We considered a range of scenarios for the degree and nature of impact each cluster of innovation could have
3 What would be the implications of these changes on customers, financial institutions, and the overall financial services industry?
Action: We analysed the implications of each scenario on customers, incumbent institutions and the overall financial services ecosystem
10
Over 15 months of research we engaged with industry leaders and innovators
through interviews and multi-stakeholder workshops
Oversight, guidance and thought leadership from 16 C-suite executives In-person and phone interviews with 100+ innovative new entrants
and 25 strategy officers of global financial institutions and subject matter experts
Global Workshops
Facilitated six multi-stakeholder workshops at global financial hubs with 300+ total participants including
industry leaders, innovators, subject matter experts, and regulators
Hong Kong SAR Tianjin, China Boston, USA New York, USA London, UK Davos, Switzerland
4 Sep. `14 11 Sep. `14 30 Sep. `14 21-22 Oct. `14 2 Dec. `14 21 Jan. `15
11
The outcome of this work is the first consolidated taxonomy for disruptive
innovation in financial services
Research Framework
Payments Insurance
Market Deposits &
Provisioning Lending
Investment Capital
Management Raising
Clusters of Innovation
We have identified 11 clusters of innovation exerting
pressure on traditional business models
12
We have synthesised six high level insights on innovation in financial services
Innovation in financial services is deliberate and predictable; incumbent players are most likely to be attacked
1
where the greatest sources of customer friction meet the largest profit pools
Innovations are having the greatest impact where they employ business models that are platform based, data
2
intensive, and capital light
The most imminent effects of disruption will be felt in the banking sector; however, the greatest impact of disruption
3
is likely to be felt in the insurance sector
Incumbent institutions will employ parallel strategies; aggressively competing with new entrants while also
4
leveraging legacy assets to provide those same new entrants with infrastructure and access to services
Collaboration between regulators, incumbents and new entrants will be required to understand how new innovations
5
alter the risk profile of the industry positively and negatively
Disruption will not be a one-time event, rather a continuous pressure to innovate that will shape customer
6
behaviours, business models, and the long-term structure of the financial services industry
13
In the following pages, we have summarised our insights by function and cluster
This section provides a summary of our findings, divided by function and clusters within the functions. For each cluster of innovation we have defined
the major disruptive trends, summarized the impact, and examined key implications for institutions in that function and cluster.
Function grouping
Innovation cluster
14
Key Findings | Payments
Cashless World Emerging Payment Rails
Summary Summary
New consumer functionalities are being built on existing payment The greatest potential for cryptocurrencies may be to radically
systems and will result in meaningful changes in customer streamline the transfer of value, rather than as store of value
behaviour
With reduced visibility, becoming the default card among specific Financial institutions may face a new set of risks (e.g., reputation,
customer segments will become critical security) and regulatory issues as they participate in new rails
Winning issuers will be able to gain visibility into more of Applications of these technologies can expand beyond money
customers spending patterns, build more holistic understanding transfer to modernise other financial infrastructures
of customers, and create more competitive offerings
15
Key Findings | Insurance
Insurance Disaggregation Connected Insurance
Disaggregated Sharing Self-Driving 3rd Party Smarter, cheaper Wearables Internet-of-Things standardised
Distribution Economy Cars Capital sensors Platforms
Summary Summary
Emergence of online insurance marketplaces and Ubiquity of connected devices will enable insurers to highly
homogenisation of risks will force big changes in insurers personalise insurance and proactively manage clients risks
strategies
16
Key Findings | Deposits & Lending
Alternative Lending Shifting Customer Preferences
Summary Summary
New lending platforms are transforming credit evaluation and New entrants will make meeting customer demands more
loan origination as well as opening up consumer lending to non- important, creating an imperative for banks to reconsider their
traditional sources of capital roles
As savers turn to alternative platforms, traditional deposits and Financial institutions ability to collaborate with non-traditional
investment products will be eroded players and other institutions will become essential
Distribution of customers credit portfolio over a large number of Financial institutions will need to choose where they will specialise
alternative platforms may make it difficult to measure customers and where they will leverage external partners (e.g., product
creditworthiness manufacturing vs. creation of customer experience)
17
Key Findings | Capital Raising
Crowdfunding
Summary
Crowdfunding platforms are widening access to capital raising
activities, making the overall ecosystem richer
As the barriers to enter the asset class fall, it becomes ever more
important for traditional intermediaries profitability to find
undiscovered start investments
18
Key Findings | Investment Management
Empowered Investors Process Externalisation
Social Automated Advice & Retail Algorithmic Advanced Natural Process-as-a- Capability
Trading Wealth Management Trading Analytics Language Service Sharing
Summary Summary
Robo-advisors are improving accessibility to sophisticated The scope of externalisable processes is expanding, giving
financial management and creating margin pressure, forcing financial institutions access to the new levels of efficiency and
traditional advisors to evolve sophistication
As more advisory functions become automated, distributing Organisational agility will become critical to sustain competitiveness
wealth products via proprietary advisory channels will become as high-value capabilities are continued to be commoditised
less effective
Externalisation of capabilities may result in workforce skill loss by
As new entrants widen the access for mass customers, they will preventing the development of a holistic view of operations
compete for customers traditional savings deposits
19
Key Findings | Market Provisioning
Smarter, Faster Machines New Market Platforms
Machine Accessible Artificial Intelligence / Big Fixed Income Funds / Fund Private Equity / Private Commodities &
Data Machine Learning Data of Funds Venture Capital Company Derivative
Shares Shares Contracts
Summary Summary
As the popularity of high frequency trading declines, the focus of New information platforms are improving connectivity among
algorithmic trading may shift to smarter, faster response to real- market constituents, making the markets more liquid, accessible,
life events and efficient
20
We identified six important themes that cut across functions and touch multiple
clusters of innovation
1 Streamlined Infrastructure
Emerging platforms and decentralised technologies provide new ways to
aggregate and analyse information, improving connectivity and reducing the
marginal costs of accessing information and participating in financial activities
3 Reduced Intermediation
Emerging innovations are streamlining or eliminating traditional institutions
5
role as intermediaries, and offering lower prices and / or higher returns to
customers
1 4
4 The Strategic Role of Data
3
Emerging innovations allow financial institutions to access new data sets, such
as social data, that enable new ways of understanding customers and markets 2
New entrants with deep specialisations are creating highly targeted products
and services, increasing competition in these areas and creating pressure for
the traditional end-to-end financial services model to unbundle
6 Customer Empowerment
Emerging innovations give customers access to previously restricted assets
and services, more visibility into products, and control over choices, as well as
the tools to become prosumers
21
At the conclusion of the research phase, the Steering Committee gave us a
mandate to dive more deeply into high-potential areas of disruption
Next Steps
We have identified three major challenge areas related to innovation in financial services that will require multi-stakeholder collaboration to be
addressed effectively. We are launching a project stream related to each area, with the goal of enabling tangible impact.
The Forum is uniquely positioned to support advancements against each challenge due to its ability to:
Convene senior multi-stakeholder groups and align diverse perspectives
Create thought leadership on cutting-edge issues with long-term implications to the industry
Challenges Projects
New financial products and services are creating significant regulatory Regulatory Models
uncertainty and fueling perceptions of regulatory arbitrage for Innovation
22
Reading Guide for
the Detailed Sections of the Report
23
The following detailed sections of the report are organised based on key
innovation clusters and how they map to the core functions of financial services
24
We have analysed the relevant cluster of innovations for each key area of impact
and developed scenarios that present potential answers
Report Structure
Brief analysis of current state Overview of key innovations Key characteristics of future Summary of potential outcomes
business models and processes impacting the topic models of financial services related to the key question for the
in the impacted function enabled by innovations for the topic in a scenario format
Key characteristics of the
impacted function
Summary of historical innovations Narratives and case studies to
developments further illustrate each scenario
Impact of the innovations on the
Key pain points and challenges current state value chain Necessary conditions required for
with the current state each scenario to be realised
Comparison of the current state
models and innovations Implications of the scenario on
customers, incumbents and
overall industry
Key opportunities and risks
associated with the scenario
Key insights from the analysis of each topic and relevant cluster of innovations have
been summarised in the Executive Summary and Conclusions pages in each module
25
Detailed Research Modules
26
Payments
How will customer needs and
behaviours change in an increasingly
cashless payments landscape?
27
Payments: Cashless World
Executive Summary
Context / Innovation
A number of innovations have emerged in the past five years leveraging mobile devices and connectivity to make payments simpler and more
valuable. Examples range from digital wallets to automated machine-to-machine payments
The majority of these innovations will modify front-end processes to improve the customer and merchant experience while leaving the underlying
payments infrastructure undisrupted
Future of Payments
These innovations will reduce the use of cash and make payments less visible to payers. They will also enable financial institutions and merchants
to use data-driven customer engagement platforms
As more payment solutions allow customers to link their bank accounts for direct payment and seamless point-of-sale vendor financing, the use
of credit cards could be displaced by these platforms
Customers may lose visibility into their payment choices, increasing their default cards share of wallet and reducing the importance of some
traditional differentiators like brand and design
The elimination of a need to carry physical cards and the emergence of payment decision support systems could support the proliferation of
niche and merchant issued cards, splintering wallet share among many cards
Key Implications
Success of any innovative payment solution will require a strong customer rationale to switch, as most customers do not consider the existing
payment regime to be broken
In an increasingly cashless future payment providers who can embrace emerging payment innovations to offer differentiated, value-adding digital
experiences will be able to deepen their relationships with customers and take a dominant place in the changing market landscape
28
Payments: Cashless World
The payments industry has continuously evolved over time, but there are still
some challenges to make the world cashless
History of the payments industry
Since the introduction of credit cards in the 1950s, debit cards in the 1980s and the rise of e-commerce through the 1990s, electronic payments have
grown in popularity, displacing cash and cheques. In 2012 they accounted for 68 percent of U.S. transactions in value
Electronic transactions rely on a number of intermediaries, which provide acceptance, convenience and security of transactions, and are generally
coordinated by large scale-based payment networks
Payment
Customer Point Of Sale (POS) Acquirer
Credentials /
Authentication
Merchant
Convenience: Reduces the need for customers and merchants to Merchant Adoption Convenience
carry cash, reducing associated costs, including trips to banks, price Electronic payments are not Small denomination payments are
inflexibility and opportunity costs (i.e., interest earned) accepted by every merchant due often still conducted reducing the
to the infrastructure costs, high number of processing steps and
Efficiency: Reduces the cash management costs for businesses and
fees and settlement delays time to complete a transaction
financial institutions as fewer bills are exchanged by hand and money
movements are settled electronically
Accessibility Fraud
Traceability: Enables a greater degree of visibility into the flow of
Under-banked population does Despite the safety measures
money for financial institutions and regulators, facilitating taxation,
not have access to primary increasingly adopted, electronic
transparency, and information gathering
accounts and therefore only uses transactions create opportunities
Protection: Protects customers and merchants from fraud and theft by cash in transactions for fraudulent activities
documenting transaction records and reducing the need to hold cash
29
Payments: Cashless World
Mobile wallets Mobile ordering & payment apps Location-based payments Biometrics / location-based
(geotagging) identification
Mobile-based merchant payment Integrated mobile shopping apps
solutions Machine-to-machine payments Tokenisation standards
Order Ahead
30
Payments: Cashless World
Most payment innovations do not disrupt the existing payment processes, but
rather modify front-end processes to improve customer and merchant experience
How different types of innovative payment solutions interact with todays payment process
How They Work Illustrative Diagram Examples
Replace,
Complement
Aims to replace or complement the
Mobile merchant or Enhance
current POS infrastructure by
payment solutions;
leveraging mobile connectivity
Customer POS Acquirer
Integrated payment apps; (and aggregate transactions in
some cases) to make the
Streamlined payment payments process more effortless Merchant
solutions and accessible by more merchants
Payment
Issuer
Network
Innovations will make payments more cashless and invisible in the future, while
enabling data-driven engagement platforms for customers
Key characteristics of the future of payments
As innovations change customer behaviours by making payments more effortless and provide
financial institutions and merchants with data, what will be the payments landscape in the future?
32
Payments: Cashless World
1 Consolidation of the Payment Market 2 Fragmentation of the Payment Market 3 Displacement of Credit Cards
Customers lose visibility into their payment The successful deployment of digital wallets Customers with revolving balances elect to
choices as innovations like Amazons 1- eliminates the need to own/carry physical use innovative point of sale vendor
click and Ubers seamless payments push cards and enable decision support systems financing schemes offering preferable
more and more transactions to a single to help customers optimise card usage terms
default card
This drives a proliferation of niche and Credit card usage is eroded as
The default cards share of wallet will merchant issued cards, splintering share transactional card users migrate to payment
increase and the importance of of wallet across many providers solutions that seamlessly link to their
differentiators like card brand and design bank accounts
will be reduced
The following scenarios illustrate potential outcomes generated by the innovations discussed in this topic, particularly in response to the key
question above they are not meant to be future predictions
These scenarios are illustrations of particular aspects of the potential future and are not meant to represent a complete view of the market and
competitive landscape in many cases, some or all scenarios could be realised at the same time
33
Payments: Cashless World
Bank Account
Today Payment
Customers Cards Merchants
Solutions
Default Payment
Customers Merchants
Future Card Solutions
Bank Account
Case studies
Order Ahead
In-app purchases within mobile apps can turn traditional physical Virtual payment processing services store customers payment
purchases into online purchases and combine purchase and credentials and allow customers to use those credentials in one-click
payment into a single tap, eliminating the step for payment method or tap to maximise convenience and improve security
selection
34
Payments: Cashless World
Availability and widespread adoption of seamless payment solutions to Customers Less complex and time-consuming customer
a large number of customers and at a large proportion of everyday- experience at check-out
spend merchants
Decreased cognitive effort on payment selection
Customers willingness to relinquish control over payment options
(e.g., convenience over control) Merchants Reduced friction and improved efficiency at check-
out
Issuers seek to incentivize merchants to influence
consumers to load their cards
Opportunities Risks
Development of more personalised rewards program me for cards to Over time, potential decrease in the number of available card choices
attract and retain customers as consumers use fewer cards, leading to decreased competition and
innovation
35
Payments: Cashless World
Bank Account
Today Payment
Customers Cards Merchants
Solutions
Payment
Customers Cards Merchants
Future Solutions
Bank Account
Case studies
Currently, customers can add multiple payments cards (credit and While currently not integrated with digital wallets, decision support
debit) to leading digital wallets (e.g., 8 for Apple Pay, unlimited for systems run on mobile and wearable devices to automatically
Google Wallet), and pick and choose a payment card for each recommend the optimal payment option among payment cards
transaction with few additional clicks / taps added by the customers to maximise the overall rewards
36
Payments: Cashless World
Merchants widespread acceptance of smart payment solutions or the Customers Able to optimise reward collection without sacrificing
solutions successful integration with existing acceptance markets seamless experience
Development of payment solutions into platforms surrounded by Potential increase in debt as it becomes easier to
innovative ecosystems (e.g., increased linkage between mobile wallets issue multiple credit cards, offset by spending
and merchant apps, location-based check-out experience creation) management functionalities of mobile wallets
Proven efficiency and impartiality of recommendations engines card
Merchants Potential decrease in total merchant service charges
choice for each transactions, creation of streamlined user experience
paid as private-label cards are more widely adopted
and differentiated value propositions by smart wallets that will drive
among each merchants customer base
consumers to want to adopt the optimisation services
Opportunities Risks
Opportunities for merchants to directly enter the payments ecosystem Decreasing opportunities to scale for credit card providers
via private label solutions and gain deeper understanding of their
Potential decline in the efficacy of rewards programmes if card is only
customers spending patterns
used for most rewarding (lowest margin) transactions
Ability for financial institutions to introduce highly specialised rewards
Displacement of traditional players who are not willing to participate in
programmes to capture specific segments of spend
smart payment solutions
Potential arms race for rewards and backward optimisation
37
Payments: Cashless World
Bank Account
Today Payment
Customers Cards Merchants
Solutions
Payment
Customers Merchants
Future Solutions
Bank Account
Leading mobile payment solutions allow Leading mobile payment platforms allow Emerging point-of-sale vendor financing
customers to fund their purchases with credit customers to add, manage and use multiple schemes provide revolving or purchase-
cards and bank accounts and generally earn merchant loyalty programmes and enable specific line of credit to replace the need for
profits only on bank-funded transactions merchants to directly issue offers to customers credit card financing
38
Payments: Cashless World
Create incentives for customers to switch their funding methods Customers Shift in financial incentives from card-driven rewards
programmes to direct savings from merchants
Merchants willingness to transfer financial incentives to customers
to be more appealing than the rewards offered by card issuers Potential savings from lower transaction fees if bank
account / wallet providers can adopt security
Sufficient trust needs to build with wallet providers, alternative
innovations and offer protection at a lower cost than
lending providers and loyalty providers
current credit card fees
Development of alternative financing providers that can offer
comparable user experience and efficiency as credit cards (e.g., Merchants Cost reduction due to elimination of credit card fees,
seamless application process at POS and efficient loan servicing) potentially offset by passing on savings to customers
Cooperation of bank account providers and payment solution providers and increased fraud costs
to allow a seamless connection of payment vehicle and account, Exert greater control in the payments ecosystem
including sufficient data visibility for real-time decisioning and
authorisation
Incumbents Reduced fee revenues
Clearly defined liability rules across all ecosystem participants and
payment solutions ability to provide zero liability for consumers while Transaction accounts become more important than
offering higher rewards credit cards in customer retention
39
Payments: Cashless World
Opportunities Risks
Encouragement of more prudent spending patterns by customers as Fragmentation of payment solutions leading to proliferation of non-
revolving credit lines are replaced by case-by-case loans interoperable or nationally exclusive payment solutions
May increase check-out conversion for merchants Increased risk of violations against data protection and security of
transactions due to replacement of proven credit card infrastructure
with immature alternative payment solutions
Lack of clear liability construct could drive confusion across participants
De-centralisation of payment transactions could drive increased fraud
and lower efficacy than existing models
40
Payments: Cashless World
! Reduced control over customer experience: Financial institutions may lose some or most control over their customers transaction experience as
digital wallets consolidate digital payment platforms
! Customer targeting: Leveraging data on specific customer segments will become an essential component of strategies to gain a dominant share
of wallet among those segments that encourage or drive more frequent usage in a diversified market
! Merchant relationships: Financial institutions ability to partner with merchants will become critical component of strategies to drive merchant-
specific usage, enable merchant-issued credits, or become a preferred card on merchant platforms
? How will issuers create differentiated customer experience when their control over customer experience is taken over by digital payment platforms?
! Competitiveness of bank-issuers: Large ! Customer retention: As consumers spread ! Shift in credit business models: As new
stand-alone issuers or network issuers may purchases over a larger and larger number credit vehicles displace credit card based
gain competitive edge over bank-issuers of cards, the credit card will lose its borrowing the overall profit models of retail
using their scale to consolidate the market significance as a key anchor of customer financial institutions will be forced to change
retention for financial institutions
! 360 view of customers: Issuers that ! Loyalty programmes: Financial institutions
consolidate their customers share of wallet ! Distributed credit: It will become more will need to create new ways to promote
will gain visibility into most of their payment difficult for individual financial institutions to customer loyalty as lower fees on bank
activities, leading to valuable data on their assess customers credit worthiness as their account transactions disrupt the current
lifestyles and preferences credits become distributed over multiple credit card loyalty models
cards
? What will be the characteristics of issuers ? How will financial institutions assess their
who successfully consolidate the market? ? How will retail financial institutions generate customers creditworthiness without
customer loyalty and stickiness in the traditional payment history?
? To what degree can and should financial
future?
institutions leverage the enhanced view of ? What will the future loyalty models look like
customers to deliver more value? on direct payments from bank accounts?
42
Payments: Decentralised and Non-Traditional Payment Schemes
Executive Summary
Context / Innovation
The current value transfer system, built on automated clearing houses and intermediary banks, has made it easier for customers to send money
across geographies, but many pain points remain to enabling rapid and inexpensive value transfer between countries
Decentralised currencies and mobile money solutions provide compelling alternatives to traditional value transferring systems by streamlining the
intermediating processes
Key Implications
To bring innovations to the traditional value transfer rails, financial institutions must collaborate to identify top priority areas for transformation solve
for regulatory complexity
43
Payments: Decentralised and Non-Traditional Payment Schemes
While the rails built on automated clearing houses have enabled value transfer
across geographies, many pain points are emerging as customer expectations rise
How do financial institutions facilitate value transfer today?
While the current rails for value transfer between financial institutions are complex and involve many institutions a similar process is used for all
transactions; from large institutional transfers to the settlement of retail payments
Secure Messaging
1 2
Sender Bank /
Sender Recipient Bank Recipient
Broker
3
Automated
FX Market Clearing House /
Intrabank
Interbank Intermediary Bank
Evolution of money transfer schemes Key pain points with todays schemes
The basic elements of the current value transfer process have been in The actual transfer is not instantaneous: funds may take several hours
place for over 150 years or even days to move from the sender's account to the receiver's
The concept of wire transfers was originated by telegraph companies account
(e.g., Western Union) who would receive funds for transfer from a If the sending and recipient banks do not hold reciprocal accounts the
sending party and send a telegraph to correspondent branch instructing payment must be sent to a clearing house or correspondent bank for
them to deliver the money to the intended recipient the assurance of payment for the recipient, adding costs and delays
The digitisation of this process throughout the latter half of the 20th The complex structure of requesting the recipient bank to demand
century improved the security of messaging services and improved the payment makes the process more vulnerable to fraud using exposed
settlement time of clearing house activities sender credentials
44
Payments: Decentralised and Non-Traditional Payment Schemes
How have decentralised schemes developed? What are some emerging decentralised schemes?
Digital payment schemes are as old as the internet itself with many
notable failures including Beenz, Flooz, and Digicash, and the most
notable success being PayPal. However, all of these schemes utilised Digital currency run on Open-source low-cost (~1 Open-source P2P Decentralised open
decentralised payment / 1000th of a cent) Internet currency source information
a centralised network requiring trust by users in a central counterparty network payments protocol and enabling instant, near- registration and
instant exchange of any zero cost payments transfer system
In 2009 a pseudonymous whitepaper proposed the creation of a form of money or value
45
Payments: Decentralised and Non-Traditional Payment Schemes
Mobile monies and P2P value transfer networks rely on a trusted central party to
transfer value rapidly across geographies, even in underbanked regions
What are non-traditional payment schemes?
Mobile money refers to a network that supports payment from one user
to another via a mobile device Sender Mobile Money Recipient
(e.g., a telco)
A mobile money service may be launched by any firm, not just a
traditional financial institution. Mobile money services have been
launched by network operators (MPESA) and online retailers (PayPal)
Sender P2P Transfer Recipient
Transactions may be denominated in a fiat currency or in a form of
value issued by the central intermediary
Local Local
In developing countries mobile payment solutions have been deployed Account Account
to extend financial services to the "unbanked" or "underbanked Batch (Net)
Value Chain
Advantages Network is scalable and includes Transfer history is transparent, Simpler and cheaper transfers
most existing financial institutions traceable and practically unalterable Improved user transparency
Proven ability to manage large capital Lower direct costs of transaction due Enables rapid or real-time settlement
flows on a global scale to distribution across the network
The reach of the intermediary may
Large retail and institutional customer Lower exposure to conventional fraud exceed that of financial institutions,
base who are familiar with the model Settlement is near real-time; no particularly in developing countries
counterparty risk
Shortcomings Limited visibility into value flow for High volatility in the value of the Scalability is dependent on the
both senders and recipients native currency availability / adoption of the
Prone to fraud when the senders Regulatory scrutiny creates intermediary platform
credentials are exposed challenges to connecting with fiat Cross border flows of funds can
Transfer can take days and efficiency currency ecosystems create regulatory challenges
varies by countries / institutions Anonymity of accounts / irreversibility
High costs / number of intermediaries of transfers creates security issues
Higher exposure to unconventional
fraud (e.g., large-scale hacking) 47
Payments: Decentralised and Non-Traditional Payment Schemes
In achieving these future state characteristics, how will the evolution of decentralised or non-
traditional payment schemes change the role of traditional financial institutions?
48
Payments: Decentralised and Non-Traditional Payment Schemes
1 Compete with an alternative network 2 Facilitate alternative payment 3 Provide leaner, faster payment
of financial providers schemes as complements options within the existing network
Savings
Bank Accounts
A Traditional Rails B Remittance
Authentication
Payments
Savings Savings
A Initial sender B End recipient Traditional providers Alternative providers Flow of Money
A network of innovative financial services Traditional institutions launch financial Alternative payment schemes act as a
providers (e.g., authentication, remittance, products that are connected to alternative catalyst for traditional institutions to develop
savings / lending, insurance, merchant payment scheme ecosystems (e.g., Bitcoin new solutions
payments) emerge around alternative savings accounts, mobile money insurance)
Leveraging elements of alternative
payment schemes
Financial institutions may also act as a schemes, traditional institutions build more
These services provide customers a gateway to alternative payment schemes streamlined rails for the movement of money
meaningful alternative to financial (e.g., authentication)
These solutions reduce the advantages of
institutions by keeping money entirely
alternative payment schemes and retain the
within the alternative schemes
flow of money within the traditional financial
network
The following scenarios illustrate potential outcomes generated by the innovations discussed in this topic, particularly in response to the key
question above they are not meant to be future predictions
These scenarios are illustrations of particular aspects of the potential future and are not meant to represent a complete view of the market and
competitive landscape in many cases, some or all scenarios could be realised at the same time
49
Payments: Decentralised and Non-Traditional Payment Schemes
Case studies
Bitcoin exchanges allow customers to securely and quickly transfer Mobile money solutions (e.g., M-PESA) have led to an
value within the Bitcoin network. Bitcoin financial services providers increase in financial product offerings from innovative new
(e.g., bitpay merchant processor, Coinbase wallet), in conjunction entrants, across various financial services functions from
with those exchanges, strive to provide a competitive value proposition insurance to savings
for customers to retain value within the Bitcoin ecosystem
50
Payments: Decentralised and Non-Traditional Payment Schemes
Low volatility in native currency of the alternative scheme(s) Customers More willing to engage in cross-border commerce
A strong rationale for widespread consumer adoption of the alternative Finances are split between native and alternative
scheme(s) currencies, creating undesirable complexities
A strong rationale for widespread merchant adoption of the alternative
Incumbents Lower floats as customers shift funds into alternative
scheme(s)
payment networks
Regulatory acceptance of alternative currency products and low friction
Price competition with various alternative currency
transfers between alternative currency and fiat currency stores of value
offerings
Provision of sufficient and efficient entry points into alternative
scheme(s) Overall Creation of a parallel ecosystem
Ecosystem
Development of regulatory institutions or expansion
of existing regulatory bodies to oversee financial
transactions in alternative ecosystems
Opportunities Risks
Competition between established and new ecosystems drives Security of stored alternative currencies is a challenge with a history of
innovation and improvements in both significant breaches (e.g., Mt. Gox)
Regulatory redress in alternative schemes has a number of unsolved
challenges
Unstable alternative currencies lead to foreign exchange exposure on
domestic transactions
51
Payments: Decentralised and Non-Traditional Payment Schemes
A Initial sender
Traditional Providers
B End recipient
Bank Accounts
Authentication Traditional providers
Savings
A Alternative Rails B Remittance Alternative providers
Traditional
Payments Providers Flow of Money
Fidor, an online full-service bank, has adopted the Ripple protocol for CIC, a traditional insurer, launched micro-insurance products (e.g.,
all internal settlement processes to improve efficiency. If usage of the funeral insurance) that accept payment, and pay out claims in M-Pesa
Ripple protocol were to expand to other banks, it could be easily used balances to target the under-banked population. These products allow
for real-time payment and settlement between these institutions with CIC to build loyalty and brand recognition with a future customer base.
no automated clearing house or correspondent banks required.
52
Payments: Decentralised and Non-Traditional Payment Schemes
Strong business case for financial institutions to offer products and Customers Expands the universe of choice between traditional
services connected to alternative schemes (e.g., customer demand vs. and alternative schemes
reputational risks)
Potential for lower fees to transfer value within the
Trust in reliability, security and sustainability of alternative payment financial system
schemes
Incumbents Shift from higher margin traditional products to low
margin alternative products
Possibility of a higher level of regulatory scrutiny
Changes to existing technologies, processes and
business models to adapt to alternative schemes
Opportunities Risks
Improved direct connectivity among institutions as others adopt same Exposure to security and volatility risks associated with alternative
alternative schemes schemes
Ability to leverage financial institutions existing core capabilities to Significant regulatory exposure as some alternative schemes are not
provide better services than alternative competition (e.g., KYC, AML) well understood yet
Opportunities for increased efficiency in foreign exchange Increased reputational risks in case of alterative schemes failure
May support financial institutions in providing a more borderless
experience for their customers
53
Payments: Decentralised and Non-Traditional Payment Schemes
A Initial sender
B End recipient
Savings
Innovative Bank Traditional
A B Remittance Traditional providers
Solutions Providers
Payments
Flow of Money
Case studies
A number of national retail financial institutions launched consortiums to provide a P2P money transfer
service to their customers. While some of these services still rely on traditional settlement rails, adoption of
more streamlined technologies and processes can improve these transfers making them lower cost and
near-real-time.
54
Payments: Decentralised and Non-Traditional Payment Schemes
Sufficient competitive pressure for incumbents to invest in development Customers Ability to receive higher standard of customer
of new rails or major improvements to existing infrastructure experience without relying on less proven systems
Incumbents must possess technical capabilities to build and maintain Receive better prices but potentially not as low as
new rails under more disruptive solutions
Sufficient cooperation among financial institutions and other
infrastructure providers globally to set up widely accepted standards, Incumbents Limited disruption of operations or customer
potentially augmenting existing standards to expedite adoption relationships
Regulatory comfort with new technologies and standards adopted Improved efficiency in operations
Introduction of new types of risks and necessary
controls
Potential costs to integrate with new networks
Opportunities Risks
Ability to achieve efficiency and improvements without adding Difficulty implementing new technologies and processes may lead to
uncertainty of introducing new parties and assets unforeseen consequences
Risks of not being able to establish appropriate, widely accepted
standards
55
Payments: Decentralised and Non-Traditional Payment Schemes
! Revised margin structure: Margins on the current payment and settlement transactions will need to be restructured as competitive pressure grows
from alternative rails
! Global implementation: Global settlement infrastructure and emerging markets may present the largest immediate opportunities for the
development of alternative rails of payment and settlement given regulatory complexity of developed local markets
! Changing role of trusted intermediaries: As highly accurate and efficient alternative rail designs are implemented, the role of traditional
intermediaries (e.g., payment networks) as a trusted party may diminish
? What are the new roles that trusted intermediaries will play in the future and how will they address key limitations and weaknesses with todays
alternative payment and settlement rails?
? How will the new or improved rails for transferring value be deployed, tested and rolled out to minimise unwanted disruption
Scenario 1: Compete with an alternative Scenario 2: Facilitate alternative payment Scenario 3: Provide leaner, faster payment
network of financial providers schemes as complements options within the existing network
! Loss of visibility into customer ! New sets of risks: As financial institutions ! Importance of industry collaboration:
transactions: As more financial participate in the further development and Due to the network-based nature of
transactions are conducted via alternative usage of alternative rails, they will face a payment and settlement rails, working with
rails, financial institutions will lose visibility new set of risks around reputation, security other financial institutions at a global level
into payment history to asset / loan portfolio and compliance that are not under their will become more critical to ensure
aspects of some or most of customers direct control seamless connectivity for customers
finances
? What are the new risks associated with ? What is the appropriate participation model
? How will financial institutions assess alternative rails for value transfer, and how for incumbent institutions in establishing
customers finance and provide appropriate will they be managed and mitigated by new infrastructure and standards for value
products when they lose visibility into financial institutions? transfer?
transactions on alternative rails?
57
Insurance: Disaggregation of Value Chain
Executive Summary
Context / Innovation
A number of emerging forces are creating pressure across the insurance value chain, with the potential to redefine the structure of the market
The rise of online aggregators and the potential entry of technology players could disaggregate the distribution of personal and small commercial
policies and separate insurers from the ownership of customer relationships
The development of autonomous vehicles and advanced sensors will inherently reduce risk with home and auto while the proliferation of sharing
economies will homogenize risks. These and other forces are standardising and commoditising individual risks
Key Implications
In order to remain competitive in the face of a disaggregating value chain insurers will need to reconsider which core competencies they will invest
in to maintain a strong competitive position
58
Insurance: Disaggregation of Value Chain
The industry has been slowly evolving over the past couple decades, adopting
customer centric innovations from other financial services functions
What are the core capabilities of insurers today?
Insurance is typically considered one of the functions within financial services where the adoption of innovation has been the slowest
However, over the past decade many innovative practices such as digital channels and process automation have been gradually adopted by many
insurers. This has been especially true in personal lines of business while large commercial lines have continued to focus on establishing a personal
touch across the value chain
Traditional broker / agent in-person distribution faces In some geographies, customer-centric high-touch services
significant competitive pressures from digital channels have emerged to provide differentiated claims experience
in personal lines (e.g., rapid response teams)
Distribution partnerships with banks and retailers The adoption of digital channels has begun to replace manual
through white-labelling and over-the-counter products time-consuming processes to empower customers and / or
have become increasingly popular workforce
Innovation labs within insurance Advanced statistical models are being Insurers traditionally deploy their own
companies are being established to deployed to understand the correlation capital and premiums collected to
combine brand and product managers between measurable factors and risk reserve funds for future claims and
with technological and analytical (actuarial) using historical data invest the rest in various classes of
resources A large portion of pricing risks with assets to earn investment income. They
New products increasingly require collected data (underwriting) has been also reinsure a portion of their business
integration with 3rd party data providers automated over the years to improve to reduce exposure to catastrophic risks
accuracy and speed, especially with the The amount of reserve capital required
advent of out-of-box solutions and allocation of investment assets
allowed are mandated by regulatory
bodies and limits insurers underwriting
capacity
59
Insurance: Disaggregation of Value Chain
60
Insurance: Disaggregation of Value Chain
As the result, the insurance value chain will be increasingly disaggregated in the
future, changing the nature of the insurance business
Key characteristics of the future state insurance value chain
Customer loyalty to insurers will decrease The importance of actuarial and Growth of insurers will be less constrained
as aggregators create distance between the underwriting capabilities will grow as other by their access to risk capital
individual and their insurer parts of the value chain are disaggregated
Increased underwriting capacity, transfer of
Erosion will occur in the competitive Insurers margins on personal and small catastrophic risks and commoditisation of
advantages from existing retail channels commercial products will decrease risks may lead to decreased impact of
(e.g., agent force, brand) insurance cycles
How will disaggregation across the value chain change the insurance landscape in the future?
61
Insurance: Disaggregation of Value Chain
How will disaggregation across the value chain change the insurance landscape
in the future?
Potential changes to the insurance landscape
1 Consolidation of the market by mega 2 Rise of multi-line policies 3 Shifting focus to niche market and
insurers commercial lines
Insurers A B C D
A B C D
Personal
A B C
SME
Commercial
Specialty
Customers
A B C D
A C Personal
A
SME
Commercial
Specialty
With increasingly homogenised risk profiles Personal insurance products that are Disaggregation of the personal lines value
and commoditised personal insurance commoditised in the future will be chain will lead insurers to shift their focus
policies, the importance of scale to drive increasingly used as a bundle to cross to niche markets where traditional
efficiency will grow, leading to the market sell other more profitable products capabilities (e.g., actuary and underwriting)
consolidation make bigger differences in performance, or
As the concept of ownership blurs in the
pivot towards an increased focus on
Disaggregation of distribution to technology sharing economy, the concept of cross sell
commercial lines
platforms will enable insurers to scale may expand so that an insurance policy
rapidly in a cost-effective manner encompasses all risks associated with In these markets, distribution and
the customer, rather than specific asset underwriting will continue to be relatively
Widened access to capital through
more manual and the insurers expertise will
securitisation and alternatives will generate Increased connectivity may allow personal
not be easily replicated by other insurers
excess underwriting capacity for insurers insurance policies to be adjusted
to support rapid growth and consolidation frequently to match customers usage
patterns
The following scenarios illustrate potential outcomes generated by the innovations discussed in this topic, particularly in response to the key
question above they are not meant to be future predictions
These scenarios are illustrations of particular aspects of the potential future and are not meant to represent a complete view of the market and
competitive landscape in many cases, some or all scenarios could be realised at the same time
62
Insurance: Disaggregation of Value Chain
Case studies
Increased transparency via online channels and limited investment returns have put significant pressure on pricing in
the US auto insurance industry, driving a rapid consolidation over the past 10 years. Even absent notable M&A
activities, large insurers who can afford big marketing and R&D budgets have grown rapidly; leveraging their
superior customer acquisition capabilities and a price advantage derived from economies of scale. As a result, the
share of top 10 auto insurers in the United States has grown from 59% in 2000 to 71% in 2012.
63
Insurance: Disaggregation of Value Chain
Regulatory allowance of the consolidation of the market (i.e., resolution Customers Reduced choices for and differentiation among
of anti-trust issues) insurance products
Ability to realise the benefits of scale, particularly in terms of cost Potential for higher prices due to lower competition
efficiencies and underwriting accuracy improvements
Personal lines customers continue to perceive insurance as a Incumbents Margins expand for surviving insurers as competition
commoditised products is lowered
Smaller insurance companies are at risk of becoming
takeover targets
Opportunities Risks
Consolidation leads to reduced transaction costs due to economies of Oligopolistic structure may lead to potential collusion among large
scale players, leading to price increases
Cost savings from efficiency gains can be passed on to customers via Mega insurers may bear more systemic risk resulting in increased
lower prices regulatory pressures
64
Insurance: Disaggregation of Value Chain
Case studies
Farm Family has introduced the concept of aggregate flexible contract to small / medium enterprises , concentrating on
rural and suburban area, and targeting specific risks surrounding certain sectors (e.g., Special Farm Package 10 for
agriculture owners). On the personal insurance side, many multi-line insurers offer bundling discounts to customers to
promote cross sell across personal auto, home and life policies, with auto and home cross sell being more popular among
customers, yet multi-line contracts are still not widely adopted.
65
Insurance: Disaggregation of Value Chain
Insurance companies need to be able to assess and cover a wide Customers Peace of mind knowing that a broad range of
range of risks for individuals situations are covered by a single contract
Insurers need the ability and capacities to modify coverage and pricing Potential loss of control over details and choices
in real-time around specific insurance coverage
Customers must trust in insurers ability to evaluate and cover their Potential premium reduction driven by vertical
risks comprehensively and fairly consolidation
Opportunities Risks
Shifting from insuring things to insuring people is more aligned with Risk of adverse selection by customers is exacerbated by insurers
who is actually exposed to risks expanding into areas where they have less experience
Mono-line and niche insurers may partner with each other or evolve Potential for certain individuals to oversubscribe to insurance
into product-specific reinsurers with deep product knowledge
66
Insurance: Disaggregation of Value Chain
Today: Diverse focus between personal and commercial lines Future: Shift to commercial lines / niche specialty
SME SME
Lines of
Insurance Company
business
Bought by Many, a UK-based insurance start-up, brings together customers with specific insurance needs
(e.g., age, illness, residence location, profession) to represent their needs to insurers and promote the
creation and distribution of specialised insurance products designed for them. Bought by Many matches
customers who do not fit commoditised insurance policies to insurers who are willing to specialise in certain
customer segments.
67
Insurance: Disaggregation of Value Chain
Niche markets and complex commercial lines must continue to require Customers Fewer suppliers of commoditised insurance products,
special capabilities that take time and investment to develop potentially resulting in a marginal price increase
Margins for niche markets and complex commercial lines need to be Proliferation of the niche market results in
attractive development of products that meet special needs
Mechanisms for insurers to exit their existing commitments in non-
niche markets Incumbents Increased competition in the most profitable niche
and commercial markets
Less competitive intensity in commoditised markets
as companies exit
Opportunities Risks
Opportunity to encourage insurers to leverage their sophisticated Greater risks for catastrophic losses as the concentration of insurers
underwriting capabilities to understand and insure against more around niche risks increases
complex risks (e.g., unhealthy population)
Increased need for reinsurance as insurers focus more on specific,
concentrated markets
68
Insurance: Disaggregation of Value Chain
! Reduced customer stickiness: With insurers ownership of customer relationship further disaggregated and personal lines products further
commoditised, customers will become more fickle and creating customer loyalty will become increasingly difficult
! Self-insurance models: The overall revenue for the insurance industry will be reduced as the agents of the commoditising forces (e.g., self-driving
car manufacturers, sharing economy platforms) gain scale and begin to self-insure
! Competitive benchmarking: Insurers ability to scan and benchmark against competitors pricing models and strategies will become more
important as customers gain visibility into prices from multiple insurers via digital distribution platforms
? How will insurers create customer loyalty and stickiness going forward as the insurance products become increasingly commoditised and new,
digital entrants disaggregate customer relationship?
? What role will insurers play in supporting the self-insuring agents of commoditising forces in response to the erosion of the premium base?
? How can the insurance industry cultivate innovation ecosystem amidst risk-averse culture in order to proactively manage the disaggregating forces
instead of reacting to them?
! Regulatory complexity: As mega insurers ! Acquisition of capabilities: Many mono- ! Relationship-driven distribution:
emerge across multiple regulatory line insurers today may face challenges in Insurers ability to build and closely manage
jurisdictions, their burden to comply with acquiring expertise and capabilities to relationships with customers and
various regulatory regimes will increase effectively provide multi-line policies distribution partners, potentially via human
workforce, will become more important
? What capabilities will insurers need to
again to penetrate niche and commercial
develop in order to quickly and accurately
markets
assess and respond to changes in
customers risks?
70
Insurance: Increasing Levels of Connectivity
Executive Summary
Context / Innovation
Increasing adoption of connected devices in cars, homes and lifestyles presents an opportunity for insurers to expand the use of telematics, i.e., the
integration of telecommunication and information processing
Key Implications
To reap the benefits of new business models enabled by connected devices, insurers must work closely with device and service providers and must
also define acceptable boundaries in utilising customer data
71
Insurance: Increasing Levels of Connectivity
The business model for property & casualty (P&C) and health insurance has
been refined over the centuries, but improvement opportunities still exist
Traditional P&C and health insurance processes
Traditionally, P&C and health insurance policies have been priced based on predictions made using historical information and best in class
statistical models
2
Claims
1
Servicing
Exploration & Underwriting
Binding Renewal
Submission (Quoting)
1 Risks are priced based on the data customers submitted and some 3rd party data, including historical data and predictive indicators, against
loss models and clusters created by insurers based on historical statistics
2 After binding, insurers and customers do not interact until renewal unless specific events are triggered such as claims (e.g., accidents) or
servicing (e.g., address change)
3 Customers usage and losses are reflected in their risk profile only in the underwriting process during the next renewal cycle
72
Insurance: Increasing Levels of Connectivity
Claims
Servicing
Exploration & Underwriting
Binding Renewal
Submission (Quoting)
73
Insurance: Increasing Levels of Connectivity
Connected devices and platforms emerging across cars, homes and lifestyles
present an opportunity to improve and expand the telematics insurance models
Drivers behind the emergence of connected devices
Run on operating systems (apps can be Monitor key metrics (e.g., temperature) and Quantify, track, monitor and manage daily
installed) and are connected to the internet automatically modify the environment activities through wearable devices
accordingly based on learning
Gather and transmit information on every Identify trends, patterns and
part of the vehicle Identify risk factors (e.g., smoke) and take recommendations based on quantified data
adequate actions for prevention / triaging
Communicate with other cars to prevent Measure, track and analyse vitals relevant
accidents Communicate with the environment to adapt for specific conditions and illness
to surrounding environments
4. Standardised Platforms
Increase interoperability; facilitate data gathering, management and utilisation; and improve coordination among connected devices
Key advantages
Easier utilization of data Real-time communication Mix-and-match of data
Gathered data can be shared easily via Data from vehicles, properties and individuals Data from multiple sources can be combined
connectivity and data-based services can be are gathered and analysed in real-time to and analysed to create more comprehensive
easily provided as apps through platforms provide timely, relevant insights and and accurate understanding of users
(i.e., a tap to install and opt in) information to users
74
Insurance: Increasing Levels of Connectivity
Proliferation of connected insurance models will create channels for P&C and
health insurers to better understand and engage more closely with their customers
Key characteristics of the future connected insurance business model
Data-Rich Engagement
Insurers will become a critical custodian of Insurers will be able to access additional
customer data as they gain access to channels to engage with their customers
behavioural data on their customers through mobile and other connected platforms
(e.g., vehicle movement), above and beyond and generate more relevant content for their
historical and static data available today customers based on data
(e.g., type of vehicle owned)
As insurers are enabled with additional data and communication channels from connected devices
and platforms, how will the value delivered by insurance companies evolve?
75
Insurance: Increasing Levels of Connectivity
How will increasing levels of connectivity impact the value delivered by insurance
providers?
Potential value proposition of connected insurers
1 Personalisation of insurance policies 2 Active management of the insureds 3 Broker of personal data
risks
Servicing Servicing
Real-time Risk Profile /
Claims Claims
Premium Adjustments
Connected devices allow insurers to track Connected devices create a bilateral channel Connected devices allow insurers to gather
and continuously refine individual risk for insurers to interact more frequently ongoing behavioural data from their
profiles with empirical data, enabling more with their customers and proactively get customers to gain a fuller view of customer
accurate underwriting of individual risks involved in managing their customers identity and lifestyle
risks (e.g., health consultation based on
Furthermore, connected devices enable a Working with retailers and other external
data gathered through wearables)
channel for consumers to purchase event- parties, insurers use the increased
based coverage to personalise their policies By developing concierge functions, knowledge on their customers to deliver
for better protection insurers can actively manage their clients relevant, financially beneficial information
risk, lower losses and deliver additional (e.g., offers)
value to customers
The following scenarios illustrate potential outcomes generated by the innovations discussed in this topic, particularly in response to the key
question above they are not meant to be future predictions
These scenarios are illustrations of particular aspects of the potential future and are not meant to represent a complete view of the market and
competitive landscape in many cases, some or all scenarios could be realised at the same time
76
Insurance: Increasing Levels of Connectivity
Claims
3rd Party Data
Servicing
Case studies
Leading mobile platforms are creating Wearable devices that can track users lifestyle Smarter sensors and control devices (e.g., fire
standardised platforms that enable the data are gaining popularity and a number of alarms, thermostats) are gaining popularity in
development of apps that can be installed across portable health solutions to track key vitals are households and aggregation platforms are
many vehicles from different automakers. These being developed. Mobile OS and device makers emerging to establish connection among and
apps can enable real-time gathering of granular have also begun to introduce platforms to provide central management of those devices
driving data connect and aggregate data from these devices and sensors
77
Insurance: Increasing Levels of Connectivity
Widespread adoption of personal connected devices Customers More customised insurance premiums and coverage
Sophisticated analytical capabilities to use real-time data streams to Premiums that are more reflective of true personal
constantly update underwriting of risks risks less cross-subsidisation between customers
Collaboration between regulators, insurance companies, device
Incumbents Increased focus on data ownership
manufactures and telecommunications operators
Need to create partnerships with other ecosystem
Customers willing to share additional personal data with insurers
players
Complete redevelopment of underwriting models
Opportunities Risks
More accurate underwriting and premium calculation on the basis of Management and protection of sensitive, personal data generated by
available individual data connected devices
Increased stickiness of customers to their insurers As cross-subsidisation decreases, accessibility to insurance becomes
a concern for high-risk customers
Red-lining customers who elect not to participate in or are excluded
from personalised insurance based on data from connected devices
78
Insurance: Increasing Levels of Connectivity
Claims
Servicing
Exploration & Underwriting
Binding Renewal
Submission (Quoting)
Marmalade Insurance, a UK based insurance company, targets less- Vitality Healths app encourages its customers to voluntarily track and
experienced driver segments with its telematics offering by providing share lifestyle data with the insurer. The app then provides analysis and
feedback and e-learning based on driving behaviour to promote safer feedback based on the gathered data, and rewards customers for
driving healthier lifestyle choices with gifts and other benefits
79
Insurance: Increasing Levels of Connectivity
Development of advanced analytical capabilities to predict future risks Customers Reduce risks and better manage future risks through
insurers advice
Clear understanding of liabilities associated with advice
Customer trust in insurers to manage their risks and provide advice Incumbents The implementation of concierge functions becomes
a core value proposition
Increased focus on behavioural indicators of risks
(i.e., what matters and when to engage)
Build customer loyalty by becoming partners to
customers
Opportunities Risks
Opportunity for insurers to evolve into a service provider that offers Dealing with losses resulting from policy holders rejection of advice
differentiated services to customers (e.g., health consulting)
Dealing with losses resulting from absence of advice or the delivery of
Lower claims due to proactive management of risks and longer-term incorrect advice
customer education
Risk of fraud from customers gaming the connected systems
80
Insurance: Increasing Levels of Connectivity
Claims
Servicing
Exploration & Underwriting
Binding Renewal
Submission (Quoting) Offers
Data
3rd party Data
Retailers /
Data Analytics
External parties
While many P&C insurers already partner with retailers to offer relevant discounts, the use of behavioural data is still
limited.
Insure the Box, a UK auto insurer, leverages telematics devices installed on cars to provide theft recovery services.
81
Insurance: Increasing Levels of Connectivity
Insurers gain customer trust as guardians of personal data by clearly Customers Financial incentives from individualised offers
demonstrating alignment of interests with customers and providing
sufficient value in exchange for their personal data Incumbents Decrease in claims and losses
Compliance with existing and future regulations on usage of personal Potential for partnership revenue
data
Halo effect with customers based on providing
additional value
Opportunities Risks
Incentives may support lower risk behaviour by policy holders (e.g., not Data might be misappropriated by external parties
delaying tire replacement)
Risk of losing customers trust, particularly if relevance of offers is low
82
Insurance: Increasing Levels of Connectivity
! Real-time data and analytics: Insurers ability to gather and analyse data in real-time will become more essential to enabling and optimising the
benefits of connected insurance models
! Strategic role of insurance business: As insurers gather behavioural data from customers and become more sophisticated in understanding
risks, the role of insurance within retail financial institutions will become critical in understanding customers financial status and needs (e.g.,
Bancassurance players may benefit significantly from insights generated from the connected insurance models)
! Importance of customer lifecycle management: As insurers relationships with customers become stickier, it will become more difficult for
insurers to steal market share. Capturing desirable customers early in their lifecycle will become critical to building revenue
? How will the individual behavioural data generated from connected devices be sourced? What issues will arise related to the aggregation and
ownership of this new data?
! Reduced cross-subsidisation: Insurers ! Separation of distribution and customer ! Merchant relationships: In order to deliver
current business model of cross-subsidising management: Insurers will need to develop relevant value to customers, insurers ability
across customers will no longer feasible direct digital channels to interact with to manage relationships with merchants will
when a majority of insurance policies and customers and manage their risks, become more critical, which is not a core
premiums are highly individualised regardless of their distribution strategies capability in the insurance industry today
and channels (e.g., brokers)
? How will insurers successfully demonstrate ? Where will the new boundaries lie in
the value new offerings to early adopters ? How will the insurers incentivise customers selecting desired customers and utilising
given their lack of historical data and limited to participate in the connected models of their data to generate value (e.g., 3rd party
experience analysing these data streams insurance and modify their behaviours as offers) while ensuring fairness and privacy?
they play more proactive role in managing
? How will less-desirable customers be
customers risks?
served as insurers become able to exclude
them, particularly considering the public
nature of some insurance products (e.g.,
health, auto)?
84
Deposits & Lending: Alternative Models of Lending
Executive Summary
Context / Innovation
Following the financial crisis, lower risk appetites among retail banks have significantly limited access to traditional bank intermediated lending. This
is particularly true among sub-prime borrowers
Over the same period of time alternative lending platforms leveraging P2P models have experienced rapid growth. These platforms use alternative
adjudication methods and lean, automated processes to offer loans to a broader base of customers and a new class of investment opportunities to
savers
Key Implications
Emerging alternative lending models create both competitive threats and evolutionary opportunities for financial institutions, making it important for
incumbent institutions and alternative platforms to develop more integrated partnerships and learn from and share each others capabilities
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Deposits & Lending: Alternative Models of Lending
Typically, interest received on loans are higher than interest paid on savings to
account for default risks and other operational costs
The breadth of borrowers served is dependent on each banks risk appetite, which is Not served by
generally related to the size and scale of the banks (e.g., riskier borrowers tend to traditional
Risk- retail banks
be served by tier 2/3 banks or balance sheet lenders) seeking High-
risk
Following the 2008-2009 global financial crisis, customer trust Limited Access Slow Speed
surrounding financial services quickly dissipated A growing lending gap limits Traditional adjudication processes
the availability of loans to with multiple layers of approval
Regulators also mandated increased safety measures around loans individuals and companies with limits the banks ability to process
(e.g., higher capital requirements) which resulted in many banks higher risk profiles loans in timely manner
tightening loan requirements
This mutual loss of confidence created a lending gap, leaving a Margin for Error Poor Customer Experience
considerable portion of borrowing needs underserved by financial Traditional adjudication models Highly manual adjudication
institutions and credit scores tend to miss processes and requirements fall
suitable lending opportunities in short of increasing expectations
Furthermore, customer preferences in financial services are rapidly a virtual economy on customer experiences
changing, demanding more transparency, efficiency and control over
their savings and loans Limited Control Low Return
Borrowers have limited visibility Operational inefficiency and
and control over the uses of funds reduced risk appetite of banks
and interest rates earned result in low returns on savings
86
Deposits & Lending: Alternative Models of Lending
Alternative lending platforms leverage P2P models and lean operations to offer
seamless services to a broader base of customers
Description of alternative lending models
Savers Borrowers
Alternative lending institutions have emerged to fill gaps in the traditional lending Alternative
model. New industry players are emerging across the globe, showcasing a myriad Risk- Platforms Low-
averse risk
of value propositions and strategies that are challenging traditional business models
Online and P2P (P2P) lending platforms provide customers low-cost, fast, flexible,
and more customer-oriented alternatives to mainstream retail banking that
traditional financial institutions once dominated
While the business models of alternative lenders often differ from one another, most
providers directly link borrowers and lenders, employ advanced adjudication
methods and streamline processes
Risk-
seeking High-
risk
87
Deposits & Lending: Alternative Models of Lending
Traditional and alternative lending models differ significantly in their flexibility and
allocation of risk
Traditional lending intermediaries (e.g., retail banks) take risks themselves and leverage their scale to provide stability to lenders (depositors),
however their focus is typically limited to low-risk borrowers and they charge high fees (in form of interest spread). Therefore the needs of risk-seeking
savers and high-risk borrowers are not fully served by traditional banks
Alternative lending platforms typically provide an online marketplace where lenders have the flexibility to pick and choose a desired risk portfolio. The
marketplace generates lenders scores and typically takes a cut of loan originations and ongoing loan revenues but does not directly take risks
Traditional lending intermediaries Alternative lending platforms
Savers Borrowers Savers Borrowers
Ecosystem Alternative
Risk- Low- Risk- Platforms Low-
averse risk averse risk
Retail
Banks
Risk- Risk-
seeking High- seeking High-
risk risk
Description Traditional intermediaries hold savings from retail, Alternative lending platforms directly match lending needs
commercial and institutional clients and provide interest in of borrowers with willing lenders (individuals or institutions)
return
Contractual obligations exist directly between borrowers
Using those funds, traditional intermediaries originate and lenders and platforms provide mere intermediation
loans to borrowers based on their creditworthiness and and adjudication
earn interest (the differential between interest, or spread
Alternative platforms are compensated through
is the intermediarys return)
originations fees or a percentage of interest payments
Advantages Lenders savings are protected by the intermediaries Lending processes and risk profiles are transparent to both
reserves and by deposit insurance schemes borrowers and lenders
Traditionally underserved borrowers gain access to loans
The complete pooling of savings and loans most effectively
and diverse risk appetite of lenders is met
mitigates individual default risks
Reduction of transaction costs
Limitations Lenders do not have flexibility to determine the desired Investments may be more susceptible to individual default
level of risk and return risks even with portfolio approach, especially for smaller
investments
Primary focus on low risk loans exclude higher risk
borrowers, depending on the market conditions Guarantees on the investments are limited
88
Deposits & Lending: Alternative Models of Lending
While enabling these future state characteristics, how will emerging alternative models of lending
change the market dynamics of traditional lenders?
89
Deposits & Lending: Alternative Models of Lending
How will emerging alternative models of lending change the market dynamics of
traditional lenders?
Potential roles of alternative lending platforms
Alternative platforms successfully move Traditional institutions and alternative Traditional institutions transform their
upstream to replace traditional institutions in platforms continue to cater to different processes and technologies or absorb
intermediating risk-averse savers and low- classes of investors and borrowers alternative platforms to adopt the key
risk borrowers features of alternative lending business
Some smaller institutions with limited lending
model
Restricted by legacy processes / bandwidth may partner with alternative
technologies and reserve requirements, lenders through customer referral and Traditional institutions serve as a lending
traditional institutions lose their share to capital investments to address the intermediary for both low-risk and high-
leaner and more consumer-friendly underserved needs of their customer base risk borrowers, building on their trust and
alternative lending platforms reliability among customers
The following scenarios illustrate potential outcomes generated by the innovations discussed in this topic, particularly in response to the key
question above they are not meant to be future predictions
These scenarios are illustrations of particular aspects of the potential future and are not meant to represent a complete view of the market and
competitive landscape in many cases, some or all scenarios could be realised at the same time
90
Deposits & Lending: Alternative Models of Lending
Risk-seeking High-risk
Case studies
Launched in 2005 as the worlds first P2P lending service, Launched in 2006, CreditEase started as a Chinese P2P
Zopa targets only prime lenders as determined by its lending service, aiming to bridge urban lenders with excess
adjudication model, and competes with traditional institutions funds and an underbanked rural population with borrowing
on rates / returns and a more seamless originations process. needs. Building on its success CreditEase has grown to offer
In 2014, Zopa achieved a default rate of 0.38 percent, other financial products and services, such as wealth
significantly lower than traditional institutions. management products for high net worth customers.
91
Deposits & Lending: Alternative Models of Lending
Sufficient customer knowledge and trust in alternative lending platforms Customers Customers across the spectrum gain ability to select
by both borrowers and lenders desired risk / return mix
Relevant authorities need to be comfortable with alternative lending Some investments become more susceptible to
platforms accounting for a significant portion of total loans originations default risk
Increased liquidity of investments through the development of
secondary markets (allowing them to compete with money market Incumbents Loss of market share to alternative lending platforms
funds and other highly liquid savings products) Reduced ability to cross-subsidise financial products
Negative impact on capital ratio as deposits erode
Opportunities Risks
Creates a new asset class once critical mass for liquidity is achieved Uncertainty around the stability of the ecosystem in a high interest rate
environment
Overhead costs for alternative lending platforms may increase as their
scale grows, eroding their cost advantage
Conflict of interest may arise as alternative lending platforms act as
rating agencies within their marketplace but also benefit from the
origination of new loans
92
Deposits & Lending: Alternative Models of Lending
Alternative
Platforms
Risk-seeking High-risk
Case studies
In 2014, Lending Club (an alternative lending platform) and Union Bank (a U.S. regional bank) formed a strategic
alliance. Under the agreement, Union Bank plans to purchase personal loans through the Lending Clubs platform and
work with the platform on the co-creation of new credit products. Through the partnership, Union Bank can meet the
borrowing needs of its sub-prime customer segments while earning higher interest on its strong balance sheet.
93
Deposits & Lending: Alternative Models of Lending
Continued regulatory acceptance of alternative lending models serving Customers Customers are more likely to trust alternative lending
the sub-prime market platforms as they become associated with
established financial institutions
Alternative lenders do not gain sufficient awareness / trust from the
low-risk borrower and investor base
Incumbents The ability to serve high-risk customers without
Banks continue to have a limited appetite for high-risk lending risking losing other business lines (e.g., transaction
accounts)
The ability to earn originations revenue from high-risk
borrowers without taking high risks
Opportunities Risks
Opportunity to create a more inclusive financial ecosystem and Reputational risks for traditional institutions who partner with alternative
mechanisms for customers to build / rebuild creditworthiness without lenders
the main financial ecosystem taking direct risks
Established institutions that refer customers to alternative lending
platforms may fuel the growth of those platforms, allowing them to
evolve into more direct competitors
94
Deposits & Lending: Alternative Models of Lending
Capabilities of
Alternative Capabilities
Alternative Platforms
Risk-seeking High-risk
Case studies
Advanced Merchant Payments (AMP) helps traditional financial institutions transform and supplement their
adjudication models with alternative methods to improve underwriting accuracy of small / medium enterprise
loans. For instance AMP enables financial institutions to leverage merchant acquiring data in adjudication,
which is more accurate indication of a companys cash flow and readily accessible by financial institutions.
95
Deposits & Lending: Alternative Models of Lending
Sufficient pressure from alternative lending platforms on traditional Customers Significant improvement in customer experience and
intermediaries to justify significant investments in new business availability of loans / investment opportunities without
processes and IT infrastructure customers having to change service providers
The ability of traditional financial institutions to achieve cost
Ability to directly serve their customer bases borrowing
competitiveness with alternative lending platforms by adopting Incumbents
needs, even for the high-risk customers
alternative adjudication and process improvements
Improved profitability due to adoption of alternative
adjudication methods
Reduced leakage during lending application process
due to streamlined straight-through processing
Opportunities Risks
Accessibility to the financial system can be extended to more Potential risks might be created by channelling additional credit volume
customers without changing the overall ecosystem through the traditional financial institutions
Financial institutions ability to more accurately understand risks Reputational risks associated with running alternative lending platforms
associated with borrowers and loans will improve that specialise in high-risk loans
96
Deposits & Lending: Alternative Models of Lending
! Erosion of deposits and investment products: As savers leverage alternative lending platforms as short and medium-term investment vehicles,
erosion will occur among traditional deposits and investment products (e.g., money market funds) offered by traditional institutions, ultimately
leading to some balance sheet shrinkage
! Distributed credit: Customers savings and credit portfolios could become distributed over a large number of alternative platforms with varying
reporting standards, making it difficult for financial institutions to measure each customers creditworthiness on a consistent basis
? How will retail banks continue to maintain their ability to serve lending needs of customers as the erosion of deposits to alternative lending platforms
leads to a smaller balance sheet?
? How will retail banks continue to accurately and consistently assess creditworthiness as customers loan portfolios become distributed and the
measurement of creditworthiness becomes increasingly diversified?
Scenario 1: Disintermediation of traditional Scenario 2: Complementing traditional Scenario 3: Driving change within traditional
intermediaries intermediaries intermediaries
98
Deposits & Lending: Shifting Customer Channel Preferences
Executive Summary
Context / Innovation
Driven by generational shifts and rapid consumer adoption of technology, customers channel preferences for financial products and services are
shifting rapidly
These changing customer preferences have manifested in a number of innovations, from the development of virtual banks to the evolution of mobile
banking capabilities, and the development of banking as platform movement
Key Implications
As customers demands continues to grow, it will become increasingly difficult for financial institutions to cater to all the needs of customers. In the
future financial institutions should consider what portion of their business they would like to retain and what partnerships can deliver better value
to customers
99
Deposits & Lending: Shifting Customer Channel Preferences
Fully virtual community bank in Germany, offering Provides financial institutions with a mobile / online solution Runs an app store for its customers to download a wide
innovative products such as game currency wallet and that enables fast, easy and low cost consumer to consumer range of additional functionalities to its core online and
high degree of social media integration money transfer via email and text across institutions mobile platform by exposing its API to external developers
100
Deposits & Lending: Shifting Customer Channel Preferences
Segment-based Externalised
Service offerings will evolve to target and meet Financial institutions, especially the smaller
the needs of each segment or community, and newer organisations, will shift away from
moving away from one-size-fits-all mass in-house approach to relying on external
market approach providers to deliver online and mobile solutions
in a timely manner
What will be the future role of financial institutions in response to continually shifting customer
preferences?
101
Deposits & Lending: Shifting Customer Channel Preferences
1 Disaggregation of customer 2 Enabling the ecosystem of non 3 Embedding closer into customers
relationship ownership traditional providers daily lives
Increasing customer demand and growing Light or virtual financial institutions emerge Financial institutions leverage virtual
trust with technology companies enable that only focus on account management, channels to offer frequent interactions with
non-financial companies that excel in offering a comprehensive suite of financial customers, above and beyond todays
creating digital customer experience to products by partnering with a range of needs-based transactions, to strengthen
disaggregate distribution of financial niche alternative providers of financial customer relationships
services and ownership of customer services (e.g., alternative lending,
Virtual channels enable financial institutions
relationships alternative payment rails, etc.)
to offer not only financial value-adds but
Traditional financial institutions evolve to These partnerships allow a network of also non-financial services to customers
become providers of financial products, alternative providers of financial services (e.g., concierge services for high value
focusing on sophisticating the products with to compete directly against incumbent full- customers) without significantly increasing
excess capacity service retail banks costs
The following scenarios illustrate potential outcomes generated by the innovations discussed in this topic, particularly in response to the key
question above they are not meant to be future predictions
These scenarios are illustrations of particular aspects of the potential future and are not meant to represent a complete view of the market and
competitive landscape in many cases, some or all scenarios could be realised at the same time
102
Deposits & Lending: Shifting Customer Channel Preferences
Case studies
Many leading technology players chose to enter the mobile payments space by partnering with established financial institutions and leveraging white-
label products. This allowed them to focus on their own expertise in customer interactions (e.g., marketing, UX, offers) while relying on their financial
partners infrastructure and capabilities. Paypals mobile payment solution used Discovers payment network infrastructure for acquiring, approval,
clearing and settlement, while a core component of Google Wallets mobile offering involves a virtual pre-paid Visa card issued by US Bancorp.
103
Deposits & Lending: Shifting Customer Channel Preferences
Non-traditional market players must be perceived as highly trustworthy Customers Significantly improved customer experience
and must provide a sufficiently superior offering to justify a change in
Changes the ways customers perceive their banks
financial institutions
and technology providers
Seamless integration among players involved in the value chain
Incumbents Acceleration of existing shifts in the dominant
distribution strategy away from branch based sales
Pressure on retail banks to cannibalise existing
business by creating competing partnerships
Loss of customer ownership and commoditisation of
core services drives decreased bargaining power
Opportunities Risks
Financial institutions will be able to develop a broader suite of more Financial institutions may lose control over the ownership of customers
sophisticated products as they focus solely on manufacturing and become at the disposal of technology providers
Potential for financial products and services to integrate more Customer loyalty and stickiness may erode as customers gain more
seamlessly with other services offered by technology players visibility and can more readily compare financial institutions and
products
Financial institutions no longer need to worry about customer
experience management Technology players may lack regulatory familiarity with requirements
on product sales and the emergence of more personalised financial
products may create regulatory uncertainties
104
Deposits & Lending: Shifting Customer Channel Preferences
105
Deposits & Lending: Shifting Customer Channel Preferences
Existence of account providers with the ability and incentive to connect Customers Creation of market for each product class leads to
with many competing providers of financial services increased choice and potentially lower prices
Services and products of alternative niche providers must in aggregate Greater control over the selection of financial
fulfill the core requirements of most clients products
The network of alternative niche providers must provide a sufficiently Lower loyalty to financial institutions
compelling value proposition for customers to consider changing Increased competition with alternative niche
financial institutions Incumbents
providers who are now able to achieve greater scale
Account providers must be able to act as a trusted verifier of services Challenge to pricing of cross-subsidised products
offered by alternative niche providers with increased competition from mono-line products
Regulatory comfort with significant growth in the use of alternative Pressure to integrate with 3rd parties to deliver
niche products cheaper and more customer friendly solutions
Opportunities Risks
Decrease in cross-subsidisation will benefit the consumers of those With increased choices, customers may face cognitive challenges to
products and services that are currently subsidising other products select the right products and providers for them
Increased pressure for innovation within each product line Liability may be unclear in cases of fraud or service failure
Non-bank virtual account providers may lack sufficient understanding
of risks associated with niche products
Decrease in customer loyalty and stickiness
106
Deposits & Lending: Shifting Customer Channel Preferences
Financial Transactions
Primary
Future Account Financial Value-adds Customers
Institution
Non-Financial Services
Key changes
Branch & Digital / Daily Touchpoints
Case studies
Transactional Innovation New Services
Voice recognition and Cardless ATM Provide instant digital Location-based Augmented reality Digital lockbox for
command withdrawals receipts reward offers new home finder important documents
107
Deposits & Lending: Shifting Customer Channel Preferences
Continued competitive pressure from disruptors on incumbent Customers Access to new and better integrated quasi-financial
institutions to innovate services
Financial institutions ability to understand customers unidentified Incumbents Importance of the traditional branch as a source of
needs and develop competitive offerings to cater to them customer interaction will decrease
Pressure to acquire or develop new capabilities
Improved stickiness of customers
Opportunities Risks
Opportunities to solidify customers trust in financial institutions by New risks and liabilities may arise as financial institutions expand to
playing bigger roles offer quasi-financial services
Opportunities to use 3rd party services to create more literate, better Potential to leave out customers unfamiliar with / unwilling to adopt
protected clients technologies as financial institutions distribution strategies change
108
Deposits & Lending: Shifting Customer Channel Preferences
! Reduced cross-subsidisation: Whether they are anchored around non-traditional players or financial institutions, financial products and services
will increasingly be offered on a stand-alone basis limiting incumbent institutions ability to competitively cross-subsidise
! Partnership with non-traditional players: Financial institutions ability to work with non-traditional players will be come essential to creating new
distribution channels, providing competitive product offerings and enabling non-traditional services
! Redefining the role of financial institutions: Financial institutions will need to realign their long-term strategy based on how they define their
shifting role with varying emphasis on product manufacturing and creation of customer experiences
? How will the emergence of competitive unbundled products and resulting limits on cross-subsidisation impact the overall structure and business
model of retail financial institutions?
Scenario 1: Disaggregation of customer Scenario 2: Enabling the ecosystem of non Scenario 3: Embedding closer into customers
relationship ownership traditional providers daily lives
! Reduced access to customer data: As ! Reduced control over customer ! New set of risks: As financial institutions
customers consume financial services on a experience: Even though financial evolve their core offerings to stay more
a-la-carte basis, financial institutions will no institutions may still act as a gateway, their relevant in customers daily lives, they may
longer own the majority of individuals ability to control end-to-end customer need to expand to unfamiliar and less-
financial data, limiting their ability to experience will be reduced defined areas, which may generate new
independently create more compelling risks and compliance issues that are not
? What will be the core value proposition of
products and services common to financial institutions today
traditional financial institutions to customers
? What will be the products and services that compared to technology players, ? What tangential products and services
anchor customer relationships to retail considering traditional institutions strengths could financial institutions offer in the future,
financial institutions in the future; as perceived by customers? leveraging their strengths (e.g., custodian of
particularly as customers move toward customer data)?
? How open and collaborative will financial
shopping for financial products through
institutions choose to be with other
technology players (e.g., Amazon, Google)?
institutions and new entrants considering
the trade-offs between control and agility?
110
Capital Raising: Alternative Funding Platforms
Executive Summary
Context / Innovation
Traditionally, capital raising activities have been facilitated by specialised financial institutions, leveraging their deep expertise to identify and
support investment opportunities. Access to investments in these intermediaries has been limited to select high net worth and institutional investors
In the face of growing interest in start-ups and digital democratisation, a series of alternative funding platforms have emerged, widening access to
capital raising activities and providing funding to a greater number of companies and projects
Key Implications
The opportunities created by the proliferation of alternative capital raising platforms likely outweigh the risks they pose to incumbent institutions as
they enable a more diversified pipeline of investment opportunities to support a richer innovation ecosystem
111
Capital Raising: Alternative Funding Platforms
Emerging pressure on traditional lending models Key challenges with traditional models
Increased connectivity, the success of internet start-ups, changing Limited Access Timely Supply of Capital
consumption behaviours and increasingly entrepreneurship-friendly Access to capital can be limited Lengthy structuring and fulfillment
policies have fueled a rapid increase in the number of start-ups, making by the size, history and process may limit timely access to
effective screening and selection processes by traditional funding relationships of a business capital
options (e.g., venture capital) increasingly difficult
Standardised Measurement Loss of Control
To maintain control and agility, rapid growth companies continue to Appeal to investors is determined Businesses may lose control over
delay accessing the public pool of capital via IPOs, aided by policies strictly by risk / return and funding key decisions to investors and
and regulations permitting widening of investor base without going may be limited for opportunities individual investors do not have
public (e.g., Jumpstart Our Business Startups Act (JOBS Act)) with alternative propositions direct control over their
As a result, an imbalance is created between supply and demand for investments
capital in the private market, calling for alternative models to provide Potential for Inadequate Funding
the funding required The ability to meet funding needs at a fair price
can be deterred by the capability of the
intermediating institution
112
Capital Raising: Alternative Funding Platforms
Alternative funding platforms enable the crowd to play a bigger role in providing
capital to investment opportunities
Description of alternative funding platforms
Alternative funding platforms provide an opportunity for businesses to interact Investors Mass High Net Worth Institutional
directly with individual investors to widen options for raising capital
Instead of providing investment advice or directly marketing investments in equity
or debt capital, alternative funding platforms aggregate investment opportunities,
provide a standardised view of the opportunities and facilitate legal structuring of Facilitator Alternative Funding Platforms
113
Capital Raising: Alternative Funding Platforms
Description Equities and debts are structured and sold through an Alternative funding platforms act as a facilitator providing an
intermediating institution, mainly to institutional investors online marketplace for individual investors to discover and
invest in businesses and projects, relying on the wisdom of
Access to the investment opportunities are limited for
the crowd or other seasoned investors in selection
individual investors and they indirectly invest through
institutional investors instead, without control over where Contractual obligations exist directly between individual
their funds are invested investors and investment opportunities
Advantages Businesses and investors can rely on the expertise of Individual investors gain direct visibility and control over
intermediating institutions to raise adequate funding and investment target selection and allocations
select more promising investment opportunities
Individual investors can gain higher return on successful
Aggregation of capital allows intermediaries or institutional investments since they are made directly
investors to effectively represent their interests to the
More businesses and projects gain an opportunity to fund
funded businesses management
their capital needs
Limitations Individual investors have limited control over how their Businesses will receive less specialised advice and
funds are invested in businesses and projects support than they would from specialised intermediaries
Funding options are limited and stratified depending on the Individual investors liquidity is highly limited, especially
size and maturity of the business with pre-IPO equity funding
114
Capital Raising: Alternative Funding Platforms
The proliferation of alternative funding platforms will make the capital raising
market more diversified and accessible
Key characteristics of the future capital raising market
In enabling these future characteristics, how will the evolution of distributed capital raising impact
the role of traditional intermediaries?
115
Capital Raising: Alternative Funding Platforms
How will the evolution of distributed capital raising impact the role of traditional
intermediaries?
Potential role of alternative funding platforms
1 Incubator of seed-stage companies 2 Provider of funding to lower return 3 Evolution into an alternative funding
investments option for larger companies
Investors Mass* High Net Worth Institutional Investors Mass* High Net Worth Institutional Investors Mass* High Net Worth Institutional
Facilitator Alternative Funding Venture Capital / Private Facilitator Alternative Funding Venture Capital / Private Facilitator Venture Capital / Private
Alternative Funding Platforms
Intermediaries Platforms Equity / Investment Banks Intermediaries Platforms Equity / Investment Banks Intermediaries Equity / Investment Banks
Peer-based funding platforms solidify their Peer-based funding platforms focus on Larger companies leverage peer-based
position as the capital raising intermediaries investors with motives beyond financial platforms as an alternative channel to
for higher risk seed-stage companies return (e.g., sustainability and social engage and raise capital from their
responsibility interests) to provide capital to customer base
Extending funding opportunities to more
low-return investment opportunities that
seed-stage companies makes the overall In addition to benefiting from implicit
otherwise would not have qualified to raise
capital raising ecosystem richer by marketing and increased customer loyalty,
capital through traditional intermediaries
increasing the number of investment larger companies further reduce costs of
opportunities eligible for later stage Seed-stage companies are funded by capital by providing non-financial
venture capital financing traditional angel investors and venture incentives to customers (e.g., future
capitalists who can provide appropriate discounts)
guidance for growth
The following scenarios illustrate potential outcomes generated by the innovations discussed in this topic, particularly in response to the key
question above they are not meant to be future predictions
These scenarios are illustrations of particular aspects of the potential future and are not meant to represent a complete view of the market and
competitive landscape in many cases, some or all scenarios could be realised at the same time
116
Capital Raising: Alternative Funding Platforms
Case studies
Seedrs is an online peer-based capital raising platform for individual investors to discover and invest in
seed-stage ventures. Investment opportunities at Seedrs provide equity shares to investors and only those
investments that meet their funding target receive funding. Seedrs acts as a custodian for the individual
investors equity to protect their interests and enable further rounds of investment.
117
Capital Raising: Alternative Funding Platforms
Accumulation of a critical mass of investors who are interested in Individual Diversify their portfolio adding on high-risk and
participating in peer-based funding models Investors potentially high return investments
Investors have access to sufficient high-quality and accurate Increased level of engagement throughout the
information to conduct due diligence investment process
Investors have sufficient financial literacy in order to understand high-
risk investment opportunities Incumbents Pressure on margin for angel investors and seed-
stage venture capitals
Regulators to implement well-defined and well-balanced investor
protection rules Increased maturity of investment opportunities
Increased number of potential investment targets
Opportunities Risks
Creates a channel to source investment opportunities for later-stage Many investors may not understand the risks associated with even the
venture capitals that have been approved by the potential customer most promising seed-stage investments thus increasing the risk and
base (e.g., VC creating a crowd-funding platform to incubate seed- impact of fraud
stage companies)
Risk of excessive dilution by venture capitals during later-stage funding
rounds
118
Capital Raising: Alternative Funding Platforms
119
Capital Raising: Alternative Funding Platforms
Limited funding opportunities for local start-ups through traditional Individual Access to investments with low financial return but
institutions Investors high social return
Existence of communities that accept a lower than market return in Low cost capital for socially beneficial projects
order to make a project succeed
The ability for investors to closely identify with their
investments
Opportunities Risks
Provides funding to local and purposeful projects with high social return Potential misallocation of funds to high profile but ineffective projects or
that would not be properly served by the traditional ecosystem over-concentration of funds into certain types of projects
Institutional investors could get access to investment opportunities they Potential for higher than expected rate of default on debentures for
dont have access to today. This would help them meeting their triple products unable to meet even the lower than market expectations
bottom line goals
120
Capital Raising: Alternative Funding Platforms
121
Capital Raising: Alternative Funding Platforms
Fully loaded cost of funding through peer-based platforms must be Customers / Feel more personally involved with their favourite
lower than the costs incurred in the traditional financial ecosystem Investors businesses
Alternative funding platforms should be able to provide equivalent Act as partners to investment targets strategic
levels of information to mass market investors as institutional investors decisions
receive from intermediaries
Gain access to an asset class unavailable to
individual investors today (e.g., corporate bonds)
Opportunities Risks
Businesses can achieve non-financial gains (e.g., revealed preference Businesses issuing securities without professional advice from capital
in the market, marketing, customer loyalty) through financial activities raising intermediaries risk underpricing and under-subscription
Individual investors may lack financial sophistication to properly
understand the covenants of financial products or assess a suitable
return for the risks entailed
Reputational risks for businesses when issues arise with their financial
products
122
Capital Raising: Alternative Funding Platforms
! Competition for investments: While distributed capital raising platforms and traditional intermediaries may have limited overlap in investment
opportunities, traditional intermediaries will need to compete for investments, especially from angel investors, against distributed platforms where
investors can play more active roles
! Shortening capital raising cycles: With access to more diverse funding options, new companies will be able to grow at a quicker pace and the
average time between funding stages will be shortened
! Alternatives to wealth products: As individual customers gain access to investment products with potential higher returns and / or better aligned
to their interests, their mix of investments in traditional wealth management products will shift over time
? How will traditional institutions, from investment managers to investment banks, participate in distributed capital raising platforms to maximise the
benefits from the broadened capital raising market (e.g., direct entry, sourcing partnerships, investment vehicles, valuation model)?
Scenario 1: Incubator of seed-stage Scenario 2: Provider of funding to lower Scenario 3: Evolution into an alternative
companies return investments funding option for larger companies
! Changes to sourcing strategy: ! Channel for new investment ! Importance of selection: Traditional
Advantages of distributed platforms as a opportunities: Distributed platforms may intermediaries' ability to provide value not
sourcing tool, such as testing with future enable traditional institutions to directly linked directly to financing will become more
customer base, will create pressure to participate in smaller investments without important if they wish to maintain their
traditional internally-driven sourcing models significant efforts (e.g., entry of hedge current role
funds)
? How will traditional intermediaries discover ? ? What differentiated value will traditional
unique investment opportunities and What are the hurdles that prevent traditional intermediaries offer to compete against
generate exclusivity when most investment institutions from participating in smaller distributed platforms that successfully move
opportunities become visible to competition investments and how may distributed upstream?
via distributed platforms? platforms resolve them?
124
Investment Management: Empowerment of Individuals
Executive Summary
Context / Innovation
The wealth management industry has suffered from the loss of customer trust since the financial crisis. This trust has been slow to recover in the
face of continued economic uncertainties
In this environment, a number of disruptors, from automated wealth management services to social trading platforms, have emerged to provide low-
cost, sophisticated alternatives to traditional wealth managers. These solutions cater to a broader customer base and empower customers to have
more control of their wealth management
Key Implications
The emergence and growing popularity of automated wealth management services and customer empowerment tools will pose a tangible threat to
the traditional practices of the wealth management industry. However, incumbent institutions who can embrace these innovations and streamline
their processes will be able to provide higher value services to a broader customer base
125
Investment Management: Empowerment of Individuals
The wealth management industry has suffered a significant loss of customer trust
and increased regulatory scrutiny following the financial crisis
Overview of the wealth management industry
Offered by variety of financial institutions, including private banks, registered investment advisors, bank brokers/ insurers
Targets higher-end of customers with investable capital, such as ultra high net worth, high net worth and mass affluent customers
In recent decades, wealth managers have begun to expand their focus High fees limit access to wealth management
from high net worth to mass affluent segments Accessibility
services for mass and mass affluent clients
Increased regulations on consumer protection requires banks to advise
customers in a more structured way, raising the bar for new entrants
Customer Customers expectations of personalisation, efficiency
Increased transparency into investment performance is allowing Expectation and low costs continue to grow
individuals to better compare products
Continued economic instability has left customers uncertain about the Ability to meet customer needs is limited by
economic outlook and reticent to pursue active strategies. This trend Agility
organisation structures and technology infrastructure
toward passive products has placed pressure on pricing
126
Investment Management: Empowerment of Individuals
Allow customers with fewer assets Commoditises previously high- Improves the financial literacy of Leverages the capabilities existing
to receive financial advice by value, manual-intensive services at customers by readily providing within the crowd to create more
reducing the minimum investment a low cost via automation. This analysis of their financial position accurate understanding of the
threshold and management fees by minimises the need for manual and empowering them with tools to market and provide low-cost
leveraging automated algorithms intervention easily create and execute alternatives to investment funds to
investment strategies customers
127
Investment Management: Empowerment of Individuals
As these disruptive innovations create pressures for the wealth management industry by
empowering individuals, how will the wealth management landscape evolve?
128
Investment Management: Empowerment of Individuals
How will the empowerment of individuals through automated systems and social
networks transform the business of investment management?
1 Erosion of the mass affluent market 2 Revamping the value proposition of 3 Lowering bars to act as an
wealth managers investment expert
Cheaper and faster online tools and Automated investment management Empowered with intuitive, affordable and
automated services that originally catered to platforms commoditise traditionally high- accessible tools, some individual investors
underserved customers steal share from value services (e.g., tax loss harvesting) gain sufficient level of sophistication to act
traditional wealth managers in the mass and reduce the value delivered by as investment experts without the technical
affluent market investment managers even to high net knowledge or infrastructure traditionally
worth customers required
Wealth managers, who have been
expanding their focus to the mass affluent Services provided by physical wealth The next generation of retail and social
market, shift their focus back to more managers evolve to more personalised, trading platforms offer effective means for
personalised and relationship-based high bespoke space, such as financial concierge individuals to share or sell their investment
net worth individuals services and the management of inter- expertise, directly competing with traditional
generational wealth transfers investment managers
The following scenarios illustrate potential outcomes generated by the innovations discussed in this topic, particularly in response to the key
question above they are not meant to be future predictions
These scenarios are illustrations of particular aspects of the potential future and are not meant to represent a complete view of the market and
competitive landscape in many cases, some or all scenarios could be realised at the same time
129
Investment Management: Empowerment of Individuals
Traditional
Wealth Managers x x
Customers High Net Ultra
Mass Mass Affluent
Worth HNW
Digital Tools
& Services
As automated wealth management services and online tools establish a Cheaper and faster online tools and automated services that originally
solid track record they continue to develop their service offerings to catered to underserved customers move upstream and steal share
encompass functionalities desired by the mass affluent segment. from traditional wealth managers in the mass affluent market
Traditional wealth managers find their market share eroding as a growing Wealth managers, who have been expanding their focus to the mass
number of mass affluent customers defect to lower cost automated affluent market, shift its focus back to more personalised and
options. Traditional wealth managers are forced to either develop their relationship-based high net-worth individuals, intensifying the
own automated solutions, accepting lower margins, or move upstream to competition and improving the services offered to those customers
higher new worth clients seeking a highly personalised experience.
Case studies
Launched in December 2011, Wealthfront offers an automated investment service that consists of managing a
diversified, continually rebalanced portfolio of index funds, along with tax loss harvesting, via fully automated algorithms.
Unlike traditional wealth management companies, the minimum account size is small ($5,000) and fees are extremely
low; which reduces the hurdles for entry for the Millennial generation. Since inception, Wealthfront has penetrated above
and beyond Millennial customers to gather $1.5 billion in assets under management within three years.
130
Investment Management: Empowerment of Individuals
Customer trust and awareness of new market entrants Customers Access to more personalised and sophisticated
services at a lower price
New players offerings must cater to sufficient portion of customers
needs to replace traditional wealth managers Extended services for high net worth and ultra high net
worth customers as incumbents move upstream
Increased transparency into and control over their
wealth
Opportunities Risks
Customers may make better, more educated choices based on a more Lack of personal relationship means customers may make irrational
holistic view of their financial situation financial choices in extreme situations (e.g., market crash)
Potential increase of market size as more customers get access to Risk of not receiving sufficient customer information to offer a suitably
investment management services customised portfolio
Mass consumers have access to different level of services which suits Shift to passive investment may increase market volatility and amplify
with their respective needs losses during extreme events
Potential impact to retail banks as their ability to cross sell wealth
management products is reduced
131
Investment Management: Empowerment of Individuals
Traditional
Wealth Managers Bespoke services
Digital Tools
& Services Commodity Services
Case studies
Facing the threats of new automated investment services like Wealthfront, Charles Schwab announced the launch of its own
automated investment service Intelligent Portfolios based on ETFs, featuring competitive capabilities like automatic
rebalancing and tax loss harvesting, at no charge and with low minimum account threshold.
132
Investment Management: Empowerment of Individuals
Incumbents must be able to acquire and implement new capabilities or Customers Reduced price for commoditised services and access
be comfortable with partnering with automated service providers to more sophisticated services
Incumbents must successfully identify and deliver on high-value Access to more differentiated offerings among
services that can only be delivered through personal relationships financial institutions
Opportunities Risks
Opportunity to leverage freed capacity from automation to serve more Customers may not find additional, personal offerings valuable,
clients eroding institutions value proposition
Ability to scale automated service offerings in new markets once Incumbents risk not being able to successfully transform their
developed workforce to adopt new business models
Evolution of mass affluent-focused institutions to offer more bespoke
services may create competitive pressure to upstream institutions
133
Investment Management: Empowerment of Individuals
Traditional New
Wealth Wealth
Customers Customers
Managers Managers
Tools
Marketplaces
Case studies
Quantopian allows sophisticated individual investors to build, Estimize gathers stock-performance opinion from professional
test and execute algorithmic trading strategies with limited and individual investors (buy-side) to create price estimates that
development knowledge and infrastructure, and manage other would mimic the market reaction, without relying on sell-side
investors investments for a fee. analysts.
134
Investment Management: Empowerment of Individuals
Sufficient track record of performance by investment experts to gain Customers Access to more diverse investment strategies at lower
customers trusts and overcome reputational barriers costs
Competitive value proposition offered by investment experts in terms of Ability to expand financial knowledge
return, risk and costs
Incumbents Erosion of market share to investment experts and DIY
Regulatory control to ensure that accountabilities and disclosure
customers
standards are well understood by all parties
Need to develop differentiated offering from individual
investment experts
Increased reliance on brand as a differentiator
Opportunities Risks
Room for misalignment of interests by incumbent advisors is reduced Risk of less sophisticated customers overlooking tail risks associated
due to increased competition with seemingly well-performing investment strategies
Interests of marketplace platforms may not be aligned with the interests
of investors, making it easier for fraudulent behaviour from investment
experts
Customers may feel overly confident or lose long-term view resulting in
investment portfolios unsuitable to their needs
Due to lower tolerance to short-term poor performance, customers may
switch too frequently between investment strategies, leading to
suboptimal return and incentivising bad behaviour among advisors
135
Investment Management: Empowerment of Individuals
! Decoupling of advisory and products: As more customers switch to automated advisors for more streamlined and cost-effective advisory
services, the one-stop model of distributing financial institutions wealth products primarily via their advisory channels will become less effective
! Eroding advantages of scale: Traditional wealth managers scale-based advantages will erode as once manual processes are automated, virtual
channels are utilised and core infrastructure become available at a low cost to new entrants
! Increased competition: The commoditising forces generated by new entrants will make more segments and services less profitable for traditional
wealth managers and intensify competition among traditional players in more specialised segments or services
? How will wealth managers that used to distribute their own products via advisory channels change their distribution strategy as new entrants
providing automated digital solutions erode their customer base?
? What are the differentiated services provided by traditional wealth managers that will remain difficult to automate and replicate by new entrants?
Scenario 1: Erosion of the mass affluent Scenario 2: Revamping the value proposition Scenario 3: Lowering bars to act as an
market of wealth managers investment expert
! Erosion of deposits: New entrants will ! Empowering retail banks: More retail ! Benchmarking challenge: Benchmarking
begin to compete for mass or mass affluent banks will be able to meet most needs of the performance of traditional wealth
customers deposits with retail banks wealth management customers through products will become increasingly difficult
automated services as distributed, constantly-changing group of
! Importance of relationship: As
prosumers become a source of competition
competition intensifies among traditional ! Organisational change: Traditional players
players in relationship-driven high / ultra net may face challenges in redeploying ! Importance of brand and trust: In
worth market, the role of in-person workforce to deliver different services and competing against prosumers who can
managers will become more critical customer segments than today generate similar return on investment,
? How will retail financial institutions prevent
traditional institutions brand and customer
? How will traditional institutions capture
trust will become a critical differentiator
the erosion of deposits to new wealth customers early on in their lifecycle as
products that now offer lower threshold for younger, mass affluent customers enter the ? How will traditional investment managers
entry? wealth management market earlier through change their competitive and workforce
automated advisors? strategy as emerging platforms empower
sophisticated individuals to compete directly
with professional investors?
! Implications ? Remaining questions
136
Investment Management
How will the externalisation of key
processes transform the financial
ecosystem?
137
Investment Management: Process externalisation
Executive Summary
Context / Innovation
Many processes within investment institutions are considered as core to their business operation. However, a new breed of process
externalisation providers are using highly flexible platforms (typically based in the cloud) to provide financial institutions with increased efficiency
and new levels of process sophistication / excellence
Key Implications
By exploring options to externalise a large number of redundant processes across institutions, firms will benefit from efficiency gains and increased
sophistication
However, financial institutions must consider which capabilities they should continue to focus on as a source of competitive advantage
138
Investment Management: Process externalisation
Despite this trend many processes, such as transaction monitoring, regulatory compliance and risk management continue to be perceived as mission
critical or competitive differentiators and have remained in house
The notion of core internal processes can change when external Capacity Constraints High Cost of Maintenance
providers emerge with the ability to complete the process more
Lost capacity on updates and Updating and maintaining
efficiently and with more sophistication than individual institutions
maintenance limits the ability to processes and technologies are
The ability to access and collect market data was once considered invest in core capabilities costly and time-consuming
a critical internal competency for equity investments firms until
external providers emerged to provide more standardised and Limited Flexibility / Agility Inconsistency
comprehensive set of data (e.g., Bloomberg, Thomson Reuters)
Timely update of the processes Fragmented, local legacy
A number of issues are arising that impact the institutions ability to and technologies is limited due to processes and technologies
excel across todays core processes: costs and efforts required impede connectivity across the
organisation
Increased regulatory burden as a result of the 2008 financial crisis
(e.g., the Dodd-Frank Act) and the introduction of stricter
Scale-driven Barriers Complexity
compliance requirements (e.g., anti-money laundering) has taken up
a large amount of institutions capacity Sophistication of capabilities is Inflexible systems designed for
not feasible due to the institutions past market environments result
Legacy processes and systems built based on the physical
scale and size in added complexity to adapt to
computing environment continue to limit institutions flexibility and
the current environment
agility in adapting to the rapidly changing market conditions and
continuously evolving regulatory requirements
139
Investment Management: Process externalisation
The new breed of process externalisation providers are built on the technologies
and philosophies behind Web 2.0
Key innovations enabling the new breed of process externalisation
140
Investment Management: Process externalisation
For each capability within investment institutions that are considered core,
process externalisation can effectively resolve key pain points experienced today
Illustrative transformative potential of process externalisation across core capabilities
Trade Strategy
Data Collection Analysis Monitoring Risk Compliance
& Execution
Current Collection from Reliance on manual Trading strategy Transactions are Risk modelling and Constantly evolving
multiple sources modelling leading to starts with monitored post-trade analysis is conducted regulations across
State
required for certain human errors, lengthy hypotheses, requiring in a batch process, by middle and back geographies mean
Pain Points assets turnaround time and trial-and-error focusing on coping office functions with significant resources
Processing of capacity constraints process with erroneous periodic reporting to must be expended to
disparate formats to support more Increasingly dynamic behaviours rather front office, limiting its ensure compliance
required prudent decision and complex trading than preventing them visibility on risk in processes are up to
making landscape requires real-time date and properly
increased costs to monitored
achieve best
execution
Benefits Aggregating data Utilisation of Advanced analytics Transactions can be Automation of risk Centralised
Offered by collection from advanced analytics support automated monitored in real-time modelling and compliance
External multiple sources and and automation make data-driven trading to ensure erroneous monitoring with user- monitoring providers
Providers automating extraction analyses instant and strategy formation trades are identified friendly interfaces for specific types of
not only improve more accurate, and Automated execution and addressed in real allows front office to regulations aggregate
efficiency, but allow allow institutions to providers improve the time directly engage in collection of changing
greater influence over test a greater number efficiency and quality understanding and regulations across
the sources of data of opinions to support of execution through analysing risk in real- multiple geographies
decision making connectivity with time with greater efficiency
multiple venues
Examples of
New
Novus aggregates Kensho automates the Ayasdi utilises RedKite monitors OpenGamma provides FundApps organises
External
performance and modelling of investment topological data erroneous trading an open source regulatory information
Providers position data of funds scenarios to support analysis to draw out patterns in real-time platform for real-time and delivers a cloud-
from regulators and decision makers with correlations and (e.g., layering) to help market risk mgmt. and based managed service
participating funds to real-time projection of outliners from big data organisations deal with analytics, allowing front to automate
provide a single point of performance under to inform hypothesis noncompliant office resources to shareholding disclosure
access to fund of fund various outlook and trading strategy transactions control and manipulate and monitor investment
managers assumptions development instantaneously calculation restrictions
141
Investment Management: Process externalisation
The next generation of process externalisation not only brings efficiency, but also
enables institutions to gain the level of sophistication unattainable by themselves
Key characteristics of the future state enabled by process externalisation
Empowered by these benefits, how will the externalisation of key processes transform
the financial ecosystem?
142
Investment Management: Process externalisation
How will the externalisation of key processes transform the financial ecosystem?
Potential impact of process externalisation
1 Redefined core capabilities of 2 Level playing field for newer, smaller 3 Centralised communications with
financial institutions financial institutions regulatory agencies
Monitoring,
Institution Institution Institution Institution Risk & Compliance
A B A B External Providers
externalised
Service providers use advanced External service providers give small and These providers improve the speed at
technologies to externalise, consolidate medium-sized organisations access to which financial institutions are able to
and commoditise processes that were sophisticated capabilities that were not respond to regulatory changes, ensure a
previously considered core capabilities, in previously attainable due to lack of scale higher level of compliance via automation,
a more efficient and sophisticated manner and empower regulators to receive
By enabling small and medium-sized
consistent inputs from financial institutions
As a result, core competencies that organisations to access top-tier processes,
differentiate winning financial institutions barriers to entry are lowered for new As more regulatory compliance and
shift from process execution to more players and smaller existing players are monitoring processes are outsourced to a
human factors (e.g., synthesis, decision able to compete with large incumbents on a small number of service providers, these
making) more level playing field firms can act as centralised
communication touch points for
regulators
The following scenarios illustrate potential outcomes generated by the innovations discussed in this topic, particularly in response to the key
question above they are not meant to be future predictions
These scenarios are illustrations of particular aspects of the potential future and are not meant to represent a complete view of the market and
competitive landscape in many cases, some or all scenarios could be realised at the same time
143
Investment Management: Process externalisation
Great Great
Good Good
Average Average
Poor Poor
Case studies
The ability to quickly and accurately model market projections and hypotheses through large quant teams has
traditionally been a key advantage of large financial institutions. Kensho threatens that advantage by offering a next-
generation analytics platform for the investment industry with massively-parallel statistical computing, scalable analytics
architectures and user-friendly visual interfaces. By leveraging Kenshos platform, any investment institution can now
rapidly model projections without an army of quantitative analysts; instead focusing more human capabilities like
hypothesis generation and market insights.
144
Investment Management: Process externalisation
External service providers ability to demonstrate a clear business case Customers High quality service levels across most financial
for financial institutions to outsource many core functions institutions
Clear definition of accountabilities and liabilities between financial Access to increasingly differentiated services /
institutions and their service providers product offerings among financial institutions
Securing regulatory comfort by demonstrating financial institutions Incumbents Need to reallocate resources to develop new core
control over the externalised processes capabilities
Increased pressure to identify and develop new
differentiating capabilities
Opportunities Risks
Fewer process failures as they are externalised to more focused and Centralisation of processes creates larger implications of process
specialised providers failures including continuity risks for banking in the case of a failure of
an external service provider
Emergence of institutions competing to excel in specific processes
drives deeper specialisation Risks resulting from potential lack of clarity surrounding accountabilities
Increased capacity for financial institutions to be innovative due to Loss of deep process knowledge within financial institutions may have
reduced focus on resource intensive core processes unforeseen spill-over consequences in other areas of the business
145
Investment Management: Process externalisation
Today Future
Large institutions have Small institutions have Both small and large institutions gain access to
access to sophisticated limited ability to build sophisticated processes via focused external providers
processes sophisticated processes
vs.
146
Investment Management: Process externalisation
Externalisation providers must be able to provide suitable options for Customers Wider universe of options for financial services as
both small and large institutions customers choice of institutions is no longer restricted
by their scale
Clear definition of accountabilities and liabilities of financial institutions
and their service providers
Incumbents Increased competition as smaller institutions gain a
Securing regulatory comfort by demonstrating financial institutions stronger competitive position
control the externalised processes
A need to re-evaluate business models that are based
on economies of scale
Opportunities Risks
Potential increase in diversification of strategies as smaller financial Risks to small and mid-sized players that their externalisation service
institutions are empowered to pursue innovative strategies providers will be acquired and internalised by large financial institutions
Increased competition might lead to reduction of transaction costs for Systemic benefits of scale, such as visibility into the market, may erode
customers as the average size of institutions decreases
147
Investment Management: Process externalisation
Today Future
Risk,
Monitor &
Compliance
Risk,
Monitor &
Compliance
148
Investment Management: Process externalisation
Buy-in from multiple regulators to collaborate with external service Customers Increased trust in financial institutions as overall
providers regarding regulatory topics will be necessary. Dealing with compliance level increases
emerging risks like cyber security might be a good starting point
Solid track record of performance and reliability demonstrated by
Incumbents Ability to respond faster, more easily and more
externalisation business models cheaply to regulatory shifts
Full accountability and liability for actions remain with financial Freed capacity from compliance processes to focus
institutions on the core competencies
Critical mass of financial institutions externalise regulatory processes to Overall Higher, more consistent level of regulatory
a manageable number of service providers Ecosystem compliance
Formalisation of externalisation providers as a core
piece of the overall financial ecosystem
Higher level of clarity in regulations
Opportunities Risks
Opportunities to improve the clarity of regulations across jurisdictions Unclear how risks of regulatory capture will be influenced by
externalised compliance models
Cost for compliance and regulation, which tends to be very high in
global institutions, potentially will be reduced Amplification of non-compliant activities and unclear liabilities when
centralised externalisation providers fail
Standardised data simplifies supervision for regulators
Decreased internal compliance expertise within financial institutions
may have unintended consequences
149
Investment Management: Process externalisation
! Loss of negotiating power and continuity: As more capabilities, technologies and processes are externalised financial institutions will become
increasingly dependent on 3rd parties for continuity
! Skill loss of workforce: Even though externalising less valuable capabilities will create efficiency, it may result in workforce skill loss over the long
term and employees ability to develop a holistic view of financial services operations
? How will financial institutions participate in capability sharing with other institutions to balance efficiency with control (e.g., utility creation, co-
development, 3rd party providers)?
? How will financial institutions prevent the loss of negotiating power and continuity as the next generation of process externalisation providers are
often built on managed services models as opposed to todays vendor models?
Scenario 1: Redefined core capabilities of Scenario 2: Level playing field for newer, Scenario 3: Centralised communications with
financial institutions smaller financial institutions regulatory agencies
! Organisational agility: As innovative ! Higher turnover of new entrants: ! Limited regulatory interpretation: When
providers continue to streamline and externalisation of processes will make it regulatory compliance is centralised and
commoditise previously high-value easier for new players to enter the market automated, regulatory models may shift
capabilities, creating an agile organisation without significant infrastructure, increasing from todays interpretation-based approach
will be critical to adapt to the changing the turnover in the industry to more measurable, black-and-white
landscape and realign core competencies approaches, reducing the room for
! Imperative for direct participation: In
regulations to be flexibly interpreted
? What capabilities and processes will order to sustain scale-driven advantages,
financial institutions focus investments on to large financial institutions will actively
create competitive advantages that cannot participate in creating, funding, and
be replicated through the new process acquiring innovative externalisation
externalisation providers? providers
? What are the advantages that larger
financial institutions may continue to benefit
from when externalisation levels the playing
field?
! Implications ? Remaining questions
150
Market Provisioning
How will smarter and faster machines
transform capital markets?
151
Market Provisioning: Smarter Faster Machines
Executive Summary
Context / Innovation
As the popularity and profitability of high frequency trading declines, the next evolution of algorithmic trading may be dependent on smarter
machines, allowing a broader class of trades to reap the benefits of automation and sophistication
Key Implications
The development of smarter, faster machines in algorithmic trading will have varying implications on the market structure in terms of volume,
liquidity, volatility and spread the future of algorithmic trading must be approached with a new lens with respect to the benefits it can deliver to the
ecosystem weighed against the new types of risks it might create
152
Market Provisioning: Smarter, Faster Machines
As the popularity and profitability of high frequency trading declines, the next
evolution of algorithmic, machine trading remains in question
Overview of algorithmic trading and high frequency trading
The use of algorithms in trading activities has proliferated in lockstep with the evolution of computing power since its initial application for optimal
portfolio determination in the 1970s and the emergence of fully automated algorithmic trades in the early 1990s
Since then, the key focus of algorithmic trading has been on exploiting arbitrage opportunities in time and / or across venues by leveraging low
latency access to the exchanges (i.e., high-frequency trading, autonomous market makers) and thereby providing liquidity to the market
These high frequency traders largely replaced the market-making activities traditionally performed by broker dealers, who provided liquidity and
made prices by manually coordinating offers and taking on the risks of buying and selling shares in return for spread
While some trading firms and hedge funds use algorithms to achieve faster processing times for analysis of large datasets; price discovery and
order execution remain the most active areas of high frequency trading
However, the popularity and profitability of high frequency trading has significantly decreased due to lower volatility, improved liquidity, rising costs
of trading infrastructure, and regulatory scrutiny
# of High Frequency Trades per Day in United States Average Profit per Share on HFTs U.S. Revenue of High Frequency Traders
(in billions, est. by Rosenblatt Securities) (est. by Rosenblatt Securities) (in billions, est. by TABB Group)
Smarter, faster machines will allow broader types of trades beyond high frequency
trading to reap the benefits of automation and sophistication
Smarter, faster machines capabilities may shape the future of algorithmic trading
Artificial Intelligence /
Machine Accessible Data Big Data
Machine Learning
Process news feeds through algorithms in Access extensive real-time data sets through Ask questions, discover and test hypotheses,
real-time without human interpretation specialised databases and make decisions automatically based on
(machine-readable news) advanced analytics on extensive data sets
Uncover predictive insights on market
Discover major events faster than the news movements based on correlations mapping Self-correct and continuously improve
through social media / sentiment analysis trading strategies with minimal human
Update and access insights in real-time
interaction through machine learning and
through cloud-based analytics
prescriptive analytics
154
Market Provisioning: Smarter Faster Machines
Agility Accuracy
Real-life events will be reflected in the market The room for human error will decrease as more
price at a much faster speed as traders gain aspects of trading activities are automated. The
access to and act on news from new and quality of trading decisions will also improve as
traditional sources more quickly the machines used in researching, hypothesising
and decision making self learn
Privileged
The gap between trading institutions and
individual investors will increase as the
increased infrastructure costs to compete in
collecting, analysing and acting on information
create barriers for individual investors
As smarter, faster machines improve the capabilities of traders, how will the capital markets
transform?
155
Market Provisioning: Smarter Faster Machines
Data Sources Traders Market Data Sources Self-learning Market Data Sources Traders Market
machines
Reacts to real-time Takes different Analyses various data Takes a similar Regulations require access to external data and /
events from diverse actions on different and predicts market action on any or trade execution to be intervened manually
data sources set of stocks outlook in similar ways stock
The race for speed transitions from As trading algorithms become more Growing public discontent with algorithmic
responding to price movements to the intelligent and are able to access more trading leads to regulations on the use of
development of strategy responding to complete sets of market data, their analyses automated data feeds and / or smart
real-life events through big data analysis converge toward a single view of the machines in executing trades
and machine readable news market
Some parts of market making activities
Algorithmic trading strategies become As trading and market-making strategies revert to old, manual processes, tangibly
diversified as they access different data converge, volume decreases and spreads reducing the trade volume and the liquidity
sources and infer different market outcomes tighten of the market
The following scenarios illustrate potential outcomes generated by the innovations discussed in this topic, particularly in response to the key
question above they are not meant to be future predictions
These scenarios are illustrations of particular aspects of the potential future and are not meant to represent a complete view of the market and
competitive landscape in many cases, some or all scenarios could be realised at the same time
156
Market Provisioning: Smarter Faster Machines
Case studies
New innovative services like Dataminr and SNTMNT enable traders to gain access to events and news that
may trigger market movement (e.g., breaking news, M&A speculation) faster than the competition by utilising
non-traditional data sources like social media / market sentiment and real-time analytics.
Leveraging these platforms, algorithmic traders can leverage their infrastructure to shift focus from reacting to
stock price movements to monitoring and reacting to real-life events faster than other traders and investors in
the market.
157
Market Provisioning: Smarter Faster Machines
Case studies
Ayasdi leverages topological data analysis to process big data sets to unveil patterns within the network of data. In capital
markets, Ayasdis technology can be used to understand the relationships between various real-life events and market
performance to derive trading hypotheses. Over time, additional historical data and trading outcomes can be added back to the
analysed big data to continuously sophisticate and automatically correct the trading hypotheses.
Neuro Dimensions TradingSolutions combines technical analysis with artificial intelligence using neural networks and genetic
algorithms to learn patterns from historical data and optimise system parameters.
As these types of systems become more sophisticated, algorithmic traders will simultaneously predict the market performance
with a greater degree of accuracy and their trading activities will converge.
158
Market Provisioning: Smarter Faster Machines
On 23 April 2013, a false report of explosions at the White House was posted on the hacked Twitter account of Associated
Press. With many algorithmic traders systems linked to key Twitter feeds, algorithmic trades caused a selling spree nearly
immediately after the posting. As the result, $136 billion was wiped out from the S&P 500 index within two minutes of the
tweets posting. While the market quickly recovered three minutes after the correcting announcement, many industry
experts and regulatory agencies perceive the event as something that would not have been caused by human traders as
humans would have second-guessed the validity of the tweet.
159
Market Provisioning: Smarter Faster Machines
! Reduced role of humans: As the adoption of smarter and faster machines accelerates the competition for speed in gathering, analysing and acting
on data, the role of humans in trade execution will diminish and intelligent machines will replace largely human activities today, such as trading
strategy development
! Larger impact of errors: Even small errors in data integrity, trade strategy, and trade execution will lead to much larger impact as end-to-end
trading activities are automated via smarter, faster machines, with limited human intervention
? What role will human traders play as end-to-end trading activities become automated through smarter, faster machines?
? How will financial institutions effectively sort out erroneous data, algorithms and execution to avoid resulting in enormous losses, while maintaining
execution speed?
! Competition for data sources: ! Marginalised returns: As trading strategies ! Competitive uncertainty: Capabilities
Competition to discover new data sources converge through big data and machine required to be competitive in the market
and gain exclusivity will intensify as the learning, competition for each trade (e.g., faster computation, faster access,
focus of algorithmic trading shifts from price triggered by real-life events will intensify advanced analytics) will change drastically
movements to real-life events and marginal returns will diminish and rapidly depending on regulatory
changes, leading to uncertainty in traders
! Increased specialisation: Traders with a ! Competition for speed: When most
long-term strategies
deeper understanding of specific players in the market rely on similar trading
companies, sectors and real-life events will strategies, the basis for competition will shift ! Impetus for agility: In order to react timely
gain advantage over firms with broader again from discovery of new insights to to those competitive uncertainties generated
approaches as trading strategies diversify faster execution via infrastructure by potential regulations, traders
investments organisational agility will become critical
? How will financial institutions gain exclusive
amidst the current shift toward replacement
or faster access to data without appearing ? How will each institution differentiate from
of workforce with smarter, faster machines
as having an unfair advantage? one another as the convergence of trading
strategies via smarter, faster machines
lower the margin?
161
Market Provisioning: Connecting Buyers and Sellers
Executive Summary
Context / Innovation
Many illiquid financial assets remain highly dependent on intermediating institutions to discover and connect buyers and sellers, often based on
networks of pre-existing relationships with other institutions
However, following the financial crisis, traditional capital market intermediaries risk appetite has been reduced while their capital requirements
increased, limiting their ability to take positions on financial assets to create liquidity; this has resulted in reduced liquidity mainly for non exchange
traded assets
Leveraging automation and standardisation of information flow, a number of platforms (information/connection platforms) have emerged with an aim
to redefine how buyers and sellers are connected in a variety of markets
Key Implications
Improving information flow among market participants through new information/connection platforms will create tangible benefits to the industry by
empowering intermediating institutions to optimise their ability to make the best decisions for their clients; however, it will also require behaviour
changes within those institutions
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Market Provisioning: Connecting Buyers and Sellers
Fixed Income Funds / Fund of Funds Private Equity / Private Company Private Company Commodities &
Venture Capital Shares Shares Tenders Derivative Contracts
Key characteristics of the platforms improving connection between buyers and sellers
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Market Provisioning: Connecting Buyers and Sellers
B E B E
C F C F
Information about buyers and sellers (e.g., current Intermediaries of buyers and sellers in some cases, are
Key Characteristics
inventory / demand, historical performance) is distributed directly discovered and connected via a central platform
via relationships / awareness existing among their Information on counterparties and the market is
intermediaries aggregated and analysed by the central platform for all
Intermediaries collect, analyse and act on the information constituents in the market
about the counterparties and the market
Advantages Reduced chance of counterparty failure by transacting More efficient discovery and assessment of demand and
through established, trusted intermediary relationships supply in the market leading to more accurate price
Reduced exposure to arbitrage attempts as demand and formation
supply is only visible to a small number of intermediaries Reduced need for financial institutions to take position in
assets and products to generate liquidity
Increased visibility and control over transactions by buyers
and sellers
Shortcomings Highly manual, relationship-based discovery and Need to balance adequate price formation with potential
assessment of demand and supply leading to inefficiency price discovery and arbitrage attempts
Potential to overlook the best price available due to the Potential counterparty risks when dealing with
limitation in the scale of each intermediarys network intermediaries (or buyers / sellers) without an established
Limited visibility of the transaction process to buyers and relationship or reputation
sellers
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Market Provisioning: Connecting Buyers and Sellers
How will the market landscape change for various financial assets and products as buyers and
sellers are better connected in the future?
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Market Provisioning: Connecting Buyers and Sellers
How will the market landscape change for various financial assets and products as
buyers and sellers are better connected in the future?
1 Levelling the playing field for newer, 2 Stabilising market framework for 3 Opening the doors to individual
smaller institutions existing institutions investors
Unlike relationship-driven market making, Platforms are developed and used by larger As platforms grow, they may choose to
where larger institutions have an advantage institutions to improve connectivity and extend connections to individual
over smaller institutions, new platforms will efficiency among a group of large investors (e.g., acting as brokerages)
allow demand and supply represented by players
When sufficient volume from individual
smaller institutions to be more readily
As connections among larger intermediaries investors can be aggregated, these
discovered by counterparties
are strengthened by information/connection platforms can act as a market for specific
These platforms will also provide fact- platforms, the need for larger institutions to assets and products and open doors for
based measures to make counterparty connect with smaller intermediaries to sellers to easily broaden their buyer base to
comparison and selection to be more generate liquidity will decrease, effectively the broader public
objective, enabling smaller institutions with building barriers of entry for smaller,
less developed networks of relationships to newer institutions
compete
The following scenarios illustrate potential outcomes generated by the innovations discussed in this topic, particularly in response to the key
question above they are not meant to be future predictions
These scenarios are illustrations of particular aspects of the potential future and are not meant to represent a complete view of the market and
competitive landscape in many cases, some or all scenarios could be realised at the same time
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Market provisioning: connecting buyers and sellers
Large Large
Best Match
Platform
Large Large
Small Small
Case studies
Novus is a portfolio intelligence platform that automatically gathers and analyses data on various funds performance to
provide visibility and transparency to fund-of-funds managers. Traditionally, fund-of-funds managers discovered and
researched investment opportunities manually by contacting target funds. As a result, the ability of fund-of-funds to
source investment opportunities was dependent on their scale, reputation and network. Through Novus automated
platform, nearly all funds operating across the world and their performance are catalogued and analysed based on an
automated collection of regulatory reporting data. This allows smaller fund-of-funds to independently identify lucrative
investment opportunities without being limited by their reputation and the size of their networks.
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Market Provisioning: Connecting Buyers and Sellers
Opportunities Risks
Incentivise deeper specialisation of intermediaries by creating higher Transparency of counterparty selection is dependent on the
returns to specialization transparency of the information/connection platforms
Potential increase in systemic resilience as the result of diversification Increased counterparty risks when dealing with newer, smaller
of related parties counterparties without standing reputation or relationships
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Market Provisioning: Connecting Buyers and Sellers
Large Large
Small Small
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Market Provisioning: Connecting Buyers and Sellers
Regulatory tolerance of exclusive networks (e.g., no collusion or Clients Liquidity may increase relative to the current state,
anti-trust concerns) but could be less than under an open platform
Opportunities Risks
Opportunities for large institutions to continue to be highly influential in Encouraging concentration of transactions among few large institutions
the market landscape
Public and regulatory agencies may perceive exclusive networks as an
Shifting transactions from obscure internal execution facilities to more unfair, colluding activity
transparent standardised platforms
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Market Provisioning: Connecting Buyers and Sellers
Large Large
Best Match
Platform
Small Small
Case studies
Liquity provides private company directors with a comprehensive suite of shareholder and equity management services
and match investors with private company shareholders who want to sell some or all of their equity. Liquity facilitates
complete deals, from introduction to transaction completion including escrow and custodial services.
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Market Provisioning: Connecting Buyers and Sellers
Appetite for individual investors with high degree of financial Clients Ability to make direct connections with trade
sophistication to directly participate in trades counterparties
Development of execution infrastructure to facilitate trades with Access to new asset classes for individual investors
individual investors who do not possess over-the-counter capabilities
Improved transparency and control over the transaction
Ability to aggregate sufficient demand and supply volume among process
individual investors to transact with institutional investors
Incumbents Erosion of market shares to brokers and groupings of
groups of high net worth individuals
Impetus for intermediaries to strengthen values they
provide to clients beyond transaction facilitation
Opportunities Risks
Opportunities to separate transactional services from high-value, Potential for sophisticated individual investors to make errors due to
advisory offerings lack of specialised knowledge (relative to professional intermediaries)
Opportunities to engage new buyers and sellers in the market, Increased burden on regulatory agencies as more parties are directly
increasing liquidity and diversifying the needs and opinions of market involved in the market
participants
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Market Provisioning: Connecting Buyers and Sellers
! Less differentiation among intermediaries: As the ability to fulfill the transaction needs of customers become commoditised by market
connection platforms, financial intermediaries will be less differentiated by their capabilities
! Redistributed negotiating power: With both counterparties and their intermediaries gaining improved visibility into market demand and supply,
negotiating power will be redistributed based on actual demand and supply resulting in more efficient pricing
! Shift to advisory models: As the financial intermediaries role in counterparty discovery and negotiation diminishes, their ability to build customer
relationships based on advice will become more important to their competitiveness
? How will financial intermediaries differentiate from one another as improved information flow and trading connections reduce the gaps in institutions
ability to find counterparties for their customers?
Scenario 1: Levelling the playing field for Scenario 2: Stabilising market framework for Scenario 3: Opening the doors to individual
newer, smaller institutions existing institutions investors
! Reduced fee structure: As the cost of ! Direct investments by established ! Reduced value proposition to
fulfilling transactions falls, the fee structure institutions: Established intermediaries will institutional customers: As some
of intermediation services, as well as actual become more active in investing, institutional customers choose to directly
products themselves (e.g., carry on funds), implementing, and acquiring market discover and transact with counterparties
may be reduced regardless of client size connection platforms to stablise the current via market connection platforms, their
market framework stickiness on other institutional services,
? How will larger financial institutions continue
such as asset management and investment
to maintain advantage over smaller players ? How will established intermediaries gain
banking, may decrease
when economies of scale are eroded and exclusive access to market connection
smaller players can gain access the same platforms while avoiding conflict-of-interest ? What additional value will financial
information and counterparties? (i.e., best execution) and anti-trust issues? intermediaries provide high net worth
individuals to prevent the erosion of their
businesses by direct access to
counterparties via market connection
platforms?
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For additional information please contact:
World Economic Forum Core Project Team Professional Services Support From Deloitte
Abel Lee
Director, Head of Insurance and Asset Management
World Economic Forum
Abel.Lee@weforum.org
Matthew Blake
Director, Head of Banking and Capital Markets
World Economic Forum
Matthew.Blake@weforum.org
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