Why now is the time for financial services companies to spur innovation and the adoption to new technologies. Michael Tae and Matt Harris look back on two recent crises for lessons on how disruption can lead to rapid change, opportunity and a new status quo, with an eye towards what might be post-Covid.
The suggestion that every crisis also brings an opportunity has been attributed to everyone from Einstein to Churchill to JFK. But perhaps nobody understands this phenomenon better than Mother Nature.
Take the 140-year-old tiny aquatic invertebrate, the bryozoan, which remained exactly the same for 40 million years and then suddenly experienced a vast diversification – perhaps a result of an abrupt change in sea levels or atmospheric temperature – followed by millions more years in stasis. The bryozoan illustrates the scientific principle of punctuated equilibrium, proposed by natural historians Niles Eldredge and Stephen Jay Gould to describe how a long-standing, static biological order can change abruptly, ushering in new species in a sudden period of revolutionary disruption.
What’s happening today in the financial services industry could also be described as a period of punctuated equilibrium.
Companies that dominate in periods of relative stability have frequently emerged victorious from a preceding crisis. They maintain their status by incrementally refining the infrastructure that aided their success, holding back sweeping change. Events such as the 2003 SARS pandemic, the 2008 global financial crisis, and now the cataclysmic Covid-19 pandemic cause rapid changes in customer needs, regulations, and technology adoption seemingly overnight, breaking the status quo and forcing financial services companies – and indeed all companies – to adapt. Suddenly, standing still becomes untenable. The result is a fintech revolution.
Fintech revolution I: The expansion of online commerce and digital payments
That was the case in 2003 when the SARS virus spread in China. In the decade leading up to that point, China’s government had begun a national networking initiative known as the “Golden Projects” to facilitate the exchange of electronic data and the expansion of the internet. This, in turn, laid the technological foundation for online commerce and digital payments.
However, it took the scare of a mysterious virus spreading throughout the country, eventually afflicting more than 8,000 people and causing almost 800 deaths, to spur real innovation and adoption of new technologies. As millions of people avoided going outside, the retail service industry experienced a major shock. People stopped transacting in person and began doing so online, forcing businesses to adopt an entirely new infrastructure for digital payments.
As SARS spread, Alibaba BABA -4.7% launched its first consumer-facing e-commerce website, Taobao, and soon after created a payments system called Alipay, enabling people to make electronic payments over long distances without fees. It also established an escrow system to enhance trust among users, allowing them to delay payment until they had verified they were satisfied with their purchase. Alipay now has nearly a billion users and has definitively revolutionized commerce and payments in China. More broadly, online payments grew exponentially from 2004 to 2008, more than doubling year-after-year.
Fintech revolution II: The dawn of digital, mobile and unbundled financial services
The global financial crisis in 2008 presented a different set of opportunities, causing an even bigger fintech revolution than the one in China. With the U.S. economy facing a housing crisis, crashes in financial markets, and a broader recession, the traditional banking system was beset with a loss of faith in its institutions. The equilibrium that had previously supported economic growth was suddenly punctured.
Financial services firms had to channel technology spend into risk and regulatory compliance and also faced restricted scope in their activities and services. These factors triggered a massive change in how consumers interacted with their financial services providers – what began with a loss of confidence in financial institutions turned into consumers demanding better customer experiences while looking for alternative sources of credit and other services.
This created an opportunity for fintechs to step in and provide services with greater digital and mobile accessibility, a better experience, and ease of use, all at a lower cost. 2008 onwards saw an explosion in the volume of fintech startups, with 818 founded in 2014 versus 190 in 2008 according to Deloitte. Financial technology firms were unencumbered by regulatory strictures and legacy technology, and were able to innovate faster and deliver new services. Their value proposition led to the unbundling of financial offerings, creating a whole slew of fintech categories – digital banking / challenger banks, robo advisors, and peer-to-peer and alternative data-based lenders – and ultimately forcing incumbents to evolve alongside their new competition.
Fintech revolution III: The imperative of more reliable, efficient and intelligent back-office infrastructure
With the current Covid-19 pandemic, the disruption to public places and workspaces is clearly an event that will punctuate the status quo. It appears ready to usher in a new wave of fintech infrastructure. While financial technology infrastructure has been a growing feature of the marketplace over the past 20 years, it has proliferated largely as add-ons to existing processes. New applications and services have been layered over old bones without overhauling or replacing underlying systems.
However, given the onset of new social distancing measures and work from home policies, we are all interacting in different ways. We are seeing a forced shift to digital communications, in ways of working, commerce, account management, and more, and this has rapidly changed how people wish and expect to interact with their banks and credit card companies, as well as how they want to pay for products. In a recent Broadridge BR -0.4% survey, 60 percent of financial services executives said they will enhance multi-channel client communications as a result of the pandemic. While digital adoption was an option before, it is now an absolute necessity demanding a new level of commitment.
Furthermore, financial services firms will have to reassess their technology infrastructure as part of a long-term assessment of underlying workplace processes and examine how they can be adapted for the new era. Resilience, scalability, and redundancy are all the more important in light of the Covid-19 crisis. Financial technology firms will need to ensure that middle- and back-office technologies can efficiently and reliably support the transformative changes being made to the more visible application layers. Unlike conditions at the end of the 2008 global financial crisis, current financial services firms tend to be financially stronger, making them well positioned to become leaders in the new post-pandemic environment.
Some areas within financial technology infrastructure are particularly ripe for development. The combined stresses of financial and physical health have intensified consumer behavior, resulting in increased transactional activity and on-demand access to information across all their accounts. These capabilities tend to be dependent on core back-office infrastructure and require a shift in methodology from batch processing to servicing requests in real-time as well as the ability to consolidate data from multiple sources. A push for this kind of instantaneous, current information is spurring the evolution from batch-oriented processing toward real-time access and increasing use of APIs.
The cloud also presents an important opportunity to leverage technology. It allows mutual access to infrastructure and underlying services upon which financial services firms rely, leading to more reliable, higher-quality services. It makes it possible to scale processing power on demand. Furthermore, it improves the resiliency of business continuity plans by providing the reassurance of greater accessibility, even when on-premises servers may have been disrupted.
As the pandemic response leads to greater adoption of digital processes, these activities will generate an increasing amount of data. Financial institutions will need to adapt to how they respond proactively to customers leveraging this data and deriving new models of interaction. They can do this by using artificial intelligence to develop increasingly intelligent and customized automated responses to customer requests, as an example. Additionally, robotic process automation can increase the scalability and reduce the error rates of middle- and back-office activities that were once manual.
In Japanese, the word “crisis” is composed of two symbols – one signifying danger, the second opportunity. The frequent association of the two ideas may stem from the cycle of life and the fact that every ending is followed by a new beginning. Just seven months into this global pandemic, it is still the beginning of a new paradigm. Fintechs and institutions would be wise to follow the wisdom of America’s first billionaire, John D. Rockefeller: “I always tried to turn every disaster into an opportunity.”
While some financial services companies may struggle to make the transition, those able to quickly adapt to the new normal and dive into the opportunities will go through a process of punctuated equilibrium, emerging stronger after the pandemic wanes.
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