Few industries are as ripe for technological innovation as the financial services sector, writes Sameer Deans, GM of ThoughtWorks.
This opportunity, however, also carries considerable risk for established players that lag disruptors such as fintech start-ups that have been able to introduce a degree of disintermediation that eats into traditional financial services providers’ income.
The introduction of Apple Pay is but one example of attempts to erode their position, with many more examples globally pointing to the shaky ground many companies in the financial services sector find themselves on.
The opportunity for South African banks and financial product providers is enormous. The country’s advanced financial systems, stable environment and a growing middle class that is both investment and technology savvy presents a significant market.
This opportunity is especially appealing to institutions able to tap into the advantages that technology presents.
These advantages lie in the ability to offer online services that no longer require human intervention. Add to this the immediacy of information, analytics and visualisation tools that draw on a nearly inexhaustible pool of data and the ability to customise products and services to cater to the most diverse and discerning needs.
One of the ways this is already playing out in the market, although not quite yet as much in South Africa, is the rise of so-called robo-investing and automated advisory services.
These services apply algorithms in order to design portfolios based on questions that clients answer online and already attract a huge following in markets such as the United States. Customers who were earlier not able to afford the higher threshold levels of private banking and wealth management can now access these services by virtue of lower fees as the cost of human advisors is eliminated and the promise of a set of investments is based on scientific and empirical data.
Bloomberg News reports that these portfolios in the US are expected to triple to as much as $60-billion in 2015 from about $16-billion last year.
There may be certain regulatory hurdles for local players to overcome to offer such automated services, but the country’s financial systems are aligned with international standards and norms so are unlikely to present insurmountable obstacles.
In fact, the Retail Distribution Review undertaken last year by the Financial Services Board may play into the hands of innovative disruptors. Among other things, this review aimed to address conflicts of interest for providers such as banks stemming from commissions they receive from investment and insurance owners. The upshot is that proposed changes that replace commissions with service fees make it less attractive for the big financial services players to compete in this market unless they innovate. What this illustrates is that financial services in the traditional sense is no longer the preserve of an exclusive group of players.
Naturally, security and trust are the biggest obstacles that need to be overcome. There are numerous strategies and processes that can appease such apprehension, and given the consumer appetite for digital service delivery it is unlikely to be a major obstacle for a new generation of customers.