Posts Tagged ‘financial sector disruption’

How Can Incumbents Respond to Disruption?

Thursday, August 4th, 2016

Part 1: Start by Accepting that Disruption will Happen!

By Dawood Khan

It is well-known that incumbents in any industry seldom feel the impact of an early-stage disruption on their core business for many years or even decades. This is even truer for those industries that are heaviCryptocurrencyly regulated, as regulation creates a barrier to new entrants. Hence, in such situations, incumbents are typically highly profitable and may not feel threatened. They may prefer to remain on the sidelines for an extended period of time, often somewhat skeptical of the degree to which the disruption may impact their business. In this period, they may experiment with new technologies and business models, or hedge via investments in emerging start-ups. In some cases, they may take a wait-and-see approach. The question is at what cost?

As an example, one could say that FinTech is another oft-hyped, early-stage technology. But a look at alliances, investments, FinTech-focused technology accelerators, and the growing number of Fintech Unicorns suggest otherwise. Exponential growth in global FinTech investments attests to the industry’s path toward acceptance. Over a span of five years (2010-2015), global investment in FinTech reached $49.7 billion. In the U.S alone FinTech investment doubled from $4.05 billion in 2013 to nearly $10 billion in 2014 and by June 2015 it skyrocketed to $31.6 billion[1].

Today a new breed of FinTechs is focusing on crypto-currency, which are powered by blockchain technology.  Crypto-currency is a blockchain technology that involves financial transactions based on encryption technology. Blockchain is on its way to disrupt a wide range of transactions in the financial industry such as stocks, bonds, loans, and payments with a subsequent transformative impact on the banking ecosystem.

From a financial perspective, blockchain technology keeps all transaction records permanently on thousands of computers from various networks distributed around the world. Each of these computers attests to the authenticity of transactions with no single entity controlling them as they all run on open-source collaboration. Hence the arrival of frictionless transactions and possible disappearance of intermediaries. Blockchains can be used to record transactions of asset exchanges (or “value”) among owners. Transfer of assets, buying and selling of stocks and properties, private banking, and lending will all be disrupted. These are what blockchain FinTechs are focusing on. 2015 U.S investments in blockchain-focused FinTechs stood at $400 million and over $150 million in Q1 2016[2].

The global FinTech Unicorns (20 and rising) are bound to make their impact felt at the corporate boardrooms of incumbent banks. However, it may appear that there is a lack of urgency among incumbents, this is because their market share has not, and may not be impacted for some time to come.

By now, you may have already asked the proverbial $64,000 question: How will the incumbents react?

Part 2 of this piece looks at this question and provides an approach to addressing on-going disruption.

[1] The State of Fintech Industry as We Know It Infographic:

[2] Quartz, “Money keeps pouring into blockchain startups”, April 19, 2016

Are FinTechs making Banks Endangered Species?

Thursday, May 5th, 2016

By Dawood Khan

Taking on water

I recently bumped into an old friend – a respected financial industry leader whom I had worked with on mobile payment initiatives almost a decade ago. She asked me something quite interesting. “We all hear that FinTechs are disrupting the financial industry, that this is forcing established banks to rethink the way they do business. These institutions are revamping their services, pricing Image1models, and trying to embrace digital channels, but I wonder if you think this will be enough? I mean, with a changing customer demographic – do all the positives traditionally associated with incumbents just become an ever-tightening noose around their necks? Do you think incumbents can successfully compete?”

The glass can actually be half-empty!

Her questions made me think of what we associate with an incumbent financial institution (FI). An established FI has well engrained processes, tested business models, an experienced workforce, a history of compliance with regulations and policies, infrastructure, and we are familiar with their services. But are all these legacy capabilities holding them back?

As an example, over-the-top players are offering digital wallets (e.g., Google wallet, Apple Pay) that are starting to result in incumbent FIs losing margins in some of their most profitable products. According to a McKinsey & Co study[1], by 2025 – FIs could lose up to 35% in profits from payments alone, Canadian banks can lose up to 70% of their margins in traditional retail banking, and wealth management can lose up to 35% of profits.

While a recent report by PWC[1] concurs and states that by 2020 consumer banking, transfer/payments, and private wealth management will be the sectors most impacted by FinTech.

But all that water’s got to go somewhere!

McKinsey & Co.[2] has reported that global investment in FinTech surged from $2.6 billion in 2012 to $12.2 billion in 2014, a whopping sixfold increase. As if it wasn’t a big enough surge in investment, 2015 finished with global investment in FinTech companies totaling $19.1 billion, with $13.8 billion invested into VC-backed FinTechs[3].

A recent report by KPMG and CB Insights[1] also shows that nearly 20 FinTech Unicorn companies globally are taking on two of the most lucrative segments of the industry: payments and lending. (Unicorns are startups with a market valuation of over $1 billion).

Clearly incumbent FIs have their work cut out for them – both organizationally and operationally. Among other things, incumbent FIs need to:

  • Innovate services and business models or at least react quickly when they trickle down the financial services food chain;
  • Evolve from legacy technology and infrastructure, practices, organizational capabilities, to meet evolving customer needs;
  • Secure significant corporate buy-in from key decision makers to support transformation.

Water – what water? Just drink the kool aid!

To stem the rising tide against them, many incumbents are investing in promising FinTech startups, setting up corporate venture capital (CVC) arms in search of startups whose products and services are in line with theirs.

But is this sufficient to reverse the tide? Yes and no!

With rising pressure on margins, the loss of market share, and the prospect of customers migrating to FinTech-based services, incumbents have no option but to invest in FinTech. However, for most this will not be enough.

These are dramatic shifts in the FI fabric, and incumbents must prepare to make monumental changes, they have no option but to transform on multiple fronts –business, customer and technology.


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[1] Fintech funding hits all-time high in 2015, despite pullback in Q4, KPMG and CB Insights, March 2016

[2] Blurred Lines: How FinTech is Shaping Financial Services, PWC Global FinTech Report March 2016

[3] Cutting Through the FinTech Noise: Markers of Success, Imperatives for Banks, McKinsey & Company Global        Banking Practice, December 2015

[4] The Pulse of Fintech, 2015 in Review, KPMG, March 9, 2016