The Future of the Financial Services: The Coming Case Study on Disruption
No industry stands on the edge of greater disruption than the financial services industry.
The wide array of changes stems from outdated ways the industry operated. It also faces shocks from emerging consumer trends that are now in place. Let’s take a look at the issues and what may be a reasonable response to the challenges.
No industry stands on the edge of greater disruption than the financial services industry.
Legacy that lacks luster
Lack of transparency:
Consumers lack understanding of what is happening behind the scenes. There are several ways for consumers to misunderstand their financial situation. It can be not understanding the conditions by which you claim points on your card. Why your credit score dipped in a particular month. Or, what alternatives are available in the market. Other services have solved this transparency issue with technology. In travel (Trivago and Kayak). In insurance (GEICO and Progressive). In financial services, they have had to rely on personal relationships. As consumers get used to new technology enabled platform, financial services have to change.
Asymmetry of information:
Financial services profit on knowledge. This knowledge is profitable if you know something the other person does not. There are many asymmetries in financial services. Who is better at forecasting sales and earnings? Who anticipates changes in interest rates? Who knows first if there are shortages or overages of commodities? Or, who understands the small print terms better? In all these case, the industry organizes around winning and losing. It seems improbable that this model will hold up over the long term.
Recently a few companies have offered services that win if the customer wins. Those who start experimenting now with new business models will learn faster. Learning that will enable those brands to capture more share from customers wanting fairness. You win, my firm wins, the brand will win a disproportionate share as consumers evolve.
Those who start experimenting now with new business models will learn faster. Learning that will enable those brands to capture more share from customers wanting fairness.
Profits over service:
Headlines show that the industry has not balanced its agenda. Their profit agenda has never been more robust. Their fairness with consumers is suspect. The evidence is in settlements, repudiated tactics, senior executive resignations, or mass firings. It is clear that the industry has not got it. Consumers perceive that their institutions are taking advantage . In most cases, firms do not break laws. The institutions claim that they have a fiduciary responsibility.
They state they must maximize profits. This profit justification is not an apt defense. Growing dissatisfaction rises among stakeholders and customers when profits trump people. Financial service brands need new understanding. To maintain independence, they must manage the social contract as well. They must balance their profit objectives with consumer needs. Consumers who are often uninformed, irrational or exuberant with their money. Balance is likely to inhibit profits in the short run. In the long run, it is more profitable. Balance the goals of both internal and external stakeholders upfront. This approach is more profitable in the long run. It’s cheaper than suffering business disruptions, penalties, and fines when results go off course.
Forces that reformat
Next generation attitudes:
Two major demographics trends are underway. A generation of successful of workers is heading to retirement. They have the largest concentration of wealth in modern times. Their concerns are the security of that wealth and the safe transfer to their families. The generation classified as Millennials are coming into the market. They have differing attitudes toward money, entitlement, relationships, and technology.
Financial institutions are not meeting the needs of both groups. These consumers want new, flexible institutions to replace the bureaucratic ones. Current firms have done well to thwart these new entrants. They have copied capabilities. Online bill pay, mobile banking, new rewards, and customized services are examples. But these early salvos are not really fundamental changes. Financial firms must make other changes. This generation has eyes for the future of things.
They believe in ideas like a cashless society. Their social behavior encourages peer-to-peer banking. They seek to live with greater security even though they want mobile innovations. They see the capabilities like block chains and visual recognition software as benefits. These innovations will fly in the face of the established hierarchy. Consumers’ frustration is high. Financial services need deep cultural and structural reorganization. If the existing brands are to maintain their incumbency, agile development is a must.
The demands on the industry are high from a consumer perspective. The demands from the government are daunting. Congress has imposed a wide net of regulations. As abuse emerged, financial services has lost much of its negotiating power. The formation of the Consumer Financial Protection Bureau (CFPB) is evidence of slipping power. The government’s mission has co-opted that of the major financial institutions. The CFPB states, “We make sure banks, lenders, and other financial companies treat you fairly.” CFPB seems to go beyond Congress. Their regulatory power outstrips the normal structure of the legislative process. A recent court ruling determined that some aspects of CFPB are unconstitutional.
While the scope and nature of their regulation is in flux with legal proceedings. The existence of a special legislative entity represents long-term failure. It is evidence that the industry lacks positive brand equity. The industry must right the ship and bring balance back. To reverse legislation will need real in-market successes. Products and services that prove that they are “treating their customer fairly.” Fair treatment may change consumer sentiment. Changing consumer sentiment will change the legislative agenda. The industry will move to something more favorable to the institutions and the economy.
Bricks, Clicks, and Experiences.
Financial services face a research conundrum. Consumer research on financial brands shows consumers are unhappy with financial brands. Yet they are happy with the individual person who provides them service. They praise the branch that they frequent. The implication of this insight is ironic. It highlights that the personal relationship often trumps the infrastructure that they bank has. Trusted relationships are the core of brand attachment. Consumers engage in many tangible parts of the brand. But focusing on the intangible experience is more likely to be a source of value creation. Intangibles are an outcome of brand management. But managing that brand potential is underdeveloped in financial services. To better brand managers, will need a new conceptualization of how to create strategy.
[bctt tweet=”Consumer research on financial brands shows consumers are unhappy with financial brands.” username=”concentricmrkt”]
Responsive processes as solution
Financial services companies have made great progress in the application of quantitative models. They are able to measure and predict in unprecedented ways. They find credit risk, identify hidden trends, and create new models for trading. Those same models have led the industry down some dry holes. Many have been even led to disastrous losses and difficulties for innumerable consumers. The systemic errors stem from a world view. A view based on three erroneous assumptions. Each of these need replacing if this vital industry sector is to adapt.
The world is rational.
The industry approach to analysis resides in the logical. Prices go up; demand goes down. They capture the history of things and then apply that history to the future. In reality, consumers are not so logical. Their behavior is less than perfect. Chance plays a larger role than we care to admit. Chance creates probabilities. Probabilities require new models that assess likely outcomes, both the positive and the negative. Swapping historical techniques for newer ones will be tough. The industry clings to what it knows. Evidence is not important. Reason, logic, and intuition are more important. But in light of where those tools have lead the industry now may be a good time to reassess. Brands need to look for models and tools that combine. They must accept that the predictable and unpredictable occur. They must plan for anticipated and unanticipated.
Return is most important.
The core metric of the industry is the return on investment. Bonus, offices, share prices, perks, and benefits are all tied to “profits.” But, profit is not always aligned with consumer needs. Adding consumer preferences as an orienting measure for managerial decision making will help. Stabilizing the industry disconnect from consumers will come from managing perceptions. Understanding perceptions relative to what drives the consumer choice will help. Showing managers how to close the social contract gap with consumer feedback is critical. Return will always matter. But until the industry balances that with customer measures it will be at risk of veering off course.
Showing managers how to close the social contract gap with consumer feedback is critical.
Process is straightforward.
Quarterly earnings, annual reports, 10-k filings, accounting standards, and regulatory filings have established a routine and consistency that defines how to do things right. What is missing from this reporting routine is a strategic process. An approach that ensures that firms are doing the right thing. In a world of dynamic forces, the process for strategy is much different. Adaptation is much different than the process for compliance.
To build a new process that adapts to market dynamics, firms will need to reexamine their culture, redesign their organization, and find new decision support systems. Tools that model consumer behavior, provide learning and leverage artificial intelligence will expose biases. Before decisions are final, managers will need to forecast results.
These forecasts will be broader than expected profits. It will look at outcomes as consumer probabilities. The system will identify which consumer segments are likely to win and which are likely to lose. How will word-of-mouth change. What will happen to our perceptions Risk mitigation in management will dominate the discussion. The unintended and the unanticipated will matter. Managers will model the entire experience in silico. Planning will allow for appropriate actions before outcomes occur.
It’s a small and nuanced shift to build new intelligence. But in the face of the large and broad challenges facing the industry, it is a required one.