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Home , Financial services

The Future of Financial Services

A global study of 500 senior banking and executives by Cognizant, Marketforce and - 2 Foreword

Organizations operating in the retail financial services sector – and insurers – need to smart and fast to keep pace with their gadget-happy customers. We may have a 24/7 love affair with our smartphones but it is clear that in the future we will be sharing information and making payments via fitbands, cars, TVs and white , as the of Things fuses the physical and digital worlds. For incumbent banks and insurers, the challenge will be to leverage the possibilities of this new hyper-connected world to embed themselves in their customers’ daily lives. This between customer and provider will be a key defense against the growing ranks of digital newcomers seeking to disrupt and dislodge incumbents through an array of innovative and smart new offers.

Cognizant, Marketforce and Pegasystems combined forces to investigate how the retail financial services sector is preparing for these threats and opportunities. Our survey makes interesting reading: are aware that serial waves of disruption leave them little but to change their operations but, worryingly, we find too many are moving too slowly, either from an excess of caution or complacency. This report should serve as a wake-up call: organizations need to accelerate their change programs or risk finding their customers have already moved on.

3 - Executive Summary & Key Findings

A customer revolution is underway, overthrowing Our key findings show a sector alert to the established models and fueling challenges and opportunities of ongoing disruption. Financial services organizations digital disruption but equally aware that legacy must change how they operate to ensure they constraints and a risk averse culture mean they emerge on the winning side. Banks and insurance are trailing pacesetters in fintech. companies that cannot keep pace will find their Increased collaboration between incumbents customers, busy pursuing flawless models and fintech1 will be essential to ensure the best and smart solutions, have moved on without them ideas get the capital, scale and speed-to-market and they are stranded on the wrong side of the to continue to delight customers. digital divide – from which there will be no return. Into which of the following categories does your For while consumers still have the same financial most naturally fit? needs – to access , pay their bills, plan for Banking – it is no longer clear that they need Consumer an incumbent financial services provider to Financial Advice fulfill these needs. And customers, it seems, are Investment increasingly happy to build their own , cherry Insurance picking the services they want from an array of Payments -smart, digitally savvy new entrants – and, Other in the process, unpicking the value chains that underpin existing insurance and banking models. How significant a player is your organization in its principal market? Our global survey shows organizations are working hard to stay current but remain adrift of many Top 10 player key , from extreme personalization to Top 20 player Top 50 player blockchain . Worryingly, many of our Outside the top 50 players surveyed organizations do not expect to achieve key digital markers for another five years – but by 2020 it may already be too late.

Key Findings expectation, however: by 2020, 89 per cent of our respondents expect to achieve full omni-channel Customer experience: staying relevant integration. This either suggests a massive surge of investment over the next five years – or an Organizations are scrambling to remain relevant in denial about the scale of the task to new customers: 79 per cent agree that their ahead. organization will have to change its operations significantly over the next five years to keep pace This omni-channel offer is in a state of flux, with customers aged 18-25. as technology gives rise to new channels and renders others obsolete: 73 per cent expect to Customer experience: omni-channel integrate wearables into their channel strategy within five years and over the same time frame Today’s customers expect a flawless end-to- 70 per cent expect video chat to largely replace end experience across all channels, yet fewer branch appointments. Indeed, six out of ten now than 4 per cent of our respondents say they believe a digital-only channel model is viable. have achieved full omni-channel integration. Organizations are looking to make good on this

1. Fintech is the shorthand term used to describe the thriving technology start-up sector that is incubating disruptive new models for mobile payments, money transfers, , fundraising and - 4 Internet of Things: moving from price, to connected devices within five years, rising to 77 value per cent for Motor carriers.

The Internet of Things (IoT) promises another Indeed, there is the potential for a complete tidal wave of digital disruption but one that could rethink of the relationship between insured and provide real opportunities for financial services insurer, with data providing the bedrock of a organizations to better understand and serve partnership where both parties work together to their customers: make life better. 80 per cent of our respondents »» 93 per cent agree that finding innovative ways believe most insurers will regularly provide to provide value-added services to customers personalized risk information to their customers based on data-driven insight will be crucial to and that pre-emptive , rather long-term success than just providing compensation, will become core to the insurance value proposition by 2020. »» 86 per cent agree that once consumers Personalization: the customer of one recognize the data potential of the IoT they will increasingly seek to benchmark their own In an age of extreme customer expectations, behavior against their peers organizations need to use accelerated data flows to offer personalized experiences and frictionless Wearables: payments on the go service. This is on corporate agendas, with three- quarters of our respondents expecting to offer The IoT could transform payments, enabling full personalization, and 83 per cent planning to frictionless on-the-go payment. Our respondents predict individual requirements within five years. predict rapid take-off as consumers embrace the convenience of payment-enabled wearables: 20 Yet legacy systems remain a roadblock to full per cent expect it to be common for consumers personalization: 85 per cent said a lack of to make financial transactions using wearables single customer view prevented a high level of within one year, 59 per cent within two years and personalization and more than eight out of ten 91 per cent within five years. are struggling with data processing, analytics and access to sufficiently rich customer data. Other connected devices will also be payment- enabled by 2020: 87 per cent expect it to be Securing access to this rich data will require an common for consumers to make financial understanding that data is now a , transactions using Smart TVs and 68 per cent via which consumers guard and monetize on their home appliances. terms. Organizations will need to have strategies to access data and engage with the rise of the Insurance Rebooted: from grudge purchase Personal Data Store: 79% believe personal data to long-term partnership stores will be commonplace within five years.

This has clear implications for insurers, enabling Self-service customers them to not only improve , manage risk and offer dynamic pricing but also build Systems must also be readied for the rise of the DIY long-term relationships with customers in what customer, with connected consumers increasingly could be a once-in-a-generation opportunity to keen for self-service options in their dealings with move beyond the annual grudge renewal. More financial services providers. Yet just 38 per cent of than half our respondents expect the majority our respondents can meet a majority of customer of insurance policies in Household and Health requirements through automation as 94 per cent lines to be dynamically priced based on data from say legacy systems are the main bottleneck in meeting customer demand for full self-service.

5 - never heard of blockchain – those who do have When self-service options stumble, customers fall some knowledge of it see rapid adoption among back to the safety net of the contact center, where consumers: computer-generated recommendations are seen »» One in five (22 per cent of our respondents) as a significant solution to Customer Experience expect it to be mainstream practice for (CX) problems: 85 per cent agree that increased consumers to hold most of their financial use of computer-generated recommendations assets in a blockchain wallet within five years, in contact centers would reduce errors and rising to 55 per cent in ten years and 71 per ultimately improve customer outcomes. Yet, cent in fifteen years despite this compelling business case, our findings show budgets have not yet been unlocked, with »» 12 per cent expect the settlement of insurance just one in five making extensive use of computer- claims using IoT data, blockchain and smart generated recommendations to guide contact contracts to be mainstream practice within center staff. two years and 74 per cent expect it to be mainstream by 2025 Avatars, robots and Siri »» 42 per cent say it will be mainstream for Customers are increasingly happy to engage with consumers to hold their personal data, non-human interfaces to resolve their service including ID, in a blockchain within five years issues: 76 per cent agree the widespread use of virtual assistants such as Siri on the iPhone means customers are more willing to engage with An appetite for innovation? automated assistance and advice. This all suggests that financial services organizations continue to face relentless and This could be a profound change: almost three- significant disruption. The response must be quarters of our respondents agree that in the ongoing innovation in order to keep pace with future customers will interact with a human-like new entrants and ever-changing customer avatar until they reach the point of needing to behaviors. Yet this is an industry that is averse to speak to a real person. the kind of risk taking that fosters true innovation: Blockchain: on the radar only 30 per cent of our respondents said their organization would tolerate a 50 per cent failure Not only must banks and insurers battle rising rate on innovation pilot projects and more than customer expectations and fierce competition six out of ten believe their governing board should from new entrants but they also face a set the failure rate for innovation pilots much possible extinction-level threat from blockchain lower, below 30 per cent. . 60 per cent believe that blockchain, a distributed public ledger which can securely This runs counter to the fact that respondents record any information and the of overwhelmingly agree that innovation is essential any asset, will prove to be the most significant to keep pace with customers in a changing world: technology development to affect financial 98 per cent agree that the key to successful value services since the Internet and 45 per cent think proposition innovation in retail financial services the combination of blockchain wallets and peer- is to think beyond traditional industry boundaries to-peer (P2P) lending could herald the end of to identify new ways of meeting consumer banking as we know it. needs. True innovation is a mindset that doesn’t merely extrapolate today but completely rethinks While few companies are taking action yet – tomorrow. Achieving this will mean new ways of indeed 35 per cent of our respondents have working, of designing systems and of leadership.

- 6 Towards an Omni-channel Customer Experience 8

The Internet of Things – The Next Phase of Digital 13 Disruption

The Future of Personalization 19

The Future of 23

Is Blockchain the Next Big Disruption? 28

The Innovation Imperative 33

Conclusions 38

7 - Chapter One Towards an Omni-channel Customer Experience

Seven years on from the financial crisis and under the continued glare of regulatory scrutiny, financial services organizations are working hard to make good on promises to put the customer first.

Research suggests customer-centric rhetoric those born between 1980 and 2000, come into is, at last, translating into improved customer their own, as trendsetters and spenders: research satisfaction: one customer service index found by Standard & Poor’s expects this will hit from that customers of UK banks and societies, 2020 when, in the US alone, Millennials will have for example, are more satisfied than they have annual spending power of US$1.4 trillion and ever been2, while beleaguered insurers have seen represent 30 per cent of total retail . The rise a welcome rise in Net Promoter Scores, if not yet of this influential generation should put incumbent loyalty3. financial institutions on notice: Millennials not only have an appetite for disruptive new technologies There is, however, no scope for complacency as but also an affinity with brand-savvy digital leaders customer expectations, shaped by disruptive with the capacity to innovate, excite and engage. digital frontrunners, outstrip the capacity of Low fee peer-to-peer models and crowdfunding institutions to keep pace. Research suggests too platforms clearly strike a chord with a generation many banks are out of touch with what customers hard hit by the financial crisis and subsequent really want: one survey found 62 per cent of retail . banking executives believed their bank offered excellent service compared to just 35 per cent The Millennial Disruption Index, a three-year of customers4. And even when financial firms study of industry disruption conducted by Viacom appear to be getting it right, customers are still subsidiary Scratch, found that banking was most willing to stray in search of something new or vulnerable to disruption from this, the largest better as customer experience initiatives, once generation in American history. Some of the cutting-edge, quickly become yet another hygiene findings make bleak reading for incumbent banks factor for the connected customer5. And those struggling to stay relevant: one in three said they customers are online, on the phone, mobile and were open to switching banks in the next 90 days; in-branch – and expect their financial services a similar proportion predicted they wouldn’t need providers to keep pace with their unique multi- a bank at all in five years’ time; and an alarming touch-point journey. three-quarters said they would be more excited by financial services provided by Google, Amazon, This matters because customer inertia has been Apple, PayPal or Square than from their own banks. replaced by customer activism: dissatisfied This suggests incumbents cannot underestimate customers not only share their experiences via the threat posed by these digital leaders when it social media but also show growing propensity comes to the Millennial customer. to switch providers. Incumbents are at the sharp end of the new switching economy as digitally- savvy new entrants snap up restless customers6. agree that their organization will have to change its Millennials: Generation Disruption 79% operations significantly over the next five years to keep pace This trend will only intensify as Millennials, often with customers aged 18-25 referred to as Generation Y and loosely covering

2. UK Customer Satisfaction Index (UKCSI), Institute of Customer Service, October 2015 3. Consumer Intelligence report, published in Insurance Times, February 2015 4. Banking Redefined, IBM, 2015 - 8 5. Few people display unwavering loyalty to their provider, and two in five banking customers state they would consider switching their account to another provider, according to a 2014 report from YouGov 6. A Uswitch.com survey found that satisfaction with big banks is falling across the board allowing new entrants to sweep up votes Our respondents clearly recognize the growing recommendations and holistic real-time power of this generation and the challenge of customer data meeting their still-evolving needs: eight out of ten Millennials may find digital their natural comfort agree that their organization will have to change zone but they do still seek out human contact, its operations significantly over the next five years particularly in moments of financial stress or when to keep pace with customers aged 18-25. making more sophisticated decisions7. Indeed, some research suggests Millennials, particularly There is no shortage of research into the Millennial those aged 18-24, place real value on talking to customer and while the picture will continue to real people: one survey found the availability of evolve as the generation matures, there are some real people to talk to topped brand and quality clear preferences: of digital services when selecting an insurance »» For the generation that sleeps with their provider8. smartphone to hand, technology solutions must be user-friendly, secure and reliable – Millennials: the “omni-generation” always

»» Value for money really matters: Millennials For this reason, financial institutions seeking to shop around and will trade data for discounts court this generation must provide a flawless omni- channel service. Other industries have already »» Self-service is increasingly preferred for speed uncovered the bottom-line benefits of providing and convenience a seamless transition between channels. In the retail sector, for example, shoppers who buy in- »» Human interactions still count and should be store and online have a 30 per cent higher lifetime personalized and authentic value than those who shop using only one channel, providing a real incentive for retailers to invest in For financial services organizations, seeking to technology solutions that enable customers to 9 emulate the customer-obsessed experiences convert on any channel . Financial institutions pioneered by digital leaders like Amazon, this are not immune to these trends: one global study “Millennialization” trend has clear operational found that omni-channel customers not only give implications: their bank a higher Net Promoter Score but also hold more products with their primary bank than »» Flawless omni-channel service will increasingly digital-only or branch-only customers. be a hygiene factor as customers fuse their online and physical experiences This virtuous circle of engagement cannot be ignored by financial services organizations as they »» Product and service innovation will be seek to retain market share in the face of fierce essential as Millennial customers reject high competition. Research found that globally more fees unless they see clear value in return than one third of customers bought a new banking »» Technology solutions must support self- product at a bank other than their primary bank service, whether the customer is online or in in 2014 and this rate of invisible defection will only the branch accelerate as digital start-ups with smart solutions make it easy for customers to defect. In response, »» Recruitment, training and employee incumbents will need to build a flawless omni- reward structures must focus on delivering channel offer: seamless, simple and personal genuine personal interactions, with front- experiences with a smart digital component that line staff supported by computer-generated acts as a gateway to other products.

7. A survey by Investing found Millennials seek out financial advisers in times of market volatility 8. Born Yesterday: Will Millennials Disrupt the Insurance Industry? Pegasystems, 2015 9. IDC 2015 from Google 9 - How much progress has your organization made in achieving How soon do you expect your organization to achieve full a seamless customer experience across all available omni-channel integration? channels? Within 6 months

Already achieved full Within 1 year omni-channel integration Within 2 years Integrated most channels but not all Within 5 years

Integrated a few Within 10 years channels but not all Never We have not integrated

any channels 0 10 20 30 40 Not applicable - we have only one channel New channels, new customers 0 10 20 30 40 50 60 These investments must include new and emerging Fewer than 4% have achieved full channels in order to stay relevant to the on-the- go consumer. Although the smartphone remains omni-channel integration... the consumer’s device of choice, and is likely to remain so for some time, market penetration Yet our survey finds this is still a work in progress of wearable devices is accelerating: worldwide for most retail financial services organizations: just shipments topped 76 million in 2015, up 163.6 per under 4 per cent of our respondents claim they cent on 2014 and will hit 173.4 million in 201911. have achieved full omni-channel integration. And This is not just a consumer-led trend: by 2018, while 85 per cent have integrated at least some Gartner estimates that two million employees will channels, there is still a resistant 10 per cent that be required to wear health and fitness tracking have yet to integrate any channels at all, leaving devices as a condition of employment. their customers exposed to inconvenient and inconsistent service. This is already a frustration For now, consumer adoption of wearables is for customers: one study found that customers dominated by fitness trackers, largely because of typically use two communication channels to their focused use and accessible price points, but a resolve customer service issues and more than tipping point is approaching: smart wearables are half said they frequently received conflicting forecast to take the lead in 2018 as advancements 10 information from the different channels . in user interface and functionality drive uptake. ...but in five years’ time 89% expect to get there expect to integrate wearables 73% into their channel strategy Financial firms are clear, however, that this within five years is not sustainable and the vast majority are now investing heavily to close the gap with the frontrunners: more than half (53 per cent) of our respondents believe they will achieve full omni- These forecasts should serve as a wake-up call channel integration within two years and 89 per for financial services organizations. Just nine per cent will get there within five years. cent of our respondents offer wearable devices as a channel and a further seven per cent have pilots under way. This is clearly on the industry’s

10. The Millennialization of Customer Service, Nuance White Paper, 2015 11. International Data Corporation Worldwide Quarterly Wearable Device Tracker, September 2015 - 10 radar, however: almost three quarters (73 per from the camera on their smart device. One cent) expect to have integrated wearables into survey suggests 75 per cent of consumers would their channel strategy within five years. welcome the options to deposit checks using their smartphones14. Frontrunners are already trialling wearable devices to communicate and serve their customers: in Singapore, for example, Mercedes Benz Financial expect video chat to largely Services (MBFS) has launched an app for Apple 70% replace branch appointments Watch allowing customers to receive up-to-date within five years information on their finance contracts through a simple glance at their wrist, including the number of remaining payments on an instalment plan and the next payment due date. There is a clear Video chat, a channel that customers have appetite for this, with nearly one in three of MBFS’ embraced in their personal and work lives, can customers currently of this wearable reduce branch visits while still delivering human account management tool. Financial services contact: Dutch bank ABN Amro, for instance, organizations that fail to keep pace with customer has been advising on and processing mortgages appetite for smart wearables could find it is a via webcam so that customers do not have to competitor that steals this opportunity for a 24/7 physically hand over documents at a branch, connection with the customer. while is out a 24/7 video chat banking service that lets customers communicate More clicks, less bricks with employees from their mobiles, tablets or laptops. This could lead to a rapid drop-off in Customers, even Millennials, still crave the human branch use as our respondents see video chat touch when managing their yet the bricks- going mainstream within five years: almost one and- branch and the much-despised call third expect video chat to largely replace branch center too often leave them dissatisfied by their appointments within two years and 70 per cent experiences. Bain & Co estimates that 50 – 70 per expect this to happen within five years. cent of call volumes at a typical bank are bad or avoidable12. believe a digital-only channel Many routine interactions work better and cost 64% model is viable less when handled digitally: certainly the uptake of online and suggests customers like the convenience of having their finances at their fingertips. Indeed, banks that encourage branch use may actually be driving customers Indeed, as new human-centered digital channels away: in the US, frequent branch use correlates emerge, the long-predicted demise of the branch with an almost three times higher likelihood of could enter its final stages. A digital-only channel switching than infrequent use13. model looks increasingly viable according to 64 per cent of our respondents. In the UK, digital-only Technology can be used to reduce branch visits: start-up Atom has received regulatory greenlight Barclays, for example, is trialling the use of mobile from the Prudential Regulation Authority (PRA) check deposits, which allows customers to pay and Financial Conduct Authority (FCA): there will in checks by sending a digital image of the check be no branches, with Atom operating entirely through an app on a smartphone.

12. Customer Behaviour and Loyalty in , Bain & Co, November 2015 13. Bain & Co, November 2015 14. Survey by Intelligent Environments, July 2013 11 - Given the lower cost to serve and the reduction in petty frustrations that can arise from branch interactions, those that back a pure digital offering could start to open up clear blue water between those still tethered to a bricks-and-mortar network. Given the pace of change, institutions must be prepared to have all models on and off the table.

Operational next steps

Our findings make clear that financial services organizations have a long way to go to meettheomni- channel expectations of today’s connected customer. For the 96 per cent that fall short of full omni-channel integration, the key message must be to start now and work fast. And that work must target true omni- channel integration rather than just adding new channels to the existing muddle: the projected proliferation of connected devices and customer channels means multi-channel strategies will be increasingly unworkable. Organizations must build a single architecture channel strategy that combines consistency with flexibility in order to deliver a seamless customer journey across existing, emerging and yet-to-be conceived channels.

- 12 Chapter Two The Internet of Things – The Next Phase of Digital Disruption

A new hyper-connected world is emerging. A torrent of machine-to-machine (M2M) communication is now being added to the vast volumes of data generated by our digitised payments, social media postings and web movements.

In 2016, 5.5 million new things will get connected Yet just as data goes into hyperdrive, so consumers every day, with 6.4 billion connected things in use are rethinking the data free-for-all. Unnerved by worldwide, up 30 per cent from 2015. By 2020, high profile data breaches and armed by there will be 20.8 billion connected things15. And increasingly stringent data protection regulation, this is only the beginning: Cisco estimates that customers will increasingly only allow access to 99.4 per cent of physical objects that may one day their data when they trust a counterparty and be part of what it calls the “Internet of Everything” see clear value in return. Banking and insurance are still unconnected. providers cannot afford to be shut out of the data marketplace – they must build trust through This of data opens up opportunities for transparent policies and robust systems and find financial services organizations to find new ways new models to motivate customers to share data. to understand and engage customers. Asking Few disagree with this: nine out of ten of our the right questions of the right data will allow respondents agree that finding innovative ways to companies to transform the customer experience provide value-added services to customers based by anticipating their needs, personalizing products on data-driven insight will be crucial to the long- and providing dynamic pricing. Digital leaders term success of their organization. such as Amazon, Google and Uber understand the power of data, and they use its insights to The wearable devices market already shows, deliver smart and intuitive technology solutions however, that customers are comfortable sharing and superlative customer experiences. It is one data when its collection is in tune with their own reason why their entry into financial services is so personal goals. Mass-market apps like Jawbone feared. UP59 and Fitbit60 demonstrate consumers will wear gadgets to capture a wide range of data While incumbents are not defenseless - banks and points about their day to day activities in return insurers have their own treasuries of customer for insights into their personal health and fitness data - unless they keep pace with the IoT , they will and that of fellow community members. Indeed, be blind to much of the data their customers are benchmarking is a popular way to engage generating as they move through this new hyper- customers and incentivize positive behaviors: connected world. As data-driven insights power Jawbone, for example, reports that when business transformation, from risk prevention to community members have three or more friends hyper-local personalization, the gap between the on their team, they move at least 10 extra miles a “data haves” and “have nots” will widen, marking month. a clear divide between the winners and losers of the IoT age. agree that once consumers recognize the data potential agree that finding innovative of the Internet of Things, they ways to provide value-added 86% will increasingly seek to 93% services to customers based benchmark their own on data-driven insight will be behaviour against their peers crucial to long-term success

15. Gartner, November 2015

13 - This data-for-insight exchange offers a clear steadily, with 2016 set to see significant growth model for the financial services industry in the with the total value of transactions age of IoT, allowing banks and insurers to embed expected to surge 210 per cent as nearly one in themselves in the lives of customers by providing five smartphone users make mobile payments17. meaningful communication that adds real value As contactless and mobile payments become and promotes engagement. Indeed, peer-to-peer mainstream, it will allay consumer caution about benchmarking is expected to be a consumer-driver making payments using other connected devices. trend that will facilitate data sharing: certainly 86 per cent of our respondents believe that once Wearable fitness trackers are an obvious entry consumers recognize the data potential of the point. In the US, fitness tracker Jawbone has IoT they will increasingly seek to benchmark their already linked one of its devices, the UP4, with own behavior against their peers. Gamification mobile payment capabilities through a link-up techniques will make this form of data-sharing with . Disney’s MagicBand, enticing and engaging, allowing drivers to use meanwhile, is an example of a wearable success data from in-car telematics to rank their driving story: the contactless wristband for its theme against other policyholders or householders to parks and can be used as a room key, use data from smart energy meters to compete on theme park ticket and payment account as well as energy-efficiency. As data becomes a commodity, enabling personalization of the guest experience. those organizations that can offer real value to Apple Watch already acts as a portable payment consumers in return for access to their data, be device in the UK and the US through Apple Pay. it insights into their own behavior or that of their Further ahead, a Canadian start-up is developing peers, will be rewarded by joining the “data haves” the Nymi Band, currently undergoing pilot testing of the future. with MasterCard, using biometric security based on the customer’s unique heartbeat, a solution Pay-as-you-go, any time, any where that could overcome the latent security concerns of consumers. The IoT is building a world where everything, from the clothes we wear, to the cars we drive, the gadgets we use and the we live believe it will be common for in, are connected and transmitting data about 91% consumers to make our routines, our habits and behaviors. This financial transactions using proliferation of connected devices has clear wearables within five years implications for enhanced payment capabilities, enabling frictionless payments for consumers on- the-go through near-field communication (NFC) It is not just fitbands and smart watches that could facilities or at home through smart appliances. have a payments capability. Smart garments could also be heading to the high street as the This is still an emergent trend. Cards remain the technology emerges from the testing phase and go-to payment option but there’s clear appetite is promoted through uptake by athletes and for more convenient options than chip-and-pin as coaches18. Indeed, Barclays has already teamed consumer comfort with contactless cards grows16. with Lyle & Scott to develop a NFC payment Payments via mobile phones are already growing: capability built into the sleeve of a jacket. according to one survey, the number of people in the US using their phones to pay for goods and services at the point of sale will continue to climb

16. According to the UK Cards Association (Kevin Jenkins, MD UK & Ireland at Visa Europe in The UK Cards Association press release, September 2015), the number of contactless transactions in September 2015 topped 103.2 million, up 220 per cent over the year, with touch-to-pay now being described as the “new normal” in the UK - 14 17. Emarketer, October 2015 18. Gartner, November 2014, believes smart garment shipments will grow from 0.1 million units in 2014 to 26 million in 2016 “How soon will it be common for consumers to make financial In the home, meanwhile, tech giants are already transactions using the following?” rolling out smart home kit, including intelligent 50 thermostats, smart meters, smoke alarms and lighting systems while white goods manufacturers 40 are adding sensors to washing machines, dryers 30 and fridges. Many households already have a Smart TV – one with built-in internet connectivity 20 allowing it to access a range of online services –

10 and already tech companies are developing allied payment services. , for example, has 0 developed a TV version of Samsung Pay for its Wearable Connected cars Smart TVs Connected devices (e.g. at petrol white goods/ Samsung Smart TV, allowing owners to associate a stations) smart home credit or with the payments service so controllers if they see an app, a game or other item they just press the “Pay Now” button and enter a security Within 1 year Within 2 years pin to purchase it from the comfort of their sofa. Within 5 years Within 10 years Never Our respondents clearly see this appealing to consumers: while just 12 per cent expect this to This is early days but our respondents predict rapid be a common feature within one year, give it a take-off as consumers embrace the convenience further 12 months and more than half expect it of payment-enabled wearables: 20 per cent to be common for consumers to make financial expect it to be common for consumers to make transactions using Smart TVs, rising to 87 per cent financial transactions using wearables within one within five years. year, 59 per cent within two years and 91 per cent within five years. Banks are ahead when it comes to wearables: 26 per cent of banks are think it will be common to already using or piloting wearables as a customer make payments through communication or service channel compared to 68% smart appliances within five just seven per cent of insurers, even though there years are clear benefits to insurers to offer pay-as-you- go cover using data from wearables. Payments via white goods appliances and smart Given limited adoption to date, this suggests home controllers will be slower to take off: only 5 the field remains open for the industry to regain per cent expect these to be common within one the payments initiative and establish an early year, rising to 23 per cent within two years and 68 mover advantage in wearable payments for the per cent within five years. Even so, the fact that connected customer. more than two-thirds of our respondents expect consumers to be commonly making payments Into the smart home through a smart appliance by 2020 is a sign of just how quickly the IoT could revolutionize all aspects of daily life. expect it to be common for consumers to make Banks must be alert to these developments: if a 87% financial transactions using bank’s app rather than an inbuilt Smart TVs within five years is used when your smart refrigerator orders milk, the bank owns the data and the relationship,

15 - creating new opportunities to gain insight, engage carriers already have innovative telematics offers, customers and remain relevant. which are growing in popularity with drivers as a means to reduce costly premiums or reduce costs of running a car: telematics-driven Discovery Insurers: building new relationships Insurance in South Africa provides fuel voucher rewards to customers based on data about their For the under-pressure insurance industry, the driving. IoT will undoubtedly be a data shot in the arm. A sector that has seen margins shredded by a fire- How soon do you expect the majority of insurance policies storm of price-driven competition and spiralling to be dynamically priced based on data from connected claims costs is being presented with a one-time- devices? only opportunity to reinvent itself: rather than 50 the annual renewal being a grudge purchase 40 dominated by price, data inflows from the IoT will allow insurers to position themselves as trusted 30 partner of the policyholders, providing data-driven 20 insights to better manage risk, identify unmet needs, charge by the minute while on-cover and 10 work hand-in-hand with policyholders to improve 0 quality of life. Motor Household Health

expect the majority of motor Within 1 year Within 2 years 77% insurance to be dynamically priced within five years Within 5 years Within 10 years Never

Health insurers are also catching on to the benefits of using data from fitness trackers to reward Data flows from sensors embedded in , policyholders for healthy lifestyle choices. South household appliances, buildings and personal African health insurer Vitality is already providing fitness trackers will allow insurers to finely perks to customers who use the health app Move. calibrate their risk exposure and offer dynamic pricing based on actual customer behavior. For an industry that has been slow to capitalize believe most insurers will on the digital revolution, creating openings for 80% regularly provide personalized tech-savvy P2P insurers to carve out market risk information to their share, the compelling bottom-line benefits of customers by 2020 improved underwriting and reduced claims costs are expected to spur rapid investment in IoT initiatives. Our survey shows huge appetite Yet the success of these initiatives goes beyond to use M2M data to overhaul pricing: more than data-for-discounts. The data from fitness trackers, half expect the majority of insurance policies in telematics and other IoT devices presents insurers Household and Health lines to be dynamically with an opportunity to engage customers on a priced within five years, rising to 77 per cent for regular basis rather than the once-a-year renewal Motor carriers. Motor’s head start is a reflection or the stress-point of a claim. They could, for of its early adoption of telematics. A number of example, provide personalized risk information:

- 16 patterns in the customer’s neighborhood, Financial Services and the Internet traffic black spots on regular routes or increased of Things: beyond payments health risks from lack of activity. In the US, Ohio-based Progressive uses a telematics offer, Snapshot, that beeps when customers make a It is not just insurers that will have the potential to hard brake, providing instant feedback to help re-imagine the relationship with the customer in customers improve their driving. With Snapshot the IoT age. Bankers, too, will be able to use the tide reportedly boosting recruitment and retention of new customer data to better understand their rates – with a retention uplift of 40 per cent for customers, offer personalized financial advice: those that earn a substantial discount19 – it’s clear a holistic view of customer spending would, for that the feedback of data to customers can deliver example, allow banks to provide highly relevant real wins for insurers on the renewals front-line. financial advice based on real understanding of a Our respondents certainly see this as an attractive customer’s spending habits. model to engage customers: 80 per cent of our respondents believe most insurers will regularly Location data has the potential to reduce fraud provide personalized risk information to their by enabling banks to use data from multiple customers by 2020. points to authenticate transactions or automate time-consuming paperwork: flagging location data when viewing properties, for example, could agree that within five years, trigger autofill data into a mortgage application pre-emptive risk management or trigger a claim at the site of a accident. 80% will become core to the Beacons in bank branches could help improve the insurance value proposition branch experience for customers, ensuring more timely assistance and a seamless flow through the premises, while analyzing customer propensity to use self-service kiosks and ATMs. IoT data could By sharing the insights gleaned from a customer’s also be used to better understand collateral and day-to-day behaviors, insurers will be able to manage lending risks: data from in-car telematics “nudge” customers towards behaviors that reduce could be used to fine-tune the terms of a car their daily risks, adding real value to the insurer- while readings from fitness trackers might expose insured relationship. Insurers would be able to when customers are engaged in activities that are inform drivers, for example, that their favored detrimental to their financial health, be it gambling route to work has black ice and recommend safer or drug taking. alternatives, inform a driver when it is time for an oil change, or use data from a fitness tracker There will need to be clear privacy policies and to advise a diabetic to test their blood sugar. By opt-ins for organizations to access the customer’s embedding themselves in the policyholder’s life day-to-day lives: products and practices must be through valued interactions and insight, insurers designed with customers’ best interests at heart, will be able to disrupt the cycle of churn that has and data collection must always be transparent so undermined the profitability of many lines. Our and systems secure. Get this right, and IoT- respondents clearly see data-sharing as a key to enabled financial services organizations will be building a sustainable insurance model: eight out able to take the customer relationship to the next of ten agree that within five years, pre-emptive level. risk management, rather than just providing compensation, will become core to the insurance value proposition.

19. Progressive CEO Glenn Renwick, November 2013

17 - Operational next steps

Increased data inflows from IoT could transform the relationship between financial services providers and their customers. Yet it is not the volume of data that counts: it is the ability to use this data in real time to make better business decisions now and action customer experience improvements now to make every moment in the customer journey count. When it comes to the IoT, the operational focus for banks and insurers should be adding value through real-time analytics and decisioning of the data they already have – which is already too vast for most organizations to make sense of – before they seek to hoover up more data from the ever-expanding data universe.

- 18 Chapter Three The Future of Personalization

The Internet brings the world to our fingertips and makes us kings of all we survey: we curate our own news feeds that reflect our own interests and prejudices, our cameras are turned not on the world but ourselves, we broadcast the minutiae of our daily lives and log our steps, our heartbeats, our sleep.

We are Generation Selfie and, encouraged by Banks face similar pressures as new entrants our experiences with digital leaders Amazon continue to eat away at core business, from and Netflix, we increasingly expect the banks payments to loans, unbundling traditional banking and insurers we interact with to have operating value chains. To retain customers in the face of this models in place that recognize us as individuals threat, incumbents need to position themselves and personalize our unique customer journey as life-long partners able to offer personal and accordingly. valued insight to help customers navigate their increasingly complex financial lives. Yet too many organizations still rely on blunt customer segmentation tools, based on income, It is not just about retaining the customers you age and postcode, which fail to recognize the already have: effective personalization can also diversity of preferences and behaviors of their deliver top-line growth. When Dutch health insurer customers. Too often interactions with financial Agis deployed real-time personalization to services involve customers having to repeat improve the relevance of content for each visitor the same information and organizations failing it achieved a 24 per cent uplift in conversion. This to provide a one-stop service across different model is now being used to improve telephone products or to understand a customer’s history. sales by dynamically offering a different phone These disjointed experiences not only leave number to connect customers to the most customers frustrated by poor service but also appropriate call agent their individual needs, with expose how little they are understood or valued existing customers presented with a different as an individual by their financial services provider. phone number, answering the customer desire Little wonder start-ups can gain traction by treating to be recognized by the corporations they are customers as valued partners: personalized already invested in. and the use of crowdsourcing for product ideation ensure customers feel a valued One third of our survey respondents part of the experience rather than just another expect their organization to offer full number. personalization within two years and three- quarters within five years...but24 per cent Customize to survive have no plans to offer this

Insurers have been trapped in a price-driven war for market share: with some markets already Financial services executives are clear they cannot teetering on the margins of profitability, there is ignore customer demand for personalization: nowhere left to go. A sustainable model for the one third of our survey respondents expect their future must seek out higher margins and capitalize organization to offer full personalization within on this one-off opportunity to shift from an annual two years and three-quarters within five years. grudge purchase towards a valued and long-term Worryingly, however, just under one quarter (24 relationship. per cent) have no plans to offer full personalization:

19 - this resistance could prove damaging as customers Building this highly detailed picture of the flock to competitors offering precision calibrated customer, and just as importantly acting on that “customer of one” experiences. data in real-time, will require access to data from the devices customers have with them the most:. When do you expect your organization to have moved Wearable devices that are with the customer beyond customer segmentation, into the following? always and everywhere are expected to show the Prediction of individual Full personalization most rapid take-off in terms of customer profiling: requirements/behavior 38 per cent expect to be using data from wearable 50 50 devices in just two years, up from just 5 per cent 40 40 now and rising to 68 per cent within five years.

30 30 Meanwhile, given our love affair with our cars, 20 20 the connected car is expected to become a data juggernaut in the years to come, providing insight 10 10 not only into our movements but also our attitudes

0 0 to risk, through our driving behaviors, and also our preferences, through the music we download, the shops we visit and the on-the-go payments Within 1 year Within 2 years we make. Inevitably given the pace of the renewal Within 5 years of cars already on the road, it will take longer for We have no plans to achieve this at present financial services companies to access data from connected cars: 22 per cent expect to use data The data inflows required to deliver this level from connected cars to profile customers in the of customization will transform all interactions, next five years, rising to 59 per cent in five years. enabling organizations to predict individual Insurers have a clear lead over banks here: 21 per requirements and behaviors so that each touch cent are already using data from connected cars point anticipates next steps to create a flawless and 44 per cent will be in two years’ time, whereas end-to-end service: 40 per cent of our respondents none of our surveyed banks are currently using expect to predict individual requirements within this data and only 11.5 per cent will be two years two years, with 83 per cent expecting to achieve out. this within five years. Again, it seems the CX gap between those that can anticipate a customer’s Smart hubs, still an emerging home technology, needs and the 17 per cent that have no plans to will also take time to go mainstream: one in five achieve this will be telling in the years between of our respondents expect to use data from now and 2020. smart home hubs in the next two years. This quickly accelerates, however, as adoption of the technology increases, particularly as Millennials Up close and personal with set up home: this digitally-savvy generation is customers twice as likely as the total population to install a smart home product20: six out of ten of our respondents expect to use data from smart home expect to be using data from hubs five years out. Again, insurers take the lead wearable devices in just two here, seeing clear synergies between data flows 38% years, rising to 68% within from smart home hubs and connected white five years goods and their core business of assessing and pricing risk.

20. The NPD Group Connected Intelligence Home Automation Advisory Service, June 2015, reported that one in four Millennials has already installed at least one such device and 41 per cent already aware of and interested in owning smart home products - 20 When do you expect your organization will use data from the 61 per cent cited the scale and complexity of the following sources to build a profile of its customers? challenge and almost a quarter cited previous 40 failed projects as a reason for slow progress21. It is clear, however, that with agile digital new entrants 30 snapping at their heels, time is running out for financial services organizations, and resolving the long-running saga of legacy systems must now be 20 a priority.

10

struggle with the availability of 0 87% sufficiently rich customer data Wearable Connected Smart home Connected Devices Cars hubs white goods We already do this Within 1 year Within 2 years Within 5 years Our respondents also cited the difficulty of processing very large data sets (cited by 84 per Within 10 years Never cent) as an obstacle to personalization. Certainly the torrent of data now flowing through the Data road blocks modern enterprise is testing all businesses22 and the acceleration of M2M data as the IoT is brought to life will only compound this challenge. And it Legacy systems are a significant barrier... is not just the processing of large data sets that is thwarting personalization: 85 per cent of our say a lack of single customer respondents are also struggling to find sufficiently view prevents a high level of powerful analytical tools. 85% personalization In our survey, the top obstacle to personalization was the availability of sufficiently rich customer data, cited by 87 per cent of respondents. Personalization may be on the agenda but our Organizations may be struggling to crunch survey finds organizations are struggling to make through existing data inflows but they are clear this a reality. Legacy systems are a significant issue that additional data sources will be required to for incumbents, with 85 per cent citing a lack of deliver finely calibrated personalization. Data single customer view as an obstacle to achieving flows from the companion devices that define a high level of personalization. Achieving a holistic 21st century life, be it the connected car or app view of the customer has long been a challenge data from the smartphone that never leaves our for financial services organizations, with customer side23, will be key to building the detailed view that data held in disparate product and departmental enables a “customer of one” service model. silos, blinkering their view of the customer and creating disjointed customer experiences. One survey of insurance executives found that Privacy, trust and transparency organizations have been deterred from building the long-elusive single view of the customer Customers may want personalized service but because of the scale of the legacy challenge: 71 per they are increasingly aware that the data flows cent cited the high cost of technology solutions, that enable personalization carry both clear value

21. Customer-Centric Differentiation in Insurance: Meeting the Data Challenge, Visionware, September 2015 22. IDG Enterprise’s 2014 Big Data survey reported that 65 per cent of respondents felt occasionally overwhelmed by incoming data, 53 per cent per cent reported that the data influx had delayed important business decisions and 42 per cent said business had been either occasionally or frequently lost due to an inability to quickly find sought-after information 21 - 23. 87 per cent say of Millennials say their smartphone never leaves their side, day or night. Research by Kleiner Perkins Caufield & Byers, Internet Trends 2015 and, following a number of high profile security the customers through opt-ins and investing breaches, risks. Indeed, not only are customers in robust encryption and security will be key to increasingly prepared to put a price tag on their accessing the data bounty generated by the IoT. value of their personal data24 but they are growing Here banks do have an advantage: a survey by warier about which organizations they trust to Unisys in 2014 found consumers have more trust handle and store their data: a survey from the in banks to look after their personal data than Economist Intelligence Unit found 71 per cent telcos, utilities, supermarkets and governments. of people in the UK lack confidence in the way companies collect, use, handle and share their data. believe personal data stores And while the IoT makes it possible for 79% will be commonplace within organizations to stalk customers through the five years digital and physical worlds, it is clear there are limits to how much personalization customers will tolerate. One survey of in-store interactions Customers are not passive in this data trade and found there’s a clear boundary at which point are being increasingly proactive to understand, personalization strays from being helpful to protect and monetize their personal data. This unwelcome: “creepy” personalization included trend is evidenced by the growth in personal facial recognition that enables targeted advertising data stores (PDS), an online service that enables (73 per cent), salesperson greeting you by name an individual to store, manage and release their based on mobile trigger (74 per cent) and facial personal data in a highly secure and structured recognition that identifies your spending habits 25 way. Our survey indicates that PDS will be to salesperson (75 per cent) . While this research commonplace within five years: while only nine per focused on retail interactions, banks intending cent of our respondents as individuals currently to use facial recognition to personalize branch use a PDS, they expect this to increase rapidly, experience, might want to take note. to 45 per cent within two years and 79 per cent within five years. Banks and insurance companies Customers, of course, are adjusting to this new must be ready to respond to the data-empowered data ecosphere: while facial recognition may be customer, both with a strategy to incentivize “creepy” now, in time it may be welcome as a way customers to provide access to data, leveraging to validate secure transactions. This adjustment their trusted reputation, and operationally with will be helped if organizations are consistently systems that interact seamlessly and securely clear and transparent about their data intentions. with the customer’s PDS. Building trust through transparency, empowering

Operational next steps

Legacy systems continue to thwart efforts to transform the customer experience. Organizations must embrace a rules-based CRM system to buffer the customer from this toxic tangle, shifting the data to the front office where it can be put to use delivering a seamless and personalized customer experience based on a holistic view of the customer.

24. A survey from Symantec, State of Privacy Report, February 2015, found that 8 per cent of consumers now value their information at over €10,000 25. Instore Personalization: creepy or cool? Survey by RichRelevance, April 2015 26. Gartner, June 2015 - 22 Chapter Four The Future of Customer Service

In the future, customer service will increasingly mean self-service. Back in 2011 Gartner predicted that by the end of this decade 85 per cent of customer relationships would be managed without human intervention.

This year the advisory firm identified self- service as one of the top three CX priorities for organizations26 as consumers increasingly can meet a majority of seek out the convenience of DIY, be it making 38% customer requirements banking deposits or initiating an insurance through automation claim. Customers are certainly keen on the DIY approach, as their extreme expectations are ever harder for organizations to fulfil: 82 per cent of companies agree that their customers are harder Yet our research shows financial services to please than three years ago, 60 per cent say organizations fall far short of offering a fully- it is difficult to please them and 42 per cent say automated self-service model: just 38 per cent customers use social media to shame their can meet a majority of customer requirements company into doing what they want. Customers through automation. This means six out of ten themselves admit to diva-ish tactics: when seeking organizations are failing to deliver a service that help online, for example, 66 per cent expect not only keeps customers happy but that also a same-day response and 43 per cent want a lowers the cost to serve. Banks are ahead on self- response within an hour or less while the much service, with 45 per cent able to currently meet maligned call center is for a majority of customers the majority of customer requirements through a channel of last resort27. Research shows that automation compared to 22 per cent of insurers. nearly three out of four consumers prefer to solve Given that automation offers a clear way to speed their customer service issues on their own, and up routine tasks, strip out costs and please almost two thirds feel good about themselves customers, insurers cannot afford to fall behind and the company they are doing business with on the DIY revolution. when they resolve a problem without talking to customer service28. Millennials are particularly Proportion of customer requirements that can currently be keen on self-service options, making the DIY shift met by self-service essential to win business from this tech-savvy self-reliant generation. Even Millennials, however, All say they prefer the personal touch when it comes The majority to more sophisticated financial transactions, such as investments and pensions. By offering a A significant minority self-service route for low value transactions and A tiny minority routine tasks, organizations will then be able to spend more time serving those who still require None personal attention, be it to handle more complex issues or to meet an individual’s preference for human interaction.

27. Technologies, October 2014 28. Survey by Aspect Software, April 2015 29. The State of Unassisted Support, 2014, Technology Services Industry Association 23 - One study of tech support in the The DIY Toolkit US found that the cost of resolving a customer service incident via phone now averages US$510; While full self-service may lie five years or more off email incidents, with their back-and-forth for the majority of our cohort, in the interim we conversations to gather additional data stretching find financial services companies are deploying out resolution, average nearly US$700. Real-time a range of services and tools to help guide chat interactions, however, average US$150 but customers through online interactions: static help the real win is web self-service, at just US$4. This pages (used by 81 per cent), online chat (80 per is a win:win, because the same study found that cent), co-browsing (79 per cent), avatars (58 per most customers prefer this low cost self-service cent) and help from the contact center (56 per channel when seeking support for a product cent). problem (65 per cent) compared to phone (just 11 per cent) or social media (five per cent)29. When asked which was the most used channel by customers who found themselves stuck or confused during an online interaction, the top answer was help from a contact center (44 per say legacy systems are the cent): it would seem that customers still seek main constraint on meeting the safety net of human interaction when self- 94% customer demand for full service options stumble, making it imperative self-service that organizations have seamless backup from the contact center. The next most used backup by customers was avatars (42 per cent), which Financial services organizations that are serious indicates that customers have no particular about customer experience must remedy this preference whether the support is human or self-service gap. Our respondents are clear about virtual as long as their query is handled seriously, the main obstacle, with 94 per cent identifying speedily and satisfactorily. Nordic insurance legacy systems as the main constraint on meeting company Alka, for example, uses live chat to customer demand for full self-service. A key support customers through the online process, challenge is that these out-dated and siloed enabling agents to handle multiple enquiries at systems cannot use customer data in real-time, once while also growing the top line, as it has which means routine tasks are derailed because proved popular as an independent sales channel. of incomplete or out-of-date data: just nine per The insurer receives 3,000 and 5,000 customer cent of our respondents say their organization enquiries per month via the live chat format, a can use all the data it holds on the customer in sign of its popularity with customers. real time during every customer interaction. This is expected to rapidly change as organizations scrabble to keep pace with customer self-service agree that increased use requirements: 46 per cent expect to be able to of computer-generated use all customer data in real time within two years 85% recommendations in contact and 86 per cent within five years. Addressing this, centers would reduce errors given the scale of the legacy system challenge, will and ultimately improve mean organizations must move business logic customer outcomes... from the tangle of back-office legacy systems to a user-friendly digital front-office. An important tool in the self-service toolkit is the use of computer-generated recommendations, whether delivered by an avatar or a contact

30. Blue Prism case study

- 24 center agent during live chat: indeed, 85 per How soon do you expect your organization to make extensive cent of our respondents agree that increased use of computer-generated recommendations for guiding use of computer-generated recommendations contact center staff? in contact centers would reduce errors and 50 ultimately improve customer outcomes. 40

30 ...but just one -in- five make extensive useof computer-generated recommendations to 20 guide contact center staff 10

0

Within 1 year Within 2 years Yet this remains an aspiration: just one in five Within 5 years Within 10 years Never make extensive use of computer-generated recommendations to guide contact center staff Indeed, customers are fast outstripping financial and only 14 per cent to directly guide customers. services providers in their willingness to embrace There are signs of change, with 43 per cent and new CX models and are quickly becoming 48 per cent conducting pilots or making minor accustomed to interacting with automated and use of computer-generated recommendations virtual assistants: 76 per cent of our respondents for contact center staff or direct to customers agree the widespread use of virtual assistants respectively. However, that still leaves more than such as Siri on the iPhone means customers are a third engaging in customer interactions without more willing to engage with automated assistance data-driven insights to speed and smooth the and advice. Companies serious about staying customer experience. Despite the compelling relevant will need to keep pace with customers, business case to deploy computer-generated who consistently show an appetite to adopt and recommendations to improve CX, uptake remains adapt to innovation: of those respondents not sluggish. This suggests organizations have not yet making extensive use of computer-generated yet appreciated the urgency of the competitive recommendations for contact center staff and threat, given customer appetite for the kind of customers, eight out of ten plan to achieve this smart solutions pioneered by innovation leaders. within five years. The one in five who expect this to take ten years or more could find the gap between customer expectations and service agree the widespread use reality becomes too wide to . of virtual assistants such as Siri on the iPhone means 76% customers are more willing Robots: the new face of banking? to engage with automated assistance and advice This gap is already looming. The application of robotic automation, high powered analytics and computer-learning can significantly improve the customer experience while driving out costs. Robot Process Automation eliminates human error, reduces costs and increases the speed of routine processes: one major global bank

25 - automated a wide range of processes, including Fraudulent Account Closure, Loan Application Opening and Right Of Set Off, eliminating over Almost three quarters of our 120 Full Time Equivalent (FTE) positions and respondents agree that in the future reducing its bad debt provision by £175 million customers will interact with a human-like per annum30. In insurance the cost of miscoding on claims adds up to millions per year, not even avatar until they reach the point of needing counting client dismay at this “moment of truth”; to speak to a real person. yet insurers could achieve 80% first-pass accuracy through auto-adjudication31. Given that a software robot would cost around one ninth of an FTE person working in the UK or US, or a third of the cost of an FTE working offshore in India, the cost savings are likely to prove compelling. Indeed, a The typical banking customer or insurance recent slew of predictions from Gartner, forecast policyholder, of course, is unaware that much that by 2018, 20 per cent of business content will of their business is being handled by software be authored by machines, autonomous software robots. This is set to change as humanoid robots agents outside of human control will participate start to join the economy: almost three quarters in five per cent of all economic transactions of our respondents agree that in the branch of and more than 3 million workers globally will be the future customers will interact with a human- supervised by a “robo-boss.” like avatar until they reach the point of needing to speak to a real person. Even tasks long the preserve of highly paid investment managers can be “roboticized”. “How likely is it that, in the branch of the future, customers Following in the digital footsteps of investment will interact with a human-like avatar until they reach the disruptors Betterment LLC and Wealthfront Inc, point of needing to speak to a real person?” US banking giant has developed a robo-adviser platform for Edge, its online trading hub, which will use algorithms and artificial intelligence to provide investment advice to clients, specifically targeting Millennials. Managed through an app, the robo-advisers suggest investments and regularly rebalance the portfolio and realize losses for the sake of efficiency. According to a study by A.T. Kearney, robots could be managing assets worth US$2.2 trillion by 2020, 0 5 10 15 20 25 30 35 about 5.6 per cent of US investment assets, up from just 0.5 per cent today. Very likely Likely Fairly likely Not likely

This future may not be too far ahead: already ’s biggest bank is trialling humanoid robot employees. The robot, Nao, is programmed to speak 19 languages and, through a camera on his forehead, analyzes customers’ emotions from

31. The Robot & I: how new and digital technologies are making smart people smarter, Cognizant white paper, 2015 32. Blythe Masters, CEO of Digital Asset Holdings - 26 their facial expressions and tone of voice. The robot will greet customers in one or two branches of UFJ Financial Group, quickly assessing their language needs, asking which services they need and, using stored insight into more than 5.5 million customers and over 100 different products, can then route the customer to the appropriate staff member based on past experience, products utilized or current mobile activity. This is not just a gimmick: Nao uses each interaction to learn a customer’s preferences and personality, enabling it to increase the accuracy of each subsequent interaction. For customers of Mitsubishi UFJ Financial Group, the future is already here.

Operational next steps

Customer appetite for innovation means they are increasingly willing to embrace web-based self-service and avatar interaction. Financial services organizations must keep pace with their customers or risk losing market share to competitors willing to invest in computer-guided service and automation to smooth the customer journey. A modern CRM system facilitates digital self-service but banks and insurers must also seek out solutions that are agile and able to flex on a monthly, if not weekly, basis in order to evolve hand in hand with customers’ changing needs.

CASE STUDY Mars

Mars National Bank, a community bank in Pennsylvania, has opened what it calls the “Branch of the Future”, offering a highly automated banking experience featuring biometric security. It still employs real human beings to greet customers as they walk in before directing them to the highly automated service area. There, customers can engage with transaction “pods,” use meeting rooms, and even access safety deposit boxes via biometric authentication. The bank’s state of the art branch, however, is an extension of an increasingly digital offering: the myMNB Mobile banking app includes account management, bill payment, “Popmoney” (a person-to-person direct payment service) and mobile deposit. It’s a seamless blend of bricks, clicks and biometrics.

27 - Chapter Five Is Blockchain the Next Big Disruption?

The jury is still out on whether blockchain is the savior of a financial services industry under pressure from digital disruption, eroding margins, increasingly audacious cyber- attacks and ongoing regulatory scrutiny, or just another technological false dawn.

Certainly the surge of fintech scrums, growing never be erased: this makes it tamper-proof and VC investment, increased press attention ensures a verifiable chronological record of every and blockchain conferences where suits now transaction made. This is the back-end overhaul outnumber hoodies suggests there is growing that has so long eluded the financial services interest in a technology that has the potential industry, allowing payment speed and security to to be a game-changer for all aspects of financial be provided without the need for cumbersome services, from current accounts, clearing and banking IT systems. settlement to insurance claims. One blockchain evangelist has described the technology as “Smart contracts” could also be embedded within “analogous to email for money”32. blockchain, as videos can be embedded in emails, leading to automated pay-outs on contracts Blockchain, a distributed public ledger which within the financial services value chain. Indeed, can securely record any information and the almost any intangible document or asset can be ownership of any asset, gained notoriety as the expressed in code, which can then be programmed platform for the cryptocurrency Bitcoin – perhaps into a distributed ledger: loyalty points, air miles, not the most promising start for a technology that health records, votes. Even physical assets, is now being touted as the savior of the global such as artworks or diamonds, could have their banking system. Indeed, financial institutions were ownership trails verified on blockchain to prevent initially wary of blockchain: not just because of the forgery and ensure authentication of source. murky Road and Mt Gox scandals but because the technology appeared to have the potential to circumvent traditional banks altogether. Nine out of ten agree that blockchain will disrupt all areas of the financial chain On a blockchain (where the block is a string of code), the information is transparently held in a shared database, without a single body acting as a middleman: this creates opportunities to strip out massive costs by cutting out inefficient intermediaries while executing trades in seconds. There are no aspects of the financial services Santander InnoVentures, the Spanish bank’s chain that will not be impacted by widespread use fintech , estimates blockchain of blockchain, although front-end retail will be less could save lenders up to US$20 billion annually in affected than back-end clearing and settlement settlement, regulatory and cross-border payment area. While nine out of ten of our respondents costs33. agree that blockchain will disrupt all areas of the financial chain, including current accounts, it is It is not just costs that will be transformed. cards & payments and clearing & settlement that Because the ledger is shared between many will bear the brunt of the upheaval: over half our different parties it can only be updated by respondents said these areas will feel significant consensus of a majority of the participants in disruption from blockchain technology. the system and, once entered, information can

33. Santander InnoVentures, June 2015 34. Bitcoin , published by CoinDesk, June 2015 - 28 The blockchain dash (83 per cent), were collaborating (80 per cent) or had dedicated teams working on blockchain (84 For now, financial institutions are still scrambling per cent). This lack of awareness reveals that to understand the implications of blockchain blockchain is still at the “wow” rather than a “what and how to harness its power. There has been and when” phase of the innovation life cycle. a splurge of investment in blockchain start-ups and fintech joint ventures: venture capitalists believe that blockchain will ploughed almost US$400 million into dozens of prove to be the most digital currency start-ups in the first six months of significant technology 2015, a fourfold jump from all of 2013 – and that 60% development to affect financial does not count investments kept quiet for stealth services since the Internet projects34.

Bitcoin’s open source blockchain is decentralized Among those of our respondents who said and open to anyone but many in banking are they had at least a general understanding of wary of this: this is an industry used to guarding blockchain, 60 per cent believe it will prove to be its secrets closely and which remains mindful the most significant technology development to of regulatory oversight. As a result, a number affect financial services since the Internet, albeit of banks have developed proprietary in-house that still leaves a third who do not see it as a rival models, such as ’s Citicoin, a digital to the revolution unleashed by Tim Berners-Lee’s technology it is testing in the bank’s laboratory. 1991 invention of the World Wide Web. This is an of Australia has teamed early-stage innovation, however, and it is likely up with open source software provider Ripple to that as blockchain initiatives emerge from proof of build a blockchain system for payments between concept, the disruptive power of the technology its subsidiaries. Others, such as JPMorgan, UBS will become more evident. and Barclays, are backing start-up R3 CEV, which is setting up an invitation-only private blockchain. There are many challenges to overcome first. These Digital Asset Holdings, meanwhile, is creating an include restricted scalability – Bitcoin’s blockchain off-the-shelf private blockchain product. handles seven transactions per second compared to VisaNet’s 47,000 – as well as issues of access and standardization, given the fragmentation of effort and potential for friction between public 35% have never heard of blockchain and private blockchain initiatives35. Innovators are optimistic these hurdles will be overcome in the coming decade: one survey found that almost one in five believe blockchain will have the greatest Despite the hype, this is still an emergent impact on the financial services space in the next technology: 42 per cent of our respondents claim three-to-five years, and almost nine per cent to understand blockchain but 23 per cent admit believe blockchain will be the “new normal” across they do not and 35 per cent have never even the financial spectrum by 203036. heard of it. What’s more, many are in the dark as to whether their organizations are on top of this potential game-changer: respondents confessed Just 17% have a strategy for blockchain they did not know if their organizations were and only 16% have a dedicated team undertaking research (46 per cent), had formed a working on blockchain working group (69 per cent), formulated a strategy

35. , Emerging Theme Radar research note, December 2015 36. Capital One survey of innovators at Money 20/20, October 2015 29 - Our respondents have some distance to travel before blockchain becomes “normal” in think the combination of their organizations: just 17 per cent say their 45% blockchain wallets and organization has a strategy for blockchain and P2P lending could herald the only 16 per cent have a dedicated team working end of banking as we know it on blockchain. In the wake of these pioneers, however, there are some fast followers, with 31 per cent working groups and 20 per The jury is still out on how this will impact cent partnering with a fintech specialist, while a incumbent banks: 45 per cent of our respondents solid group at least have the technology on their believe the combination of blockchain wallets radar, with 54 per cent saying their organization is and peer-to-peer lending could herald the end of undertaking research into the potential impact of banking as we know it. That 55 per cent disagree blockchain. with this apocalyptic vision suggests there’s cautious optimism about the industry’s chances Blockchain wallets in a blockchain-enabled world. How the current scramble to investigate blockchain initiatives will tip this balance is a question that will be answered One in fiveexpect it to be mainstream in years to come. practice for consumers to hold most of their How soon will the following become mainstream practice? financial assets in a blockchain wallet within just five years... 40 35

30

25

20 For retail banks the big threat could come from 15 blockchain wallets, where consumers could hold most of their financial assets on the blockchain, 10 eliminating the need for third parties, to enable 5 secure peer-to-peer transactions. Millennials 0 have already shown a clear appetite to embrace Consumers holding Certain types of Consumers holding P2P models, such as Venmo, so it is not too much most of their insurance claims their personal data, financial assets in a being settled using including their ID, of a stretch to see consumers using blockchain to blockchain wallet IoT data, blockchain in a blockchain manage their financial affairs in the future. One and smart in five (22 per cent of our respondents) expect it contracts to be mainstream practice for consumers to hold Within 1 year Within 2 years Within 5 year most of their financial assets in a blockchain wallet within five years, rising to 55 per cent in ten years Within 10 years Within 15 years and 71 per cent in 15 years. Within 20 year Never

- 30 Insurance claims: a new paradigm even negotiate with other devices, both in the home and outside, to optimize its environment, including power bartering. Information that 12% expect the settlement of insurance contracts have been issued, and fulfilled, would be claims using IoT data, blockchain and smart broadcast to the smartphone of the householder. contracts to be mainstream practice within Blockchain and IoT combined really are bringing two years... the future forward. While this massively reduces costs and fraud for insurers, it does risk the 74% expect it to be mainstream by 2025 customer relationship shifting to manufacturers of connected goods, who could embed warranties and insurance as smart contracts within their Claims have long been a difficult issue for insurers. appliances: insurance companies need to It is the costliest part of insurance, the most have strategies to handle these still-evolving vulnerable to fraud and also the “moment of truth” opportunities and threats. when insurers have an opportunity to delight — or disappoint — in a largely undifferentiated Blockchain: your personal data store marketplace. Blockchain has the potential to transform the claims process: on data The tamper-proof nature of the blockchain has from IoT to validate a claim – evidence rain clear advantages to an industry under siege damage to a crop, for example – could then auto- from cyber-fraud, hackers and organized crime. trigger the filing of a claim, which is then promptly Consumers are also likely to welcome a technology settled via a smart contract on the blockchain. that would no longer leave their personal data Given the insurance industry’s reputation for sitting on centralized servers, vulnerable to attack conservatism, it is interesting to note that 12 per or theft, but instead keep it on a blockchain and cent of our respondents expect the settlement allow temporary release to organizations for of insurance claims using IoT data, blockchain specified transactions or periods of time. Forty- and smart contracts to be mainstream practice two per cent of our respondents believe it will be within two years, and from there rapid take-off is mainstream for consumers to hold their personal predicted: 47 per cent expect it to be mainstream data, including ID, in a blockchain within five years, within five years, 74 per cent within ten years and rising to 73 per cent within ten years. 85 per cent by 2025. It is worth pointing out, however, that the features This vision of a smart, automated future is already that make blockchains so attractive in terms at proof-of-concept stage. IBM is working with of security are also likely to give rise to privacy Samsung on ADEPT, (Autonomous Decentralized concerns. Blockchains are append-only data Peer-to-Peer Telemetry), which uses blockchain stores – data can only be added, not deleted. They to build a distributed network of devices. This is are also distributed, being maintained by a peer IoT 2.0, building a ledger of existence for billions network across multiple nodes, each of which has of devices that would autonomously broadcast a copy of the blockchain and has equal authority transactions with ADEPT serving as a low cost to add to it, but data cannot be altered without bridge between many devices to create intelligent being detected and rejected by the other nodes in semi-autonomous things. A washing machine, the network. Yet privacy law is still evolving in the for example, could manage its own consumables digital age: there is now a right to be forgotten, be supply using smart contracts to issue commands it related to past insolvency or gender transition, to a retailer to order new supplies of detergent, and there are clearly scenarios where data held in perform self-service and maintenance, and

31 - a blockchain would be contrary to this legal right. Operational next steps Blockchains also create opportunities for people to collaborate on datasets in a peer network: Blockchain is an emerging technology that could this could be useful for crowdsourcing and peer- trigger wholesale disruption, with some pundits to-peer lending models but could create issues warning it could end banking as we know it while when those datasets concern personal data on others argue it could be the savior of financial individuals who may not have consented but find services sector. Banks and insurers need to be malicious or incorrect data difficult to remove. The aware of the risks, and opportunities, presented implications of blockchain pose major questions by blockchain: the earlier these are understood not just for financial institutions but for wider at the highest levels of the business, the sooner society. organizations will be able to understand the implications, develop strategies to mitigate the risks and harness its power and begin a potentially transformative operational overhaul. It is too early to say whether the claims made for blockchain are hyperbole but one thing is clear: banks and insurers cannot afford to be complacent.

CASE STUDY Visa Europe: innovation in international

Visa Europe’s innovation hub Visa Europe Collab is testing blockchain technology to improve the transfer of money overseas. It is a service that is a vital lifeline for millions of families across the world but one that can be expensive, cumbersome and slow even in the digital age and was seen as ripe for disruption by peer- to-peer payments on the blockchain. Partnering with Epiphyte, a start-up specializing in distributed ledger solutions, Visa Europe Collab is trialling whether blockchain can improve international remittances for both sender and receiver in terms of fees, speed and ease of use. Unlike many financial companies, which are pursuing closed proprietary ledgers, the payments giant is conducting the test project on the live Bitcoin blockchain: because this is open source it means local players can integrate with this and extend the reach of the network. This is seen to be a creative solution to what is called the “last mile” problem, in which much of the cost of remittances is down to the physical kiosks that pay out the hard currency.

This is just the beginning, with Visa Europe Collab investigating other possibilities around cryptocurrencies and blockchain within the payments ecosystem. Clearly, this incumbent is determined to leverage blockchain to improve its services and capabilities rather than lose its head start to P2P disruption.

- 32 Chapter Six The Innovation Imperative

The past decade has seen a relentless cycle of disruption and innovation. The pace of change means all bets are off as disruption and innovation stress-test existing models, with past market dominance no guarantee of success, or even survival, in the future.

According to the Global Center for Digital particularly Millennials, have an appetite to Business Transformation, 40 per cent of today’s switch to smart digital solutions that offer a leading companies will be displaced from their frictionless end-to-end experience. In insurance, a market position by digital disruption in the next Marketforce survey found 92 per cent of insurers five years37. expect digitally-enabled players that are new to financial services to become a significant force Interestingly, this means even current tech giants in insurance within five years, and 55 per cent will find it challenging to remain in the top spot expect this to happen within two years38. Possible unless they constantly stoke the fires of innovation. new entrants include an internet search provider, Venmo, the hot P2P payment app, for example is an online retailer or even a social network. owned by one-time payment disruptor PayPal, which is already considered a legacy incumbent Banks are also feeling the heat of fierce that could not have developed Venmo itself: competition: in 2014 a record 29 firms applied for instead it bought the app through its acquisition banking licences from the UK financial regulator, of Braintree. Similarly, social media giant Facebook the Prudential Regulatory Authority (PRA), sharp is working hard to stay fresh through acquisitions, contrast to 2010 when Metro Bank was the first buying WhatsApp and Instagram. new bank to obtain a license in the UK since the 19th Century. As with insurance, banking The challenge that faces all organizations, both customers are attracted to smart digital solutions: incumbents and challengers, is that there is no One survey found one in five customers would single technology to which they must adapt but bank with PayPal if it offered a current account instead a series of disruptions assaulting them while studies regularly show Millennials would almost simultaneously. The most significant happily switch to financial services provided by disruption in the next five years is believed to be Google, Amazon or Square, that is if they need a the impact of digitally-savvy new entrants (50 per bank at all39. cent of our respondents said this would unleash significant or massive disruption by 2020), New entrants in lending and payments followed by the peer-to-peer model (41 per cent), disaggregate banks from key parts of the value the Internet of Things (39 per cent) and Blockchain chain The range of digital-only services already (34 per cent). encompasses the full value chain: »» Investing services, like the robo-adviser Digital competition: disrupt or be Betterment or disrupted »» Saving and investing apps, such as Acorns or Digitally-savvy new entrants certainly present a Moneybox, which invest spare change from clear and present threat to incumbent banks and everyday purchases insurers. Survey after survey shows consumers,

37. Global Center for Digital Business Transformation, a Cisco/IDC initiative, June 2015 38. Future of General Insurance 2015, Marketforce 39. The Millennial Disruption Index, Scratch, 2015 33 - »» alternative, Affirm, which allows Risk averse, innovation afraid customers to obtain a micro-loan at a point of sale instead of using a credit card

»» ATM challenger Nimbl, a delivery service of our respondents said their organization would tolerate »» refinancing service, such as SoFi 30% such a 50% failure rate on innovation pilot projects... »» Small business lending: new services from mobile payments companies iZettle in Europe and Square in the US Replicating not only these experiences but also the crucible of innovation that gives rise to the likes of It is not just that these nimble new entrants Venmo is a challenge for incumbents, with their provide intuitive frictionless solutions but, as with centuries of history, their entrenched corporate the social banter of a Venmo exchange, they also cultures and cumbersome legacy systems. manage to make the experience fun and engaging. Indeed, our survey finds that the appetite for risk New entrants seem to be able to strike the right in innovation is relatively low: while innovation balance between one-click convenience and the experts believe companies should accept a 50 warmth of human interaction. per cent failure rate across all innovation pilots in order to fuel a culture of innovation, only 30 per Incumbents need to foster the same customer- cent of our respondents said their organization obsessed mind set, harnessing the power of would tolerate such a failure rate. digital technology, such as gamification and social media functions, to create experiences that are ...and more than six out of ten believe engaging and rewarding for customers. Spanish bank BBVA has successfully deployed gamification their governing board should set the failure to encourage customers to use its rate for innovation pilots much lower, service, with users rewarded with points and below 30% badges based on how often they use the online platform. It helps guide customers through the lesser-known functions on the platform, such as electronic tax payment, modification of personal information, banking products and service applications. This encourages customers to Furthermore, more than six out of ten believe share more data with the bank, which can then their governing board should set the maximum use the data to launch personalized challenges failure rate for innovation pilots much lower, and rewards. By linking the game with the bank’s below 30 per cent. This conservatism is a brake on sponsorship of the football league, the game innovation: in Silicon Valley, the crucible of digital has also proven a useful tool for new customer innovation, the mantra is “fail fast, fail often” and acquisition as existing customers share online some estimates put the start-up failure rate to quizzes, video games and social media chat with be 90 per cent. This is clearly beyond the pale for their friends. banks and insurers, now walking in the shadow of the 2008 financial crisis and under the scrutiny of regulators. Indeed, this balancing act between innovation and regulatory compliance could well be the defining skill of 21st century financial

- 34 services leaders. This is not just a tight- walk for banks and insurers: governments that wish agree that “the key to successful to host best-in-class financial services sectors value proposition innovation must ensure that regulatory regimes are carefully in retail financial services is calibrated so that they safeguard against the kinds 98% to think beyond traditional of behaviors that characterized the 2008 crisis industry boundaries to identify while also nurturing and tolerating innovations new ways of meeting consumer that will deliver better outcomes for customers. needs”

Would your organization’s What failure rate for governing board find it innovation pilots do you A number of institutions have recognized their acceptable for there to be think your organization’s limitations, fostering arm’s-length innovation a 50 per cent failure rate governing board should hubs and “laboratories” to foster innovation, often across all innovation pilots? tolerate? in partnership with fintech partners, who have a clear mandate to innovate and think “outside the box”. Our respondents are clear that this will be essential: an overwhelming 98 per cent agree that “the key to successful value proposition innovation in retail financial services is to think beyond traditional industry boundaries to identify new ways of meeting consumer needs”.

Yes Up to 20% Already some companies are thinking outside their industry box to deliver true innovation No Up to 30% to customers. Insurance company More Than, Up to 50% for example, used a lean start-up approach to Up to 70% develop its innovative pet telematics offer, Waggle Pets, which in return for a monthly fee provides But are banks and insurers now too cowed by deliveries of healthy pet food, a wearable pet the fear of failure? Analysts at PwC estimate activity tracker, toys, treats and preventative that roughly 80 per cent of financial institutions treatments. It partnered with animal charity rely excessively on incremental innovation – RSPCA to ensure the treatments and food are marginal improvements that focus on “better, healthy, a tie-up that ensures peace of mind for its faster, cheaper” or “me too” imitations of their pet-loving policyholders. Banks are also extending competitors” – rather than focusing on real to improve their relevancy to their innovation. customers. In the US, for example, a regional bank offers car financing through a mobile app: when Breakthrough innovation that can really shift the the customer enters information about the model needle on ROI requires an enterprise-wide culture of car, if the bank has a relationship with the of innovation, with those at senior level tolerating dealership, the app displays the price the bank failure, carving out time, resource and budget for has negotiated with the dealer and determines if innovation and encouraging and supporting new the buyer is qualified to receive financing from the ideas. bank, providing the customer with a frictionless service and puts the bank at the forefront of this major purchasing decision.

35 - Challengers have their own challenges believe it is very important for their organization to improve It is not just traditional players that are struggling the speed with which systems to innovate. Despite excitement about the launch 80% and processes can be created of so-called challenger banks in the years following or adapted to underpin new the financial crash, their impact has been muted: offerings 86 per cent of our respondents believe that challenger banks in their own country have yet to demonstrate any significant disruptive innovation. Organizations need to find ways to work faster and smarter so they can flex with changing market To some extent this is because the “challenger” demands. Product development cycles that could label is not always accurate: many were spun be measured in years now need to scramble to out of existing banking groups and bequeathed be ready to launch in months. Our respondents a toxic legacy of a replicate IT system, which is clearly recognize the importance of speed and even more of an encumbrance for a smaller agility to support innovation: 80 per cent believe it bank. Others, even with more agile back office is very important for their organization to improve systems, struggle with the reporting and capital the speed with which systems and processes can requirements of regulatory requirements: as a be created or adapted to underpin new offerings. result, in the UK there are discussions to lighten the regulatory load for smaller banks as the To what extent do legacy systems constrain your organization’s authorities recognize current requirements are agility in adapting quickly to new technological advances and undermining competition. Given the barriers still changes in consumer behavior? facing this group of banks seven years on from the financial crash, it is little wonder that customers Massively now expect disruption to come from outside the banking sector: nearly half are counting on tech Significantly 40 start-ups to overhaul the way banking works . Moderately Innovate fast Slightly Not at all The pace of change is eye-watering. From smart 0 10 20 30 40 50 refrigerators, driverless cars, 3D and rise of the robots, suddenly the technology of the future Unsurprisingly, 95 per cent say legacy systems is in our homes, on our , in our workplaces. constrain their organization’s agility in adapting Consumer adoption rates continue to compress quickly to new technological advances and at startling rates: it took more than 30 years for changes in consumer behavior – for 62 per radio to achieve an adoption rate of 50 per cent; cent this is a significant impediment. Financial mobile phones took 15 years to reach the same services organizations must find ways to free their level; social media just 3.5 years. Once industries innovation teams of cumbersome legacy systems had years to adjust to technological change: now so that they can put in place a customer-obsessed the disruption is coming in so hard and fast that operating model, whether this is through industries have little chance to fight back: look at simplification of core platforms to support new Uber’s near knock-out blow in markets where it digital products and services, or an investment in operates, while just after Google launched its beta cloud-based solutions to provide scale and agility. app, Google Maps, the GPS device market lost as much as 85 per cent of its market cap. Yet it is worth pointing out some of the issues that constrain incumbent players can also be their

40. Cited in PWC report, When the Growing Gets Tough: How Retail Banks Can Thrive in a Disruptive, Mobile, Regulated World

- 36 strengths: they have scale, a key drawback for It is clear our respondents expect this integration challengers; they have a head start in managing of cultures to change the face of banking as the complexity and onerous reporting demands techie hipsters collide with suited bankers: 80 of regulatory requirements, and, importantly - per cent of our respondents think the financial they have the capital that fintech start-ups crave services leaders of the future are likely to have to scale-up innovation. coffee addictions, 82 per cent think they are likely to own an Apple Watch and 78 per cent envisage Indeed, it might seem that the best solution to the male of the species sporting a beard. Some many of the challenges of digital disruption is a things are not changing however: respondents marrying of fintech creativity with the customer still think it more likely that the financial services base scale and trust that incumbents own. This leaders of the future will regularly wear a to suit will bring challenges of its own in marrying very to work (78 per cent) rather than regularly wear different cultures and attitudes – one banking jeans (66 per cent). executive said “fintegration” is the holy grail for banks41 - but it does offer a clear route for both Although light-hearted, parties to drive forward innovation at scale and it is interesting to note pace but with a mind to the trusted position of that these attitudes looking after other people’s money and the need show how entrenched to stay compliant. conservative thinking is in the financial services sector. It might be 80% think it likely the financial useful for them to look services leaders of the future will to the CEO of blockchain have a coffee addiction innovator Digital Asset Holding Blythe Masters, 82% that they are likely to own an Gabrielle Patrick, co- Apple Watch founder of cryptofinance software solution provider Epiphyte or Louise 78% expect the male of the species Wilson, co-founder of peer-to-peer investment to sport a beard firm Abundance: not a beard in sight.

Operational next steps

It is clear that many in the financial services industry have a low tolerance for risk and innovation; this is natural for organizations that are trusted to look after other people’s hard-earned money and assets and face stiff penalties if they are seen to transgress strict regulatory rules. But it is also a failure of leadership, within both companies and regulatory authorities, as this innate conservatism leaves incumbents vulnerable to competition from digital new entrants that can offer highly innovative solutions that change how customers behave. To find a balance, banks and insurers should engage regulators in early dialogue about their innovation ambitions and then partner with fintech start-ups to realize them: both sides win from these partnerships, with incumbents gaining access to the best new ideas in return for customer insight, capital and scale. Banks and insurers cannot afford to ignore fintechs; if they do not partner with these crucibles of innovation, their competitors will.

41. Andres Wolberg-Stok, Global Head of Emerging Platforms and Services at , quoted in The Disruption of Banking, a report from the Economist Intelligence Unit, 2015 37 - Conclusions

It may have weathered the financial crash, but the retail financial services sector has had no respite.

Instead, banks and insurers face a perfect Some pioneers are already piloting the financial storm of fierce competition, changing customer services models of the future – and customers, behavior and ongoing regulatory scrutiny. On the especially Millennials, like them. As customer horizon, we see successive waves of technological adoption of P2P models, crowdfunding and disruption, be it the IoT, extreme personalization, wearable payments takes off, many banks and robotics, AI or blockchain. insurers risk looking increasingly irrelevant and will lose market share to those organizations that Organizations must work fast to ready their have kept pace with customers. Our research operations for these changes. With legacy systems shows too many organizations are falling behind; increasingly unfit for purpose, serious investment they can see where the trends are going but are needs to be made in modern CRM with the back failing to make the necessary operational changes office increasingly acting as a data repository. quickly enough. A sophisticated front office interface needs to be able to flex and evolve in partnership with Our recommendation could not be clearer: find customers, anticipating their needs and delivering smart fixes to the legacy issues that impede the a flawless customer experience – whether the customer experience and build agility into your customer interacts via digital self-service on their solutions so that your operations are customer smartphone, makes payments through a fitband obsessive and ready for the future, whatever it or smart TV or even takes advice from a branch- may bring. based avatar.

- 38 iPhone, Siri and Apple Watch are registered trademarks of Apple Inc. Other names used herein may be trademarks of their respective owners. © Cognizant © Marketforce Business Media Ltd © Pegasystems Inc

January 2016 Research devised and conducted by Marketforce