This article is part of the MITB Thought Leadership Series published by the SMU School of Information Systems’ Master of IT in Business programme.
By Edgar Low, Adjunct Faculty, MITB (Financial Technology), SMU School of Information Systems
Disruptive innovation was identified as a phenomenon more than two decades ago by prominent Harvard scholar Clayton Christensen. So you may wonder why established industries are only now waking up to the prospect of digital transformation—the banking industry in particular.
Equally, you might ask why banks would care about digital disruption—for a long time business has been good, profitability high and competition limited by a plethora of government regulations.
But in these uncertain, disrupted times, banks face the same challenge for survival as organisations in every sector. The digital economy has turned the traditional playing field upside down—empowering consumers, and fueling demand for mobile, always-on convenience and flexibility.
The Asian financial sector’s healthy balance sheet cannot insulate banks from the threat of fintech, which has seen a massive influx of non-banking technology players mount a two-pronged assault. On the front end, fintech upstarts are making banking simpler, cheaper and more accessible for consumers. And on the backend, blockchain technology is poised to transform complex asset transactions which can take days to complete.
So why have banks been so slow to harness disruption? There are three key reasons:
First, the digital economy demands a level of agility which banks just don’t have—they’re sprawling, unwieldy, traditionally conservative institutions where the culture is very much against rocking the boat. Many lack a clear digital transformation strategy, and banking talent remains motivated by profit and earnings, not innovation and entrepreneurship.
Second, banks are saddled with decades-old legacy systems, which make it difficult to adopt new technology fast enough to meet new competitive pressures and the demands of young, tech-savvy customers.
And third, in Asia specifically, banks have been even slower to harness disruptive technology than their counterparts in Europe and the US where the business environment is more receptive to ideas and friendlier to the brave hearts who are willing to push and test the limit of their ideas.
That said, the threat of losing their direct relationship with customers and, ultimately, their franchise, has created the commercial imperative to spur banks into action. Many are now beginning to respond with their own digital transformation strategies and deciding how to co-exist with the disruptors.
“In Asia specifically, banks have been even slower to harness disruptive technology”
And the good news for banks is that coexistence is possible—essential, in fact. Fintech needs the established incumbents to provide the platforms and infrastructures for almost every aspect of financial transaction. Fintech start-ups are not banking entities and so not licensed to operate under regulatory supervision—they need banks as a platform through which to legitimately offer their innovations to consumers. That said, to truly harness digital disruption for success, banks still need to rebuild their foundation of talents, rewire their DNA, and create a culture that allows for innovation aligned with their long-term objectives. Many are making progress here—establishing innovation labs, accelerators and acquiring start-ups in order to gain a deeper understanding of what is technologically possible and then adopt that technology to offer new value propositions via innovative business models.
But we should brace ourselves as this is only the first wave of fintech. As technology companies carve out increasingly significant swathes of traditional financial services territory, in the second wave, “TechFin” will bring about even more dramatic change as technology and e-commerce corporations roll out next generation tech-driven business and operating models as alternatives to traditional models.
TechFin is the total transformation of engagement and delivery models through technology—and its impact on the banking landscape is likely to be very significant.
As the pressure for banks to sustain market share and stay relevant increases, TechFin will see them forge partnerships with technology and e-commerce players to deliver existing banking services in new ways.
Through TechFin, banks will transform the consumer experience in order to keep up with the insatiable demand for mobile, seamless, consumer-centric, financial services—or risk being consigned to the digital shadows as faceless service providers behind the consumer interface owning giants like Alibaba, Google, Airbnb and Facebook.
This second wave goes beyond digital transformation—it will bring about total reinvention of the banking business. The third wave is already in the making.
Edgar Low is currently an Adjunct Faculty of the Master of IT in Business (Financial Technology & Analytics) programme and a trainer in the Financial IT Academy at Singapore Management University. View Edgar Low’s profile here.