A common problem of traditional players is that they often use digitalisation and technology to try and address the threat of FinTech and TechFin companies. This is akin to selling an old product with new technologies. What they do not understand is that these guys don’t just offer new technology, they are providing a completely different set of products.
Emerging technologies such as Big Data, Generative AI and Open AI have led to major developments in the finance industry, resulting in the rollout of many new products and services such as Platform Finance, Peer-to-Peer Finance, and Robo-Advisory. How concerned should players in traditional finance institutions be about these new developments, and what can disruptors in the FinTech and TechFin space do to ensure a lasting piece of the pie?
Distinguished Professor of Finance at INSEAD, Massimo Massa, who is regularly quoted in major business publications and journals, gets to the core of the issue and offers insightful perspectives into what finance professionals should be doing to stay ahead of the digital finance revolution.
How are emerging technologies threatening the traditional financial industry today?
Fundamentally, we can think about two major blocks of threats to the traditional finance industry.
The first threat comes from FinTech companies, which provide very specialised services ranging from currency exchange services like Transferwise to cryptocurrency-trading apps such as Robinhood. Their value lies in providing solutions to problems that are not being adequately addressed by traditional players such as banks and wealth managers.
The second threat comes from TechFin players like Alibaba, Tencent, Baidu, Google, Meta and Amazon who already possess their own ecosystems and more importantly, their clients. These players provide financial services in direct competition with traditional players like banks and financial intermediaries.
A common problem of traditional players is that they often use digitalisation and technology to try and address the threat of FinTech and TechFin companies. This is akin to selling an old product with new technologies. What they do not understand is that these guys don’t just offer new technology, they are providing a completely different set of products.
Traditional players are, therefore, continuing to offer the same old 20th-century product, just sold more efficiently or cheaply using technology. This is not in line with the needs of clients, which require a totally new and different product.
To provide an example: Alibaba may seem like just another e-commerce company, but in reality, the reason for its success in China is because it was able to establish trust among people who don’t trust each other. FinTech companies may use blockchain, and TechFin companies may rely on ecosystems, but fundamentally, both are using technology to address a need that is not being properly met by the traditional player.
Another area of neglect by traditional players is people who are keen to invest in the financial markets, but are unable to afford the entry costs that are being presented by the banks. This is where companies like Yue Bao were able to take advantage. Instead of focusing on the fact that one individual client may not be able to cover the transaction costs of opening a bank account, Yue Bao saw the potential of 100 million clients, each with $10, representing a pool of $1 billion. They were thus able to invest directly into the markets, sidestepping the bank.
In summary, Alibaba has been able to create financial inclusion and stock market participation for millions of retail investors excluded from the financial markets due to the high costs of participation. Its mutual fund (Yuebao) does in TechFin what RoboAdvisors do in FinTech, providing a service that banks and traditional asset managers do not offer.
What then can traditional players be doing to make themselves relevant again?
First of all, they should look at slimming down. Universal banks that do everything are no longer the solution. They should be focusing more on their role as advisors.
Secondly, instead of only offering the bank’s products to clients, they can consider bundling their products with those of other players. Providing your clients with a good solution is a much better approach than trying to shove your product down the throat of your client, because therein lies a conflict of interest, which clients can easily perceive.
Finally, banks have to stop demanding exclusivity from their clients. Customers today want a multi-channel approach. Banks, therefore, need to retain clients by offering them a good value proposition, instead of gating them with high exit fees and transaction costs. The way forward is to start sharing clients, because when clients know that they can come to you for unbiased advice, the more they will come back to you, and that’s when you can offer them your unique products.
How about for the FinTechs and TechFins? Do they then already possess the winning formula?
The strength of FinTech and TechFin players is that they know themselves and their products very well. But unfortunately, they don’t know the other players very well. Thus, they may not fully understand where the source of their competitive advantage comes from. Many have a confused understanding of the strategic canvas and scenario of the financial market. They can therefore benefit by getting to know their ‘enemies’ or potential partners better.
By understanding the players and the industry around them, they can get a better understanding of their own weaknesses, as well as how they might collaborate and partner with traditional players.
What can traditional players and disruptors be doing to better equip themselves to thrive in this new financial landscape?
They can consider attending a structured programme such as INSEAD’s Strategic Management in Banking (SMB) programme, which imparts learning through three different channels.
The first is through the actual course material, which spans different areas such as retail banking, private banking, investment banking, and of course, emerging technology such as FinTech, as well as new products and behaviours in the market.
The second way is through simulations. There are two simulations that we use in our programme. The first is a pure numbers-based simulation for risk management, which is a core skill for financial players. The second simulation is a leadership simulation, in which participants role-play a scenario where one bank buys over another bank. Unlike the first simulation, where all the numbers are provided, this second simulation requires participants to obtain the numbers from the people in the simulation. This helps them to understand that in real life, the important thing is not just number crunching, but also being able to ask the right questions to get the numbers, as well as how to engage people to execute the plan after it is generated.
The last part of our learning strategy involves creating a conducive environment for participants to interact. Because SMB attracts professionals from all over the globe, who come from traditional banks, family offices, asset management, insurance and consulting, as well as FinTech and TechFin, participants get to build lasting and meaningful networks that last for years even after their programme has ended.
In a rapidly evolving world, where things you learn today often become obsolete tomorrow, what are some of the unique advantages that INSEAD has to offer?
There are a few types of course providers in the market today. One of these is consulting companies, which possess practitioner knowledge, but which lack academic rigour and traditional knowledge. They often provide information that is anecdotal, but which may not be supported by evidence, theory, or more importantly research.
Another type is the traditional academic institutions. They provide a lot of theory, and a lot of research, but little links to real life.
INSEAD has a long tradition of merging these two components. We teach and consult with many companies and banks, and simultaneously we do rigorous research through our Centre for International Financial Services, which has been in action for the last 30 years.
So, the main idea of INSEAD is to bring into the classroom the latest research in banking, asset management, strategy, and behavioural finance, and merge that with our real-life experience of interacting with executives, managers and board members.
What are some of the challenges that come with emerging technologies and what can leaders do to deal with these challenges in a sustainable manner?
The fundamental challenge for finance professionals is whether they see these disruptive emerging technologies as a mortal threat or an opportunity. Should they operate in defensive or attack mode?
In my class, we discuss the difference between innovation and disruption, and we try to get people to understand that disruption should be interpreted as a challenge that can bring opportunities.
The real problem with formulating plans is managing the timing and the amount of shifts. In my class, I use real-life case studies of different banks to show how spending too much money early in digital may be disruptive, but also how spending no money in digital may be disruptive. There is an optimal sweet spot of how you choose to invest, and how much to invest.
What do you predict will be the next big wave in finance?
My view is that the competitive advantage of banks cannot be based purely on technology. If they compete with FinTech and TechFin players head-on, they’re doomed, because Platforms will always be faster, more efficient and cheaper.
Price efficiencies are necessary but not sufficient to win. The core activity of banking is the link with the client – having the human touch and building trust.
Today, the biggest enemy of the client in the financial market is the client himself. This is due to all the biases that exist within ourselves. Financial institutions can therefore take the next step by utilising Behavioural Finance to help clients overcome their biases.
By integrating behavioural finance features into their products, banks can move away from managing cash to managing the behaviour of clients. So, instead of taking on the passive position of lending money to clients, banks will be lending money to clients while changing their behaviour so that they become more willing to pay back. The traditional banking model is passive, but the new behavioural model is active.
As for how to execute this - come to the class, and I’ll tell you.
