A failure by the financial services industry to innovate has left it wide open to disruption from as-yet unknown competitors, warn voices from both the old and new guard.
Sargon Capital co-founder and chief executive Phillip Kingston predicts the greatest threat to the banking and wealth-management incumbents won’t come from existing competitors, but from “outsiders”.
Kingston is also the managing director of Trimantium Capital, a venture capital fund that has backed Trustee Partners – the entity behind start-up super fund Spaceship. The ‘fintech’ investor was also involved in launching niche ethical super fund Good Super, of which he remains a director.
He said the greatest disruptors to established financial services players would be foreign specialists that manage to get through the government protectionism that keeps banks’ market share intact, or “smart local players who are competing at a product level and competing on features that become so compelling that the bundling benefits of the incumbents’ power are diluted and they cut through the oligopoly”.
Kingston made his comments during a panel discussion at the Financial Services Council’s 2017 Leaders Summit, in Sydney on Tuesday, July 25.
Real innovation, in superannuation in particular, has been slow because of the very nature of the product, he said. Some industries create and absorb technology much faster than others, and they’re typically those with “a short feedback cycle”.
For example, “payments at a restaurant: if you want to pay with your phone, you know if that works within a minute,” he said. “You can review that experience, change supplier. It’s a fairly quick and short interaction.”
Kingston said industries with low technology-absorption rates tend to be industries that have long feedback cycles.
“If you look at prudentially regulated institutions, like superannuation funds, [you won’t know if] you’ve got a good outcome until probably 20 years post retirement age, and you might be making your choice when you’re 20,” he said. “So how do you know if the innovation is good?”
Large players see danger
It is not only small tech-focused players who warn financial services is overdue for technological disruption, but also the leaders of some of the sector’s biggest incumbents.
BlackRock Australia managing director and country head Dominik Rohe told the summit that the last major innovation in financial services was probably the automatic teller machine (ATM), which was introduced to Australia in 1977.
The industry itself has a poor record of innovation and “the real disruptors in the financial services industry – which I think is ready for disruption in major ways – might come from areas where we don’t expect it”.
“We have to think about and look at things like Tencent in China, and look at other industries,” Rohe said. Existing competitors are not a threat on the innovation front, but “unknown unknowns” – smaller start-up organisations “coming from somewhere, where we don’t see them” – are a potentially far greater problem, he warned.
BlackRock is one of the largest funds management businesses in the world with more than $US5.4 trillion in funds under management.
Sean Colvin, a partner and former customer impact consultant with PwC, predicted three factors would come together to facilitate disruption of the financial services sector: mobility, cloud computing and artificial intelligence.
He said these trends are embodied in companies such as Lemonade, an online insurance business that has turned the traditional underwriting process upside down.
“There’s some innovation starting to take shape,” Colvin said. “Companies can see this change taking place around them. They can see it, they can hear it, they read the same articles that everyone else does, but the question is, how do you innovate a core business?”