By Eugene van Rensburg, Head of Wealth Management, IRESS Ltd South Africa.
Asset managers, banks and insurance companies are feeling the pressures from investors, customers and regulators scrutinising the manner in which they conduct their business and what they are doing to protect their customers. Financial institution business models are being challenged and shaped by increased financial sector regulation, more demanding better informed customers and multi-channel multi-platform capability being a modern day reality. Developments in technology are providing financial institutions with unprecedented opportunities from which to grow and optimise their business models.
“If you go back a few hundred years, what we take for granted today would seem like magic – being able to talk to people over long distances, to transmit images, flying, accessing vast amounts of data like an oracle. These are all things that would have been considered magic a few hundred years ago.” – Elon Musk[fusion_builder_container hundred_percent=”yes” overflow=”visible”][fusion_builder_row][fusion_builder_column type=”1_1″ background_position=”left top” background_color=”” border_size=”” border_color=”” border_style=”solid” spacing=”yes” background_image=”” background_repeat=”no-repeat” padding=”” margin_top=”0px” margin_bottom=”0px” class=”” id=”” animation_type=”” animation_speed=”0.3″ animation_direction=”left” hide_on_mobile=”no” center_content=”no” min_height=”none”][i]
Reflecting on only the last 15 years it is astonishing to note how much has been accomplished in technological advancement. More than 1 billion of the world’s population born after 2000[ii] will only know a hyper-connected and technology-rich social and commercial environment. Society has quickly become adapted to and dependent on this newfound connected world and the direct access it gives us to information. Standout milestone technology innovations since the turn of the century include:
- iPod – Apple launched the iPod in January 2001[iii] changing the way the world listens to music.
- iTunes Music Store – Apple launched the iTunes Music Store in April 2003[iv] changing the way the world accesses and purchases music. Today Apple holds the banking details of almost 800’000 million consumers[v].
- Web 2.0 emerged in 2004[vi] as the Internet evolves into a user-generated content and usability platform changing the manner in which people globally access, contribute and connect to information and their social context as a whole.
- Facebook launched in February 2004[vii] changing the way the world connects socially and commercially. Facebook connects an estimated 1,23 billion active monthly users[viii].
- YouTube launched in February 2005[ix] changing the manner in which we visually share and view our social and commercial world. YouTube now has more than 1 billion users and more than 12 days of video is uploaded every minute[x].
- iPhone – Apple launched the iPhone in January 2007[xi] in line with the global trend of migrating cellular phone users from feature phones to connected smartphones.
- Amazon Kindle introduced in 2007[xii] challenging the paradigm of print books and magazines. Today there are over 3.2 million e-books available in the Kindle store with annual estimated sales as high as $530m per annum[xiii].
- Uber launched in 2009[xiv]becoming the world’s largest global taxi service company today operating in 57[xv] markets internationally with an estimated registered driver network in excess of 20’000 across its global network. Uber does not own any vehicles.
- iPad – Apple launched the iPad in January 2010[xvi].
These highlights provide just a glimpse into the changes that we have seen over a very short period of time. There have been many more innovations that have contributed to the ability to launch the devices and services above, and many more. Further major consumer technology advancements are attributed to companies such as Samsung, Google, Google Android, Sony, Microsoft, IBM, HP, Dell and Intel to name a few.
Our ability as a society to develop and embrace new innovation is astounding and will constantly change the way we live. The universal constant is that technology facilitates change.
Financial institutions globally are increasingly focussed on the following seven industry trends that are fast shaping the financial products and services environment resulting in the convergence of the traditional wealth and capital markets.
These trends have led to financial institutions rethinking their business models in the pursuit of scalable, capable and cost-efficient operating models within rigorous risk management frameworks.
Increased financial services regulation regarding market conduct, systemic risk, pre- and post-trade transparency, counterparty capital requirements and centralised clearing are but a few of the focus areas for new policy development globally. This increased focus on review of the regulation and monitoring of financial services by national and international regulatory authorities has created policy convergence in the traditional wealth and financial markets regulatory environment. This is evidenced in South Africa by the development of the Twin Peaks model of financial regulation focussing on functions of the Prudential Authority, primarily concerned with systemic risk and safety and soundness of financial institutions, and the Market Conduct Authority, aimed at monitoring and enforcing regulations intended to protect customers of financial services businesses and to improve the manner in which these institutions conduct their business: Therefore encompassing the activities of the South African National Treasury, the Financial Services Board and the South African Reserve Bank for all financial institutions regardless of financial sector being serviced.
The increasing cost of compliance, operational and capital requirements in a weak global economic environment is placing a large amount of pressure on financial institutions to innovate and adapt their existing business models to remain sustainable. Efficiency gains and scalable operating models are the order of the day with technology playing a central role in the automation and monitoring of business processes in order for financial institutions to remain viable.
Financial institutions are increasingly looking to up-sell and cross-sell their products and services to existing customers across the businesses. The traditional divisions of South Africa’s largest financial institutions, following on from a global trend, are being reshaped and transformed into customer service segments, rather than product focussed pillars, typically aligned to retail, wealth and institutional or corporate customers. These customer service segments each with their particular service model value proposition to that market segment but across all products of the financial institutions.
Internationally there has been a trend for customers to increasingly engage with self-directed direct-to-customer financial products and services. It is interesting to observe the evolution of both the Internet as a system and of the technology to connect to it. Since the emergence of Web 1.0 in 1991 and subsequent evolution of Web 2.0, when user-generated content became possible in around 2004, it could be said that the system is now moving into its early adulthood phase of development. Compared to the life stages of human development the first 21 years have seen the system go through infancy development, playfulness and imagination of early childhood and the passion and ingenuity of late childhood and adolescence. These formative co-creation years have been focussed on predominantly social interactions of society as it relates to sharing personal or consumer information. Now going into the early adulthood of the system, individuals have developed the skills in these formative years to take the next evolutionary step of the system into enterprise. Society during this phase will look to contribute and actively participate in the system to self-direct their financial life.
In order to manage the multichannel and multiplatform customer engagements, whilst providing the robust compliance functionality required by regulation, financial services providers and advisors require business systems solutions that empower their business models. The business systems solutions need to be pro-active in managing customer engagement and ensuring regulatory compliance. It is essential to combine effective delivery of the financial services provider’s value proposition to customers whilst being able to provide to both client and regulator evidence they have treated their customers fairly and have earned their fees in a transparent manner.
Customers are more informed and more demanding than ever in terms of the rules of engagement with any service provider. Customers expect to be able to engage with financial services providers whenever and however they choose and to use the same channels they use across all parts of their everyday lives. This encompasses face to face, online, automated, semi-automated, phone, apps etc.
As the Internet has become ubiquitous so consumers have become more demanding. Today children do their homework online and we can buy almost anything our bank balance allows at the touch of a screen. Customers are used to having access to web technology in their personal and professional lives on multiple platforms empowering the consumer with an abundance of information on products and services from not only the providers of these but also from society as a whole.
Technology has caused people to demand simple, clear and easy to access information. In a recent IRESS UK consumer study, nearly a quarter of people (23%) said they would like the ability to view their financial world in one place. Further to this, 18% of people want fully integrated customer service options across phone, online, social media and text. This demand transcends borders and has led to an evolution in customer centric thinking.
Traditional product customer focus models saw customers being serviced on multiple platforms each matching multiple distribution channels along clearly defined product lines. These platforms typically have very little back end integration and no real single customer view resulting in multiple engagements with little connectivity for the consumer or opportunity to cross-sell for the provider. This is illustrated as follows:
The six step advice process referred to above is briefly defined as i) prospecting; ii) fact find; iii) needs and goal identification; iv) product and service recommendation; v) product and service implementation plan; vi) on-going service and support. This is generic and used in a variety of different forms in the financial services world.
The emergent new holistic single client focus business models view the customer as a single entity with multiple product and service needs. Multichannel and multiplatform capabilities integrate back, middle and front office in a manner that ultimately leads to a single client view, bringing benefits to both provider and client.
In this customer value proposition model the customer share of wallet is not considered from a single product or services perspective but rather from a multichannel customer perspective. This new customer centric paradigm requires a deep understanding of the full spectrum of a customer’s financial environment. The customer’s “wallet” and resultant customer engagement design needs to take into account all the various aspects of the customer’s financial life. The customer has the following ten broad financial categories each with their own unique value proposition: i) lifestyle and entertainment; ii) communication; iii) primary banking; iv) risk products; v) insurance products; vi) medical care; vii) food and housing; viii) education; ix) social burden; x) saving and investment. It is important to understand in this new customer centric paradigm that financial services disruption is most likely to come from broadly distributed traditional consumer channels, as already evidenced by traditional financial services being offered by consumer goods retailers.
In order to adapt to the changing environment it is important for financial institutions to take into account high level design principles as measures of suitability for introducing new products and services to their existing and potential new customers. The following design principles developed in a qualitative research study into the constraints to discretionary savings and investment in South Africa concluded in 2013[xvii] provide good insight into effective design principles:
- Policy incentives and rewards – Design within the existing and proposed national policy incentives and rewards structures. The South African regulators are actively improving and incentivising new product and service provision within the existing policy frameworks and it is not necessary to change or wait for change before innovating new products and services.
- Enable frequent and habitual engagement – Physical access to financial services products and services need to empower customers to interact and engage with these in a multichannel and multiplatform world.
- Simplified and cognitively accessible – It is imperative that in the design of financial products and services that the information regarding these is simplified and easily understood by customers, not only by the financial service provider professionals.
- Culturally desirable and socially inclusive – New and existing financial products and services have to engender social norms and behaviours that promote access to these in a manner that is culturally desirable and socially inclusive.
The aim of these design principles as measures of suitability is to ultimately drive an engaged and integrated multichannel and multiplatform customer centric financial services environment.
Financial institutions wishing to adapt their business models to take advantage of the new regulatory and customer environments will need to ensure that technology is integrated into their entire advice and business proposition, incorporating an integrated client front office system with a common infrastructure connected into multiple channel support systems. Such a platform would be required to deliver a single client view with business processes to enable advice congruence and unified regulatory compliance in a multichannel and multiplatform environment. The platform needs to enable customers to define their rules of engagement with financial services providers and enable moving between the multichannel products and service offering of the financial institution. A successful solution would thus integrate into the back-end systems of the financial services provider, 3rd party providers and ultimately be able to drive the workflow to the fulfilment and execution of a transaction. The following diagram illustrates the high level architecture of an integrated scaled customer financial services advice platform.
Technology is facilitating the rapid convergence of wealth and capital markets as demanded by customers and regulators in this digital age. While clearly no substitute for traditional customer face-to-face or direct engagement, technology provides the opportunity to build advice propositions that allow for multi-channel engagement, supporting the development of lasting, trusted relationships between financial services providers and their customers. In essence, embraced and used correctly technology provides the ability to scale and enhance the customer relationship.
Technology alone will not achieve the change required, most importantly, it is the proactive engagement of an evolutionary customer centric business model delivered through technology that ultimately delivers a unique and differentiated customer value proposition for a sustainable and resilient financial services provider environment.
For more information please contact Eugene van Rensburg at email@example.com.
[xvii] Van Rensburg, E. (2013). Constraints to discretionary saving and investment in South Africa. University of Cape Town, Graduate School of Business.