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Major Transformation Factors in Financial Services Industry


Technology is changing, businesses are expanding, industry is consolidating.

Today all of the change forces that we are considering are occurring amid an unprecedented wave of deregulation—financial services companies have been liberated from Depressionera regulations restricting the businesses in which they can participate.
Deregulation is serving as a catalyst—unleashing tremendous change and enhancing the impact on professionals at work.

The dominant and inter-related pressures faced by the Financial Services Industry may be summarised as follows:

• information, trading and delivery technology is transforming all aspects of financial industry;
• consumer trends are changing;
• competitive pressures are increasing and coming from a wider range of competitors;
• the financial service industry is becoming increasingly globalised and subject to global com petitive pressures;
• entry barriers into finance industry are declining;
• this has resulted in excess capacity: with respect to the number of firms, infrastructure, capital, and technology;
• the potential for deconstruction (the unbundling of products and processes with each being supplied separately) allows ‘cherry picking’ and lowers entry barriers as new entrants are not required to offer the whole service or product;
• competition is operating asymmetrically: finance industry can be invaded from outside more easily than they can diversify out of finance;
• the potential for cross-subsidies is being eroded;
• pressure on cost structures is mounting;
• increased competition coming from the capital market, and
• capital market pressure to maximise shareholder value.
• risk pressures are changing
• regulation is adapting slowly

There are five major change forces affecting the financial services industry.

Transformation by Technology Evolution

Today the relationship between business and technology has been completely turned around in online work space, where technology is driving what the business can do. It’s become an enabler of business rather than a solution to business problems. It’s something that actually creates business. When you buy a stock or a bond, nobody mails you a physical certificate—these securities are just pieces of information in some fault-tolerant system located somewhere in the country. You probably pay the premiums on your insurance policies using electronic funds transfers (EFTs) that came out of your checking account, which has no real money in it anyway.

Outcome 1: Higher Volume, Higher Speed, Better Quality
• Higher Volume. Customers can access dozens of services through automated teller machines (ATMs); billions of shares of stock are traded in one day; and insurance companies distribute standardized, low-cost products to a wider range of customers.
• Higher Speed. Loans are approved in 30 minutes, online trades are executed in 30 seconds (or less), and property damage settlements take place on-site.
• Better Quality. Credit scoring models allow for fairer approval of loan applications, automated trading programs improve risk management, and sophisticated actuarial models improve profitability.

Outcome 2: Increased Transparency, Access
• Breakdown of Traditional Barriers and Disparities. In the securities business, brokers used to have access to price information that others did not have—that was part of what investors paid their brokers for. Now everyone has access to information.
• Price and Service Comparisons. When consumers have enough information about financial markets— bond markets, over-the-counter equity markets—to make price and ser-vice comparisons, the playing field is leveled.

Outcome 3: Redefining Relationships
Relationships are a key survival issue in the new financial marketplace. In information-based industries such as the Financial Services Industry, geography is just a game you play on long car trips.
You can connect with customers, employees, partners, and channels any- where they happen to be. Technology has also helped redefine how industry professionals relate to their customers in terms of the human element, (videoconferencing vs. meetings), distribution/delivery (clicks vs. bricks), and communication.

Transformation by Customer Sophistication
Customers are becoming more knowledgeable and sophisticated in their dealings with financial institutions. The implications for these firms and the people that work in them are significant. Not only is the balance of power shifting between financial companies and their customers but professionals are faced with new challenges as they work with a sharper group of people they need to please.
Retail customers have little power over the price they pay for goods and services. Institutional customers are financial and nonfinancial corporations and institutions that engage in relatively large transactions. Financial institutions give them special attention, usually in the form of relationship and account managers. Given their size and importance, institutional customers have tremendous buying power, which results in an influence on price and execution of the services they buy.
In a world of increasingly powerful technologies and changing retail and institutional customer needs, institutions are grappling with questions such as:
• What do our customers want?
• How many different channels should we support?
• What is the role of people in our distribution strategy?
• How can we use our distribution channels as a lever for growth?
• Does our distribution system make sense from a profitability standpoint?
A recent survey of CEOs in the banking, investment management, life insurance, and property/casualty insurance sectors conducted by a global consulting organization confirmed that distribution is an important issue.
Participants in the study ranked the following issues as most critical to their businesses’ success:
• Distribution effectiveness/productivity.
• Increased competition and restructuring.
• Changing market/customer demands.

Outcome 1: Identifying and Meeting Complex Needs
Financial institutions are trying to stay ahead of sophisticated Customers by identifying what they want. In a complex and dynamic industry, however, customer preferences increasingly become a moving target.
Assume for a moment that you have identified your sophisticated Customer’s needs. Then what? How long is the new trend going to last? Do you go out and become a leader in the marketplace or a fast follower? Or do you sit this dance out? After you meet your sophisticated Customer’s needs and everyone is happy (at least until tomorrow), is it all really worth it? Why are you doing this? You are in this business to make a profit. Do you really know if you are making money chasing this customer?

Outcome 2: Financial Services Battleground
The emergence of sophisticated customers in the financial marketplace has created a divide that forces institutions to make choices regarding attention, support, and products. In one camp there are the knowledgeable, sophisticated customers that demand premium service and specialized products. In another are the “business as usual” customers that often are the heart of a financial institution’s core businesses.
• We see this in the life insurance market as it separates into a high-end asset management market on one side and commoditized, low-cost mass marketer of term insurance on the other.
• We see this in the brokerage business where firms are abandoning the low-end retail investor in favor of the more profitable premium customers.
• We see this in banks that charge customers a fee if they want to talk to a person.
Institutions and the people that work there face a number of hard questions. Spend all your time on premium and high-dollar institutional accounts—the others will walk. What is the fallout from abandoned customers? Although the regulatory grip is loosening, will regulators step up as groups of customers are left behind? What about your role as a good corporate citizen?

Outcome 3: Pressures on Customer-Facing Professionals
Another significant issue created by the growth in sophisticated customers is that professionals with direct customer interaction are dealing with a new set of pressures.
• Sales. Sophisticated customers have very specialized needs. They typically know more than the financial services employee does. How do you sell in that environment?

• Service. Financial services professionals who face the customer must have a baseline understanding of the issues; access to relevant resources (information and people); and the ability to ask questions, analyze needs, and take responsibility. This calls into question a myriad of issues including traditional roles and responsibilities, compensation/ recognition systems, and professional development strategies.

Transformation by Globalization
Integration of markets, nation-states and technologies is enabling individuals, corporations and nation-states to reach around the world farther, faster, deeper, cheaper than ever before.
• Markets Integration. Globalization in financial services followed the globalization of business. As companies expanded their operations outside their domestic markets, they needed a broad range of international financial services such as transactions processing (to receive money and pay bills in local currencies); foreign exchange services to convert foreign currencies back to their home currency; lending products and capital-raising services to acquire funds. Financial institutions were also there to help these companies identify and manage the financial risks of doing business globally.
• Nation-states Integration. Nation-states should have some shared vision of the globalization benefits and processes. This issue is particularly relevant in financial services areas such as regulations and standards, capital flows, business processes, and a compatible legal framework for issues such as security, privacy, taxes and intellectual property.
• Technologies Integration. Communications, networking, the Internet, and other technological and communication advances—all of these serve as the backbone of globalization.
• Farther. Financial services extend anywhere in the world (and beyond).
• Faster. Business is conducted at the speed of your Internet connection.
• Deeper. Globalization reaches into the core structure of local markets.
• Cheaper. A video phone call to China costs far less than airfare, hotel, meals, and souvenirs.

Outcome 1: Change in Competitive Landscape
• More retail and institutional customers. One of the major attractions of globalization is to be able to reach out and extend product and service offerings to a wider range of customers. And once you have your global infrastructure in place, economies of scale kick in.
The cost of adding another global customer plummets on a per unit basis, resulting in significant profit potential.
• More competitors. Institutions are now facing a whole new set of competitors. There is a whole new set of competitors knocking on your customers’ doors.
• New partnerships and dependencies. Moving into global markets may require institutions to form new alliances with local firms and professionals to implement product and service strategies.

Outcome 2: Developping a Global Presence
• Mergers/acquisition. Join forces with an existing player and combine your operations, or acquire someone outright.
• Partnerships. Bring your people together; do a team-building offsite; generate lots of revenues and distribute profits according to a predetermined plan.
• Strategic alliances. Form an iron-clad pact with another institution. Refer business, provide services, share a vision and keep your eyes peeled for an even better deal.

Outcome 3: New Risks and Uncertainties
Globalization creates new risks and uncertainties for financial institutions and their employees. Certainly, as institutions have gotten larger and spanning across greater geographies and spanning across greater product mix, there is simply a greater level of complexity that comes to bear and the greater sophistication that people are trying to achieve as they seek to manage risk.

Outcome 4: Outsourcing
There are several reasons why out-sourcing is undertaken and why it has become an increasingly common feature in financial services:
• to reap economies of scale that cannot be obtained internally;
• to avoid installing excess capacity to cope with peak-load problems;
• some technology projects last only for a short period;
• some areas may be too specialised to be undertaken internally;
• skills can be enhanced when technologists work on several projects;
• a particular expertise may not be available internally and may be uneconomic to acquire;
• increased flexibility in the use of technology;
• to spread costs and risks;
• to break an internal monopoly when services are supplied exclusively internally;
• to change the cost structure: lower fixed costs.

Transformation by Shifting Risks
The traditional assumption regarding activities in financial services is that market participants are risk averse. This means that market participants have to be compensated if they take on risk. The more risk, the higher the compensation. How you are impacted by risk depends on which side you are on: issuer or investor, borrower or lender, insurer or insured.

Outcome 1: Dealing with New Market Realities
Institutions are entering a new risk environment. Stock and bond market volume and volatility numbers are changing. Institutions and individuals must reexamine their approaches to where they play, how they play, and with whom.

Outcome 2: Crisis News Capture
Crises capture the attention of regulators and the markets as various events unfold, often resulting in a wave of new procedures and safeguards that wreak havoc and disrupt business as usual. Enron created an existential crisis in financial services—can we ever trust our perceptions of reality in the market again? Here are more examples:
• The globalization of financial markets has resulted in an increased awareness of foreign exchange and other associated risks.
• As the industry evolves into a deregulated world of financial superpowers, how will the regulatory system evolve? What will be the Next Big Thing? As the industry moves to rely more heavily on intellectual assets, will institutions be required to reserve capital against the risk of losing people and their knowledge, skills, and abilities?

Outcome 3: Increased Uncertainty
The level of uncertainty rises as the market continues to change. Banks are going into the securities business. Securities firms are buying banks.
Insurance companies are demutualizing to beef up and get into the acquisition game. Moving from a world of probabilities to a world of uncertainties forces institutions and professionals to change the way they think about risk taking and decision making. As you can see, the industry is being whip-sawed by a number of significant forces.

Transformation by Regulatory Dynamics
Recent significant changes in the regulatory environment have affected everyone industrywide. Statutes and regulations change with the natural push- and-pull process between private institutions and oversight agencies.

Outcome 1: Changing Market Dynamics
Banks, securities firms, and insurance companies are now competing in new areas while fending off new competition in their traditional markets.
Bank Consolidation is developping. One bank buys another bank to make a bigger bank. Convergence refers to financial institutions competing in all the different sectors. The result has been an unprecedented wave of mergers and acquisitions—reducing the number of players and increasing the size of the remaining institutions. Competition is positive for customers: Many providers, lower prices for customers, survival of the fittest. Consolidation is not so positive for customers: Concentration of power, monopolies.

Outcome 2: Institutional Changes
Several institutions are reorganizing themselves into stock companies to gain access to capital markets. While stock ownership may provide easier access to capital, it also brings increased scrutiny and accountability to shareholders; shorter time horizons to get your business done. This is a major issue for the insurance industry.

Outcome 3: External Implications
The primary markets and reinsurance markets are facing important drawback from a terrorism perspective. There is a lot of legislation on the books today that limits your ability to take into consideration terrorism risks.


The successful development of corporate strategy is ultimately a question of defining comparative advantages, and developing alternative ways of exploiting such advantages.
Information advantages can be exploited in many ways. While financial institutions may lose market share in some of their traditional markets, they will gain and develop other business and use their core competencies in different ways.
A major strategic issue to be addressed by all financial services firms is the role of technology in changing the economics of delivering financial services. Proposing an optimum mix of delivery channels will present a major strategic challenge for all financial institutions and other suppliers of retail financial services.


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