Understanding the new industrial revolution

We have previously experienced industrial revolutions in agriculture and manufacturing, largely driven by a desire to increase productivity and enabled by advances in technology. Steam engines mechanized agricultural production in the fields and productivity increased as a result. The implementation of machines into production lines not only increased productivity in manufacturing but also improved the quality and standardization of the goods produced.

We are now about to experience a new industrial revolution and unsurprisingly, machines will again drive the change. The digital revolution will be applicable to all industry sectors although its impact will be most obvious in the relatively non-mechanised service industry. Currently, office based white collar workers are the primary unit of production, processes are manually intensive and production methods are non-standard.

Industries in the professional services sector are going to experience massive and unprecedented change at an exponential rate. The Financial Services industry will experience a pivot from the current un-mechanised environment to the new automated Digital Epoch. This will happen in a remarkably short timeframe due almost entirely to Disruptive Technology.  

Disruptive Technology 

It currently gets a lot of airplay but what do we actually mean by Disruptive Technology? It describes a piece of technology that arrives suddenly and quickly changes the way business is conducted, an umbrella term that describes a number of different strands of technology that have individually transformed entire industries. Established examples include; ecommerce platforms, mobile telephony and social networks. Emerging technologies include; Cloud Computing, the Internet of Things [IOT], Robotic Process Automation [RPA], Virtual Reality [VR], Artificial Intelligence [AI], Predictive Technology, Intelligent Business Operations, Crowd Sourcing and Big Data Analytics as well as a whole host of emerging technology referred to as ‘Fintech’. This includes; Blockchain, Peer to Peer Lending, Challenger Bank platforms, Currency Crossing Exchanges, Robo-advisors and Sentiment Analytics. Although each of these technologies is individually a game changer, when they are used in conjunction with one another then together their disruptive power can be greater than the sum of their parts.

What do these disruptive technologies actually do?

In essence these technologies improve on existing functionality to provide enterprises with enhanced capabilities. On one hand this will enable proactive legacy industries to redefine how they do business and to become more productive, but on the other hand the technology allows new challengers to create businesses unencumbered by the operating models of legacy players and to suddenly enter an industry and very quickly take market share. We’ve experienced this recently; who would have thought only a few years ago that Google would be a significant player in the automotive industry, that Amazon would be sending rockets into space or, that Snapchat would market investment products?

why is this important for financial services?  

Our industry is beginning to realise that these game changing technologies command our attention. They can be applied to brand new industries from those for which they were originally designed and they have the potential to combine to disrupt, revolutionise and forever change the way Financial Services are provided. We face a changing landscape where business outcomes will be delivered by utterly changed business processes. This will give rise to business outcomes being delivered cheaper and more efficiently. Enterprises will become more intelligent, adaptive and productive. Possibilities will be vastly increased resulting in changes to client expectations. This will give rise to a new wave of competition. Ultimately the consumer will benefit by receiving greater; access, choice and value whilst at the same time being delighted by the service given by their Financial Services provider. 

Financial services in the context of the digital revolution

What can we say about the near term prospects for legacy companies in the Financial Services Industry? Competition risks exist from a variety of sources, but the use of digital technology will enable all companies to reduce operating costs and increase productivity. This could encourage companies to market investment products at a reduced cost to investors whilst still maintaining existing margins. Combine this with an improved speed to market and existing client mandates are likely to become less ‘sticky’, enabling challengers to quickly take market share. In our view the risk to legacy companies will stem from four sources:

• Some legacy competitors will be early adopters of disruptive technology and by reducing their operating costs they will increase productivity. Their new platforms will improve the speed to market for new products and services and increase client coverage whilst providing a service that delights their customers. They will tend to take market share from other legacy companies that either; do not adopt or, are slow to embrace disruptive technology. 
• The trend for large institutional investors taking their investment operations in-house to reduce the fees they pay to Financial Services companies may gather pace should they utilise the benefits of this technology. 
• Start-ups that build their business models from scratch, unencumbered by legacy processes and systems can build quick and lean, bypassing existing overhead costs.
• Established tech giants have the technology, the existing client base, the data, and perhaps most importantly the innovative mind-set. Few industries are off limits to them and they will focus disruption on those with the largest profit margins and the greatest operational inefficiencies.

When considered against the familiar ‘vanilla’ change backdrop of; downward pressure on fees, calls for cost transparency, increased regulation and diminishing cost savings from labour arbitrage, it’s clear elements of the Financial Services Industry need to adapt quickly to avoid getting overtaken. In the normal course of events changing situations for both individuals and enterprises generally subject them to a degree of risk or potential benefit. The unprecedented nature and level of change being whipped up by the Digital Revolution will have a magnifying effect on the normal levels of risk and benefit. The outcome of Digital Transformation promises huge upside benefits, but equally the downside risks, if left unmanaged could be catastrophic. Enterprises need to start taking action to plan for the ramifications of the Digital Revolution, not just to thrive but to also ensure they survive the risks inherent in this new normal.