financial industry is inherently more unstable

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The Future of Financial Services
How disruptive innovations are reshaping the way financial
services are structured, provisioned and consumed
An Industry Project of the Financial Services Community | Prepared in collaboration with Deloitte
Final Report ● June 2015
1
Contact
For feedback or questions,
please contact:
R. Jesse McWaters
jesse.mcwaters@weforum.org
+1 (212) 703-6633
Consistent with the World Economic Forum’s mission of applying a multi-stakeholder approach
to address issues of global impact, the creation of this report involved extensive outreach and
dialogue with the financial services community, innovation community, academia and a large
number of financial technology startups. The dialogue included numerous interviews and
interactive sessions to discuss the insights and opportunities for collaborative action.
Sincere thanks are extended to the industry experts and emerging disruptors who contributed
their unique insights to this report. In particular, the members of the Project’s Steering
Committee and Working Group, who are introduced in the following pages, played an invaluable
role as experts and patient mentors.
We are also very grateful for the generous commitment and support to Deloitte Consulting LLP
in the U.S., an entity within the Deloitte1 network, in its capacity as the official professional
services advisor to the World Economic Forum for this project.
1 Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member
firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as
“Deloitte Global”) does not provide services to clients. Please see www.deloitte.com/about for a more detailed description of DTTL and its
member firms.
This report contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or their related entities
(collectively, the “Deloitte network”) is, by means of this report, rendering professional advice or services. No entity in the Deloitte network shall be
responsible for any loss whatsoever sustained by any person who relies on this report.
Forward
2
Table of Contents
Acknowledgements…………………………………………………………….………………………………………………………………………………………………..…………… 4
Executive Summary…………………………………………………………………………………………………………………………………………………………………………..… 10
Reading Guide…………………………………………………………………………………………………………………………………………………………………………………..… 24
Detailed Research Modules………………………………………………………………………………………………………………………………………………………………… 27
Payments:
How will customer needs and behaviours change in an increasingly cashless payments landscape?……………………………………………………………………………… 28
How will the evolution of decentralised or non‐traditional payment schemes change the role of traditional financial institutions? ………………………………..…… 43
Insurance:
How will disaggregating forces across the value chain transform the insurance industry? ………………………………………………………………………………………….. 58
How will an ever more connected world impact the value delivered by insurance providers? ………………………………………………………………………………………. 72
Deposits and Lending:
How will emerging alternative models of lending change the market dynamics of traditional lenders? ………………………………………………………………………… 86
What will be the future role of financial institutions in response to continually shifting customer preferences? …………………………………………………………….. 100
Capital Raising:
How will the evolution of distributed capital raising impact the role of traditional intermediaries? ……………………………………………………………………………… 112
Investment Management:
How will the empowerment of individuals through automated systems and social networks transform the business of investment management?…………… 127
How will the externalisation of key processes transform the financial ecosystem? …………………………………………………………………………………………………….. 139
Market Provisioning
How will smarter and faster machines transform capital markets? ………………………………………………………………………………………………………………………….. 153
What impact will better connected buyers and sellers have on capital markets? ……………………………………………………………………………………………………….. 163
Contact Details……………………………………………………………………… ……………………………………………………………………………………………. 178
3
Acknowledgements
4
John Flint
Chief Executive Officer, Retail Banking
and Wealth Management,
HSBC
Jason Harris
Chief Executive Officer, International
Property and Casualty, XL Group
Michael Harte
Chief Technology Officer,
Barclays
Rob Heyvaert
Corporate Executive Vice President,
FIS
David Puth
Chief Executive Officer,
CLS Group
Henry Ritchotte
Chief Operating Officer,
Deutsche Bank
Joanna Rotenberg
Chief Marketing Officer and Head of
Strategy, BMO Financial Group
Neeraj Sahai
President,
Standard & Poor’s
William Sheedy
Global Executive, Corporate Strategy,
M&A, Government Relations, Visa
Lance Uggla
Chief Executive Officer,
Markit Group
Dieter Wemmer
Member of the Board of Management,
Finance, Controlling, Risk (CFO),
Allianz SE
Oliver Bussman
Chief Information Officer,
UBS
Ann Cairns
President, International Markets,
MasterCard
David Craig
President, Financial and Risk,
Thomson Reuters
Fred Crawford
Chief Executive Officer,
Alix Partners
Stephen Cross
Chief Executive Officer, Aon GRIP
Solutions, Aon
Anna Ewing
Executive Vice President, Global
Technology Solutions, NASDAQ
Acknowledgements
Members of the Steering Group
The following senior leaders of global financial institutions have provided guidance, oversight and thought leadership to the “Disruptive Innovation in Financial Services”
project as its Steering Group:
5
Robert Hedges
Managing Director,
AlixPartners
Neil Mumm
VP Corporate Strategy,
Visa
Matthew Levin
EVP and Head of Global Strategy,
Aon
Victor Matarranz
Director of Strategy & Chief of Staff to
the CEO, Santander
Max Neukirchen
Head of Strategy,
JP Morgan Chase
Christine O’Connell
Global Head of Strategy & Business
Development, Thomson Reuters
Kosta Peric
Deputy Director Financial Services for
the Poor, Bill and Melinda Gates
Foundation
Robert Palatnick
Managing Director and Chief Technology
Architect, DTCC
Peter Rutland
Senior Managing Director,
CVC Capital Partners
Nicolas de Skowronski
Chief of Staff,
Bank Julius Baer
John Smith
IT Director, Group Head Office,
Prudential PLC
Huw Van Steenis
Head of Financial Services Research,
Morgan Stanley
Andrew Tarver
Head of UK Operations,
FIS / Capco
Colin Teichholtz
Partner & Co-Head of Fixed Income
Trading, Pine River Capital
Fabien Vandenreydt
Head of Markets Management, Innotribe
& the SWIFT Institute, SWIFT
Derek White
Chief Design & Digital Officer,
Barclays
Rob Galaski (Project Advisor)
Deloitte Canada
Rachel Bale
VP Mobile Converged Payments,
MasterCard Worldwide
Tom Brown
Partner,
Paul Hastings
Francis Bouchard
Group Head of Government and Industry
Affairs, Zurich
Fabrizio Campelli
Head of Group Strategy,
Deutsche Bank
Ericson Chan
Chief Information Officer Hong Kong and
Greater China, Standard Chartered
Robert Coppola
Chief Technology Officer of S&P Capital
IQ and S&P Dow Jones, McGraw Hill
Christof Edel
Global Head of Trading Strategy &
Business Development, Thomson
Reuters
John Edge
Chairman,
Digital Stored Value Association
Ignacio A. Goicoechea
Head of IT and Operations,
Banorte
Acknowledgements
Members of the Working Group
The project team would also like to acknowledge the following executives of global financial institutions who helped define the project framework and shape strategic
analyses as its Working Group:
6
Acknowledgements
List of innovators and subject matter experts (1 / 2)
In addition, the project team expresses its gratitude to the following innovators and subject matter experts who contributed their valuable perspectives through interviews
and workshops (in alphabetical order):
Asheesh Advani CEO, Covestor
Jeremy Allaire Co-Founder & CEO, Circle
Giles Andrews Co-Founder & CEO, Zopa
Radhika Angara Chief Marketing Officer, Fastacash
Yoni Assia CEO, eToro
Jolyon Barker Deloitte UK
Alex Batlin Group CTO, Applied Innovation and Market Research, UBS
Inga Beale CEO, Lloyd’s
Nick Beecroft Emerging Risks and Research Manager, Lloyds of London
Eric Benazeh Director, International Development, Meniga
Sarah Biller President, Capital Market Exchange
Stephen Bingle Business Development Asia, Smart Engine
Dave Birch Director, Consult Hyperion
Josh Bottomley Global Head of Digital, HSBC
Catherine Brown Group Strategy Director, Lloyd’s
Chris Brycki CEO, Stockspot
Olaf Carlson Wee Head of Risk, Coinbase
Ulf Carlsson General Manager, North Asia & Japan, Nasdaq
Bhaskar Chakravorti Senior Associate Dean, The Fletcher School of Law and Diplomacy,
Tufts University
James Chappell CTO, Digital Shadows
Gongpil Choi Senior Advisor, Korea Institute of Finance
Jonathan Coblentz CFO, Progresso Financero
Claire Cockerton CEO / Founding Director, Innovate Finance
Charlotte Cowell Head of Product, Wealth Management, MetLife
Eugene Danilkis CEO, Mambu
Bruce Davis Joint Managing Director, Abundance Generation
Thomas Deluca CEO, Advanced Merchant Payment
Marten Den Haring Chief Economist and Product Officer, Digital Reasoning Systems
Samir Desai Co-Founder & CEO, Funding Circle
Maciej Dolinski CEO & Founder, Friendly Score
Matt Dooley Managing Director, Connected Thinking Asia
Paul Drake Managing Director, Strategy & Business Development, Standard &
Poor’s
Leigh Drogen CEO, Estimize
Aron Dutta Head of Strategy for Financial Markets, Cisco
Grechen Effgen Head of Business Development, Zipcar
John Fawcett CEO, Quantopian
Lin Feng CEO, Deal Globe
Clare Flynn Levy Founder & CEO, Essentia Analytics
Dave Girouard Founder & CEO, Upstart
Colin Gleeson Deloitte UK
Matthew Goldman CEO, Wallaby
Russell Gould Product Manager, Mobile Wallet Solutions, Vodafone
Ian Green Co-Founder & CEO, eCo Financial
Julia Groves Chair, UKFCA
Sarah Habberfield Deutsche Bank
William Harris Jr. CEO, Personal Capital
Jilliene Helman CEO, Realty Mogul
Dylan Higgins CEO, Kopo Kopo
Dorothy Hillenius Director Group Strategy, ING
Reid Hoffman Innnovator, Investor and Author
Brian Hong Managing Director, Financial Services, CVC Capital Partners
Kaori Iida Senior Editor, Economic News Division, NHK
Bert Jan Van Essen Managng Director & Co-Founder, Dragon Wealth
Paul Jung Vice-President, Head of Emerging Products and Innovation, North Asia, Visa
Inc.
Sony Kapoor Managing Director, Re-Define
Brad Katsuyama CEO, IEX
Tom Keene Anchor & Editor-at-Large, Bloomberg
James Kennedy CTO, Asia Pacific, UBS
Damian Kimmelman CEO, DueDil
David Kirkpatrick Founder & CEO, Techonomy
Andy Kooper Founder & CEO, LeapfrogInvestments
Christian Lanng CEO, Tradeshift
Francine Lacqua Anchor & Editor-at-Large, Bloomberg
Renaud Laplanche CEO, Lending Club
Chris Larsen CEO, Ripple
Michael Laven CEO, Currency Cloud
Gerard Lemos Chairman, UK Payments Council
Max Levchin Founder, Affirm
Michael Li CEO, CTQuan
Sandra Linhan CEO, Lark
Nektarios Liolios Managing Director, Startupbootcamp Fintech
Ken Lo Co-Founder & CEO, ANX
7
Acknowledgements
List of innovators and subject matter experts (2 / 2)
In addition, the project team expresses its gratitude to the following innovators and subject matter experts who contributed their valuable perspectives through interviews
and workshops (in alphabetical order):
Bo Lu CEO, Future Advisor
Jeff Lynn CEO, Seedrs
John Macdonald Director, Risk Analytics & Customer Solutions, IBM
Kevin Mak Managing Director, IronFly Technologies
Paul Makin Head of Mobile Money, Consult Hyperion
Demetrios Marantis Head, International Policy and Regulatory Affairs, Square
Emmanuel Marot Co-Founder & President, Lending Robot
Kevin Martin Head of Retail Banking and Wealth Management, Asia Pacific, HSBC
Mike Massaro CEO, peerTransfer
Mike Mathias Deloitte China
Steve Mendel Co-Founder & CEO, Bought by Many
Douglas Merrill Founder & CEO, Zest Finance
Liao Min Director-General, Shanghai Office, China Banking Regulatory
Commission
Rory Moloney CEO, Aon Global Risk Consulting, Aon
Daniel Nadler CEO, Kensho
Mas Nakachi CEO, Open Gamma
Mike Naughton Managing Director of Asia for Strategic Customers & Solutions,
Thomson Reuters
Christian Nentwich CEO, DuCo
Zhu Ning Deputy Director and Professor of Finance, Shanghai Advanced
Institute of Finance
Michael Nugent CEO, Bison
Stephen Pair CEO, bitpay
Kyung Yang Park CEO, UbiPay
Kitty Parry CEO, Templars
Loren Pastore Business Development Manager, UpSlide
Andy Patton VP, EMEA International Business Development, AMEX
Leslie Payne Director of Public Affairs, Lendup
Sandy Peng CEO, UCAN
Anthony Pereira Founder & CEO, Percentile
Claudine Perlet Head of COO Office, Allianz
Jonas Piela Founder, Avuba
Basil Qunibi CEO, Novus
Simon Redfern CEO, Open Bank Project
Josh Reich CEO, Simple
Selma Ribica Principal Product Development Manager, Mobile Payments, Vodafone
Christoph Rieche Co-Founder & CEO, iwoca
Antonia Rofagha Communications Manager, Transferwise
Yin Rong Deputy Director, IT, Bank of China
Jeff Rosenberger VP, Research & Customer Development, Wealthfront
Kevin Sara Chairman, Batan Limited
Arjan Schutte Managing Partner, Core Innovation Capital
Vasuki Shastry Group Head of Public Affairs, Standard Chartered
Hyunwook Shin CEO, Popfunding
Barry Shrier Founder & CEO, Liquity
Barry Silbert Founder, Second Market
Brian Sin Former Head of Innovation, Cigna
Gurjeet Singh CEO, Ayasdi
Balvinder Singh CEO, TootPay
Siddarth Singh Head of Programme, Pivotal Innovations
Maria Sit Regional Managing Director, Asia, Health Wallace
Paul Sonderegger Big Data Strategist, Oracle
Stan Stalnaker CEO, Hub Culture
Jeff Stewart CEO, Lenddo
Ron Suber CEO, Prosper
Stu Talyor Co-Founder & CEO, Algomi
Matin Tamizi Co-Founder & CEO, Balanced Payments
Donald Tang CEO, China, D.E. Shaw & Co. LP
Spiros Theodossiou VP Product Strategy, Skrill
James Tickner VP, Corporate Solutions, Nasdaq
Don Trotta Global Head of Banking, SAP
Eric Van der Kleij Head, Level39
Mark Wales Deloitte China
Karen Webster Managing Director, Market Platform Dynamics
Karsten Wenzlaff Leader, German Crowdfunding Network
Darren Westlake CEO, Crowdcube
Paul Wilkins Chairman & CEO, Marsh (MMCo), Hong Kong SAR
Jeremy Wilson Vice Chairman, Corporate Banking, Barclays
Andrew White CEO, FundApps
Edan Yago CEO, Epiphyte
Roger Ying Co-Founder & CEO, Pandai
Joyce Zhang VP, Oriental Patron
Giuseppe Zocco Co-Founder, Index Ventures
8
Acknowledgements
Project Team and Additional Thanks
Project Team
The “Disruptive Innovation in Financial Services” project team includes the following
individuals
World Economic Forum Project Team
Giancarlo Bruno, Senior Director, Head of Financial Services Industry
Abel Lee, Director, Insurance and Asset Management Industry
Matthew Blake, Director, Banking and Capital Markets Industry
Jesse McWaters, Project Manager, Disruptive Innovation in Financial Services – Report Editor
Professional Services Support From Deloitte
Rob Galaski, Deloitte Canada
Hwan Kim, Deloitte Canada
Additional Thanks
In addition, the project team expresses its gratitude to the following individuals for their
contribution and support throughout the project (in alphabetical order):
Mika Ciotola Eva-Maria Thurnhofer
Frank Oberholzner Joerg Weydanz
Maja Schwob
Market Color (Digital Production)
The Value Web (Event Facilitation)
Level 39 (Location Services)
9
Executive Summary
10
The mandate of this project was to explore the transformative potential of new
entrants and innovations on business models in financial services
We set out to address three major problems that have prevented a comprehensive understanding of the state of disruptive innovation in the industry:
 There is no common taxonomy or understanding of which innovations are the most relevant
 There is no clear understanding of the evolutionary path of emerging innovations
 The implications of those evolutions on incumbent business models are unclear, creating significant uncertainty for traditional players as they strive to
react to growing competitive pressures
We structured our research around three main questions, each requiring distinct actions:
Project Approach
1 Which emerging innovations are the most impactful and relevant to the financial services industry?
2 How will these innovations impact the ways in which financial services are structured, provisioned and consumed in the future?
3 What would be the implications of these changes on customers, financial institutions, and the overall financial services industry?
Action: We identified 11 key clusters of innovations based on how they impact the core functions of financial services
Action: We considered a range of scenarios for the degree and nature of impact each cluster of innovation could have
Action: We analysed the implications of each scenario on customers, incumbent institutions and the overall financial services ecosystem
Project Context
11
Over 15 months of research we engaged with industry leaders and innovators
through interviews and multi-stakeholder workshops
 In-person and phone interviews with 100+ innovative new entrants
and subject matter experts
Hong Kong SAR
4 Sep. `14
Tianjin, China
11 Sep. `14
Boston, USA
30 Sep. `14
New York, USA
21-22 Oct. `14
London, UK
2 Dec. `14
Davos, Switzerland
21 Jan. `15
Industry Leaders Innovators
 Facilitated six multi-stakeholder workshops at global financial hubs with 300+ total participants including
industry leaders, innovators, subject matter experts, and regulators
 Oversight, guidance and thought leadership from 16 C-suite executives
and 25 strategy officers of global financial institutions
Global Workshops
12
The outcome of this work is the first consolidated taxonomy for disruptive
innovation in financial services
Research Framework
We have structured our framework against six
functions of financial services and eleven clusters
of innovation.
Functions of Financial Services
Even in an environment of rapid change to the
design, delivery and providers of financial services,
the core needs those services fulfill remain the
same. We have identified six core functions that
comprise financial services :
 Payments
 Market
Provisioning
 Investment
Management
 Insurance
 Deposits &
Lending
 Capital
Raising
Clusters of Innovation
We have identified 11 clusters of innovation exerting
pressure on traditional business models
13
We have synthesised six high level insights on innovation in financial services
Key Research Findings
Innovation in financial services is deliberate and predictable; incumbent players are most likely to be attacked
where the greatest sources of customer friction meet the largest profit pools 1
Innovations are having the greatest impact where they employ business models that are platform based, data
intensive, and capital light
2
The most imminent effects of disruption will be felt in the banking sector; however, the greatest impact of disruption
is likely to be felt in the insurance sector
3
Incumbent institutions will employ parallel strategies; aggressively competing with new entrants while also
leveraging legacy assets to provide those same new entrants with infrastructure and access to services
4
Collaboration between regulators, incumbents and new entrants will be required to understand how new innovations
alter the risk profile of the industry – positively and negatively
5
Disruption will not be a one-time event, rather a continuous pressure to innovate that will shape customer
behaviours, business models, and the long-term structure of the financial services industry
6
14
In the following pages, we have summarised our insights by function and cluster
This section provides a summary of our findings, divided by function and clusters within the functions. For each cluster of innovation we have defined
the major disruptive trends, summarized the impact, and examined key implications for institutions in that function and cluster.
Function grouping
Major implications for financial institutions
as a result of activity within the cluster
Key trends driving disruption in financial
services business model
Summary of the activity that the cluster
of innovation is creating
Insight Summary – Reading Guide
Innovation cluster
15
Key Findings | Payments
Cashless World Emerging Payment Rails
Implications for Financial Institutions
 As more efficient alternative rails are adopted, the role of traditional
intermediaries as a trusted party may diminish
 Financial institutions may face a new set of risks (e.g., reputation,
security) and regulatory issues as they participate in new rails
 Applications of these technologies can expand beyond money
transfer to modernise other financial infrastructures
Mobile
Money
Cryptographic
Protocols
P2P
Transfers
Summary
New consumer functionalities are being built on existing payment
systems and will result in meaningful changes in customer
behaviour
Key Disruptive Trends
Mobile
Payments
Streamlined
Payments
Integrated
Billing
Next Generation
Security
Implications for Financial Institutions
 Financial institutions may lose control over their customers’
transaction experience as payments become more integrated
 With reduced visibility, becoming the default card among specific
customer segments will become critical
 Winning issuers will be able to gain visibility into more of
customers’ spending patterns, build more holistic understanding
of customers, and create more competitive offerings
Key Disruptive Trends
Summary
The greatest potential for cryptocurrencies may be to radically
streamline the transfer of value, rather than as store of value
16
Key Findings | Insurance
Implications for Financial Institutions
 As customer relationships evolve from short-term product-based to
long-term advisory, capturing customers early on becomes critical
 As insurers become a hub for customer data, their strategic value
within full-service financial institutions will grow
 Forming partnerships with data providers, device manufacturers and
other ecosystem participants will be critical to enable connected
insurance
Summary
Emergence of online insurance marketplaces and
homogenisation of risks will force big changes in insurers’
strategies
Key Disruptive Trends
Implications for Financial Institutions
 In an increasingly commoditised environment, the risks of
customers being more fickle will increase and creating loyalty
through innovation will become more important
 Insurers’ ability to benchmark against competitors will become
more important as customers gain ability to comparison-shop
 With increased margin pressure, insurers will need to increase
their size by expanding either scope or scale
Key Disruptive Trends
Summary
Ubiquity of connected devices will enable insurers to highly
personalise insurance and proactively manage clients’ risks
Insurance Disaggregation Connected Insurance
Self-Driving
Cars
Disaggregated
Distribution
Sharing
Economy
3rd Party
Capital Smarter, cheaper Internet-of-Things sensors Wearables standardised Platforms
17
Implications for Financial Institutions
 Financial products will increasingly be offered on a stand-alone basis
limiting incumbents’ ability to competitively cross-subsidise
 Financial institutions’ ability to collaborate with non-traditional
players and other institutions will become essential
 Financial institutions will need to choose where they will specialise
and where they will leverage external partners (e.g., product
manufacturing vs. creation of customer experience)
Summary
New lending platforms are transforming credit evaluation and
loan origination as well as opening up consumer lending to nontraditional
sources of capital
Key Disruptive Trends
Implications for Financial Institutions
 Intensified competition will narrow spread between deposits and
loans, decreasing financial institutions’ profitability
 As savers turn to alternative platforms, traditional deposits and
investment products will be eroded
 Distribution of customers’ credit portfolio over a large number of
alternative platforms may make it difficult to measure customer’s
creditworthiness
Key Disruptive Trends
Summary
New entrants will make meeting customer demands more
important, creating an imperative for banks to reconsider their
roles
Key Findings | Deposits & Lending
Alternative Lending Shifting Customer Preferences
Alternative
Adjudication
P2P Lean, Automated
Processes
Evolution of Mobile
Banking
Virtual Banking
2.0
Banking as Platform
(API)
18
Key Findings | Capital Raising
Crowdfunding
Empowered Angel
Investors
Alternative
Adjudication
Summary
Crowdfunding platforms are widening access to capital raising
activities, making the overall ecosystem richer
Key Disruptive Trends
Implications for Financial Institutions
 Access to more diverse funding options allow new companies to
grow at a quicker pace and shorten the average time between
early funding stages
 Distribution platforms create a venue for investors to tailor their
investment portfolio across dimensions beyond financial return
 As the barriers to enter the asset class fall, it becomes ever more
important for traditional intermediaries’ profitability to find
undiscovered “start” investments
19
Key Findings | Investment Management
Empowered Investors Process Externalisation
Implications for Financial Institutions
 The ability to access sophisticated capabilities without large
infrastructure investments flattens the playing field for mid-sized
institutions
 Organisational agility will become critical to sustain competitiveness
as high-value capabilities are continued to be commoditised
 Externalisation of capabilities may result in workforce skill loss by
preventing the development of a holistic view of operations
Summary
Robo-advisors are improving accessibility to sophisticated
financial management and creating margin pressure, forcing
traditional advisors to evolve
Key Disruptive Trends
Implications for Financial Institutions
 New entrants will place pressure on margins and intensify
competition among traditional players in more specialised
segments
 As more advisory functions become automated, distributing
wealth products via proprietary advisory channels will become
less effective
 As new entrants widen the access for mass customers, they will
compete for customers’ traditional savings deposits
Key Disruptive Trends
Summary
The scope of externalisable processes is expanding, giving
financial institutions access to the new levels of efficiency and
sophistication
Automated Advice &
Wealth Management
Social
Trading
Retail Algorithmic
Trading
Process-as-aService
Advanced Analytics Natural Language Capability Sharing
20
Implications for Financial Institutions
 As traditional differentiators among intermediaries (e.g., ability to
discover counterparty) become commoditised, the importance of
advisory services will increase
 Information platforms will evolve the standards for best-execution
from a best-efforts basis to more quantifiable and comparable
metrics
Summary
As the popularity of high frequency trading declines, the focus of
algorithmic trading may shift to smarter, faster response to reallife
events
Key Disruptive Trends
Implications for Financial Institutions
 The impacts of event-driven algorithmic trading on liquidity,
spread and systemic stability are unclear
 With end-to-end trading activities automated, even small errors in
data integrity, trade strategy, and execution will lead to large
impacts
 Regulators have the potential to significantly alter the course of
developments in this area
Key Disruptive Trends
Summary
New information platforms are improving connectivity among
market constituents, making the markets more liquid, accessible,
and efficient
Key Findings | Market Provisioning
Smarter, Faster Machines New Market Platforms
Big
Data
Machine Accessible
Data
Artificial Intelligence /
Machine Learning
Fixed Income Funds / Fund
of Funds
Private Equity /
Venture Capital
Shares
Private
Company
Shares
Commodities &
Derivative
Contracts
21
We identified six important themes that cut across functions and touch multiple
clusters of innovation
Niche, Specialised Products
 New entrants with deep specialisations are creating highly targeted products
and services, increasing competition in these areas and creating pressure for
the traditional end-to-end financial services model to unbundle
Reduced Intermediation
 Emerging innovations are streamlining or eliminating traditional institutions’
role as intermediaries, and offering lower prices and / or higher returns to
customers
Automation of High-Value Activities
 Many emerging innovations leverage advanced algorithms and computing
power to automate activities that were once highly manual, allowing them to
offer cheaper, faster, and more scalable alternative products and services
Customer Empowerment
 Emerging innovations give customers access to previously restricted assets
and services, more visibility into products, and control over choices, as well as
the tools to become “prosumers”
Streamlined Infrastructure
 Emerging platforms and decentralised technologies provide new ways to
aggregate and analyse information, improving connectivity and reducing the
marginal costs of accessing information and participating in financial activities
The Strategic Role of Data
 Emerging innovations allow financial institutions to access new data sets, such
as social data, that enable new ways of understanding customers and markets
4 1
2
3
5
6
1
2
3
4
5
6
22
At the conclusion of the research phase, the Steering Committee gave us a
mandate to dive more deeply into high-potential areas of disruption
Next Steps
We have identified three major challenge areas related to innovation in financial services that will require multi-stakeholder collaboration to be
addressed effectively. We are launching a project stream related to each area, with the goal of enabling tangible impact.
The Forum is uniquely positioned to support advancements against each challenge due to its ability to:
 Convene senior multi-stakeholder groups and align diverse perspectives
 Create thought leadership on cutting-edge issues with long-term implications to the industry
We will be presenting outcomes from these projects in early 2016
Regulatory Models
for Innovation
New financial products and services are creating significant regulatory
uncertainty and fueling perceptions of regulatory arbitrage
Applications of
Decentralised Systems
Decentralised systems, such as the blockchain protocol, threaten to
disintermediate almost every process in financial services
Blueprint for
Digital Identity
Outdated identity management protocols create risks and
inefficiencies for both service providers and consumers
Challenges Projects
23
Reading Guide for
the Detailed Sections of the Report
24
The following detailed sections of the report are organised based on key
innovation clusters and how they map to the core functions of financial services
25
We have analysed the relevant cluster of innovations for each key area of impact
and developed scenarios that present potential answers
 Brief analysis of current state
business models and processes
in the impacted function
 Summary of historical
developments
 Key pain points and challenges
with the current state
Key insights from the analysis of each topic and relevant cluster of innovations have
been summarised in the Executive Summary and Conclusions pages in each module
Report Structure
A Background Context
B Analysis of Innovations Future Characteristics Scenarios C
D
 Overview of key innovations
impacting the topic
 Key characteristics of the
innovations
 Impact of the innovations on the
current state value chain
 Comparison of the current state
models and innovations
 Key characteristics of future
models of financial services
enabled by innovations for the
impacted function
 Summary of potential outcomes
related to the key question for the
topic in a scenario format
 Narratives and case studies to
further illustrate each scenario
 Necessary conditions required for
each scenario to be realised
 Implications of the scenario on
customers, incumbents and
overall industry
 Key opportunities and risks
associated with the scenario
26
Detailed Research Modules
27
Payments
How will customer needs and
behaviours change in an increasingly
cashless payments landscape?
28
Executive Summary
Context / Innovation
 A number of innovations have emerged in the past five years leveraging mobile devices and connectivity to make payments simpler and more
valuable. Examples range from digital wallets to automated machine-to-machine payments
 The majority of these innovations will modify front-end processes to improve the customer and merchant experience while leaving the underlying
payments infrastructure undisrupted
Future of Payments
 These innovations will reduce the use of cash and make payments less visible to payers. They will also enable financial institutions and merchants
to use data-driven customer engagement platforms
‒ As more payment solutions allow customers to link their bank accounts for direct payment and seamless point-of-sale vendor financing, the use
of credit cards could be displaced by these platforms
‒ Customers may lose visibility into their payment choices, increasing their default cards’ share of wallet and reducing the importance of some
traditional differentiators like brand and design
‒ The elimination of a need to carry physical cards and the emergence of payment decision support systems could support the proliferation of
niche and merchant issued cards, splintering wallet share among many cards
Key Implications
 Success of any innovative payment solution will require a strong customer rationale to switch, as most customers do not consider the existing
payment regime to be broken
 In an increasingly cashless future payment providers who can embrace emerging payment innovations to offer differentiated, value-adding digital
experiences will be able to deepen their relationships with customers and take a dominant place in the changing market landscape
Payments: Cashless World
29
The payments industry has continuously evolved over time, but there are still
some challenges to make the world cashless
Payments: Cashless World
History of the payments industry
 Since the introduction of credit cards in the 1950s, debit cards in the 1980s and the rise of e-commerce through the 1990s, electronic payments have
grown in popularity, displacing cash and cheques. In 2012 they accounted for 68 percent of U.S. transactions in value
 Electronic transactions rely on a number of intermediaries, which provide acceptance, convenience and security of transactions, and are generally
coordinated by large scale-based payment networks
Benefits of electronic transactions Key challenges inhibiting the cashless world
 Convenience: Reduces the need for customers and merchants to
carry cash, reducing associated costs, including trips to banks, price
inflexibility and opportunity costs (i.e., interest earned)
 Efficiency: Reduces the cash management costs for businesses and
financial institutions as fewer bills are exchanged by hand and money
movements are settled electronically
 Traceability: Enables a greater degree of visibility into the flow of
money for financial institutions and regulators, facilitating taxation,
transparency, and information gathering
 Protection: Protects customers and merchants from fraud and theft by
documenting transaction records and reducing the need to hold cash
Merchant Adoption
Electronic payments are not
accepted by every merchant due
to the infrastructure costs, high
fees and settlement delays
Convenience
Small denomination payments are
often still conducted reducing the
number of processing steps and
time to complete a transaction
Accessibility
Under-banked population does
not have access to primary
accounts and therefore only uses
cash in transactions
Fraud
Despite the safety measures
increasingly adopted, electronic
transactions create opportunities
for fraudulent activities
Customer
Merchant
Issuer
Acquirer
Payment Network
Point Of Sale (POS)
Credentials /
Authentication
Payment
30
A number of payments innovations have emerged in the past five years,
leveraging mobile and connectivity to make payments simpler and add value
Payments: Cashless World
Key innovations for the cashless world
Common characteristics of successful payments innovations
 Most innovative payment solutions are not
restricted to a single payment method,
allowing customers to manage and use a
variety of credit cards, debit cards or bank
accounts for payment
 Payments innovations allow customers to
make payments in a single tap or
automatically by leveraging connectivity
(e.g., wireless network, near-field
communications)
 Many innovative solutions offer value-add
functionalities in addition to payments,
enabling merchants and financial institutions
to interact more closely with customers and
deliver additional value (e.g., loyalty, offers)
Simplicity Interoperability Value-Add Services
Integrated Billing
 Location-based payments
(geotagging)
 Machine-to-machine payments
Mobile Payments
 Mobile wallets
 Mobile-based merchant payment
solutions
Streamlined Payments
Order Ahead
 Mobile ordering & payment apps
 Integrated mobile shopping apps
 Biometrics / location-based
identification
 Tokenisation standards
Next Generation Security
31
Open-loop mobile
payment solutions
Closed-loop mobile
payment solutions
Mobile merchant
payment solutions;
Integrated payment apps;
Streamlined payment
solutions
Most payment innovations do not disrupt the existing payment processes, but
rather modify front-end processes to improve customer and merchant experience
Payments: Cashless World
How different types of innovative payment solutions interact with today’s payment process
Payment Credentials / Authentication
Allows for increased consumer
access by using existing payment
network ecosystem to connect to
parties already on the platform
(including a large number of
merchants) and make payments
more convenient for customers
leveraging new form factors (e.g.,
NFC, QR code)
How They Work Illustrative Diagram Examples
Consolidates the POS, acquirer
and payment network as a single
entity to create a more flexible
experience, requiring consumers,
issuers, and merchants to
participate. Often allows
consumers to fund transactions via
the traditional payment network
ecosystem
Aims to replace or complement the
current POS infrastructure by
leveraging mobile connectivity
(and aggregate transactions in
some cases) to make the
payments process more effortless
and accessible by more merchants
Customer
Issuer Payment Network
POS Acquirer
Merchant
Customer
Issuer Payment Network
POS Acquirer
Merchant
Customer
Issuer Payment Network
POS Acquirer
Merchant
Enhance
Replace,
Complement
or Enhance
Consolidate
32
Innovations will make payments more cashless and invisible in the future, while
enabling data-driven engagement platforms for customers
Payments: Cashless World
Key characteristics of the future of payments
Cashless
More cash will be displaced by electronic
transactions as payments innovations make it
beneficial for customers to use payment cards
even in small denomination transactions
Back of Mind
As more transactions become virtual and
automated, more payments processes will
become invisible to end customers, changing
their needs and behaviours
Engagement
As payments and mobility becomes more
integrated, the importance of payment
transactions as a potential customer interaction
point will increase for merchants and financial
institutions
Data-Driven
With greater adoption of electronic payments,
more data will be accumulated from payment
transactions, allowing financial institutions,
services providers and merchants to gain
greater understanding of customers and
businesses
Reduced Costs
Because innovative solutions build on the
existing infrastructure, which has very low
variable costs, the cost of making electronic
transactions will fall as electronic payments
gain more volume
As innovations change customer behaviours by making payments more effortless and provide
financial institutions and merchants with data, what will be the payments landscape in the future?
Increased Access to Loans
As more payments are processed through
electronic rails, financial institutions’ visibility
into individuals’ and businesses’ cashflow and
spending patterns will increase, improving their
ability to extend loans to customers previously
less understood
33
How will changing customer needs and behaviours in an increasingly cashless
world change the payments landscape?
Payments: Cashless World
Potential impact on the payments landscape
1 Consolidation of the Payment Market Fragmentation of the Payment Market 2
3
 Customers lose visibility into their payment
choices as innovations like Amazon’s 1-
click and Uber’s seamless payments push
more and more transactions to a single
default card
 The default cards’ share of wallet will
increase and the importance of
differentiators like card brand and design
will be reduced
 The successful deployment of digital wallets
eliminates the need to own/carry physical
cards and enable decision support systems
to help customers optimise card usage
 This drives a proliferation of niche and
merchant issued cards, splintering share
of wallet across many providers
 Customers with revolving balances elect to
use innovative point of sale vendor
financing schemes offering preferable
terms
 Credit card usage is eroded as
transactional card users migrate to payment
solutions that seamlessly link to their
bank accounts
Displacement of Credit Cards
Customers Merchants Payment Solutions
Bank Account
Customers Merchants Payment Solutions
Bank Account
Today
Future
Cards Customers Merchants Payment Solutions
Bank Account
Customers Merchants Payment Solutions
Bank Account
Today
Future
Cards
Default
Card
Customers Merchants Payment Solutions
Bank Account
Customers Merchants Payment Solutions
Bank Account
Today
Future
Cards
Cards
Key change to payment behaviour
 The following scenarios illustrate potential outcomes generated by the innovations discussed in this topic, particularly in response to the key
question above – they are not meant to be future predictions
 These scenarios are illustrations of particular aspects of the potential future and are not meant to represent a complete view of the market and
competitive landscape – in many cases, some or all scenarios could be realised at the same time
34
Scenario 1: Consolidation of the payment market (1 / 2)
 Customers lose the desire to regularly use a variety of cards as
payment innovations enable a seamless transaction experience in oneclick
/ one-touch or less
 Driven by simplicity and convenience, customers push more
transactions to a single default card, increasing the default card’s share
of wallet
 As customers’ desire to switch cards decreases, traditional
differentiators like card brand and design may become less prominent,
making it more difficult for card issuers to differentiate
Case studies
To avoid “moments of truth” in customer decision-making, more
merchants and payment solutions will adopt an automated or one-click /
one-touch / one- tap check-out in both virtual and physical marketplaces.
These “seamless” check-out environments will rely on a default card that
will be used unless customers make a conscious choice to change cards.
As a result, default cards will become significantly stickier and receive a
higher share of total customer spend.
Card issuers will respond to the changing landscape by developing
products that provide the best loyalty points and benefits in aggregate to
compete for the role of the default card.
Payments: Cashless World
Default
Card
In-app purchases within mobile apps can turn traditional physical
purchases into online purchases and combine purchase and
payment into a single tap, eliminating the step for payment method
selection
Order Ahead
Virtual payment processing services store customers’ payment
credentials and allow customers to use those credentials in one-click
or tap to maximise convenience and improve security
Today
Future
Narrative Summary of impact
Customers Merchants Payment Solutions
Customers Merchants Payment Solutions
Bank Account
Cards
Bank Account
35
Scenario 1: Consolidation of the payment market (2 / 2)
Necessary conditions for the scenario Implications of the scenario on…
 Availability and widespread adoption of seamless payment solutions to
a large number of customers and at a large proportion of everydayspend
merchants
 Customers’ willingness to relinquish control over payment options
(e.g., convenience over control)
 Development of more personalised rewards program me for cards to
attract and retain customers
 Less complex and time-consuming customer
experience at check-out
 Decreased cognitive effort on payment selection
Opportunities and risks associated with the scenario
Customers
Incumbents
Overall
Ecosystem
 Increased competitive intensity among existing
players to become top of wallet
 Marginalisation of niche players
 Reduction in the number of credit card providers
 Increased stickiness to those surviving card issuing
institutions
Opportunities Risks
Payments: Cashless World
Merchants  Reduced friction and improved efficiency at checkout
 Issuers seek to incentivize merchants to influence
consumers to load their cards
 Over time, potential decrease in the number of available card choices
as consumers use fewer cards, leading to decreased competition and
innovation
36
Scenario 2: Fragmentation of the payment market (1 / 2)
 The successful deployment of digital wallets eliminates the need to
carry physical cards and virtually removes the limitations on the
number of payment cards customers can carry and use
 Proliferation of digital wallets also enables decision support systems to
help customers optimise card usage by automating card selection
based on loyalty points and other benefits
 This drives a proliferation of niche and merchant-branded cards,
optimised for specific purchases, splintering share of wallet across
many providers
Case studies
The adoption of digital wallets will free consumers from physical limitations
on the number of cards they can carry, allowing niche cards to gain
popularity, particularly in geographies where customers are valueconscious.
This proliferation of cards will encourage the development of decision
support systems that interact with digital wallets to help customers choose
the best card for each purchase. As a result, owning and using multiple
payment cards will no longer hinder the delivery of a seamless customer
experience, prompting further proliferation of niche / merchant-issued
cards.
Payments: Cashless World
Cards
Currently, customers can add multiple payments cards (credit and
debit) to leading digital wallets (e.g., 8 for Apple Pay, unlimited for
Google Wallet), and pick and choose a payment card for each
transaction with few additional clicks / taps
While currently not integrated with digital wallets, decision support
systems run on mobile and wearable devices to automatically
recommend the optimal payment option among payment cards
added by the customers to maximise the overall rewards
Today
Future
Narrative Summary of impact
Customers Merchants Payment Solutions
Customers Merchants Payment Solutions
Bank Account
Cards
Bank Account
37
Scenario 2: Fragmentation of the payment market (2 / 2)
Necessary conditions for the scenario Implications of the scenario on…
 Merchants’ widespread acceptance of smart payment solutions or the
solutions’ successful integration with existing acceptance markets
 Development of payment solutions into platforms surrounded by
innovative ecosystems (e.g., increased linkage between mobile wallets
and merchant apps, location-based check-out experience creation)
 Proven efficiency and impartiality of recommendations engines’ card
choice for each transactions, creation of streamlined user experience
and differentiated value propositions by smart wallets that will drive
consumers to want to adopt the optimisation services
 Opportunities for merchants to directly enter the payments ecosystem
via private label solutions and gain deeper understanding of their
customers’ spending patterns
 Ability for financial institutions to introduce highly specialised rewards
programmes to capture specific segments of spend
 Able to optimise reward collection without sacrificing
seamless experience
 Potential increase in debt as it becomes easier to
issue multiple credit cards, offset by spending
management functionalities of mobile wallets
Opportunities and risks associated with the scenario
Customers
Incumbents
Overall
Ecosystem
 Increased issuance of a greater variety of cards
 Increased competition from new entrants, including
merchant credit cards
 Stronger competitive position for niche players
 Encourage issuers to improve and innovate their
product offerings (e.g., rewards programmes, interest
rates)
Opportunities Risks
Payments: Cashless World
 Decreasing opportunities to scale for credit card providers
 Potential decline in the efficacy of rewards programmes if card is only
used for most rewarding (lowest margin) transactions
 Displacement of traditional players who are not willing to participate in
smart payment solutions
 Potential arms race for rewards and backward optimisation
Merchants  Potential decrease in total merchant service charges
paid as private-label cards are more widely adopted
among each merchant’s customer base
38
Narrative Summary of impact
 Credit card usage is eroded on two fronts: payment facilitation and
revolving lending / loyalty
 Payment solutions that link directly to bank accounts provide an
alternative to customers who previously relied on credit cards for
payment facilitation
 Point-of-sale vendor financing schemes and merchant loyalty
functionalities within new payment solutions further their appeal to
customers who currently rely on credit cards for revolving balances or
loyalty accumulation
Case studies
Today, merchants and payment solutions providers, such as mobile wallets
pay higher merchant service charges on credit card-funded transactions
than on bank account-funded transactions. To reduce costs, these players
will use incentives to encourage customers to switch their funding method
from credit cards to bank accounts. At the same time, merchants will adopt
data-driven alternative vendor financing solutions that offer customers
lower interest rates and provide financing income to merchants.
These innovations will place pressure on credit card transaction volume
and interest income; limiting issuers’ ability to offer attractive loyalty
programmes and reducing competitiveness in the face of merchants who
are able to directly offer their own incentives (e.g., loyalty points, special
offers).
Payments: Cashless World
Customers Merchants Payment Solutions
Customers Merchants Payment Solutions
Bank Account
Today
Future
Cards
Bank Account
Scenario 3: Displacement of credit cards (1/3)
Leading mobile payment solutions allow
customers to fund their purchases with credit
cards and bank accounts and generally earn
profits only on bank-funded transactions
Leading mobile payment platforms allow
customers to add, manage and use multiple
merchant loyalty programmes and enable
merchants to directly issue offers to customers
Emerging point-of-sale vendor financing
schemes provide revolving or purchasespecific
line of credit to replace the need for
credit card financing
39
Scenario 3: Displacement of credit cards (2/3)
Necessary conditions for the scenario Implications of the scenario on…
 Create incentives for customers to switch their funding methods
‒ Merchants’ willingness to transfer financial incentives to customers
to be more appealing than the rewards offered by card issuers
‒ Sufficient trust needs to build with wallet providers, alternative
lending providers and loyalty providers
 Development of alternative financing providers that can offer
comparable user experience and efficiency as credit cards (e.g.,
seamless application process at POS and efficient loan servicing)
 Cooperation of bank account providers and payment solution providers
to allow a seamless connection of payment vehicle and account,
including sufficient data visibility for real-time decisioning and
authorisation
 Clearly defined liability rules across all ecosystem participants and
payment solutions’ ability to provide zero liability for consumers while
offering higher rewards
 Bank account providers’ willingness to take on credit risk
 Fraud monitoring that maintains fraud levels near those of the current
payment networks
 Development of wallet solutions and business models that do not
impose large adoption costs to merchants and have a strong business
case
 Acceptance infrastructure of providers must be ubiquitous enough to
build customer use patterns
 Shift in financial incentives from card-driven rewards
programmes to direct savings from merchants
 Potential savings from lower transaction fees if bank
account / wallet providers can adopt security
innovations and offer protection at a lower cost than
current credit card fees
Customers
Incumbents
Overall
Ecosystem
 Reduced fee revenues
 Transaction accounts become more important than
credit cards in customer retention
 Potential disintermediation of credit card networks
 Entrance of technology companies as providers of
alternative payment networks
Payments: Cashless World
Merchants  Cost reduction due to elimination of credit card fees,
potentially offset by passing on savings to customers
and increased fraud costs
 Exert greater control in the payments ecosystem
40
Scenario 3: Displacement of credit cards (3/3)
 Encouragement of more prudent spending patterns by customers as
revolving credit lines are replaced by case-by-case loans
 May increase check-out conversion for merchants
Opportunities and risks associated with the scenario
Opportunities
 Fragmentation of payment solutions leading to proliferation of noninteroperable
or nationally exclusive payment solutions
 Increased risk of violations against data protection and security of
transactions due to replacement of proven credit card infrastructure
with immature alternative payment solutions
 Lack of clear liability construct could drive confusion across participants
 De-centralisation of payment transactions could drive increased fraud
and lower efficacy than existing models
Risks
Payments: Cashless World
41
What does this mean for financial institutions?
 Reduced control over customer experience: Financial institutions may lose some or most control over their customers’ transaction experience as
digital wallets consolidate digital payment platforms
 Customer targeting: Leveraging data on specific customer segments will become an essential component of strategies to gain a dominant share
of wallet among those segments that encourage or drive more frequent usage in a diversified market
 Merchant relationships: Financial institutions’ ability to partner with merchants will become critical component of strategies to drive merchantspecific
usage, enable merchant-issued credits, or become a preferred card on merchant platforms
 How will issuers create differentiated customer experience when their control over customer experience is taken over by digital payment platforms?
Payments: Cashless World
Key implications and remaining questions
Scenario 1: Consolidation of the payment
market
Scenario 2: Fragmentation of the payment
market Scenario 3: Displacement of credit cards
“Safe Bets” – Likely Implications Under All Scenarios
 Competitiveness of bank-issuers: Large
stand-alone issuers or network issuers may
gain competitive edge over bank-issuers
using their scale to consolidate the market
 360° view of customers: Issuers that
consolidate their customers’ share of wallet
will gain visibility into most of their payment
activities, leading to valuable data on their
lifestyles and preferences
 What will be the characteristics of issuers
who successfully consolidate the market?
 To what degree can and should financial
institutions leverage the enhanced view of
customers to deliver more value?
 Customer retention: As consumers spread
purchases over a larger and larger number
of cards, the credit card will lose its
significance as a key anchor of customer
retention for financial institutions
 Distributed credit: It will become more
difficult for individual financial institutions to
assess customers’ credit worthiness as their
credits become distributed over multiple
cards
 How will retail financial institutions generate
customer loyalty and stickiness in the
future?
 Shift in credit business models: As new
credit vehicles displace credit card based
borrowing the overall profit models of retail
financial institutions will be forced to change
 Loyalty programmes: Financial institutions
will need to create new ways to promote
customer loyalty as lower fees on bank
account transactions disrupt the current
credit card loyalty models
 How will financial institutions assess their
customers’ creditworthiness without
traditional payment history?
 What will the future loyalty models look like
on direct payments from bank accounts?
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! Implications Remaining questions ?
42
Payments
How will the evolution of
decentralised or non-traditional
payment schemes change the role of
traditional financial institutions?
43
Executive Summary
Context / Innovation
 The current value transfer system, built on automated clearing houses and intermediary banks, has made it easier for customers to send money
across geographies, but many pain points remain to enabling rapid and inexpensive value transfer between countries
 Decentralised currencies and mobile money solutions provide compelling alternatives to traditional value transferring systems by streamlining the
intermediating processes
Future of Payment and Settlement Rails
 Driven by competitive pressure from these innovations, the future of value transfer will be more global, faster, more transparent, and cheaper
‒ These non-traditional schemes may compete directly with the existing financial ecosystem as alternative payment networks emerge along with a
variety of financial products denominated in network’s native currency
‒ Financial institutions may choose to facilitate the growth of alternative payment networks as a complement to existing networks. They might act
as a gateway for value into these networks and launch financial products that are connected to non-traditional payment schemes
‒ Alternatively, the non-traditional schemes may act as a catalyst for traditional institutions to develop solutions that fix key pain points in the
current value transfer system; potentially by leveraging elements of the non-traditional schemes
Key Implications
 To bring innovations to the traditional value transfer rails, financial institutions must collaborate to identify top priority areas for transformation solve
for regulatory complexity
Payments: Decentralised and Non-Traditional Payment Schemes
44
While the rails built on automated clearing houses have enabled value transfer
across geographies, many pain points are emerging as customer expectations rise
Payments: Decentralised and Non-Traditional Payment Schemes
 While the current “rails” for value transfer between financial institutions are complex and involve many institutions a similar process is used for all
transactions; from large institutional transfers to the settlement of retail payments
How do financial institutions facilitate value transfer today?
Evolution of money transfer schemes Key pain points with today’s schemes
 The basic elements of the current value transfer process have been in
place for over 150 years
 The concept of “wire transfers” was originated by telegraph companies
(e.g., Western Union) who would receive funds for transfer from a
sending party and send a telegraph to correspondent branch instructing
them to deliver the money to the intended recipient
 The digitisation of this process throughout the latter half of the 20th
century improved the security of messaging services and improved the
settlement time of clearing house activities
 The actual transfer is not instantaneous: funds may take several hours
or even days to move from the sender’s account to the receiver’s
account
 If the sending and recipient banks do not hold reciprocal accounts the
payment must be sent to a clearing house or correspondent bank for
the assurance of payment for the recipient, adding costs and delays
 The complex structure of requesting the recipient bank to demand
payment makes the process more vulnerable to fraud using exposed
sender credentials
Sender Recipient Bank Sender Bank / Broker
Automated
Clearing House /
Intermediary Bank
Recipient
Secure Messaging
FX Market
Intrabank
Interbank
1
3
2
1 Sender Request
Sender asks their financial
institution to transfer an amount to
a specific address (using BIC or
IBAN codes)
2 Secure Messaging
Sending bank sends a secure
message to the recipient bank
requesting transfer of the specified
amount
Flow of Funds
The recipient bank responds to the
sender bank’s request for funds via
a clearing house or correspondent
bank
3
Transfer Request /
authorisation
Flow of Funds
45
Decentralised payment schemes leverage cryptographic protocols to transfer
value virtually in a secure, low cost, near-instantaneous manner
Payments: Decentralised and Non-Traditional Payment Schemes
What are decentralised payment schemes?
 Decentralised networks utilise a common set of protocols to allocate
tasks across many individual nodes rather than via a central point
 Email is an example of a decentralised system that uses a common
protocol (SMTP) to distribute mail between a vast number of servers
 Decentralised payment systems allow users to transmit value between
users, typically secured by a set of cryptographic processes
 Most decentralised payment schemes use a single distributed ledger
and denominate payments between users in a native “currency,” often
referred to as a “crypto-currency”
How have decentralised schemes developed? What are some emerging decentralised schemes?
 Digital payment schemes are as old as the internet itself with many
notable failures including Beenz, Flooz, and Digicash, and the most
notable success being PayPal. However, all of these schemes utilised
a centralised network requiring trust by users in a central counterparty
 In 2009 a pseudonymous whitepaper proposed the creation of a
distributed ledger where transactions between participants could be
processed in a trustless environment via a cryptographic process
 The implementation of this distributed payment protocol is the Bitcoin
network and the native currency of the ledger are Bitcoins
 Since 2009 a range of service providers have emerged to support the
acceptance of payments via the Bitcoin network
 At the same time, many competing schemes have launched, built on
the same underlying concepts but employing different encryption
technology or focusing on different use cases
Characteristics of decentralised schemes
 Secured by cryptographic protocols
 Capable of near real-time settlement
 Very low transaction costs
 Frequently open source where changes are governed by a network of
participants
 Transparency and traceability of transactions is typically superior to
current systems but user identification may be weaker or nonexistent
Sender Recipient
Illustrative Distributed Payment Network
Digital currency run on
decentralised payment
network
Open-source low-cost (~1
/ 1000th of a cent)
payments protocol and
instant exchange of any
form of money or value
Open-source P2P
Internet currency
enabling instant, nearzero
cost payments
Decentralised open
source information
registration and
transfer system
Decentralised System / Ledger
46
Payments: Decentralised and Non-Traditional Payment Schemes
What are non-traditional payment schemes?
 Mobile money refers to a network that supports payment from one user
to another via a mobile device
 A mobile money service may be launched by any firm, not just a
traditional financial institution. Mobile money services have been
launched by network operators (MPESA) and online retailers (PayPal)
 Transactions may be denominated in a fiat currency or in a form of
value issued by the central intermediary
 In developing countries mobile payment solutions have been deployed
to extend financial services to the “unbanked” or “underbanked“
How have non-traditional schemes developed? What are some emerging non-traditional schemes?
 In 2002, researchers noted that individuals in Uganda, Botswana and
Ghana were spontaneously using airtime as a proxy for money
transfer; transferring airtime to their relatives or friends who would then
use or resell it
 In April 2007, Kenya’s dominant mobile network operator, Safaricom,
launched a new mobile phone-based payment and money transfer
service, M-Pesa allowing users to deposit money into an account that
can be accessed on their cell phones and send balances using SMS
 In January 2011, Transferwise launched a P2P cross-border money
transfer service to aggregate and facilitate exchange of foreign
currency and transfer needs at the interbank rate
Characteristics of non-traditional schemes
 Transactions are completed rapidly and are highly transparent to both
senders and recipients
 Transfer costs are very low and fees are highly transparent
 Many schemes are moving towards open systems, as they build in
interoperability with other schemes and traditional outlets (e.g., ATM)
 Does not necessarily require a traditional bank account or well
established financial infrastructure making them well suited for financial
inclusion goals
Mobile monies and P2P value transfer networks rely on a trusted central party to
transfer value rapidly across geographies, even in underbanked regions
Sender
Sender Recipient
Recipient Mobile Money (e.g., a telco)
P2P Transfer
Local
Account
Local
Account Batch (Net)
Flow of Funds Transfer Request / authorisation
47
While non-traditional payment schemes offer a greater level of efficiency than
the traditional rails, their usefulness is dependent on the scale of adoption
Payments: Decentralised and Non-Traditional Payment Schemes
How do decentralised and non-traditional schemes differ from traditional money transfer models?
Value Chain
Key Characteristics
Advantages
Shortcomings
Traditional Model Decentralised Schemes Other Non-Traditional Schemes
 Processing of transfers is handled by
correspondent financial institutions,
often facilitated by payment schemes
(e.g., SWIFT, Visa, MasterCard)
 Relies on a central clearing body
 Transfer is initiated by recipient bank
 Value transfer is recorded in a
distributed ledger
 Transactions are managed by a
distributed network of processors
 Sender initiates the transfer
 Value transfer is facilitated by a
single trusted non-financial 3rd party
 Relies on the intermediary to keep
records and settle the transfer
 Sender initiates the transfer
 Network is scalable and includes
most existing financial institutions
 Proven ability to manage large capital
flows on a global scale
 Large retail and institutional customer
base who are familiar with the model
 Transfer history is transparent,
traceable and practically unalterable
 Lower direct costs of transaction due
to distribution across the network
 Lower exposure to conventional fraud
 Settlement is near real-time; no
counterparty risk
 Simpler and cheaper transfers
 Improved user transparency
 Enables rapid or real-time settlement
 The reach of the intermediary may
exceed that of financial institutions,
particularly in developing countries
 Limited visibility into value flow for
both senders and recipients
 Prone to fraud when the sender’s
credentials are exposed
 Transfer can take days and efficiency
varies by countries / institutions
 High costs / number of intermediaries
 High volatility in the value of the
native “currency”
 Regulatory scrutiny creates
challenges to connecting with fiat
currency ecosystems
 Anonymity of accounts / irreversibility
of transfers creates security issues
 Higher exposure to unconventional
fraud (e.g., large-scale hacking)
 Scalability is dependent on the
availability / adoption of the
intermediary platform
 Cross border flows of funds can
create regulatory challenges
48
Payments: Decentralised and Non-Traditional Payment Schemes
Key characteristics of the future value transfer systems
Global
Geographical distance as a factor in
transferring value will continue to narrow and
even under-banked regions will be connected
Fast
The time it takes to transfer value between
two accounts will be significantly reduced
Transparent
The flow of funds will become increasingly
visible and traceable
Secure
The opportunities for fraudulent activities will
be largely reduced
Reduced Costs
The cost to execute transfers will be
minimised with the streamlined and
automated rails
These emerging non-traditional payment schemes will create competitive pressure
for the value transfer rails to become faster, cheaper and more borderless
In achieving these future state characteristics, how will the evolution of decentralised or nontraditional
payment schemes change the role of traditional financial institutions?
49
How will the evolution of decentralised or non-traditional payment schemes
change the role of traditional financial institutions?
Potential changes to the role of traditional institutions
 A network of innovative financial services
providers (e.g., authentication, remittance,
savings / lending, insurance, merchant
payments) emerge around alternative
payment schemes
 These services provide customers
a
meaningful alternative to financial
institutions by keeping money entirely
within the alternative schemes
 Traditional institutions launch financial
products that are connected to alternative
payment scheme ecosystems (e.g., Bitcoin
savings accounts, mobile money insurance)
 Financial institutions may also act as a
gateway to alternative payment schemes
(e.g., authentication)
 Alternative payment schemes act as a
catalyst for traditional institutions to develop
new solutions
 Leveraging elements of alternative
schemes, traditional institutions build more
streamlined rails for the movement of money
 These solutions reduce the advantages of
alternative payment schemes and retain the
flow of money within the traditional financial
network
Compete with an alternative network
of financial providers
Facilitate alternative payment
schemes as complements
Provide leaner, faster payment
options within the existing network
1 2
3
Traditional Rails
Alternative
Rails
A
A B
B
Savings
Payments
Savings
Payments
Alternative
Rails
A B
Savings
Payments
Authentication
Bank Accounts
Innovative
Bank Solutions
A B
Savings
Payments
Flow of Money
Payments: Decentralised and Non-Traditional Payment Schemes
A Initial sender B End recipient Alternative providers Traditional providers
Remittance
Remittance
Remittance Remittance
 The following scenarios illustrate potential outcomes generated by the innovations discussed in this topic, particularly in response to the key
question above – they are not meant to be future predictions
 These scenarios are illustrations of particular aspects of the potential future and are not meant to represent a complete view of the market and
competitive landscape – in many cases, some or all scenarios could be realised at the same time
50
Scenario 1: Incumbent institutions compete with an alternative network of
financial providers (1 / 2)
Payments: Decentralised and Non-Traditional Payment Schemes
Narrative Summary of impact
With new start-ups providing protection against fraud and fluctuation in
value, decentralised schemes (e.g., Bitcoin) gain momentum as a set of
rails to transfer value between individuals. In less developed countries,
alternative payment schemes (e.g., M-Pesa) become the dominant
solution for the under-banked population.
New entrants emerge to manufacture and distribute financial products with
a compelling value proposition (e.g., savings accounts, insurance policies,
merchant solutions) denominated in the native currencies of these
alternative payment networks. As the result, customers no longer need to
transfer money out of the scheme to consume these products, further
reinforcing the network.
Case studies
Bitcoin exchanges allow customers to securely and quickly transfer
value within the Bitcoin network. Bitcoin financial services providers
(e.g., bitpay – merchant processor, Coinbase – wallet), in conjunction
with those exchanges, strive to provide a competitive value proposition
for customers to retain value within the Bitcoin ecosystem
 A network of innovative financial services providers (e.g., savings /
lending, insurance, authentication, merchant payments) emerge around
alternative payment schemes
 These services provide customers a meaningful alternative to
traditional financial institutions by keeping money entirely within the
alternative schemes
 Traditional rails and alternative schemes will stay mostly separated
with limited points of interaction
Traditional Rails
Alternative Rails
A
A
B
B
Savings
Payments
Savings
Payments
Traditional
Providers
Alternative
Providers
Mobile money solutions (e.g., M-PESA) have led to an
increase in financial product offerings from innovative new
entrants, across various financial services functions from
insurance to savings
Remittance
Remittance
Flow of Money
A Initial sender
B End recipient
Alternative providers
Traditional providers
51
Scenario 1: Incumbent institutions compete with an alternative network of
financial providers (2 / 2)
Payments: Decentralised and Non-Traditional Payment Schemes
Necessary conditions for the scenario Implications of the scenario on…
 Low volatility in native currency of the alternative scheme(s)
 A strong rationale for widespread consumer adoption of the alternative
scheme(s)
 A strong rationale for widespread merchant adoption of the alternative
scheme(s)
 Regulatory acceptance of alternative currency products and low friction
transfers between alternative currency and fiat currency stores of value
 Provision of sufficient and efficient entry points into alternative
scheme(s)
 Competition between established and new ecosystems drives
innovation and improvements in both
 More willing to engage in cross-border commerce
 Finances are split between native and alternative
currencies, creating undesirable complexities
Opportunities and risks associated with the scenario
Customers
Incumbents
Overall
Ecosystem
 Lower floats as customers shift funds into alternative
payment networks
 Price competition with various alternative currency
offerings
 Creation of a parallel ecosystem
 Development of regulatory institutions or expansion
of existing regulatory bodies to oversee financial
transactions in alternative ecosystems
Opportunities
 Security of stored alternative currencies is a challenge with a history of
significant breaches (e.g., Mt. Gox)
 Regulatory redress in alternative schemes has a number of unsolved
challenges
 Unstable alternative currencies lead to “foreign” exchange exposure on
domestic transactions
Risks
52
Scenario 2: Incumbent institutions facilitate alternative payment schemes as
complements (1 / 2)
Payments: Decentralised and Non-Traditional Payment Schemes
Narrative Summary of impact
As the popularity of decentralised and other non-traditional payment
schemes grows within customer segments, incumbent institutions make it
easier for their customers to transfer value into and out of the alternative
rails. Gradually, these institutions leverage their current products and
capabilities to begin playing a greater role as a gateway to non-traditional
payment networks rails and financial products denominated in alternative
currencies (e.g., a Bitcoin denominated bank account).
Alternatively, incumbent institutions could adopt non-traditional schemes
as an internal settlement rail to improve efficiency and customer
experience. Once these rails are in place, it would be easier for financial
institutions to offer products for non-traditional schemes.
Case studies
 Traditional institutions launch financial products that are connected to
alternative payment scheme ecosystems (e.g., Bitcoin savings
accounts, mobile money insurance)
 Financial institutions may also act as a gateway to alternative payment
schemes (e.g., authentication)
 Traditional institutions are involved in both alternative payment
schemes and traditional rails and in some cases, act as points of
interaction
CIC, a traditional insurer, launched micro-insurance products (e.g.,
funeral insurance) that accept payment, and pay out claims in M-Pesa
balances to target the under-banked population. These products allow
CIC to build loyalty and brand recognition with a future customer base.
A Alternative Rails B
Savings
Payments
Traditional Providers
Remittance
Authentication
Bank Accounts
Traditional
Providers Flow of Money
A Initial sender
B End recipient
Alternative providers
Traditional providers
Fidor, an online full-service bank, has adopted the Ripple protocol for
all internal settlement processes to improve efficiency. If usage of the
Ripple protocol were to expand to other banks, it could be easily used
for real-time payment and settlement between these institutions with
no automated clearing house or correspondent banks required.
53
Scenario 2: Incumbent institutions facilitate alternative payment schemes as
complements (2 / 2)
Payments: Decentralised and Non-Traditional Payment Schemes
Necessary conditions for the scenario Implications of the scenario on…
 Strong business case for financial institutions to offer products and
services connected to alternative schemes (e.g., customer demand vs.
reputational risks)
 Trust in reliability, security and sustainability of alternative payment
schemes
 Improved direct connectivity among institutions as others adopt same
alternative schemes
 Ability to leverage financial institution’s existing core capabilities to
provide better services than alternative competition (e.g., KYC, AML)
 Opportunities for increased efficiency in foreign exchange
 May support financial institutions in providing a more borderless
experience for their customers
 Expands the universe of choice between traditional
and alternative schemes
 Potential for lower fees to transfer value within the
financial system
Opportunities and risks associated with the scenario
Customers
Incumbents
Overall
Ecosystem
 Shift from higher margin traditional products to low
margin alternative products
 Possibility of a higher level of regulatory scrutiny
 Changes to existing technologies, processes and
business models to adapt to alternative schemes
 Increased focus on cyber security
 Potential for new competition among institutions from
different geographies
Opportunities
 Exposure to security and volatility risks associated with alternative
schemes
 Significant regulatory exposure as some alternative schemes are not
well understood yet
 Increased reputational risks in case of alterative schemes’ failure
Risks
54
Scenario 3: Incumbent institutions provide leaner, faster payment options within
the existing network (1 / 2)
Payments: Decentralised and Non-Traditional Payment Schemes
Narrative Summary of impact
Increasingly perceiving alternative payment schemes as a threat,
traditional financial institutions have intensified efforts to transform their
payment and settlement rails. Financial institutions may make major
upgrades to existing payment and settlement systems or build on top of
them, employing existing or proprietary message sets. Alternatively,
financial institutions may leverage innovations developed by alterative
payment networks (such as the block chain) to achieve these goals but
elect to stop short of using the alternative networks themselves.
As transferring value within the existing financial ecosystem becomes
cheaper, faster, more transparent and more global, the incentives for
customers to use payment rails from non-traditional providers will
decrease in the face of uncertainties associated with these options.
Case studies
 Alternative payment schemes act as a catalyst for traditional
institutions to develop new solutions
 Leveraging elements of alternative schemes, traditional institutions
build more streamlined rail for the movement of money
 These solutions reduce the advantages of alternative payment
schemes and retain the flow of money within the traditional financial
network
 As a result, alternative payment schemes do not reach maturity and
cease to be a serious threat of disintermediation
A number of national retail financial institutions launched consortiums to provide a P2P money transfer
service to their customers. While some of these services still rely on traditional settlement rails, adoption of
more streamlined technologies and processes can improve these transfers making them lower cost and
near-real-time.
Innovative Bank
Solutions
A
B
Savings
Payments
Traditional
Providers Remittance
Flow of Money
A Initial sender
B End recipient
Traditional providers
55
Scenario 3: Incumbent institutions provide leaner, faster payment options within
the existing network (2 / 2)
Payments: Decentralised and Non-Traditional Payment Schemes
Necessary conditions for the scenario Implications of the scenario on…
 Sufficient competitive pressure for incumbents to invest in development
of new rails or major improvements to existing infrastructure
 Incumbents must possess technical capabilities to build and maintain
new rails
 Sufficient cooperation among financial institutions and other
infrastructure providers globally to set up widely accepted standards,
potentially augmenting existing standards to expedite adoption
 Regulatory comfort with new technologies and standards adopted
 Ability to achieve efficiency and improvements without adding
uncertainty of introducing new parties and assets
 Ability to receive higher standard of customer
experience without relying on less proven systems
 Receive better prices but potentially not as low as
under more disruptive solutions
Opportunities and risks associated with the scenario
Customers
Incumbents
Overall
Ecosystem
 Limited disruption of operations or customer
relationships
 Improved efficiency in operations
 Introduction of new types of risks and necessary
controls
 Potential costs to integrate with new networks
 Development of leaner, more efficient global system
for transfer of value
Opportunities Risks
 Difficulty implementing new technologies and processes may lead to
unforeseen consequences
 Risks of not being able to establish appropriate, widely accepted
standards
56
What does this mean for financial institutions?
 Revised margin structure: Margins on the current payment and settlement transactions will need to be restructured as competitive pressure grows
from alternative rails
 Global implementation: Global settlement infrastructure and emerging markets may present the largest immediate opportunities for the
development of alternative rails of payment and settlement given regulatory complexity of developed local markets
 Changing role of trusted intermediaries: As highly accurate and efficient alternative rail designs are implemented, the role of traditional
intermediaries (e.g., payment networks) as a trusted party may diminish
 What are the new roles that trusted intermediaries will play in the future and how will they address key limitations and weaknesses with today’s
alternative payment and settlement rails?
 How will the new or improved rails for transferring value be deployed, tested and rolled out to minimise unwanted disruption
Key implications and remaining questions
Scenario 1: Compete with an alternative
network of financial providers
Scenario 2: Facilitate alternative payment
schemes as complements
Scenario 3: Provide leaner, faster payment
options within the existing network
“Safe Bets” – Likely Implications Under All Scenarios
 Loss of visibility into customer
transactions: As more financial
transactions are conducted via alternative
rails, financial institutions will lose visibility
into payment history to asset / loan portfolio
aspects of some or most of customers’
finances
 How will financial institutions assess
customers’ finance and provide appropriate
products when they lose visibility into
transactions on alternative rails?
 New sets of risks: As financial institutions
participate in the further development and
usage of alternative rails, they will face a
new set of risks around reputation, security
and compliance that are not under their
direct control
 What are the new risks associated with
alternative rails for value transfer, and how
will they be managed and mitigated by
financial institutions?
 Importance of industry collaboration:
Due to the network-based nature of
payment and settlement rails, working with
other financial institutions at a global level
will become more critical to ensure
seamless connectivity for customers
 What is the appropriate participation model
for incumbent institutions in establishing
new infrastructure and standards for value
transfer?
?
!
!
!
!
?
!
?
!
?
! Implications Remaining questions ?
Payments: Decentralised and Non-Traditional Payment Schemes
?
57
Insurance
How will disaggregating forces
across the value chain transform the
insurance industry?
58
Executive Summary
Context / Innovation
 A number of emerging forces are creating pressure across the insurance value chain, with the potential to redefine the structure of the market
 The rise of online aggregators and the potential entry of technology players could disaggregate the distribution of personal and small commercial
policies and separate insurers from the ownership of customer relationships
 The development of autonomous vehicles and advanced sensors will inherently reduce risk with home and auto while the proliferation of sharing
economies will homogenize risks. These and other forces are standardising and commoditising individual risks
Future of Insurance Value Chain
 New sources of capital and investment management capabilities, such as hedge funds and investment banks, are aggressively moving in to the
insurance industry through innovative securitisation products, offering more cost-effective options to fund policies
‒ As the insurance value chain is disaggregated and commoditised, the importance of scale as a source of efficiency may increase, leading to
market consolidation
‒ Increased use of commoditised personal insurance products in cross sell, along with blurring lines of property ownership, may support the rise of
extremely broad multi-line policies
‒ Disaggregation of the mass personal lines market may also lead to insurers shifting their focus to niche and commercial markets where
traditional capabilities like actuarial skill, underwriting and personal relationships can make bigger differences to performance
Key Implications
 In order to remain competitive in the face of a disaggregating value chain insurers will need to reconsider which core competencies they will invest
in to maintain a strong competitive position
Insurance: Disaggregation of Value Chain
59
The industry has been slowly evolving over the past couple decades, adopting
customer centric innovations from other financial services functions
Insurance: Disaggregation of Value Chain
What are the core capabilities of insurers today?
 Advanced statistical models are being
deployed to understand the correlation
between measurable factors and risk
(actuarial) using historical data
 A large portion of pricing risks with
collected data (underwriting) has been
automated over the years to improve
accuracy and speed, especially with the
advent of out-of-box solutions
 Insurers traditionally deploy their own
capital and premiums collected to
reserve funds for future claims and
invest the rest in various classes of
assets to earn investment income. They
also reinsure a portion of their business
to reduce exposure to catastrophic risks
 The amount of reserve capital required
and allocation of investment assets
allowed are mandated by regulatory
bodies and limits insurers’ underwriting
capacity
R&D/ Product
Manufacturing Underwriting Claims
Risk Capital &
Investment
Mgmt.
Distribution
 Traditional broker / agent in-person distribution faces
significant competitive pressures from digital channels
in personal lines
 Distribution partnerships with banks and retailers
through white-labelling and over-the-counter products
have become increasingly popular
 In some geographies, customer-centric high-touch services
have emerged to provide differentiated claims experience
(e.g., rapid response teams)
 The adoption of digital channels has begun to replace manual
time-consuming processes to empower customers and / or
workforce
 Innovation labs within insurance
companies are being established to
combine brand and product managers
with technological and analytical
resources
 New products increasingly require
integration with 3rd party data providers
 Insurance is typically considered one of the functions within financial services where the adoption of innovation has been the slowest
 However, over the past decade many innovative practices such as digital channels and process automation have been gradually adopted by many
insurers. This has been especially true in personal lines of business while large commercial lines have continued to focus on establishing a “personal
touch” across the value chain
60
A number of emerging forces will lead to pressure on the insurance industry
across the value chain (1 / 2)
Key pressures across the insurance value chain
Advancing technologies, changing customer preferences and the market landscape are enabling a number of innovations and trends, which create
pressure across the insurance value chain
Insurance: Disaggregation of Value Chain
R&D/
Product
Manufacturing
Underwriting Claims
Risk Capital &
Investment
Mgmt.
Distribution
e-Aggregators
Online aggregators that allow customers to
compare prices and purchase insurance
products online may displace traditional
distribution channels as customer
preferences change and more insurance
products are commoditised (e.g., UK P&C
market)
Entry of tech players
Technology providers with brand
recognition and trust surpassing financial
institutions may enter the insurance
distribution market, leveraging their
extensive data and distribution capability.
Google acquired a UK e-aggregator
BeatThatQuote charging insurers up to $54
per click
Securitization
Insurance linked securities such as
catastrophe bonds are introducing new
pools of capital providing fully collateralised
coverage to insurers, outside of traditional
re-insurance and insurance pools
Self-driving cars
Fully or partially self-driving cars are
emerging leveraging smart sensors,
connectivity and machine-to-machine
communications. This will considerably
reduce the risks associated with driving and
may shift the principal of insurance from
drivers to manufacturers
Sharing economy
As sharing economies emerge from pay-asyou-go
rentals to shared vehicles and
houses, the concept of ownership may
radically change, challenging traditional
insurance models developed based on oneto-one
ownership structure
Entry of hedge funds
Driven by a low interest rate environment
and access to premiums, hedge funds and
alternative sources of capital are moving
closer to the insurance value chain by
setting up reinsurers, providing additional
funding options for insurers
Impact on all Insurers Impact on P&C insurers
61
As the result, the insurance value chain will be increasingly disaggregated in the
future, changing the nature of the insurance business
Key characteristics of the future state insurance value chain
Insurance: Disaggregation of Value Chain
Disaggregation of Distribution
e-Aggregators and technology providers could
disaggregate the distribution of personal and
small commercial policies and the ownership of
customer relationships from insurers
Commoditization of Risks
As properties (home and auto) become safer
and sharing economy homogenises risks,
individual risks will be increasingly standardised
and commoditised
Decoupling of Capital
A larger proportion of investment risks will be
transferred outside of an insurance company as
more alternative providers of capital (e.g., hedge
funds) offer cost-effective options
 Growth of insurers will be less constrained
by their access to risk capital
 Increased underwriting capacity, transfer of
catastrophic risks and commoditisation of
risks may lead to decreased impact of
insurance cycles
 The importance of actuarial and
underwriting capabilities will grow as other
parts of the value chain are disaggregated
 Insurers’ margins on personal and small
commercial products will decrease
 Customer loyalty to insurers will decrease
as aggregators create distance between the
individual and their insurer
 Erosion will occur in the competitive
advantages from existing retail channels
(e.g., agent force, brand)
How will disaggregation across the value chain change the insurance landscape in the future?
R&D/
Product
Manufacturing
Underwriting Claims
Risk Capital &
Investment
Mgmt.
Distribution
62
How will disaggregation across the value chain change the insurance landscape
in the future?
Potential changes to the insurance landscape
Consolidation of the market by mega
insurers
Rise of multi-line policies Shifting focus to niche market and
commercial lines
 With increasingly homogenised risk profiles
and commoditised personal insurance
policies, the importance of scale to drive
efficiency will grow, leading to the market
consolidation
 Disaggregation of distribution to technology
platforms will enable insurers to scale
rapidly in a cost-effective manner
 Widened access to capital through
securitisation and alternatives will generate
excess underwriting capacity for insurers
to support rapid growth and consolidation
 Personal insurance products that are
commoditised in the future will be
increasingly used as a bundle to cross
sell other more profitable products
 As the concept of ownership blurs in the
sharing economy, the concept of cross sell
may expand so that an insurance policy
encompasses all risks associated with
the customer, rather than specific asset
 Increased connectivity may allow “personal”
insurance policies to be adjusted
frequently to match customers’ usage
patterns
 Disaggregation of the personal lines value
chain will lead insurers to shift their focus
to niche markets where traditional
capabilities (e.g., actuary and underwriting)
make bigger differences in performance, or
pivot towards an increased focus on
commercial lines
 In these markets, distribution and
underwriting will continue to be relatively
more manual and the insurers’ expertise will
not be easily replicated by other insurers
1 2
3
A
B
C
Insurers
Customers
A
C
A
B
C
D
A
Insurance: Disaggregation of Value Chain
 The following scenarios illustrate potential outcomes generated by the innovations discussed in this topic, particularly in response to the key
question above – they are not meant to be future predictions
 These scenarios are illustrations of particular aspects of the potential future and are not meant to represent a complete view of the market and
competitive landscape – in many cases, some or all scenarios could be realised at the same time
Personal
SME
A B C D
Commercial
Specialty
Personal
SME
A B C D
Commercial
Specialty
63
Narrative Summary of impact
As a homogenisation of risk profiles leads to margin pressures and a price
sensitive market (particularly in more commoditised segments such as
personal auto) insurers who can achieve economies of scale will be able
to provide lower prices and gain market share. In order to gain scale, M&A
activities among insurers will proliferate and insurers will partner with nontraditional
companies, such as technology platforms, to distribute their
products. This will allow customers to compare prices and products more
readily and accelerate commoditisation of the market. Insurers may also
actively reinsure their businesses using securitisation and alternative
capital sources to minimise regulatory burdens and stablise their margins.
Case studies
 With increasingly homogenised risk profiles and commoditised
personal insurance policies, the importance of scale to drive efficiency
will grow, leading to the market consolidation
 Disaggregation of distribution to technology platforms will enable
insurers to scale rapidly in a cost-effective manner
 Widened access to capital through securitisation and hedge funds will
generate excess underwriting capacity for insurers to support rapid
growth and consolidation
Insurance: Disaggregation of Value Chain
A B C
Today: fragmented market
A C
Future: consolidated market
Increased transparency via online channels and limited investment returns have put significant pressure on pricing in
the US auto insurance industry, driving a rapid consolidation over the past 10 years. Even absent notable M&A
activities, large insurers who can afford big marketing and R&D budgets have grown rapidly; leveraging their
superior customer acquisition capabilities and a price advantage derived from economies of scale. As a result, the
share of top 10 auto insurers in the United States has grown from 59% in 2000 to 71% in 2012.
Scenario 1: Consolidation of the market by mega insurers (1 / 2)
Customers A Insurance Company Insurance Contract
A C
64
Necessary conditions for the scenario Implications of the scenario on…
 Regulatory allowance of the consolidation of the market (i.e., resolution
of anti-trust issues)
 Ability to realise the benefits of scale, particularly in terms of cost
efficiencies and underwriting accuracy improvements
 Personal lines customers continue to perceive insurance as a
commoditised products
 Consolidation leads to reduced transaction costs due to economies of
scale
 Cost savings from efficiency gains can be passed on to customers via
lower prices
 Reduced choices for and differentiation among
insurance products
 Potential for higher prices due to lower competition
Opportunities and risks associated with the scenario
Customers
Incumbents
Overall
Ecosystem
 Margins expand for surviving insurers as competition
is lowered
 Smaller insurance companies are at risk of becoming
takeover targets
 Decreased impetus for innovation and diversification
as smaller players exit the market
Opportunities
 Oligopolistic structure may lead to potential collusion among large
players, leading to price increases
 Mega insurers may bear more systemic risk resulting in increased
regulatory pressures
Risks
Insurance: Disaggregation of Value Chain
Scenario 1: Consolidation of the market by mega insurers (2 / 2)
65
Narrative Summary of impact
Today insurers frequently cross sell commoditised, low margin products
with their higher margin peers (e.g., the bundling of low margin auto
insurance with higher margin home insurance). As the commoditisation of
risks accelerates across various products, multi-line insurers may focus
more heavily on bundling and cross selling products to achieve economies
of scale and build customer loyalty.
Leveraging the more granular and individualised data available through
connected devices, insurers may ultimately be able to take product cross
selling to its logical extreme; offering a single insurance policy covering all
(or a very wide range) of an individual’s risks.
Case studies
 Personal insurance products that are commoditised in the future will be
increasingly used as a bundle to cross sell other more profitable
products
 As the concept of property ownership blurs in the sharing economy, the
concept of cross sell may expand so that an insurance policy
encompasses all risks associated with the customer, rather than risks
associated with specific assets
 Through increased connectivity, the “personal” insurance policies may
be adjusted more frequently to add, subtract or modify coverages to
match the customers’ individual usage patterns
Insurance: Disaggregation of Value Chain
Scenario 2: Rise of multi-line policies (1 / 2)
A B C D A
Today: Product-based insurance Future: Customer-based insurance
Farm Family has introduced the concept of aggregate flexible contract to small / medium enterprises , concentrating on
rural and suburban area, and targeting specific risks surrounding certain sectors (e.g., Special Farm Package 10 for
agriculture owners). On the personal insurance side, many multi-line insurers offer bundling discounts to customers to
promote cross sell across personal auto, home and life policies, with auto and home cross sell being more popular among
customers, yet multi-line contracts are still not widely adopted.
Customers A Insurance Company Insurance Contract
66
Scenario 2: Rise of multi-line policies (2 / 2)
Necessary conditions for the scenario Implications of the scenario on…
 Insurance companies need to be able to assess and cover a wide
range of risks for individuals
 Insurers need the ability and capacities to modify coverage and pricing
in real-time
 Customers must trust in insurers‘ ability to evaluate and cover their
risks comprehensively and fairly
 Shifting from insuring “things” to insuring “people” is more aligned with
who is actually exposed to risks
 Mono-line and niche insurers may partner with each other or evolve
into product-specific reinsurers with deep product knowledge
 Peace of mind knowing that a broad range of
situations are covered by a single contract
 Potential loss of control over details and choices
around specific insurance coverage
 Potential premium reduction driven by vertical
consolidation
Opportunities and risks associated with the scenario
Customers
Incumbents
Overall
Ecosystem
 Requires a full suite of products offering to participate
in the market
 Economies of scale driven by vertical consolidation
 Potential challenges for mono-line and niche insurers
regarding their competition with multi-line insurers
 Expansion of coverage range for each individual
 Minimum size/capabilities required to participate in
the market increases
Opportunities
 Risk of adverse selection by customers is exacerbated by insurers
expanding into areas where they have less experience
 Potential for certain individuals to oversubscribe to insurance
Risks
Insurance: Disaggregation of Value Chain
67
Scenario 3: Shifting focus to niche market and commercial lines (1 / 2)
Narrative Summary of impact
As access to granular data and sophisticated underwriting become
necessary conditions for personal insurers to survive, those with
insufficient scale to compete may choose to specialise in specific market
segments. These segments will tend to require in-depth historical
knowledge and niche distribution networks based on factors such as
demographics (e.g., cancer patients), sector (e.g., medical SME), or
region (e.g., Manhattan). Multi-line insurers who sell both personal and
commercial policies today may also choose to exit the commoditised
personal insurance market and focus more heavily on the commercial
market, where their specialised capabilities can lead to higher margins
and growth / customer retention.
Case studies
 Disaggregation of the personal lines value chain may lead some
insurers to shift their focus to niche markets where traditional
capabilities (e.g., actuary and underwriting) can make bigger
differences in performance and profitability, or pivot toward an
increased focus on commercial lines
 In these markets, distribution and underwriting will continue to be
relatively more manual and the insurers’ expertise will not be easily
replicated or replaced
Insurance: Disaggregation of Value Chain
Bought by Many, a UK-based insurance start-up, brings together customers with specific insurance needs
(e.g., age, illness, residence location, profession) to represent their needs to insurers and promote the
creation and distribution of specialised insurance products designed for them. Bought by Many matches
customers who do not fit commoditised insurance policies to insurers who are willing to specialise in certain
customer segments.
Insurance Company
Today: Diverse focus between personal and commercial lines Future: Shift to commercial lines / niche specialty
Lines of
business
Personal
SME
Insurer A Insurer B Insurer C Insurer D
Large Commercial
Niche / Specialty
Personal
SME
Insurer A Insurer B Insurer C Insurer D
Large Commercial
Niche / Specialty
68
Scenario 3: Shifting focus to niche market and commercial lines (2 / 2)
Necessary conditions for the scenario Implications of the scenario on…
 Niche markets and complex commercial lines must continue to require
special capabilities that take time and investment to develop
 Margins for niche markets and complex commercial lines need to be
attractive
 Mechanisms for insurers to exit their existing commitments in nonniche
markets
 Opportunity to encourage insurers to leverage their sophisticated
underwriting capabilities to understand and insure against more
complex risks (e.g., unhealthy population)
 Increased need for reinsurance as insurers focus more on specific,
concentrated markets
 Fewer suppliers of commoditised insurance products,
potentially resulting in a marginal price increase
 Proliferation of the niche market results in
development of products that meet special needs
Opportunities and risks associated with the scenario
Customers
Incumbents
Overall
Ecosystem
 Bifurcation of the ecosystem into commodity and
niche markets with different characteristics
Opportunities
 Greater risks for catastrophic losses as the concentration of insurers
around niche risks increases
Risks
 Increased competition in the most profitable niche
and commercial markets
 Less competitive intensity in commoditised markets
as companies exit
Insurance: Disaggregation of Value Chain
69
What does this mean for financial institutions?
 Reduced customer stickiness: With insurers’ ownership of customer relationship further disaggregated and personal lines products further
commoditised, customers will become more fickle and creating customer loyalty will become increasingly difficult
 Self-insurance models: The overall revenue for the insurance industry will be reduced as the agents of the commoditising forces (e.g., self-driving
car manufacturers, sharing economy platforms) gain scale and begin to self-insure
 Competitive benchmarking: Insurers’ ability to scan and benchmark against competitors’ pricing models and strategies will become more
important as customers gain visibility into prices from multiple insurers via digital distribution platforms
 How will insurers create customer loyalty and stickiness going forward as the insurance products become increasingly commoditised and new,
digital entrants disaggregate customer relationship?
 What role will insurers play in supporting the self-insuring agents of commoditising forces in response to the erosion of the premium base?
 How can the insurance industry cultivate innovation ecosystem amidst risk-averse culture in order to proactively manage the disaggregating forces
instead of reacting to them?
Key implications and remaining questions
Scenario 1: Consolidation of the market by
mega insurers Scenario 2: Rise of multi-line policies Scenario 3: Shifting focus to niche market and commercial lines
“Safe Bets” – Likely implications under all scenarios
 Regulatory complexity: As mega insurers
emerge across multiple regulatory
jurisdictions, their burden to comply with
various regulatory regimes will increase
 Acquisition of capabilities: Many monoline
insurers today may face challenges in
acquiring expertise and capabilities to
effectively provide multi-line policies
 What capabilities will insurers need to
develop in order to quickly and accurately
assess and respond to changes in
customers’ risks?
 Relationship-driven distribution:
Insurers’ ability to build and closely manage
relationships with customers and
distribution partners, potentially via human
workforce, will become more important
again to penetrate niche and commercial
markets
?
!
!
! !
?
!
! Implications Remaining questions ?
Insurance: Disaggregation of Value Chain
!
?
?
70
Insurance
How will an ever more connected
world impact the value delivered by
insurance providers?
71
Executive Summary
Context / Innovation
 Increasing adoption of connected devices in cars, homes and lifestyles presents an opportunity for insurers to expand the use of telematics, i.e., the
integration of telecommunication and information processing
Future of Personal Insurance
 Expansion of the telematics insurance models through connected devices and platforms will create channels for insurers to better understand their
customers and engage more closely with them
‒ Connected devices can allow insurers to track and continuously refine individual risk profiles, enabling more accurate underwriting of individual
risks and more personalised products
‒ Insurers can also evolve into a risk manager for clients by interacting more frequently with their customers and proactively participating in risk
management through their customers’ connected devices
‒ Furthermore, insurers could leverage the individualised data gathered through connected devices to gain a fuller view of customers’ identities
and lifestyles, and work with retailers and external parties to deliver relevant, and financially beneficial, offers to customers
Key Implications
 To reap the benefits of new business models enabled by connected devices, insurers must work closely with device and service providers and must
also define acceptable boundaries in utilising customer data
Insurance: Increasing Levels of Connectivity
72
The business model for property & casualty (P&C) and health insurance has
been refined over the centuries, but improvement opportunities still exist
 Traditionally, P&C and health insurance policies have been priced based on predictions made using historical information and best in class
statistical models
Traditional P&C and health insurance processes
Exploration &
Submission
Underwriting
(Quoting)
Claims
Servicing
Binding Renewal
 Risks are priced based on the data customers submitted and some 3rd party data, including historical data and predictive indicators, against
loss models and clusters created by insurers based on historical statistics
 After binding, insurers and customers do not interact until renewal unless specific events are triggered such as claims (e.g., accidents) or
servicing (e.g., address change)
 Customers’ usage and losses are reflected in their risk profile only in the underwriting process during the next renewal cycle
3rd Party Data
1
2
3
1
2
3
Improvement opportunities in the traditional P&C and health insurance model
Backward-looking
Despite the gradual improvement on the
accuracy of loss prediction models, losses are
predicted using historical indicators. Most pricing
models do not adjust to real-time individual
behavioural and usage data.
Limited interactions
Profitable, claim-free customers typically do not
interact with insurers until renewal, limiting
insurers’ ability to demonstrate value to them
and develop stickiness
Passive
Insurers only react to customers’ predicted risk
profiles upon binding and at renewal, with little to
no visibility into proactive risk management
opportunities throughout the policy term
Insurance: Increasing Levels of Connectivity
73
Telematics offers a promising proposition to P&C and health insurers and
customers, but its adoption is slow due to a number of factors
 First introduced in the mid-2000s, telematics insurance products leverage the GPS technology and wireless communications to enable auto insurers
to collect usage and behaviour data of their customers in real time or near-real time
 Leveraging such data, insurers charge customers’ premiums based on their usage of the vehicles and current driving behaviours instead of typical
fixed premiums, given the strong correlation between usage of vehicles and risks
 Today’s telematics devices have evolved to measure a variety of additional behavioural factors from rapid acceleration to air bag deployment
What is telematics?
 Installation of physical tracking devices creates an
additional “moment of truth” when customers may
abandon adoption of telematics
Exploration &
Submission
Underwriting
(Quoting)
Claims
Servicing
Binding Renewal
3rd Party Data
Benefits of telematics
 Pricing Accuracy: Insurers’ risk models become more accurate as
individual, empirical and near real-time data is used combined with
historical predictions based on segmentation
 Lower Claims: Telematics products incentivise safer behaviours
among customers as premiums are linked directly to the behaviours
and reduce the overall claims losses for insurers
 Personalisation: As usage and behavioural data accumulates, the
insurance premium becomes increasingly personalised to each
customer, resulting in lower premiums for customers and customer
stickiness for insurers
(Near) Real-time, behaviour-based pricing
Factors inhibiting adoption of telematics
Device
 Only predominantly low-risk customers sign up for
telematics-based insurance contracts and high-risk
customers opt out, deterring insurers’ economics
Selection
 Gathering and utilisation of data is usually delayed
due to connectivity, costs and analytical power Delays
 Discounts often do not serve as sufficient incentives
for customers to adopt and share personal data Incentives
Insurance: Increasing Levels of Connectivity
74
Connected devices and platforms emerging across cars, homes and lifestyles
present an opportunity to improve and expand the telematics insurance models
Innovations creating potential opportunities for the connected insurance model
Drivers behind the emergence of connected devices
Smarter, cheaper sensors Internet-of-things Advanced analytics Communication protocols
 Run on operating systems (apps can be
installed) and are connected to the internet
 Gather and transmit information on every
part of the vehicle
 Communicate with other cars to prevent
accidents
 Monitor key metrics (e.g., temperature) and
automatically modify the environment
accordingly based on learning
 Identify risk factors (e.g., smoke) and take
adequate actions for prevention / triaging
 Communicate with the environment to adapt
to surrounding environments
 Quantify, track, monitor and manage daily
activities through wearable devices
 Identify trends, patterns and
recommendations based on quantified data
 Measure, track and analyse vitals relevant
for specific conditions and illness
1. Connected Cars 2. Connected Homes 3. Connected Lifestyles
 Increase interoperability; facilitate data gathering, management and utilisation; and improve coordination among connected devices
4. Standardised Platforms
Key advantages
Easier utilization of data
Gathered data can be shared easily via
connectivity and data-based services can be
easily provided as apps through platforms
(i.e., a tap to install and opt in)
Real-time communication
Data from vehicles, properties and individuals
are gathered and analysed in real-time to
provide timely, relevant insights and
information to users
Mix-and-match of data
Data from multiple sources can be combined
and analysed to create more comprehensive
and accurate understanding of users
Insurance: Increasing Levels of Connectivity
75
Proliferation of connected insurance models will create channels for P&C and
health insurers to better understand and engage more closely with their customers
Key characteristics of the future connected insurance business model
Personalisation
Increased measurability and availability of
personal data will allow insurers to refine their
understanding of customers’ risks from clusterbased
approach to individualised pricing
Accuracy
With better understanding of each individual’s
risks, the pricing accuracy of insurers will
improve and more customers will pay
premiums appropriate for their risks (i.e., less
cross-subsidisation among customers)
Transparency
As customers’ usage and behaviours become
more measurable, insurers will gain greater
visibility into the circumstances surrounding
claims and the opportunities for fraud will
decrease
Data-Rich
Insurers will become a critical custodian of
customer data as they gain access to
behavioural data on their customers
(e.g., vehicle movement), above and beyond
historical and static data available today
(e.g., type of vehicle owned)
Engagement
Insurers will be able to access additional
channels to engage with their customers
through mobile and other connected platforms
and generate more relevant content for their
customers based on data
As insurers are enabled with additional data and communication channels from connected devices
and platforms, how will the value delivered by insurance companies evolve?
Insurance: Increasing Levels of Connectivity
76
How will increasing levels of connectivity impact the value delivered by insurance
providers?
Potential value proposition of connected insurers
1 Personalisation of insurance policies Active management of the insured’s 2
3
risks
Broker of personal data
 Connected devices allow insurers to track
and continuously refine individual risk
profiles with empirical data, enabling more
accurate underwriting of individual risks
 Furthermore, connected devices enable a
channel for consumers to purchase eventbased
coverage to personalise their policies
for better protection
 Connected devices create a bilateral channel
for insurers to interact more frequently
with their customers and proactively get
involved in managing their customers’
risks (e.g., health consultation based on
data gathered through wearables)
 By developing ‘concierge’ functions,
insurers can actively manage their client’s
risk, lower losses and deliver additional
value to customers
 Connected devices allow insurers to gather
ongoing behavioural data from their
customers to gain a fuller view of customer
identity and lifestyle
 Working with retailers and other external
parties, insurers use the increased
knowledge on their customers to deliver
relevant, financially beneficial information
(e.g., offers)
Insurance: Increasing Levels of Connectivity
Submission UW Binding Renewal
3rd party
Data
Claims
Servicing
Risk Advice
Submission UW Binding Renewal
3rd party
Data Claims
Servicing
Submission UW Binding Renewal
3rd party
Data
Retailers /
External parties
Data
Analytics
Offers Data
Claims
Servicing
New processes New processes New processes
 The following scenarios illustrate potential outcomes generated by the innovations discussed in this topic, particularly in response to the key
question above – they are not meant to be future predictions
 These scenarios are illustrations of particular aspects of the potential future and are not meant to represent a complete view of the market and
competitive landscape – in many cases, some or all scenarios could be realised at the same time
Real-time Risk Profile /
Premium Adjustments
77
Narrative Summary of impact
A wider adoption of wearable devices (e.g., wristbands) and smarter home
sensors (e.g., smart thermometers), as well as the development of
aggregation platforms, allows insurers to expand usage-based offerings to
home and health policies. As the result, customers pay premiums that are
more customised to their risk profiles and usage.
In the automotive space the adoption of standardised platforms and
improved sensors enables insurers to create app-based telematics offerings
that customers can easily sign up for. Through these apps, customers can
purchase additional coverage for specific events.
Case studies
 Connected devices create a real-time stream of more granular,
individualised, empirical data, enabling insurers to track, analyse,
understand and continuously refine individual risk profiles for more
accurate underwriting of individual and organisational risks
 Telematics and usage-based-insurance become readily adoptable
through the elimination of the need for physical devices and the
development of standardised platforms
 Increased connectivity via mobile creates a channel for consumers to
purchase event-based coverage to personalise their policies for better
protection
Exploration &
Submission
Underwriting
(Quoting) Binding Renewal
3rd Party Data
Claims
Servicing
Leading mobile platforms are creating
standardised platforms that enable the
development of apps that can be installed across
many vehicles from different automakers. These
apps can enable real-time gathering of granular
driving data
Wearable devices that can track users’ lifestyle
data are gaining popularity and a number of
portable health solutions to track key vitals are
being developed. Mobile OS and device makers
have also begun to introduce platforms to
connect and aggregate data from these devices
Smarter sensors and control devices (e.g., fire
alarms, thermostats) are gaining popularity in
households and aggregation platforms are
emerging to establish connection among and
provide central management of those devices
and sensors
Scenario 1: Personalisation of insurance policies (1 / 2)
Insurance: Increasing Levels of Connectivity
New processes
Real-time Risk Profile / Premium Adjustments
78
Scenario 1: Personalisation of insurance policies (2 / 2)
Necessary conditions for the scenario Implications of the scenario on…
 Widespread adoption of personal connected devices
 Sophisticated analytical capabilities to use real-time data streams to
constantly update underwriting of risks
 Collaboration between regulators, insurance companies, device
manufactures and telecommunications operators
 Customers willing to share additional personal data with insurers
 More accurate underwriting and premium calculation on the basis of
available individual data
 Increased stickiness of customers to their insurers
 More customised insurance premiums and coverage
 Premiums that are more reflective of true personal
risks – less cross-subsidisation between customers
Opportunities and risks associated with the scenario
Customers
Incumbents
Overall
Ecosystem
 Increased focus on data ownership
 Need to create partnerships with other ecosystem
players
 Complete redevelopment of underwriting models
 Personalised insurance products allow less
comparability between insurers
Opportunities
 Management and protection of sensitive, personal data generated by
connected devices
 As cross-subsidisation decreases, accessibility to insurance becomes
a concern for high-risk customers
 Red-lining customers who elect not to participate in or are excluded
from personalised insurance based on data from connected devices
Risks
Insurance: Increasing Levels of Connectivity
79
Utilising driving patterns gathered from connected cars and 3rd party data
(e.g., weather), insurers send warnings and advice via in-car applications
to support safer driving by their customers
As health insurers gain more granular data on customers’ lifestyles and
better understand indicators for future illness, they arrange health
consultants to high risk customers via mobile apps
As a result, customers benefit by avoiding accidents and illness and find
their insurance policy more valuable, whereas the frequency and
magnitude of losses are reduced for insurers
Case studies
 Collection and analyses of more granular data allows insurers to more
accurately understand behavioural risk factors and predict near and
long-term increases in risk
 Connected devices create a bilateral channel for insurers to interact
more frequently with their customers and proactively get involved in
managing their customers’ risks before events occur
 By evolving into a manager for their client’s risks, insurers can lower
losses while delivering additional value to customers
Exploration &
Submission
Underwriting
(Quoting) Binding Renewal
3rd party Data
Claims
Servicing
Risk Advice
Marmalade Insurance, a UK based insurance company, targets lessexperienced
driver segments with its telematics offering by providing
feedback and e-learning based on driving behaviour to promote safer
driving
Vitality Health’s app encourages its customers to voluntarily track and
share lifestyle data with the insurer. The app then provides analysis and
feedback based on the gathered data, and rewards customers for
healthier lifestyle choices with gifts and other benefits
Scenario 2: Active management of the insured’s risks (1 / 2)
Insurance: Increasing Levels of Connectivity
Narrative Summary of impact
New processes
80
Scenario 2: Active management of the insured’s risks (2 / 2)
Necessary conditions for the scenario Implications of the scenario on…
 Development of advanced analytical capabilities to predict future risks
 Clear understanding of liabilities associated with advice
 Customer trust in insurers to manage their risks and provide advice
 Opportunity for insurers to evolve into a service provider that offers
differentiated services to customers (e.g., health consulting)
 Lower claims due to proactive management of risks and longer-term
customer education
 Reduce risks and better manage future risks through
insurers’ advice
Opportunities and risks associated with the scenario
Customers
Incumbents
Overall
Ecosystem
 The implementation of ‘concierge’ functions becomes
a core value proposition
 Increased focus on behavioural indicators of risks
(i.e., what matters and when to engage)
 Build customer loyalty by becoming partners to
customers
 Decease in the overall risk pool of the participating
customers through active management of individuals’
risks
Opportunities
 Dealing with losses resulting from policy holders rejection of advice
 Dealing with losses resulting from absence of advice or the delivery of
incorrect advice
 Risk of fraud from customers gaming the connected systems
Risks
Insurance: Increasing Levels of Connectivity
81
Scenario 3: Broker of personal data (1 / 2)
Narrative Summary of impact
Insurers already gather static data on customers’ properties (e.g., make of
car, house location, age). Connected devices will allow insurers to track
their customers’ behaviour with sufficient granularity to create a
comprehensive picture of their identity and lifestyle. Automotive insurers
will be able to predict future erosion of tires and collaborate with auto parts
retailers to send discount offers to replace tires based on the make of
vehicles. Home insurers could utilise customer data to predict a vacation
approaching and offer discounts on travel packages as well as travel
insurance. These offers will provide additional financial value to
customers, encouraging loyalty and supporting proactive risk
management.
Case studies
 Connected cars, homes and health devices will allow insurers to gather
ongoing behavioural data from their customers, which can be combined
with existing asset data to better understand customers’ identity and
lifestyle
 Working with retailers and other external parties, insurers can use the
improved knowledge of their customers to deliver relevant, financially
beneficial information to customers, which can incent them to better
manage their risks
Exploration &
Submission
Underwriting
(Quoting) Binding Renewal
3rd party Data
Retailers /
External parties
Claims
Servicing
Data Analytics
Offers
Data
While many P&C insurers already partner with retailers to offer relevant discounts, the use of behavioural data is still
limited.
Insure the Box, a UK auto insurer, leverages telematics devices installed on cars to provide theft recovery services.
Insurance: Increasing Levels of Connectivity
New processes
82
Scenario 3: Broker of personal data (2 / 2)
Necessary conditions for the scenario Implications of the scenario on…
 Insurers gain customer trust as guardians of personal data by clearly
demonstrating alignment of interests with customers and providing
sufficient value in exchange for their personal data
 Compliance with existing and future regulations on usage of personal
data
 Incentives may support lower risk behaviour by policy holders (e.g., not
delaying tire replacement)
 Financial incentives from individualised offers
Opportunities and risks associated with the scenario
Customers
Incumbents
Overall
Ecosystem
 Increased competition for partnerships
 Early-movers may benefit from locking up
partnerships
Opportunities
 Data might be misappropriated by external parties
 Risk of losing customers’ trust, particularly if relevance of offers is low
Risks
 Decrease in claims and losses
 Potential for partnership revenue
 Halo effect with customers based on providing
additional value
Insurance: Increasing Levels of Connectivity
83
What does this mean for financial institutions?
 Real-time data and analytics: Insurers’ ability to gather and analyse data in real-time will become more essential to enabling and optimising the
benefits of connected insurance models
 Strategic role of insurance business: As insurers gather behavioural data from customers and become more sophisticated in understanding
risks, the role of insurance within retail financial institutions will become critical in understanding customers’ financial status and needs (e.g.,
Bancassurance players may benefit significantly from insights generated from the connected insurance models)
 Importance of customer lifecycle management: As insurers’ relationships with customers become stickier, it will become more difficult for
insurers to steal market share. Capturing desirable customers early in their lifecycle will become critical to building revenue
 How will the individual behavioural data generated from connected devices be sourced? What issues will arise related to the aggregation and
ownership of this new data?
Key implications and remaining questions
Scenario 1: Personalisation of insurance
policies
Scenario 2: Active management of the
insured’s risks Scenario 3: Broker of personal data
“Safe Bets” – Likely implications under all scenarios
 Reduced cross-subsidisation: Insurers’
current business model of cross-subsidising
across customers will no longer feasible
when a majority of insurance policies and
premiums are highly individualised
 How will insurers successfully demonstrate
the value new offerings to early adopters
given their lack of historical data and limited
experience analysing these data streams
 How will less-desirable customers be
served as insurers become able to exclude
them, particularly considering the public
nature of some insurance products (e.g.,
health, auto)?
 Separation of distribution and customer
management: Insurers will need to develop
direct digital channels to interact with
customers and manage their risks,
regardless of their distribution strategies
and channels (e.g., brokers)
 How will the insurers incentivise customers
to participate in the connected models of
insurance and modify their behaviours as
they play more proactive role in managing
customers’ risks?
 Merchant relationships: In order to deliver
relevant value to customers, insurers’ ability
to manage relationships with merchants will
become more critical, which is not a core
capability in the insurance industry today
 Where will the new boundaries lie in
selecting desired customers and utilising
their data to generate value (e.g., 3rd party
offers) while ensuring fairness and privacy?
?
!
!
!
?
!
?
!
?
! Implications Remaining questions ?
?
Insurance: Increasing Levels of Connectivity
!
84
Deposits & Lending
How will emerging alternative models
of lending change the market
dynamics of traditional lenders?
85
Executive Summary
Context / Innovation
 Following the financial crisis, lower risk appetites among retail banks have significantly limited access to traditional bank intermediated lending. This
is particularly true among sub-prime borrowers
 Over the same period of time alternative lending platforms leveraging P2P models have experienced rapid growth. These platforms use alternative
adjudication methods and lean, automated processes to offer loans to a broader base of customers and a new class of investment opportunities to
savers
Future of Savings & Lending
 As competitive pressures from alternative lending platforms grow, the overall savings and lending industry will be forced to compete
‒ Alternative lenders could successfully move upstream to replace traditional institutions in intermediating prime loans while traditional lenders,
restricted by legacy processes and high capital requirements, lose share
‒ Alternatively, traditional institutions and alternative platforms may continue to cater to different classes of investors and borrowers, especially
with growing partnerships between smaller traditional institutions and alternative platforms
‒ Traditional institutions could also transform their processes and technologies, potentially absorbing alternative platforms, to adopt the key
features of alternative lending business models
Key Implications
 Emerging alternative lending models create both competitive threats and evolutionary opportunities for financial institutions, making it important for
incumbent institutions and alternative platforms to develop more integrated partnerships and learn from and share each other’s capabilities
Deposits & Lending: Alternative Models of Lending
86
In a risk-averse economy, retail banks’ model of intermediating savers and
borrowers has reduced accessibility to loans for subprime customers
Deposits & Lending: Alternative Models of Lending
How do financial institutions facilitate lending activities today?
 Retail banks receive savings from their account holders and provide interest on the
savings in return. In most countries, regulators mandate banks to insure and hold
minimum reserve on the savings held
 Using the saved funds, retail banks originate loans to borrowers and receive interest
in return. The availability of loans and the interest rates are determined by the
adjudication of borrowers’ risk profiles, typically using credit scores
 Typically, interest received on loans are higher than interest paid on savings to
account for default risks and other operational costs
 The breadth of borrowers served is dependent on each bank’s risk appetite, which is
generally related to the size and scale of the banks (e.g., riskier borrowers tend to
be served by tier 2/3 banks or balance sheet lenders)
Evolution of traditional lending models Key characteristics of traditional models
 Following the 2008-2009 global financial crisis, customer trust
surrounding financial services quickly dissipated
 Regulators also mandated increased safety measures around loans
(e.g., higher capital requirements) which resulted in many banks
tightening loan requirements
 This mutual loss of confidence created a lending gap, leaving a
considerable portion of borrowing needs underserved by financial
institutions
 Furthermore, customer preferences in financial services are rapidly
changing, demanding more transparency, efficiency and control over
their savings and loans
Limited Access
A growing lending gap limits
the availability of loans to
individuals and companies with
higher risk profiles
Slow Speed
Traditional adjudication processes
with multiple layers of approval
limits the banks’ ability to process
loans in timely manner
Margin for Error
Traditional adjudication models
and credit scores tend to miss
suitable lending opportunities in
a virtual economy
Poor Customer Experience
Highly manual adjudication
processes and requirements fall
short of increasing expectations
on customer experiences
Limited Control
Borrowers have limited visibility
and control over the uses of funds
and interest rates earned
Low Return
Operational inefficiency and
reduced risk appetite of banks
result in low returns on savings
Savers
Riskaverse
Riskseeking
Borrowers
Lowrisk
Highrisk
Retail
Banks
Not served by
traditional
retail banks
87
 Alternative lending institutions have emerged to fill gaps in the traditional lending
model. New industry players are emerging across the globe, showcasing a myriad
of value propositions and strategies that are challenging traditional business models
 Online and P2P (P2P) lending platforms provide customers low-cost, fast, flexible,
and more customer-oriented alternatives to mainstream retail banking that
traditional financial institutions once dominated
 While the business models of alternative lenders often differ from one another, most
providers directly link borrowers and lenders, employ advanced adjudication
methods and streamline processes
Key characteristics of alternative lending platforms
P2P Alternative adjudication Lean, automated processes
 Alternative lenders leverage online platforms
and legal contracts to provide direct matching
of funds between savers and borrowers
 By acting as online marketplaces P2P lenders
facing lower funding costs than traditional
depository lenders
 Alternative lending platforms assess the
creditworthiness of borrowers based on
metrics beyond the credit scores used by
traditional lenders (e.g., social data)
 Most alternative lenders also refine their risk
engine more frequently than traditional
lenders to incorporate feedback based on
empirical analysis
 Alternative lending platforms are free of
legacy processes and technologies, allowing
them to onboard and assess borrowers and
lenders in a more streamlined fashion
 At most alternative platforms, assessment of
borrowers is at least partly automated against
predefined rules for fast, transparent
processing
Deposits & Lending: Alternative Models of Lending
Description of alternative lending models
Savers
Riskaverse
Riskseeking
Borrowers
Lowrisk
Highrisk
Alternative lending platforms leverage P2P models and lean operations to offer
seamless services to a broader base of customers
Alternative
Platforms
88
Traditional and alternative lending models differ significantly in their flexibility and
allocation of risk
Traditional lending intermediaries Alternative lending platforms
Ecosystem
Description
Limitations
Advantages
 Traditional intermediaries hold savings from retail,
commercial and institutional clients and provide interest in
return
 Using those funds, traditional intermediaries originate
loans to borrowers based on their creditworthiness and
earn interest (the differential between interest, or “spread”
is the intermediary’s return)
 Alternative lending platforms directly match lending needs
of borrowers with willing lenders (individuals or institutions)
 Contractual obligations exist directly between borrowers
and lenders and platforms provide mere intermediation
and adjudication
 Alternative platforms are compensated through
originations fees or a percentage of interest payments
 Lenders’ savings are protected by the intermediaries’
reserves and by deposit insurance schemes
 The complete pooling of savings and loans most effectively
mitigates individual default risks
 Lending processes and risk profiles are transparent to both
borrowers and lenders
 Traditionally underserved borrowers gain access to loans
and diverse risk appetite of lenders is met
 Reduction of transaction costs
 Lenders do not have flexibility to determine the desired
level of risk and return
 Primary focus on low risk loans exclude higher risk
borrowers, depending on the market conditions
 Investments may be more susceptible to individual default
risks even with portfolio approach, especially for smaller
investments
 Guarantees on the investments are limited
 Traditional lending intermediaries (e.g., retail banks) take risks themselves and leverage their scale to provide stability to lenders (depositors),
however their focus is typically limited to low-risk borrowers and they charge high fees (in form of interest spread). Therefore the needs of risk-seeking
savers and high-risk borrowers are not fully served by traditional banks
 Alternative lending platforms typically provide an online marketplace where lenders have the flexibility to pick and choose a desired risk portfolio. The
marketplace generates lenders’ scores and typically takes a cut of loan originations and ongoing loan revenues but does not directly take risks
Deposits & Lending: Alternative Models of Lending
Savers
Riskaverse
Riskseeking
Borrowers
Lowrisk
Highrisk
Savers
Riskaverse
Riskseeking
Borrowers
Lowrisk
Highrisk
Retail
Banks
Alternative
Platforms
89
Alternative lending platforms are creating competitive pressures to savings and
lending industry to become more transparent and customer friendly
Deposits & Lending: Alternative Models of Lending
Key characteristics of future deposits and lending models
Increased Access
Use of alternative adjudication and
diversification of lenders will provide more
lending options to a broader spectrum of
borrowers (e.g., “thin file” borrowers)
Control and Transparency
Lenders will gain more control over the return
on their savings based on their risk appetite
and more visibility into the flow of
their savings
Reduced Costs for Borrowers/
Increased Return for Savers
As the understanding of risk profiles of
borrowers is improved, the margins of lending
intermediaries may be pressured, resulting in
lower cost of obtaining loans for borrowers and
increased return for lenders
Fast and Customer Friendly
Streamlined and automated processes
expedite loan processing and improve
customer experience for borrowers
More Accurate Underwriting
Adverse selection by lending intermediaries
with superior underwriting capabilities will lead
to a broader adoption of alternative credit
indicators for adjudication and pricing
While enabling these future state characteristics, how will emerging alternative models of lending
change the market dynamics of traditional lenders?
90
Traditional
Institutions
How will emerging alternative models of lending change the market dynamics of
traditional lenders?
Potential roles of alternative lending platforms
1 Disintermediation of traditional
2
3
intermediaries
Complementing traditional
intermediaries
Driving change within traditional
intermediaries
 Alternative platforms successfully move
upstream to replace traditional institutions in
intermediating risk-averse savers and lowrisk
borrowers
 Restricted by legacy processes /
technologies and reserve requirements,
traditional institutions lose their share to
leaner and more consumer-friendly
alternative lending platforms
 Traditional institutions and alternative
platforms continue to cater to different
classes of investors and borrowers
 Some smaller institutions with limited lending
bandwidth may partner with alternative
lenders through customer referral and
capital investments to address the
underserved needs of their customer base
 Traditional institutions transform their
processes and technologies or absorb
alternative platforms to adopt the key
features of alternative lending business
model
 Traditional institutions serve as a lending
intermediary for both low-risk and highrisk
borrowers, building on their trust and
reliability among customers
Risk-averse
Risk-seeking
Low-risk
High-risk
Investors
(Savers) Borrowers
Deposits & Lending: Alternative Models of Lending
Traditional
Institutions
Alternative
Capabilities
Risk-averse
Risk-seeking
Low-risk
High-risk
Investors
(Savers) Borrowers
Risk-averse
Risk-seeking
Low-risk
High-risk
Investors
(Savers) Borrowers Alternative
Platforms
Alternative
Platforms
 The following scenarios illustrate potential outcomes generated by the innovations discussed in this topic, particularly in response to the key
question above – they are not meant to be future predictions
 These scenarios are illustrations of particular aspects of the potential future and are not meant to represent a complete view of the market and
competitive landscape – in many cases, some or all scenarios could be realised at the same time
91
Narrative Summary of impact
As the position of alternative lending platforms in the high-risk lending
market matures, alternative lending marketplaces will gain sufficient
customer trust and reputation to attract more risk-adverse investors and
low-risk borrowers. The ability of alternative lending platforms to offer
borrowers lower interest rates and a more streamlined customer
experience will also help attract and retain low-risk borrowers.
As lending marketplaces move upstream to prime lending markets they
may evolve to become the primary origination point for consumer lending
and an investment destination for a portion of bank’s deposit float.
Case studies
 Leveraging alternative adjudication methods, streamlined processes,
and lower overhead, alternative lenders successfully move upstream
and emerge as a cheaper and faster direct competitor to traditional
lending institutions in the low-risk lending space
 Entrenched by legacy processes / technologies and capital
requirements, traditional institutions do not adapt quickly enough and
lose share to leaner and more consumer-friendly alternative lending
platforms
Deposits & Lending: Alternative Models of Lending
Risk-averse
Risk-seeking
Low-risk
High-risk
Investors (Savers) Borrowers
Scenario 1: Disintermediation of traditional intermediaries (1 / 2)
Launched in 2005 as the world’s first P2P lending service,
Zopa targets only prime lenders as determined by its
adjudication model, and competes with traditional institutions
on rates / returns and a more seamless originations process.
In 2014, Zopa achieved a default rate of 0.38 percent,
significantly lower than traditional institutions.
Launched in 2006, CreditEase started as a Chinese P2P
lending service, aiming to bridge urban lenders with excess
funds and an underbanked rural population with borrowing
needs. Building on its success CreditEase has grown to offer
other financial products and services, such as wealth
management products for high net worth customers.
Alternative
Platforms
92
Scenario 1: Disintermediation of traditional intermediaries (2 / 2)
Necessary conditions for the scenario Implications of the scenario on…
 Sufficient customer knowledge and trust in alternative lending platforms
by both borrowers and lenders
 Relevant authorities need to be comfortable with alternative lending
platforms accounting for a significant portion of total loans originations
 Increased liquidity of investments through the development of
secondary markets (allowing them to compete with money market
funds and other highly liquid savings products)
 Creates a new asset class once critical mass for liquidity is achieved
 Customers across the spectrum gain ability to select
desired risk / return mix
 Some investments become more susceptible to
default risk
Opportunities and risks associated with the scenario
Customers
Incumbents
Overall
Ecosystem
 Loss of market share to alternative lending platforms
 Reduced ability to cross-subsidise financial products
 Negative impact on capital ratio as deposits erode
 Loss of savings accounts may lead to losing shares
in other products
Opportunities
 Uncertainty around the stability of the ecosystem in a high interest rate
environment
 Overhead costs for alternative lending platforms may increase as their
scale grows, eroding their cost advantage
 Conflict of interest may arise as alternative lending platforms act as
rating agencies within their marketplace but also benefit from the
origination of new loans
Risks
Deposits & Lending: Alternative Models of Lending
93
Scenario 2: Complementing traditional intermediaries (1 / 2)
Narrative Summary of impact
Unable to build sufficient customer awareness / trust, particularly in the
market for low-risk lending, alternative lenders enter into partnerships with
existing financial institutions. Traditional financial institutions are able to
refer high-risk borrowers who do not meet minimum lending requirements
to alternative platforms, thereby helping those customers fulfill their
financing needs without the risk of losing other elements of their business
(e.g., deposit accounts, credit cards) to another traditional financial
institution.
Some smaller, and more regional, institutions may also find it beneficial to
“park” excess funds with their lending marketplace partners as a
mechanism for diversifying their lending portfolios.
Case studies
 Traditional institutions and alternative lending platforms continue to
cater to different classes of investors and borrowers – traditional
institutions cater to the low-risk market based on trust, and alternative
platforms cater to the high-risk market based on access
 Some traditional institutions with limited lending bandwidth may partner
with alternative lenders to meet the underserved needs of their
customer base, by referring customers or investing excess capital
 Overall, more customers gain access to savings and lending products
that best suit their needs as the industry becomes more diversified
Deposits & Lending: Alternative Models of Lending
Risk-averse Traditional Institutions
Risk-seeking
Low-risk
High-risk
In 2014, Lending Club (an alternative lending platform) and Union Bank (a U.S. regional bank) formed a strategic
alliance. Under the agreement, Union Bank plans to purchase personal loans through the Lending Club’s platform and
work with the platform on the co-creation of new credit products. Through the partnership, Union Bank can meet the
borrowing needs of its sub-prime customer segments while earning higher interest on its strong balance sheet.
Investors (Savers) Borrowers
Alternative
Platforms
94
Scenario 2: Complementing traditional intermediaries (2 / 2)
Necessary conditions for the scenario Implications of the scenario on…
 Continued regulatory acceptance of alternative lending models serving
the sub-prime market
 Alternative lenders do not gain sufficient awareness / trust from the
low-risk borrower and investor base
 Banks continue to have a limited appetite for high-risk lending
 Opportunity to create a more inclusive financial ecosystem and
mechanisms for customers to build / rebuild creditworthiness without
the main financial ecosystem taking direct risks
 Customers are more likely to trust alternative lending
platforms as they become associated with
established financial institutions
Opportunities and risks associated with the scenario
Customers
Incumbents
Overall
Ecosystem
 The ability to serve high-risk customers without
risking losing other business lines (e.g., transaction
accounts)
 The ability to earn originations revenue from high-risk
borrowers without taking high risks
 Expansion of credit without disruption of traditional
industry structure and lending models
Opportunities
 Reputational risks for traditional institutions who partner with alternative
lenders
 Established institutions that refer customers to alternative lending
platforms may fuel the growth of those platforms, allowing them to
evolve into more direct competitors
Risks
Deposits & Lending: Alternative Models of Lending
95
Scenario 3: Driving change within traditional intermediaries (1 / 2)
Narrative Summary of impact
Responding to the threat of alternative lending platforms, traditional
institutions transform their technologies and processes and / or acquire
the alternative platforms. This allows traditional institutions to leverage
alterative adjudication methods, deliver a more streamlined lending
process, and improve efficiency to potentially offer lower interest rates. It
will also allow them to selectively cater to more borrowers that traditionally
fell in underserved categories.
Case studies
 Traditional institutions transform their processes and technologies or
absorb alternative platforms to adopt the key features of an alternative
lending business model, such as alternative adjudication and
streamlined processes, to provide compelling value proposition to
customers
 Traditional institutions successfully create financial products beyond
savings products to cater to the borrowing needs of high-risk borrowers
and provide the desired level of return to risk-seeking lenders
Deposits & Lending: Alternative Models of Lending
Risk-averse
Risk-seeking
Capabilities of
Alternative Platforms
Low-risk
High-risk
Investors (Savers) Borrowers
Advanced Merchant Payments (AMP) helps traditional financial institutions transform and supplement their
adjudication models with alternative methods to improve underwriting accuracy of small / medium enterprise
loans. For instance AMP enables financial institutions to leverage merchant acquiring data in adjudication,
which is more accurate indication of a company’s cash flow and readily accessible by financial institutions.
Traditional Institutions
Alternative Capabilities
96
Scenario 3: Driving change within traditional intermediaries (2 / 2)
Necessary conditions for the scenario Implications of the scenario on…
 Sufficient pressure from alternative lending platforms on traditional
intermediaries to justify significant investments in new business
processes and IT infrastructure
 The ability of traditional financial institutions to achieve cost
competitiveness with alternative lending platforms by adopting
alternative adjudication and process improvements
 Accessibility to the financial system can be extended to more
customers without changing the overall ecosystem
 Financial institution’s ability to more accurately understand risks
associated with borrowers and loans will improve
 Significant improvement in customer experience and
availability of loans / investment opportunities without
customers having to change service providers
Opportunities and risks associated with the scenario
Customers
Incumbents
Overall
Ecosystem
 Incumbents remain dominant with minimal changes to
ecosystem but significant improvements are made in
the efficiency of the lending process
Opportunities
 Potential risks might be created by channelling additional credit volume
through the traditional financial institutions
 Reputational risks associated with running alternative lending platforms
that specialise in high-risk loans
Risks
Deposits & Lending: Alternative Models of Lending
 Ability to directly serve their customer base’s borrowing
needs, even for the high-risk customers
 Improved profitability due to adoption of alternative
adjudication methods
 Reduced leakage during lending application process
due to streamlined straight-through processing
97
What does this mean for financial institutions?
 Erosion of deposits and investment products: As savers leverage alternative lending platforms as short and medium-term investment vehicles,
erosion will occur among traditional deposits and investment products (e.g., money market funds) offered by traditional institutions, ultimately
leading to some balance sheet shrinkage
 Distributed credit: Customers’ savings and credit portfolios could become distributed over a large number of alternative platforms with varying
reporting standards, making it difficult for financial institutions to measure each customer’s creditworthiness on a consistent basis
 How will retail banks continue to maintain their ability to serve lending needs of customers as the erosion of deposits to alternative lending platforms
leads to a smaller balance sheet?
 How will retail banks continue to accurately and consistently assess creditworthiness as customers’ loan portfolios become distributed and the
measurement of creditworthiness becomes increasingly diversified?
Key implications and remaining questions
Scenario 1: Disintermediation of traditional
intermediaries
Scenario 2: Complementing traditional
intermediaries
Scenario 3: Driving change within traditional
intermediaries
“Safe Bets” – Likely implications under all scenarios
 Pressure on spread: Intensified
competition driven by alternative lending
models will create pressure on spread
earned between interest paid to savers and
earned from borrowers, leading to margin
pressure on financial institutions
 How will traditional institutions offer
competitive interest rates to both savers
and lenders against the disintermediated
business model of alternative lending
platforms?
 Reduced diversification of customers:
As risk-tolerant savers and high risk
borrowers switch to alternative lending
platforms, the profiles of customers served
by traditional institutions will become
increasingly homogenised
 How will traditional institutions participate in
the alternative lending market to meet the
needs of their customers who are currently
underserved (e.g., direct entry, investment
vehicle, distribution partnership)?
 Diversification of products: In order to
compete against diverse lending platforms
and serve various needs of savers and
borrowers, traditional institutions will need
to diversify savings and lending products
from today’s one-size-fits-all approach
 In addition to the adoption of alternative
adjudication models and streamlined
processing, how will financial institutions
meet increasingly diversified needs of
savers and borrowers nurtured by
alternative lending platforms?
?
!
!
!
?
!
?
!
?
! Implications Remaining questions ?
?
Deposits & Lending: Alternative Models of Lending
98
Deposits & Lending
What will be the future role of
financial institutions in response to
continually shifting customer
preferences?
99
Executive Summary
Context / Innovation
 Driven by generational shifts and rapid consumer adoption of technology, customers’ channel preferences for financial products and services are
shifting rapidly
 These changing customer preferences have manifested in a number of innovations, from the development of virtual banks to the evolution of mobile
banking capabilities, and the development of “banking as platform” movement
Future of Primary Accounts
 As customer expectations for financial institutions continue to rise, financial institutions will be required to create a fuller virtual experience that is
more customer driven, potentially changing the role of primary account providers
‒ Increasing customer demand and growing trust with tech companies may enable non-traditional firms that excel in creating digital customer
experiences to assume control of the customer relationship, while traditional institutions focus on manufacturing financial products
‒ Full-service virtual banks could offer a comprehensive suite of financial products by partnering with a range of niche alternative providers (e.g.,
P2P lenders, automated asset managers); allowing the network of alternative providers to compete directly with full-service retail banks
‒ In the future financial institutions could leverage virtual channels to offer frequent customer interactions and non-financial value-adds above and
beyond needs-based transactions to strengthen customer relationships
Key Implications
 As customers’ demands continues to grow, it will become increasingly difficult for financial institutions to cater to all the needs of customers. In the
future – financial institutions should consider what portion of their business they would like to retain and what partnerships can deliver better value
to customers
Deposits & Lending: Shifting Customer Channel Preferences
100
These changing customer preferences have manifested in a number of
innovations emerging across primary account providers
What are the key innovations manifested by shifting customer channel preferences?
Virtual Banks
 “Direct Banks” first emerged in the 1990s
based on telephone banking and have since
evolved to become more “virtual,” relying on
online / mobile channels
 Most virtual banks established to date have
been subsidiaries of large traditional financial
institutions, targeting their price-sensitive
customer segments
 Today, improved technology is allowing
virtual banks to offer new and compelling
value propositions beyond just lower cost
Evolution of Mobile Banking
 Rapid adoption of mobile devices has led
many financial institutions to quickly add
digital channels for basic transactions
 However, these channels often struggle to
meet customers’ demands for fully functional
mobile platforms
 Free of legacy systems, non-traditional
players are emerging to offer mobile apps
that make financial transactions even more
effortless for customers (e.g., P2P money
transfer, photo bill payment, voice
recognition)
Banking as Platform
 Legacy systems and competing priorities limit
the speed at which traditional players can
offer innovative online and mobile tools;
particularly for smaller institutions where the
cost to deliver a full suite of solutions to meet
diverse customer needs can be prohibitive
 Banking-as-platform movement aims to
standardise APIs across financial institutions
allowing 3rd party developers to easily build
and integrate customer-facing enhancements
to the institutions’ core offerings
Fully virtual “community” bank in Germany, offering
innovative products such as game currency wallet and
high degree of social media integration
Provides financial institutions with a mobile / online solution
that enables fast, easy and low cost consumer to consumer
money transfer via email and text across institutions
Runs an app store for its customers to download a wide
range of additional functionalities to its core online and
mobile platform by exposing its API to external developers
Deposits & Lending: Shifting Customer Channel Preferences
Case studies Case studies Case studies
Other Examples Other Examples Other Examples
101
As customer expectations continue to rise, the primary accounts industry will
become more virtual and customer-driven
Full Virtual Experience
Virtual channels will evolve beyond basic
transactions to provide broader functionality
such as onboarding and servicing
Higher Expectations
Banks will need to cater to heightened
expectations of customers who are
accustomed to the seamless customer
experiences offered by technology providers
Customer-Driven
As customers become more tech savvy, the
value propositions and customer experiences
of financial institutions will be increasingly
shaped by customer demands
Segment-based
Service offerings will evolve to target and meet
the needs of each segment or community,
moving away from one-size-fits-all mass
market approach
Externalised
Financial institutions, especially the smaller
and newer organisations, will shift away from
in-house approach to relying on external
providers to deliver online and mobile solutions
in a timely manner
Deposits & Lending: Shifting Customer Channel Preferences
Key characteristics of the future banking experience
What will be the future role of financial institutions in response to continually shifting customer
preferences?
102
What will be the future role of financial institutions in response to continually
shifting customer preferences?
Potential impact of shifting customer channel preferences
Disaggregation of customer
relationship ownership
Enabling the ecosystem of non
traditional providers
Embedding closer into customers’
daily lives
 Increasing customer demand and growing
trust with technology companies enable
non-financial companies that excel in
creating digital customer experience to
disaggregate distribution of financial
services and ownership of customer
relationships
 Traditional financial institutions evolve to
become providers of financial products,
focusing on sophisticating the products with
excess capacity
 “Light” or virtual financial institutions emerge
that only focus on account management,
offering a comprehensive suite of financial
products by partnering with a range of
niche alternative providers of financial
services (e.g., alternative lending,
alternative payment rails, etc.)
 These partnerships allow a network of
alternative providers of financial services
to compete directly against incumbent fullservice
retail banks
 Financial institutions leverage virtual
channels to offer frequent interactions with
customers, above and beyond today’s
needs-based transactions, to strengthen
customer relationships
 Virtual channels enable financial institutions
to offer not only financial value-adds but
also non-financial services to customers
(e.g., concierge services for high value
customers) without significantly increasing
costs
1 2
3
Customers
Traditional
Full Services Bank
Non-Traditional
Network
Account
Lending
Investment
Payments
FX
Remittance
Account
Provider
Alternative
Payment Rails
Alternative
Lending
Traditional
Products
Automated
Investment Branch Banking
Today
Future
Primary Account Institution
Distribution Manufacturing Risk Taking
Financial
Institution
Distribution Manufacturing Risk Taking
Investors
Deposits & Lending: Shifting Customer Channel Preferences
Primary Account
Institution
Customers
Financial
Transactions
Daily Touchpoints
Financial
Transactions
Financial
Value-adds
Non-Financial
Services
 The following scenarios illustrate potential outcomes generated by the innovations discussed in this topic, particularly in response to the key
question above – they are not meant to be future predictions
 These scenarios are illustrations of particular aspects of the potential future and are not meant to represent a complete view of the market and
competitive landscape – in many cases, some or all scenarios could be realised at the same time
103
Narrative Summary of impact
A partnership is launched between a financial institution with no retail
banking presence and a technology player with existing customer
relationships, customer trust, and an expertise in the creation of online
experiences. Together these partners leverage their respective expertise
in a seamless digital customer experience and manufacturing financial
products to create a new kind of online financial experience complete with
a full suite of financial products.
The structure of the partnership allows the technology player to increase
their access of data and centrality to the lives of their customers with
limited pressure on their balance sheet or increased regulatory exposure.
Case studies
 In the face of rising customer expectations for a highly flexible, intuitive
and personalised service across multiple platforms, new and existing
players who are accustomed to providing these sort of solutions
disaggregate the manufacturing of financial products from the
ownership of customer relationships
 Traditional financial institutions evolve to become manufacturers of
financial products, shifting freed capacity from distribution to focus on
manufacturing sophisticated or highly personalised products
Today
Future
Primary Account Institution
Distribution Manufacturing Risk Taking
Financial
Institution
Distribution Manufacturing Risk Taking
Investors
Many leading technology players chose to enter the mobile payments space by partnering with established financial institutions and leveraging whitelabel
products. This allowed them to focus on their own expertise in customer interactions (e.g., marketing, UX, offers) while relying on their financial
partners’ infrastructure and capabilities. Paypal’s mobile payment solution used Discover’s payment network infrastructure for acquiring, approval,
clearing and settlement, while a core component of Google Wallet’s mobile offering involves a virtual pre-paid Visa card issued by US Bancorp.
Scenario 1: Disaggregation of customer relationship ownership (1 / 2)
Deposits & Lending: Shifting Customer Channel Preferences
Non-Traditional Players Key changes
104
Scenario 1: Disaggregation of customer relationship ownership (2 / 2)
Necessary conditions for the scenario Implications of the scenario on…
 Non-traditional market players must be perceived as highly trustworthy
and must provide a sufficiently superior offering to justify a change in
financial institutions
 Seamless integration among players involved in the value chain
 Financial institutions will be able to develop a broader suite of more
sophisticated products as they focus solely on manufacturing
 Potential for financial products and services to integrate more
seamlessly with other services offered by technology players
 Financial institutions no longer need to worry about customer
experience management
 Significantly improved customer experience
 Changes the ways customers perceive their banks
and technology providers
Opportunities and risks associated with the scenario
Customers
Incumbents
Overall
Ecosystem
 Acceleration of existing shifts in the dominant
distribution strategy away from branch based sales
 Pressure on retail banks to cannibalise existing
business by creating competing partnerships
 Loss of customer ownership and commoditisation of
core services drives decreased bargaining power
 Potential for consolidation of financial service product
providers
 Pressure on regional players with limited ability to
partner with technology providers
Opportunities
 Financial institutions may lose control over the ownership of customers
and become at the disposal of technology providers
 Customer loyalty and stickiness may erode as customers gain more
visibility and can more readily compare financial institutions and
products
 Technology players may lack regulatory familiarity with requirements
on product sales and the emergence of more personalised financial
products may create regulatory uncertainties
Risks
Deposits & Lending: Shifting Customer Channel Preferences
105
Scenario 2: Enabling the ecosystem of alternative providers (1 / 2)
Narrative Summary of impact
Alternative providers of niche financial services continue to mature and
become reliable alternatives to offerings of traditional institutions. Initially,
connections develop among these niche providers through bi- or multilateral
partnerships. Eventually, some traditional banks shift their focus to
managing customer relationships as “depositories of trust” and serve as a
central platform for connections to niche providers’ products. Alternatively,
digital wallets (e.g., Google Wallet, PayPal) or online marketplaces (e.g.,
Money Supermarket, Amazon) may evolve to become those central
platforms.
These network of non-traditional niche providers collectively meet
customers’ banking needs and compete with traditional full service banks.
They also provide the ability to seamlessly mix and match niche providers
that fit the clients needs in a fashion not possible within today’s full service
financial institutions.
Case studies
 “Light” or virtual financial institutions emerge that only focus on account
management, offering a comprehensive suite of financial products by
partnering with a range of niche providers of financial services (e.g.,
alternative lending, alternative payment rails)
 These partnerships allow a network of alternative financial service
providers to compete directly with full-service retail banks
 Customers are able to select the products that best fit their needs and
pay transparent fees since financial products are not cross-subsidised
Customers
Traditional Full Service Bank Non Traditional Network
Account
Lending
Investment
Payments
FX
Remittance
Account
Provider
Alternative
Payment Rails
Alternative Lending
Traditional
Institutions
Automated Investment
Simple is a low cost, virtual-only bank that provides primary account services to its customers with a focus on improving
customers’ ability to save, budget and control their spending. Simple has partnered with a number of traditional and
emerging financial institutions to provide fuller functionalities to customers: Visa to facilitate payments (debit cards),
Venmo to enable mobile payments, Bankcorp and CBW to deposit savings in FDIC-insured products, and Allpoint to
provide a fee-free access to ATM networks.
Deposits & Lending: Shifting Customer Channel Preferences
Key changes
106
Scenario 2: Enabling the ecosystem of alternative providers (2 / 2)
Necessary conditions for the scenario Implications of the scenario on…
 Existence of account providers with the ability and incentive to connect
with many competing providers of financial services
 Services and products of alternative niche providers must in aggregate
fulfill the core requirements of most clients
 The network of alternative niche providers must provide a sufficiently
compelling value proposition for customers to consider changing
financial institutions
 Account providers must be able to act as a trusted verifier of services
offered by alternative niche providers
 Regulatory comfort with significant growth in the use of alternative
niche products
 Decrease in cross-subsidisation will benefit the consumers of those
products and services that are currently subsidising other products
 Increased pressure for innovation within each product line
 Creation of market for each product class leads to
increased choice and potentially lower prices
 Greater control over the selection of financial
products
 Lower loyalty to financial institutions
Opportunities and risks associated with the scenario
Customers
Incumbents
Overall
Ecosystem
 Increased competition with alternative niche
providers who are now able to achieve greater scale
 Challenge to pricing of cross-subsidised products
with increased competition from mono-line products
 Pressure to integrate with 3rd parties to deliver
cheaper and more customer friendly solutions
 Alternative niche providers gain access to the main
population and form more meaningful pressures for
financial institutions to innovate
 Markets for each product become more modular
Opportunities
 With increased choices, customers may face cognitive challenges to
select the right products and providers for them
 Liability may be unclear in cases of fraud or service failure
 Non-bank virtual account providers may lack sufficient understanding
of risks associated with niche products
 Decrease in customer loyalty and stickiness
Risks
Deposits & Lending: Shifting Customer Channel Preferences
107
Scenario 3: Embedding closer into customers’ daily lives (1 / 2)
Description of the scenario Potential development stories
To meet evolving customer demands, financial institutions actively explore
innovations in mobile and other virtual channels’ transactional services.
Empowered by smarter machines that can emulate human-human
interactions, financial institutions automate previously high-touch, highvalue
services and deliver them through virtual channels to increase
touchpoints with customers.
Financial institutions also build on their core competencies today and
extend them to tangent spaces (e.g., extending secure management of
finances to personal data / identity management) to play a bigger role in
customers’ lives and improve customer loyalty and retention.
Case studies
 Financial institutions leverage virtual channels to offer frequent
enriched interactions with customers above and beyond today’s needsbased
transactions in order to strengthen customer relationships
 Virtual channels may present an opportunity for financial institutions to
evolve their role from providing financial transactional and value-add
services to delivering non-financial services to customers (e.g.,
concierge services for high value customers, custodian of data, identity
management) without significantly increasing costs
Transactional Innovation New Services
Provide instant digital
receipts
Voice recognition and
command
Cardless ATM
withdrawals
Location-based
reward offers
Augmented reality
new home finder
Digital lockbox for
important documents
Deposits & Lending: Shifting Customer Channel Preferences
Branch / Infrequent Touchpoints Primary
Account
Institution
Financial Transactions Customers
Branch & Digital / Daily Touchpoints
Financial Transactions
Financial Value-adds
Non-Financial Services
Today
Future
Key changes
Primary
Account
Institution
Customers
108
Scenario 3: Embedding closer into customers’ daily lives (2 / 2)
Necessary conditions for the scenario Implications of the scenario on…
 Continued competitive pressure from disruptors on incumbent
institutions to innovate
 Financial institutions’ ability to understand customers’ unidentified
needs and develop competitive offerings to cater to them
 Opportunities to solidify customers’ trust in financial institutions by
playing bigger roles
 Opportunities to use 3rd party services to create more literate, better
protected clients
 Access to new and better integrated quasi-financial
services
Opportunities and risks associated with the scenario
Customers
Incumbents
Overall
Ecosystem
 Expansion of the role of financial institutions in
customers’ lives
 Non-cost differentiation of product offerings
Opportunities
 New risks and liabilities may arise as financial institutions expand to
offer quasi-financial services
 Potential to leave out customers unfamiliar with / unwilling to adopt
technologies as financial institutions’ distribution strategies change
Risks
 Importance of the traditional branch as a source of
customer interaction will decrease
 Pressure to acquire or develop new capabilities
 Improved stickiness of customers
Deposits & Lending: Shifting Customer Channel Preferences
109
What does this mean for financial institutions?
 Reduced cross-subsidisation: Whether they are anchored around non-traditional players or financial institutions, financial products and services
will increasingly be offered on a stand-alone basis limiting incumbent institutions’ ability to competitively cross-subsidise
 Partnership with non-traditional players: Financial institutions’ ability to work with non-traditional players will be come essential to creating new
distribution channels, providing competitive product offerings and enabling non-traditional services
 Redefining the role of financial institutions: Financial institutions will need to realign their long-term strategy based on how they define their
shifting role with varying emphasis on product manufacturing and creation of customer experiences
 How will the emergence of competitive unbundled products and resulting limits on cross-subsidisation impact the overall structure and business
model of retail financial institutions?
Key implications and remaining questions
Scenario 1: Disaggregation of customer
relationship ownership
Scenario 2: Enabling the ecosystem of non
traditional providers
Scenario 3: Embedding closer into customers’
daily lives
“Safe Bets” – Likely implications under all scenarios
 Reduced access to customer data: As
customers consume financial services on a
a-la-carte basis, financial institutions will no
longer own the majority of individuals’
financial data, limiting their ability to
independently create more compelling
products and services
 What will be the products and services that
anchor customer relationships to retail
financial institutions in the future;
particularly as customers move toward
“shopping” for financial products through
technology players (e.g., Amazon, Google)?
 Reduced control over customer
experience: Even though financial
institutions may still act as a gateway, their
ability to control end-to-end customer
experience will be reduced
 What will be the core value proposition of
traditional financial institutions to customers
compared to technology players,
considering traditional institutions’ strengths
as perceived by customers?
 How open and collaborative will financial
institutions choose to be with other
institutions and new entrants considering
the trade-offs between control and agility?
 New set of risks: As financial institutions
evolve their core offerings to stay more
relevant in customers’ daily lives, they may
need to expand to unfamiliar and lessdefined
areas, which may generate new
risks and compliance issues that are not
common to financial institutions today
 What tangential products and services
could financial institutions offer in the future,
leveraging their strengths (e.g., custodian of
customer data)?
!
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! Implications Remaining questions ?
?
Deposits & Lending: Shifting Customer Channel Preferences
?
!
110
Capital Raising
How will the evolution of distributed capital
raising impact the role of traditional
intermediaries?
111
Executive Summary
Context / Innovation
 Traditionally, capital raising activities have been facilitated by specialised financial institutions, leveraging their deep expertise to identify and
support investment opportunities. Access to investments in these intermediaries has been limited to select high net worth and institutional investors
 In the face of growing interest in start-ups and digital democratisation, a series of alternative funding platforms have emerged, widening access to
capital raising activities and providing funding to a greater number of companies and projects
Future of Alternative Funding Platforms
 While these alternative funding platforms are not likely to replace the traditional capital raising ecosystem in the short or medium term, their growth
could change the role of incumbent institutions
‒ Alternative funding platforms may solidify their position as a key capital raising intermediary for higher risk seed-stage companies, which would
increase their access to funding and increase the number of new firms eligible for venture capital
‒ Alternative platforms could also evolve to focus on investors with motives beyond financial return. They could help funnel capital to low-return
opportunities that would not have qualified for investment from traditional venture capitalists but provide non-financial returns to crowd investors
(e.g., alternative energy projects or local development projects)
‒ Alternative capital raising platforms could also provide a channel for larger companies to raise capital directly from their customers base,
potentially reducing costs while supporting customer engagement
Key Implications
 The opportunities created by the proliferation of alternative capital raising platforms likely outweigh the risks they pose to incumbent institutions as
they enable a more diversified pipeline of investment opportunities to support a richer innovation ecosystem
Capital Raising: Alternative Funding Platforms
112
Capital raising has been traditionally facilitated by specialised institutions with
deep expertise, but individual investors have limited access so far
Capital Raising: Alternative Funding Platforms
How do financial institutions facilitate capital raising activities today?
 While smaller loans for small / medium enterprises are directly issued by retail /
commercial banks, larger capital needs of companies are typically fulfilled by issuing
equity or debt through a specialised intermediary like an investment bank
 Unlike lending transactions where loans are issued from the banks’ balance sheet,
investment banks facilitate the structuring, marketing and sales of equity or debt
capital to potential investors and charge a fee to the issuing company (in certain
cases, banks participate as an investor by buying shares / bonds, managing
investors funds or providing a lending facility)
 Issuing companies directly pay back principal and interest on debt or pay dividends
for equity to the investors
 Layers of financial institutions, from venture capital to investment banks, specialise
in and focus on various stages of businesses to facilitate capital raising
Emerging pressure on traditional lending models Key challenges with traditional models
 Increased connectivity, the success of internet start-ups, changing
consumption behaviours and increasingly entrepreneurship-friendly
policies have fueled a rapid increase in the number of start-ups, making
effective screening and selection processes by traditional funding
options (e.g., venture capital) increasingly difficult
 To maintain control and agility, rapid growth companies continue to
delay accessing the public pool of capital via IPOs, aided by policies
and regulations permitting widening of investor base without going
public (e.g., Jumpstart Our Business Startups Act (JOBS Act))
 As a result, an imbalance is created between supply and demand for
capital in the private market, calling for alternative models to provide
the funding required
Limited Access
Access to capital can be limited
by the size, history and
relationships of a business
Loss of Control
Businesses may lose control over
key decisions to investors and
individual investors do not have
direct control over their
investments
Timely Supply of Capital
Lengthy structuring and fulfillment
process may limit timely access to
capital
Standardised Measurement
Appeal to investors is determined
strictly by risk / return and funding
may be limited for opportunities
with alternative propositions
Potential for Inadequate Funding
The ability to meet funding needs at a fair price
can be deterred by the capability of the
intermediating institution
Mass
Investors High Net Worth Institutional
Seed Series A-D Mid- Market Large
Venture Capital / Private Equity /
Investment Banks Intermediaries
Investment
Opportunities Local
113
Alternative funding platforms enable the crowd to play a bigger role in providing
capital to investment opportunities
 Alternative funding platforms provide an opportunity for businesses to interact
directly with individual investors to widen options for raising capital
 Instead of providing investment advice or directly marketing investments in equity
or debt capital, alternative funding platforms aggregate investment opportunities,
provide a standardised view of the opportunities and facilitate legal structuring of
equity or debt issued
 The rating of investment opportunities are conducted through the wisdom of the
crowd (i.e., minimum target must be met for successful funding) or by allowing
more experienced individual investors to lead the investment activities, instead of
using credit rating agencies or sell-side analysts
Key characteristics of alternative funding platforms
Crowd Based Empowering Individuals Customisation
 Alternative funding platforms provide a
marketplace for individual investors to directly
discover and invest in investment
opportunities
 Investment opportunities are typically only
funded when a pre-determined target is met,
to weed out less credible or less promising
opportunities through “crowd’s approval”
 Some alternative funding platforms leverage
the expertise of more experienced individual
investors in certain fields (e.g., angel
investors) by providing them an opportunity to
lead funding for desired investments
 Some platforms allow these “lead” investors
to gain additional income through fees, similar
to carries paid to general partners of private
equity firms
 Alternative funding platforms provide a
number of customisable parameters for
businesses to adjust and easily design
funding options desirable for them
(e.g., term, equity share)
 Moreover, some platforms allow businesses
to build in unique clauses, such as rewards,
to make them appealing to investor segments
Description of alternative funding platforms
Capital Raising: Alternative Funding Platforms
Investors Mass High Net Worth Institutional
Seed Series A-D Mid- Market Large
Facilitator Alternative Funding Platforms
Investment
Opportunities Local
114
While traditional capital raising intermediaries directly structure products or
investment money for their customers, alternative platforms act as a marketplace
Traditional intermediaries Alternative funding platforms
Ecosystem
Description
Limitations
Advantages
 Equities and debts are structured and sold through an
intermediating institution, mainly to institutional investors
 Access to the investment opportunities are limited for
individual investors and they indirectly invest through
institutional investors instead, without control over where
their funds are invested
 Alternative funding platforms act as a facilitator providing an
online marketplace for individual investors to discover and
invest in businesses and projects, relying on the “wisdom of
the crowd” or other seasoned investors in selection
 Contractual obligations exist directly between individual
investors and investment opportunities
 Businesses and investors can rely on the expertise of
intermediating institutions to raise adequate funding and
select more promising investment opportunities
 Aggregation of capital allows intermediaries or institutional
investors to effectively represent their interests to the
funded businesses’ management
 Individual investors gain direct visibility and control over
investment target selection and allocations
 Individual investors can gain higher return on successful
investments since they are made directly
 More businesses and projects gain an opportunity to fund
their capital needs
 Individual investors have limited control over how their
funds are invested in businesses and projects
 Funding options are limited and stratified depending on the
size and maturity of the business
 Businesses will receive less specialised advice and
support than they would from specialised intermediaries
 Individual investors’ liquidity is highly limited, especially
with pre-IPO equity funding
Capital Raising: Alternative Funding Platforms
Investors Mass High Net Worth Institutional
Seed Series A-D Mid-Market Large
Venture Capital / Private Equity /
Investment Banks Intermediaries
Investment
Opportunities
Investors Mass High Net Worth Institutional
Seed Series A-D Large Mid-Market
Facilitator Alternative Funding Platforms
Investment
Opportunities
115
The proliferation of alternative funding platforms will make the capital raising
market more diversified and accessible
Key characteristics of the future capital raising market
Increased Access
As more individual investors receive
opportunities to directly fund businesses, more
businesses and projects will gain access to
potential funding options
Increased Control
Individual investors will gain more control over
where their investments flow and determine
whether they want direct control over
investment decisions
Reduced Costs
As individual investors participate directly in
funding without going through intermediaries,
their cost to invest will decrease, but the impact
to overall profitability remains unclear
Diversified Options
Businesses will be able to structure equity or
debt more flexibly to meet funding needs and
will offer more diversified incentives to potential
investors to increase appeal
Increased Accuracy
As more individual investors get involved in
funding decisions, the business’ prospects will
be tested from multiple perspectives. This
“wisdom of the crowd” may improve the
accuracy of overall investment decisions
Capital Raising: Alternative Funding Platforms
In enabling these future characteristics, how will the evolution of distributed capital raising impact
the role of traditional intermediaries?
116
How will the evolution of distributed capital raising impact the role of traditional
intermediaries?
Potential role of alternative funding platforms
Incubator of seed-stage companies Provider of funding to lower return
investments
Evolution into an alternative funding
option for larger companies
1 2
3
 Peer-based funding platforms solidify their
position as the capital raising intermediaries
for higher risk seed-stage companies
 Extending funding opportunities to more
seed-stage companies makes the overall
capital raising ecosystem richer by
increasing the number of investment
opportunities eligible for later stage
venture capital financing
 Peer-based funding platforms focus on
investors with motives beyond financial
return (e.g., sustainability and social
responsibility interests) to provide capital to
low-return investment opportunities that
otherwise would not have qualified to raise
capital through traditional intermediaries
 Seed-stage companies are funded by
traditional angel investors and venture
capitalists who can provide appropriate
guidance for growth
 Larger companies leverage peer-based
platforms as an alternative channel to
engage and raise capital from their
customer base
 In addition to benefiting from implicit
marketing and increased customer loyalty,
larger companies further reduce costs of
capital by providing non-financial
incentives to customers (e.g., future
discounts)
Capital Raising: Alternative Funding Platforms
Investors Mass* High Net Worth Institutional
Seed Series A-D Mid- Market Large
Alternative Funding
Platforms
Facilitator
Intermediaries
Investment
Opportunities Local
Venture Capital / Private
Equity / Investment Banks
* Mass connecting also to institutional investors
Investors Mass* High Net Worth Institutional
Series
A-D
MidMarket
Large
Alternative Funding
Platforms
Facilitator
Intermediaries
Investment
Opportunities Local Seed
Venture Capital / Private
Equity / Investment Banks
Investors Mass* High Net Worth Institutional
Seed Series A-D Mid- Market Large
Alternative Funding Platforms Facilitator Intermediaries
Investment
Opportunities Local
Venture Capital / Private
Equity / Investment Banks
 The following scenarios illustrate potential outcomes generated by the innovations discussed in this topic, particularly in response to the key
question above – they are not meant to be future predictions
 These scenarios are illustrations of particular aspects of the potential future and are not meant to represent a complete view of the market and
competitive landscape – in many cases, some or all scenarios could be realised at the same time
117
Narrative Summary of impact
The popularity of peer-based funding platforms grows but remains focused
on seed-stage ventures, with later stage firms opting to raise funds
through traditional providers, such as venture capitalists, who are able to
provide guidance and access to networks.
Within this environment early-stage companies can more easily test their
product ideas, and gain exposure to potential customers, while later-stage
companies can accelerate their growth through venture capital
involvement. Some venture capitalists may partner with peer-based
platforms as a sourcing channel for potential deals.
Case studies
 Peer-based funding platforms solidify their position as the capital
raising intermediaries for higher risk seed-stage companies
 Private equity and venture capital firms move upstream to focus on
Series A or later stage ventures, where their networks and guidance
matter most and risks of failure are lower
 Extending funding opportunities to more seed-stage companies makes
the overall capital raising ecosystem richer by increasing the number of
investment opportunities eligible for later-stage venture capital
financing
Seedrs is an online peer-based capital raising platform for individual investors to discover and invest in
seed-stage ventures. Investment opportunities at Seedrs provide equity shares to investors and only those
investments that meet their funding target receive funding. Seedrs acts as a custodian for the individual
investor’s equity to protect their interests and enable further rounds of investment.
Capital Raising: Alternative Funding Platforms
Scenario 1: Incubator of seed-stage companies (1 / 2)
Investors Mass* High Net Worth Institutional
Seed Series A-D Mid-Market Large
Alternative Funding Platforms Facilitator Intermediaries
Investment
Opportunities Local
Venture Capital / Private Equity / Investment
Banks
* Mass investors also
indirectly invest via
institutional investors
(e.g., pension funds)
118
Scenario 1: Incubator of seed-stage companies (2 / 2)
Necessary conditions for the scenario Implications of the scenario on…
 Accumulation of a critical mass of investors who are interested in
participating in peer-based funding models
 Investors have access to sufficient high-quality and accurate
information to conduct due diligence
 Investors have sufficient financial literacy in order to understand highrisk
investment opportunities
 Regulators to implement well-defined and well-balanced investor
protection rules
 Creates a channel to source investment opportunities for later-stage
venture capitals that have been approved by the potential customer
base (e.g., VC creating a crowd-funding platform to incubate seedstage
companies)
 Diversify their portfolio adding on high-risk and
potentially high return investments
 Increased level of engagement throughout the
investment process
Opportunities and risks associated with the scenario
Individual
Investors
Incumbents
Overall
Ecosystem
 Pressure on margin for angel investors and seedstage
venture capitals
 Increased maturity of investment opportunities
 Increased number of potential investment targets
 More diversified opportunities are funded fostering
economic growth in financial markets
Opportunities
 Many investors may not understand the risks associated with even the
most promising seed-stage investments thus increasing the risk and
impact of fraud
 Risk of excessive dilution by venture capitals during later-stage funding
rounds
Risks
Capital Raising: Alternative Funding Platforms
119
Scenario 2: Provider of funding to lower return investments (1 / 2)
Peer-based capital raising platforms that focus on seed-stage investment
opportunities lose popularity among mass investors as they realise that
the investment horizon is very long and the chance of a successful exit is
extremely low.
Instead, peer-based platforms shift their focus to smaller projects that
either have a higher chance of generating sustainable profits sooner, or
can deliver benefits above and beyond financial return. Examples of nonfinancial
returns include community development (e.g., funding expansion
of a favorite coffee shop, funding re-paving local roads) and ideological
pursuits (e.g., sustainable energy).
Case studies
 Peer-based funding platforms focus on connecting lower-return
investment opportunities, which would not qualify for capital raising
through traditional intermediaries, with investors with motives beyond
financial return (e.g., empowering local community, sustainability)
 Seed-stage companies continue to be funded by traditional venture
capitalists and angel investors who can provide appropriate guidance
for growth
 Peer-based mechanisms are adopted by traditional intermediaries or
high net worth individuals to encourage angel investor involvement
Spacehive is a peer-based funding platform for civic
projects, which enables local residents and
businesses to fund community development projects
(e.g., playgrounds, parks). Individuals with project
ideas can directly pitch ideas to other residents
through Spacehive and rally support and capital.
Capital Raising: Alternative Funding Platforms
Narrative Summary of impact
Abundance Generation is a peer-based capital raising
platform for local or regional sustainable energy
projects that are too small to be attractive to
investment banks. The platform raises capital from
environmentally conscious investors and facilitates
issuance of debentures to create cash flow back to
investors sooner.
Investors Mass* High Net Worth Institutional
Series
A-D Mid-Market Large
Alternative Funding Platforms Facilitator Intermediaries
Investment
Opportunities Local Seed
Venture Capital / Private Equity / Investment
Banks
* Mass investors also
indirectly invest via
institutional investors
(e.g., pension funds)
120
Scenario 2: Provider of funding to lower return investments (2 / 2)
Necessary conditions for the scenario Implications of the scenario on…
 Limited funding opportunities for local start-ups through traditional
institutions
 Existence of communities that accept a lower than market return in
order to make a project succeed
 Provides funding to local and purposeful projects with high social return
that would not be properly served by the traditional ecosystem
 Institutional investors could get access to investment opportunities they
don’t have access to today. This would help them meeting their triple
bottom line goals
 Access to investments with low financial return but
high social return
 Low cost capital for socially beneficial projects
 The ability for investors to closely identify with their
investments
Opportunities and risks associated with the scenario
Individual
Investors
Incumbents
Overall
Ecosystem
 Traditional investors like government funding
agencies can re-deploy funds to other investment
targets
 Minimal overlap with traditional capital raising
intermediaries
 Potential erosion of businesses for commercial banks
(e.g., balance sheet lending)
Opportunities
 Potential misallocation of funds to high profile but ineffective projects or
over-concentration of funds into certain types of projects
 Potential for higher than expected rate of default on debentures for
products unable to meet even the lower than market expectations
Risks
Capital Raising: Alternative Funding Platforms
121
Inspired by the ability of peer-based funding platforms to simultaneously
raise funding and cultivate new clients, established companies partner
with peer-based platforms to fund their growth. By engaging directly with
customers large companies can gain exposure to potential customers and
build deeper partnerships with exiting customers. Customers in turn feel
that they are participating in the growth of their favourite businesses.
Businesses can also further compensate or incentivise their customerinvestor
base by providing perks that go beyond interest or dividends,
such as future discounts.
Case studies
 Large established companies utilise peer-based capital raising
platforms as an alternative channel to raise capital directly from their
customer base
 In addition to benefiting from implicit marketing and increased customer
loyalty, larger companies further reduce direct cost of capital by
providing non-financial incentives to customers (e.g., future discounts)
 Peer-based funding platforms develop into an alternative funding
method that exists in parallel with the traditional capital raising
ecosystem, potentially reducing traditional intermediaries’ businesses
Capital Raising: Alternative Funding Platforms
Scenario 3: Evolution into an alternative funding option for larger companies
(1 / 2)
Narrative Summary of impact
Chilango, a UK-based fast food chain, structured a campaign to raise £1 million for expansion by selling
four-year corporate bonds with an 8 percent unsecured, unlisted coupon through peer-based capital
raising platform, Crowdcube. In addition to offering a financial return (8 percent coupon), Chilango
offered a free burrito every week for the duration of the bond to investors who invested more than
£10,000 and a voucher for two free burritos to investors with smaller investments. This campaign raised
£2.16 million from 749 investors, exceeding the target as the largest funds raised on the Crowdcube
platform.
Investors Mass* High Net Worth Institutional
Seed Series A-D Mid-Market Large
Alternative Funding Platforms Facilitator Intermediaries
Investment
Opportunities Local
Venture Capital / Private Equity / Investment
Banks
* Mass investors also
indirectly invest via
institutional investors
(e.g., pension funds)
122
Scenario 3: Evolution into an alternative funding option for larger companies
(2 / 2)
Necessary conditions for the scenario Implications of the scenario on…
 Fully loaded cost of funding through peer-based platforms must be
lower than the costs incurred in the traditional financial ecosystem
 Alternative funding platforms should be able to provide equivalent
levels of information to mass market investors as institutional investors
receive from intermediaries
 Businesses can achieve non-financial gains (e.g., revealed preference
in the market, marketing, customer loyalty) through financial activities
 Feel more personally involved with their favourite
businesses
 Act as partners to investment target’s strategic
decisions
 Gain access to an asset class unavailable to
individual investors today (e.g., corporate bonds)
Opportunities and risks associated with the scenario
Customers /
Investors
Incumbents
Overall
Ecosystem
 Increased competition and potential margin pressure
for commercial loans / investment banks
 Introduction of new tool to raise capital may induce
traditional institutions to innovate
Opportunities
 Businesses issuing securities without professional advice from capital
raising intermediaries risk underpricing and under-subscription
 Individual investors may lack financial sophistication to properly
understand the covenants of financial products or assess a suitable
return for the risks entailed
 Reputational risks for businesses when issues arise with their financial
products
Risks
Capital Raising: Alternative Funding Platforms
123
What does this mean for financial institutions?
 Competition for investments: While distributed capital raising platforms and traditional intermediaries may have limited overlap in investment
opportunities, traditional intermediaries will need to compete for investments, especially from angel investors, against distributed platforms where
investors can play more active roles
 Shortening capital raising cycles: With access to more diverse funding options, new companies will be able to grow at a quicker pace and the
average time between funding stages will be shortened
 Alternatives to wealth products: As individual customers gain access to investment products with potential higher returns and / or better aligned
to their interests, their mix of investments in traditional wealth management products will shift over time
 How will traditional institutions, from investment managers to investment banks, participate in distributed capital raising platforms to maximise the
benefits from the broadened capital raising market (e.g., direct entry, sourcing partnerships, investment vehicles, valuation model)?
Key implications and remaining questions
Scenario 1: Incubator of seed-stage
companies
Scenario 2: Provider of funding to lower
return investments
Scenario 3: Evolution into an alternative
funding option for larger companies
“Safe Bets” – Likely implications under all scenarios
 Changes to sourcing strategy:
Advantages of distributed platforms as a
sourcing tool, such as testing with future
customer base, will create pressure to
traditional internally-driven sourcing models
 How will traditional intermediaries discover
unique investment opportunities and
generate exclusivity when most investment
opportunities become visible to competition
via distributed platforms?
 Channel for new investment
opportunities: Distributed platforms may
enable traditional institutions to directly
participate in smaller investments without
significant efforts (e.g., entry of hedge
funds)
 What are the hurdles that prevent traditional
institutions from participating in smaller
investments and how may distributed
platforms resolve them?
 Importance of selection: Traditional
intermediaries’ ability to provide value not
linked directly to financing will become more
important if they wish to maintain their
current role
 What differentiated value will traditional
intermediaries offer to compete against
distributed platforms that successfully move
upstream?
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Capital Raising: Alternative Funding Platforms
124
Investment Management
How will the empowerment of
individuals through automated
systems and social networks
transform the business of investment
management?
125
Executive Summary
Context / Innovation
 The wealth management industry has suffered from the loss of customer trust since the financial crisis. This trust has been slow to recover in the
face of continued economic uncertainties
 In this environment, a number of disruptors, from automated wealth management services to social trading platforms, have emerged to provide lowcost,
sophisticated alternatives to traditional wealth managers. These solutions cater to a broader customer base and empower customers to have
more control of their wealth management
Future of Investment Management
 These innovations will create pressures for the wealth management industry to improve the value delivered while broadening access to more
customers
‒ Cheaper and faster online tools and automated services that originally catered to underserved customers may steal share from traditional wealth
managers in the mass affluent market, pushing traditional managers to switch their focus to more personalised, relationship-based segments
‒ Alternatively, automated investment management platforms could commoditise traditional high-value services and reduce the value delivered by
wealth managers across all customer segments, enabling traditional wealth managers to focus on providing more personalised, bespoke
services to a broader customer base
‒ Empowered with intuitive and affordable tools, some individual investors may also gain sufficient level of sophistication to act as investment
experts, selling and sharing their investment expertise via social trading platforms that erode the value of traditional wealth management
professionals
Key Implications
 The emergence and growing popularity of automated wealth management services and customer empowerment tools will pose a tangible threat to
the traditional practices of the wealth management industry. However, incumbent institutions who can embrace these innovations and streamline
their processes will be able to provide higher value services to a broader customer base
Investment Management: Empowerment of Individuals
126
The wealth management industry has suffered a significant loss of customer trust
and increased regulatory scrutiny following the financial crisis
Recent developments in wealth management Key challenges in wealth management
 In recent decades, wealth managers have begun to expand their focus
from high net worth to mass affluent segments
 Increased regulations on consumer protection requires banks to advise
customers in a more structured way, raising the bar for new entrants
 Increased transparency into investment performance is allowing
individuals to better compare products
 Continued economic instability has left customers uncertain about the
economic outlook and reticent to pursue active strategies. This trend
toward passive products has placed pressure on pricing
Investment Management: Empowerment of Individuals
 Customer trust has been slow to recover following the
financial crisis Lack of Trust
 High fees limit access to wealth management
services for mass and mass affluent clients Accessibility
 Customers’ expectations of personalisation, efficiency
and low costs continue to grow
Customer
Expectation
 Ability to meet customer needs is limited by
organisation structures and technology infrastructure Agility
Advisory
 Investment allocation strategies
 Active money management (e.g., asset selection)
 Securities analysis
Brokerage
 Distribution of wealth products (e.g., mutual
funds, ETFs, annuities, insurance products)
 Access to rare products and assets
 Brokerage account management
Value-Add Services
 Wealth transfer planning
 Estate / tax strategies
 Retirement planning
 Private banking
Overview of the wealth management industry
 Offered by variety of financial institutions, including private banks, registered investment advisors, bank brokers/ insurers
 Targets higher-end of customers with investable capital, such as ultra high net worth, high net worth and mass affluent customers
127
A number of disruptors are emerging to provide low-cost and sophisticated
alternatives to traditional wealth managers to a broader customer base
Social Trading
 Offers high-value advisory services on
portfolio allocation and money management
at low costs based on automated analysis
 Automates the management of a
personalised investment portfolio based on
individual needs
 Provides aggregated view and analysis of
multiple accounts
Retail Algorithmic Trading
 Enables investors to easily build, test and
execute trading algorithms with limited
technical knowledge and infrastructure
 Provides platforms for sophisticated
investors to share trading algorithms with
others
Automated Management and Advice
 Empowers individual investors to build and
share investment strategies and portfolios
with other investors
 Empowers individual investors to share
their opinions and gain market insights from
the opinions shared by the crowd
Key innovations democratising wealth management
Common characteristics of wealth management disruptions
Lower Barriers Algorithm-Driven Customer Empowerment Reliance on the Crowd
Allow customers with fewer assets
to receive financial advice by
reducing the minimum investment
threshold and management fees by
leveraging automated algorithms
Commoditises previously highvalue,
manual-intensive services at
a low cost via automation. This
minimises the need for manual
intervention
Improves the financial literacy of
customers by readily providing
analysis of their financial position
and empowering them with tools to
easily create and execute
investment strategies
Leverages the capabilities existing
within the crowd to create more
accurate understanding of the
market and provide low-cost
alternatives to investment funds to
customers
Investment Management: Empowerment of Individuals
128
Disruptive innovation in wealth management pressures the industry to improve
the value delivered to more customers
Key characteristics of the future of wealth management
Accessibility
More sophisticated wealth management
services will become available to a broader
customer base, including the mass affluent and
mass market customers
Transparency and Control
Customers will gain greater visibility into their
financials and how their money is invested and
will be able to make adjustments to their
financials more readily as more wealth
management options become available
Convenience
Online and mobile channels will be increasingly
leveraged to interact with customers and
deliver higher value services, providing access
to financial information on demand
Personalised
As algorithms used in managing wealth
become more sophisticated, the degree of
customisation and individualisation will
increase for services delivered to mass affluent
and mass market customers
Low Cost
The cost of receiving advisory and
management services will decrease as
automation lowers the operating costs and new
disruptive entrants spur competition in the
market
As these disruptive innovations create pressures for the wealth management industry by
empowering individuals, how will the wealth management landscape evolve?
Investment Management: Empowerment of Individuals
129
How will the empowerment of individuals through automated systems and social
networks transform the business of investment management?
Investment Management: Empowerment of Individuals
Potential impact to investment experts
Erosion of the mass affluent market Revamping the value proposition of
wealth managers
Lowering bars to act as an
investment expert
 Cheaper and faster online tools and
automated services that originally catered to
underserved customers steal share from
traditional wealth managers in the mass
affluent market
 Wealth managers, who have been
expanding their focus to the mass affluent
market, shift their focus back to more
personalised and relationship-based high
net worth individuals
 Automated investment management
platforms commoditise traditionally highvalue
services (e.g., tax loss harvesting)
and reduce the value delivered by
investment managers even to high net
worth customers
 Services provided by physical wealth
managers evolve to more personalised,
bespoke space, such as financial concierge
services and the management of intergenerational
wealth transfers
 Empowered with intuitive, affordable and
accessible tools, some individual investors
gain sufficient level of sophistication to act
as investment experts without the technical
knowledge or infrastructure traditionally
required
 The next generation of retail and social
trading platforms offer effective means for
individuals to share or sell their investment
expertise, directly competing with traditional
investment managers
1 2
3
Mass Affluent High Net Worth Ultra HNW
Traditional
Wealth
Managers
Customers Mass
x x
Digital Tools
& Services
Mass Affluent High Net Worth Ultra HNW
Traditional
Wealth
Managers
Customers Mass
Bespoke services
Commodity Services
Digital Tools
& Services
Traditional
Customers Wealth Managers
New
Customers Wealth Managers
Tools
Marketplaces
 The following scenarios illustrate potential outcomes generated by the innovations discussed in this topic, particularly in response to the key
question above – they are not meant to be future predictions
 These scenarios are illustrations of particular aspects of the potential future and are not meant to represent a complete view of the market and
competitive landscape – in many cases, some or all scenarios could be realised at the same time
130
Narrative Summary of impact
As automated wealth management services and online tools establish a
solid track record they continue to develop their service offerings to
encompass functionalities desired by the mass affluent segment.
Traditional wealth managers find their market share eroding as a growing
number of mass affluent customers defect to lower cost automated
options. Traditional wealth managers are forced to either develop their
own automated solutions, accepting lower margins, or move upstream to
higher new worth clients seeking a highly personalised experience.
Case studies
 Cheaper and faster online tools and automated services that originally
catered to underserved customers move upstream and steal share
from traditional wealth managers in the mass affluent market
 Wealth managers, who have been expanding their focus to the mass
affluent market, shift its focus back to more personalised and
relationship-based high net-worth individuals, intensifying the
competition and improving the services offered to those customers
Traditional
Wealth Managers
Customers Mass Affluent High Net Worth Ultra HNW Mass
x x
Digital Tools
& Services
Launched in December 2011, Wealthfront offers an automated investment service that consists of managing a
diversified, continually rebalanced portfolio of index funds, along with tax loss harvesting, via fully automated algorithms.
Unlike traditional wealth management companies, the minimum account size is small ($5,000) and fees are extremely
low; which reduces the hurdles for entry for the Millennial generation. Since inception, Wealthfront has penetrated above
and beyond Millennial customers to gather $1.5 billion in assets under management within three years.
Scenario 1: Erosion of the mass affluent market (1 / 2)
Investment Management: Empowerment of Individuals
131
Scenario 1: Erosion of the mass affluent market (2 / 2)
Necessary conditions for the scenario Implications of the scenario on…
 Customer trust and awareness of new market entrants
 New players’ offerings must cater to sufficient portion of customers’
needs to replace traditional wealth managers
 Customers may make better, more educated choices based on a more
holistic view of their financial situation
 Potential increase of market size as more customers get access to
investment management services
 Mass consumers have access to different level of services which suits
with their respective needs
 Access to more personalised and sophisticated
services at a lower price
 Extended services for high net worth and ultra high net
worth customers as incumbents move upstream
 Increased transparency into and control over their
wealth
Opportunities and risks associated with the scenario
Customers
Incumbents
Overall
Ecosystem
 Revenue and margin pressure as the mass affluent
market is eroded
 Intensified competition in high net worth market as
incumbents move upstream
 Competition will increase and pricing for advisory
services will adjust accordingly
 Shift into low-fee, passive investment
Opportunities
 Lack of personal relationship means customers may make irrational
financial choices in extreme situations (e.g., market crash)
 Risk of not receiving sufficient customer information to offer a suitably
customised portfolio
 Shift to passive investment may increase market volatility and amplify
losses during extreme events
 Potential impact to retail banks as their ability to cross sell wealth
management products is reduced
Risks
Investment Management: Empowerment of Individuals
132
Scenario 2: Revamping the value proposition of wealth managers (1 / 2)
Narrative Summary of impact
Automated investment management platforms commoditise a large
portion of the wealth management transactions by automating
standardised activities (e.g., asset allocation) and formerly high-value
services (e.g., tax loss harvesting). However, the demand for in-person
interactions and other specialised transactions continues to exist across
the customer segment spectrum.
In order to remain competitive against automated platforms, traditional
wealth institutions adopt and further develop automated functionalities,
which in return free up capacity for in-person wealth advisors. Leveraging
freed capacity, wealth managers can now offer more specialised, hightouch
services to a broader customer base, improving the overall quality of
services received by customers
Case studies
 Automated investment management platforms commoditise services
once considered high-value and reduce the value delivered by
investment managers even to high net-worth customers
 Services provided by physical wealth managers evolve to be a more
personalised financial concierge and expand to provide specialty in
areas such as intergenerational wealth transfer
 As incumbent institutions adopt improved automation, traditional wealth
managers can free up capacity to expand their customer base
Bespoke services
Mass Affluent High Net Worth Ultra HNW
Traditional
Wealth Managers
Customers Mass
Digital Tools
& Services Commodity Services
Facing the threats of new automated investment services like Wealthfront, Charles Schwab announced the launch of its own
automated investment service “Intelligent Portfolios” based on ETFs, featuring competitive capabilities like automatic
rebalancing and tax loss harvesting, at no charge and with low minimum account threshold.
Investment Management: Empowerment of Individuals
133
Scenario 2: Revamping the value proposition of wealth managers (2 / 2)
Necessary conditions for the scenario Implications of the scenario on…
 Incumbents must be able to acquire and implement new capabilities or
be comfortable with partnering with automated service providers
 Incumbents must successfully identify and deliver on high-value
services that can only be delivered through personal relationships
 Opportunity to leverage freed capacity from automation to serve more
clients
 Ability to scale automated service offerings in new markets once
developed
 Reduced price for commoditised services and access
to more sophisticated services
 Access to more differentiated offerings among
financial institutions
Opportunities and risks associated with the scenario
Customers
Incumbents
Overall
Ecosystem
 Pressure to differentiate from other institutions
 May face challenges in redeploying workforce to
deliver different services than today
 Market structure will remain largely similar as
existing players evolve
 Increased focus on non-price differentiation
Opportunities
 Customers may not find additional, “personal” offerings valuable,
eroding institutions’ value proposition
 Incumbents risk not being able to successfully transform their
workforce to adopt new business models
 Evolution of mass affluent-focused institutions to offer more bespoke
services may create competitive pressure to upstream institutions
Risks
Investment Management: Empowerment of Individuals
134
Scenario 3: Lowering bars to act as investment expert (1 / 2)
Narrative Summary of impact
Since the advent of online discount brokerages, the ability for individual
investors to develop sophisticated strategies and participate in investment
activities has grown continuously. Next generation tools (e.g., retail
algorithmic trading platforms) are leveraging advanced algorithms,
visualisation and cloud computing to eliminate traditional barriers like a
need for programming skills.
These innovations are narrowing the gap between individual and
professional investors and facilitating the emergence of marketplaces for
trading strategies and algorithms, enabling some of these empowered
individuals to steal share from traditional investment managers.
Case studies
 The next generation of retail and social trading platforms offer effective
means for individuals to share or sell their investment expertise to other
individual investors
 Sophisticated individual investors directly compete with traditional
investment managers and aspects of the market for active retail
investment management experience margin compression
Traditional
Customers Wealth Managers
New
Customers Wealth Managers
Tools
Marketplaces
Quantopian allows sophisticated individual investors to build,
test and execute algorithmic trading strategies with limited
development knowledge and infrastructure, and manage other
investors’ investments for a fee.
Estimize gathers stock-performance opinion from professional
and individual investors (buy-side) to create price estimates that
would mimic the market reaction, without relying on sell-side
analysts.
Investment Management: Empowerment of Individuals
135
Scenario 3: Lowering bars to act as investment expert (2 / 2)
Necessary conditions for the scenario Implications of the scenario on…
 Sufficient track record of performance by investment experts to gain
customers’ trusts and overcome reputational barriers
 Competitive value proposition offered by investment experts in terms of
return, risk and costs
 Regulatory control to ensure that accountabilities and disclosure
standards are well understood by all parties
 Room for misalignment of interests by incumbent advisors is reduced
due to increased competition
 Access to more diverse investment strategies at lower
costs
 Ability to expand financial knowledge
Opportunities and risks associated with the scenario
Customers
Incumbents
Overall
Ecosystem
 Creation of “prosumer” environment where consumers
participate in production
 Increased churn of entries and exits into investment
advisory roles by individual experts
Opportunities
 Risk of less sophisticated customers overlooking tail risks associated
with seemingly well-performing investment strategies
 Interests of marketplace platforms may not be aligned with the interests
of investors, making it easier for fraudulent behaviour from investment
experts
 Customers may feel overly confident or lose long-term view resulting in
investment portfolios unsuitable to their needs
 Due to lower tolerance to short-term poor performance, customers may
switch too frequently between investment strategies, leading to
suboptimal return and incentivising bad behaviour among advisors
Risks
 Erosion of market share to investment experts and DIY
customers
 Need to develop differentiated offering from individual
investment experts
 Increased reliance on brand as a differentiator
Investment Management: Empowerment of Individuals
136
What does this mean for financial institutions?
 Decoupling of advisory and products: As more customers switch to automated advisors for more streamlined and cost-effective advisory
services, the “one-stop” model of distributing financial institutions’ wealth products primarily via their advisory channels will become less effective
 Eroding advantages of scale: Traditional wealth managers’ scale-based advantages will erode as once manual processes are automated, virtual
channels are utilised and core infrastructure become available at a low cost to new entrants
 Increased competition: The commoditising forces generated by new entrants will make more segments and services less profitable for traditional
wealth managers and intensify competition among traditional players in more specialised segments or services
 How will wealth managers that used to distribute their own products via advisory channels change their distribution strategy as new entrants
providing automated digital solutions erode their customer base?
 What are the differentiated services provided by traditional wealth managers that will remain difficult to automate and replicate by new entrants?
Key implications and remaining questions
Scenario 1: Erosion of the mass affluent
market
Scenario 2: Revamping the value proposition
of wealth managers
Scenario 3: Lowering bars to act as an
investment expert
“Safe Bets” – Likely implications under all scenarios
 Erosion of deposits: New entrants will
begin to compete for mass or mass affluent
customers’ deposits with retail banks
 Importance of relationship: As
competition intensifies among traditional
players in relationship-driven high / ultra net
worth market, the role of in-person
managers will become more critical
 How will retail financial institutions prevent
the erosion of deposits to new wealth
products that now offer lower threshold for
entry?
 Empowering retail banks: More retail
banks will be able to meet most needs of
wealth management customers through
automated services
 Organisational change: Traditional players
may face challenges in redeploying
workforce to deliver different services and
customer segments than today
 How will traditional institutions capture
customers early on in their lifecycle as
younger, mass affluent customers enter the
wealth management market earlier through
automated advisors?
 Benchmarking challenge: Benchmarking
the performance of traditional wealth
products will become increasingly difficult
as distributed, constantly-changing group of
prosumers become a source of competition
 Importance of brand and trust: In
competing against prosumers who can
generate similar return on investment,
traditional institutions’ brand and customer
trust will become a critical differentiator
 How will traditional investment managers
change their competitive and workforce
strategy as emerging platforms empower
sophisticated individuals to compete directly
with professional investors?
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Investment Management: Empowerment of Individuals
137
Investment Management
How will the externalisation of key
processes transform the financial
ecosystem?
138
Executive Summary
Context / Innovation
 Many processes within investment institutions are considered as “core” to their business operation. However, a new breed of process
externalisation providers are using highly flexible platforms (typically based in the cloud) to provide financial institutions with increased efficiency
and new levels of process sophistication / excellence
Future of Process externalisation
 As service providers externalise and consolidate processes previously considered core capabilities, the core competencies that differentiate winning
financial institutions shift from process execution to more “human” factors (e.g., synthesis, decision making)
 External service providers could enable small and medium-sized organisations to better compete with large incumbents by providing them access
to top-tier processes that were once unreachable due to lack of scale
 Some external providers that consolidate regulatory compliance capabilities may also create an opportunity to centralise communications to
regulatory agencies. This would improve the speed at which financial institutions are able to respond to regulatory changes and ensure a higher
level of compliance
Key Implications
 By exploring options to externalise a large number of redundant processes across institutions, firms will benefit from efficiency gains and increased
sophistication
 However, financial institutions must consider which capabilities they should continue to focus on as a source of competitive advantage
Investment Management: Process externalisation
139
Many processes within investment management institutions considered as core
to their business today are facing various pressures
Investment Management: Process externalisation
Core capabilities of investment institutions today
 Over the past few decades, externalisation of non-core processes (e.g., HR, finance) has been a major trend in the financial services industry to drive
efficiency and operational excellence
 Despite this trend many processes, such as transaction monitoring, regulatory compliance and risk management continue to be perceived as mission
critical or competitive differentiators and have remained in house
Evolution of landscape impacting core processes Key challenges faced by institutions
 The notion of core internal processes can change when external
providers emerge with the ability to complete the process more
efficiently and with more sophistication than individual institutions
‒ The ability to access and collect market data was once considered
a critical internal competency for equity investments firms until
external providers emerged to provide more standardised and
comprehensive set of data (e.g., Bloomberg, Thomson Reuters)
 A number of issues are arising that impact the institutions’ ability to
excel across today’s core processes:
‒ Increased regulatory burden as a result of the 2008 financial crisis
(e.g., the Dodd-Frank Act) and the introduction of stricter
compliance requirements (e.g., anti-money laundering) has taken up
a large amount of institutions’ capacity
‒ Legacy processes and systems built based on the physical
computing environment continue to limit institutions’ flexibility and
agility in adapting to the rapidly changing market conditions and
continuously evolving regulatory requirements
Data
Collection Analysis Trade Strategy & Execution Transaction Monitoring Risk Management Compliance HR Finance
“Core” processes largely remaining in-house “None-core” processes
typically externalised
Capacity Constraints
Lost capacity on updates and
maintenance limits the ability to
invest in core capabilities
High Cost of Maintenance
Updating and maintaining
processes and technologies are
costly and time-consuming
Limited Flexibility / Agility
Timely update of the processes
and technologies is limited due to
costs and efforts required
Inconsistency
Fragmented, local legacy
processes and technologies
impede connectivity across the
organisation
Scale-driven Barriers
Sophistication of capabilities is
not feasible due to the institutions’
scale and size
Complexity
Inflexible systems designed for
past market environments result
in added complexity to adapt to
the current environment
140
The new breed of process externalisation providers are built on the technologies
and philosophies behind Web 2.0
Investment Management: Process externalisation
Key innovations enabling the new breed of process externalisation
Common models of the new breed of process externalisation providers
 Provide full externalisation of an entire
capability, including automated and manual
processes, as a service to institutions to
minimise infrastructure investments required
 Technology platforms, such as real-time
databases and expert systems, that leverage
automation to help users complete tasks
faster and with fewer resources
 Facilitate institutions to work with one
another to share capabilities or easily
integrate with new providers by constructing
legal and technical standards and vehicles
Platform As-a-Service Capability Sharing
Advanced Analytics Cloud Computing Natural Language
 Leverage cloud technology to improve
connectivity with and within institutions to
facilitate data sharing, streamline
implementation and maintenance of
processes, and enable real-time processing
 Utilise advanced computing power,
algorithms and analytical models to not only
automate existing manual processes but also
provide a new level of sophistication
 Integrate natural language technology into
processes to make them more intuitive for
end users, reducing the need for deep
technical backgrounds
141
For each capability within investment institutions that are considered “core”,
process externalisation can effectively resolve key pain points experienced today
Investment Management: Process externalisation
Analysis Trade Strategy & Execution Data Collection Monitoring Risk Compliance
Current
State
Pain Points
Examples of
New
External
Providers
Benefits
Offered by
External
Providers
Illustrative transformative potential of process externalisation across core capabilities
 Collection from
multiple sources
required for certain
assets
 Processing of
disparate formats
required
 Reliance on manual
modelling leading to
human errors, lengthy
turnaround time and
capacity constraints
to support more
prudent decision
making
 Trading strategy
starts with
hypotheses, requiring
trial-and-error
process
 Increasingly dynamic
and complex trading
landscape requires
increased costs to
achieve best
execution
 Transactions are
monitored post-trade
in a batch process,
focusing on coping
with erroneous
behaviours rather
than preventing them
 Risk modelling and
analysis is conducted
by middle and back
office functions with
periodic reporting to
front office, limiting its
visibility on risk in
real-time
 Constantly evolving
regulations across
geographies mean
significant resources
must be expended to
ensure compliance
processes are up to
date and properly
monitored
 Aggregating data
collection from
multiple sources and
automating extraction
not only improve
efficiency, but allow
greater influence over
the sources of data
 Utilisation of
advanced analytics
and automation make
analyses instant and
more accurate, and
allow institutions to
test a greater number
of opinions to support
decision making
 Advanced analytics
support automated
data-driven trading
strategy formation
 Automated execution
providers improve the
efficiency and quality
of execution through
connectivity with
multiple venues
 Transactions can be
monitored in real-time
to ensure erroneous
trades are identified
and addressed in real
time
 Automation of risk
modelling and
monitoring with userfriendly
interfaces
allows front office to
directly engage in
understanding and
analysing risk in realtime
 Centralised
compliance
monitoring providers
for specific types of
regulations aggregate
collection of changing
regulations across
multiple geographies
with greater efficiency
Novus aggregates
performance and
position data of funds
from regulators and
participating funds to
provide a single point of
access to fund of fund
managers
Kensho automates the
modelling of investment
scenarios to support
decision makers with
real-time projection of
performance under
various outlook
assumptions
Ayasdi utilises
topological data
analysis to draw out
correlations and
outliners from big data
to inform hypothesis
and trading strategy
development
RedKite monitors
erroneous trading
patterns in real-time
(e.g., layering) to help
organisations deal with
noncompliant
transactions
instantaneously
OpenGamma provides
an open source
platform for real-time
market risk mgmt. and
analytics, allowing front
office resources to
control and manipulate
calculation
FundApps organises
regulatory information
and delivers a cloudbased
managed service
to automate
shareholding disclosure
and monitor investment
restrictions
142
The next generation of process externalisation not only brings efficiency, but also
enables institutions to gain the level of sophistication unattainable by themselves
Investment Management: Process externalisation
Key characteristics of the future state enabled by process externalisation
Automation
More processes will be automated and
commoditised to free up capacity to invest in
differentiating core capabilities
Flexibility / Agility
Updating and maintaining processes and
technologies to adapt to the changing landscape will
become quicker and more effortless
Sophistication
Leveraging scale, externalised processes will
become more sophisticated than was
possible within a single organisation
Consistency
Increased standardisation of processes, technologies
and their interfaces will bring consistency across
various operations and facilitate sharing of data
Reduced Costs
The costs to update and maintain processes
and technologies will be reduced as they are
shared among a number of institutions
Empowered by these benefits, how will the externalisation of key processes transform
the financial ecosystem?
143
How will the externalisation of key processes transform the financial ecosystem?
Investment Management: Process externalisation
 Service providers use advanced
technologies to externalise, consolidate
and commoditise processes that were
previously considered core capabilities, in
a more efficient and sophisticated manner
 As a result, core competencies that
differentiate winning financial institutions
shift from process execution to more
“human” factors (e.g., synthesis, decision
making)
 External service providers give small and
medium-sized organisations access to
sophisticated capabilities that were not
previously attainable due to lack of scale
 By enabling small and medium-sized
organisations to access top-tier processes,
barriers to entry are lowered for new
players and smaller existing players are
able to compete with large incumbents on a
more level playing field
 These providers improve the speed at
which financial institutions are able to
respond to regulatory changes, ensure a
higher level of compliance via automation,
and empower regulators to receive
consistent inputs from financial institutions
 As more regulatory compliance and
monitoring processes are outsourced to a
small number of service providers, these
firms can act as centralised
communication touch points for
regulators
 The following scenarios illustrate potential outcomes generated by the innovations discussed in this topic, particularly in response to the key
question above – they are not meant to be future predictions
 These scenarios are illustrations of particular aspects of the potential future and are not meant to represent a complete view of the market and
competitive landscape – in many cases, some or all scenarios could be realised at the same time
vs.
Potential impact of process externalisation
Redefined core capabilities of
financial institutions
Level playing field for newer, smaller
financial institutions
Centralised communications with
regulatory agencies
1 2
3
Monitoring,
Risk & Compliance
Monitoring,
Risk & Compliance
Today Future Today Future
Large
Institution
Small
Institution
External Providers
Quality of Processes
Poor
Avg.
Good
Great
Institution
A
Institution
B
Institution
A
Institution
B
Today Future
externalised
144
Narrative Summary of impact
Financial institutions begin to outsource select processes to specialised
external firms who leverage advanced technologies to provide improved
outcomes at a much lower cost. Efforts previously spent on managing
these processes in-house can be deployed toward higher value activities
that provide competitive differentiation.
As this pattern repeats over multiple processes, a financial institution’s
competitive position ceases to be defined by core operational excellence
and instead is defined by which higher value activities they have chosen to
focus on.
Case studies
 Service providers using advanced technologies provide options for
financial institutions to externalise processes once considered core
capabilities
 Competitive advantages derived from excellence in process execution
will disappear as high quality process execution becomes a commodity
available for purchase
 Financial institutions are required to redefine what capabilities
differentiate them from other institutions with process execution taking
a backseat to more “human” factors
Investment Management: Process externalisation
Scenario 1: Redefined core capabilities of financial institutions (1 / 2)
The ability to quickly and accurately model market projections and hypotheses through large quant teams has
traditionally been a key advantage of large financial institutions. Kensho threatens that advantage by offering a nextgeneration
analytics platform for the investment industry with massively-parallel statistical computing, scalable analytics
architectures and user-friendly visual interfaces. By leveraging Kensho’s platform, any investment institution can now
rapidly model projections without an army of quantitative analysts; instead focusing more “human” capabilities like
hypothesis generation and market insights.
Today Future
Financial Institution A Financial Institution B
Quality of Processes
Poor
Average
Good
Great
Financial Institution A Financial Institution B
Quality of Processes
Poor
Average
Good
Great
Externalised
Processes
145
Scenario 1: Redefined core capabilities of financial institutions (2 / 2)
Necessary conditions for the scenario Implications of the scenario on…
 External service provider’s ability to demonstrate a clear business case
for financial institutions to outsource many core functions
 Clear definition of accountabilities and liabilities between financial
institutions and their service providers
 Securing regulatory comfort by demonstrating financial institutions’
control over the externalised processes
 Fewer process failures as they are externalised to more focused and
specialised providers
 Emergence of institutions competing to excel in specific processes
drives deeper specialisation
 Increased capacity for financial institutions to be innovative due to
reduced focus on resource intensive core processes
 High quality service levels across most financial
institutions
 Access to increasingly differentiated services /
product offerings among financial institutions
Opportunities and risks associated with the scenario
Customers
Incumbents
Overall
Ecosystem
 Need to reallocate resources to develop new core
capabilities
 Increased pressure to identify and develop new
differentiating capabilities
 Emergence of a class of institutions specialising in
externalising specific processes
 Increase in the average level of sophistication of
processes across institutions
Opportunities
 Centralisation of processes creates larger implications of process
failures including continuity risks for banking in the case of a failure of
an external service provider
 Risks resulting from potential lack of clarity surrounding accountabilities
 Loss of deep process knowledge within financial institutions may have
unforeseen spill-over consequences in other areas of the business
Risks
Investment Management: Process externalisation
146
Scenario 2: Level playing field for newer, smaller financial institutions (1 / 2)
Narrative Summary of impact
Once an external service provider has developed the tools for a financial
institution to externalise a process, the cost of extending that service to
additional financial institutions is typically very low and not dependent on
the institution’s size.
Small and medium-sized financial institutions capitalise on these
economics to both improve their efficiency and radically increase the
sophistication of their processes across the board. As process
sophistication ceases to be a source of competitive advantage for large
financial institutions, small and medium-sized institutions are able to
increase their focus on differentiating capabilities.
Case studies
 External service providers provide small and medium-sized
organisations access to sophisticated capabilities, which were
previously unattainable due to lack of scale
 Barriers to entry into the market will be lowered and the playing field
will be leveled with small and medium-sized organisations increasingly
able to compete with large institutions
Investment Management: Process externalisation
Open Gamma uses and an open source platform to provide real-time market risk management analytics to buy-side, sell-side
and clearing institutions. While Open Gamma provides the platform free of charge, they offer support, consulting and training
services to help institutions configure and modify the platform and select appropriate risk models. The platform includes a
number of advanced functions not normally available to small institutions.
Through services like Open Gamma, new and small institutions no longer need to set up extensive support functions in middle
and back offices to attain sophisticated capabilities and compete with larger institutions.
Today Future
vs.
Large institutions have
access to sophisticated
processes
Small institutions have
limited ability to build
sophisticated processes
Both small and large institutions gain access to
sophisticated processes via focused external providers
147
Scenario 2: Level playing field for newer, smaller financial institutions (2 / 2)
Necessary conditions for the scenario Implications of the scenario on…
 Externalisation providers must be able to provide suitable options for
both small and large institutions
 Clear definition of accountabilities and liabilities of financial institutions
and their service providers
 Securing regulatory comfort by demonstrating financial institutions’
control the externalised processes
 Potential increase in diversification of strategies as smaller financial
institutions are empowered to pursue innovative strategies
 Increased competition might lead to reduction of transaction costs for
customers
 Wider universe of options for financial services as
customers’ choice of institutions is no longer restricted
by their scale
Opportunities and risks associated with the scenario
Customers
Incumbents
Overall
Ecosystem
 Increased competition as smaller institutions gain a
stronger competitive position
 A need to re-evaluate business models that are based
on economies of scale
 Wider distribution of market share
 Increased monitoring burden to regulators as the
number of players increase
Opportunities
 Risks to small and mid-sized players that their externalisation service
providers will be acquired and internalised by large financial institutions
 Systemic benefits of scale, such as visibility into the market, may erode
as the average size of institutions decreases
Risks
Investment Management: Process externalisation
148
Scenario 3: Centralised communications with regulatory agencies (1 / 2)
Narrative Summary of impact
A number of niche service providers are emerging who are able to
externalise processes related to specific regulations (e.g., restricted
holdings, KYC). These firms are able to interpret regulatory changes and
translate them into rules that can be applied across various financial
institutions, improving regulatory compliance and the speed at which
financial institutions can respond to regulatory changes.
As regulatory compliance within financial institutions becomes more
closely integrated with these service providers, some regulators may
choose to collaborate directly with them even to the point of issuing
regulations in code rather than as policy documents.
Case studies
 More regulatory compliance and monitoring processes are outsourced
to a small number of service providers with better connections to and
understanding of regulations, reducing the compliance burden for
financial institutions
 These compliance service providers can act as centralised
communication touch point for regulators
 By solidifying their connections with regulators, these providers
improve the speed at which financial institutions are able to respond to
regulatory changes, ensuring a higher level of compliance
Investment Management: Process externalisation
FundApps organises regulatory information and delivers a cloud-based managed-service to automate shareholding
disclosure and monitor investment restrictions across 100+ regulatory regimes on a daily basis. FundApps partners with
a global legal service provider to monitor and translate changes in relevant regulations into rules on a daily basis.
If regulatory agencies partner with FundApps in the future, they could ensure consistent compliance across financial
institutions, make dissemination of regulatory changes in disclosure regimes faster, and reduce the compliance burden
faced by the industry.
Today Future
Risk,
Monitor &
Compliance
Risk,
Monitor &
Compliance
149
Scenario 3: Centralised communications with regulatory agencies (2 / 2)
Necessary conditions for the scenario Implications of the scenario on…
 Buy-in from multiple regulators to collaborate with external service
providers regarding regulatory topics will be necessary. Dealing with
emerging risks like cyber security might be a good starting point
 Solid track record of performance and reliability demonstrated by
externalisation business models
 Full accountability and liability for actions remain with financial
institutions
 Critical mass of financial institutions externalise regulatory processes to
a manageable number of service providers
 Opportunities to improve the clarity of regulations across jurisdictions
 Cost for compliance and regulation, which tends to be very high in
global institutions, potentially will be reduced
 Standardised data simplifies supervision for regulators
 Increased trust in financial institutions as overall
compliance level increases
Opportunities and risks associated with the scenario
Customers
Incumbents
Overall
Ecosystem
 Ability to respond faster, more easily and more
cheaply to regulatory shifts
 Freed capacity from compliance processes to focus
on the core competencies
 Higher, more consistent level of regulatory
compliance
 Formalisation of externalisation providers as a core
piece of the overall financial ecosystem
 Higher level of clarity in regulations
Opportunities
 Unclear how risks of regulatory capture will be influenced by
externalised compliance models
 Amplification of non-compliant activities and unclear liabilities when
centralised externalisation providers fail
 Decreased internal compliance expertise within financial institutions
may have unintended consequences
Risks
Investment Management: Process externalisation
150
What does this mean for financial institutions?
 Loss of negotiating power and continuity: As more capabilities, technologies and processes are externalised financial institutions will become
increasingly dependent on 3rd parties for continuity
 Skill loss of workforce: Even though externalising less valuable capabilities will create efficiency, it may result in workforce skill loss over the lon
g
term and employees ability to develop a holistic view of financial services operations
 How will financial institutions participate in capability sharing with other institutions to balance efficiency with control (e.g., utility creation, codevelopment,
3rd party providers)?
 How will financial institutions prevent the loss of negotiating power and continuity as the next generation of process externalisation providers are
often built on managed services models as opposed to today’s vendor models?
Key implications and remaining questions
Scenario 1: Redefined core capabilities of
financial institutions
Scenario 2: Level playing field for newer,
smaller financial institutions
Scenario 3: Centralised communications with
regulatory agencies
“Safe Bets” – Likely implications under all scenarios
 Organisational agility: As innovative
providers continue to streamline and
commoditise previously high-value
capabilities, creating an agile organisation
will be critical to adapt to the changing
landscape and realign core competencies
 What capabilities and processes will
financial institutions focus investments on to
create competitive advantages that cannot
be replicated through the new process
externalisation providers?
 Higher turnover of new entrants:
externalisation of processes will make it
easier for new players to enter the market
without significant infrastructure, increasing
the turnover in the industry
 Imperative for direct participation: In
order to sustain scale-driven advantages,
large financial institutions will actively
participate in creating, funding, and
acquiring innovative externalisation
providers
 What are the advantages that larger
financial institutions may continue to benefit
from when externalisation levels the playing
field?
 Limited regulatory interpretation: When
regulatory compliance is centralised and
automated, regulatory models may shift
from today’s interpretation-based approach
to more measurable, “black-and-white”
approaches, reducing the room for
regulations to be flexibly interpreted
!
!
!
?
!
?
!
! Implications Remaining questions ?
?
Investment Management: Process externalisation
?
!
151
Market Provisioning
How will smarter and faster machines
transform capital markets?
152
Executive Summary
Context / Innovation
 As the popularity and profitability of high frequency trading declines, the next evolution of algorithmic trading may be dependent on smarter
machines, allowing a broader class of trades to reap the benefits of automation and sophistication
Future of Smarter Faster Machines
 The proliferation of smarter machines will further shift the focus of machine-based trading to rapidly respond to real-life events
‒ As the race for speed transitions to the development of strategies responding to real-life events, market makers’ trading strategies may
become more diversified as they access a vast amount of different data sources and infer different market conditions from that data
‒ When trading algorithms become more intelligent by incorporating machine learning, the breadth and accuracy of their analyses will
expand, and could result in convergence toward a single view of the market
‒ Growing public discontent with algorithmic trading may lead to regulations on the use of automatic data feeds or smart machines in
executing trades, reverting some parts of market-making activities to manual processes
Key Implications
 The development of smarter, faster machines in algorithmic trading will have varying implications on the market structure in terms of volume,
liquidity, volatility and spread – the future of algorithmic trading must be approached with a new lens with respect to the benefits it can deliver to the
ecosystem weighed against the new types of risks it might create
Market Provisioning: Smarter Faster Machines
153
As the popularity and profitability of high frequency trading declines, the next
evolution of algorithmic, machine trading remains in question
Overview of algorithmic trading and high frequency trading
 The use of algorithms in trading activities has proliferated in lockstep with the evolution of computing power since its initial application for optimal
portfolio determination in the 1970s and the emergence of fully automated algorithmic trades in the early 1990s
 Since then, the key focus of algorithmic trading has been on exploiting arbitrage opportunities in time and / or across venues by leveraging low
latency access to the exchanges (i.e., high-frequency trading, autonomous market makers) and thereby providing liquidity to the market
 These high frequency traders largely replaced the market-making activities traditionally performed by broker dealers, who provided liquidity and
made prices by manually coordinating offers and taking on the risks of buying and selling shares in return for spread
 While some trading firms and hedge funds use algorithms to achieve faster processing times for analysis of large datasets; price discovery and
order execution remain the most active areas of high frequency trading
Declining popularity and profitability of high frequency trading
Market Provisioning: Smarter, Faster Machines
$7.2
$1.3
$-
$2.0
$4.0
$6.0
$8.0
2009 2014 (e)
$0.0050
$0.0025
$-
$0.002
$0.004
$0.006
$0.008
2009 2012
3.3
1.6
0.0
1.0
2.0
3.0
4.0
2009 2012
# of High Frequency Trades per Day in United States
(in billions, est. by Rosenblatt Securities)
Average Profit per Share on HFTs
(est. by Rosenblatt Securities)
U.S. Revenue of High Frequency Traders
(in billions, est. by TABB Group)
Data Collection Data Processing and Analytics Order Routing Trading Strategy Formation Price Discovery Order Execution
Focus of algorithmic trading by HFTs
 High frequency trading reached its peak in 2009-2010, where those trades accounted for over 60 percent of all U.S. equities traded in volume
 However, the popularity and profitability of high frequency trading has significantly decreased due to lower volatility, improved liquidity, rising costs
of trading infrastructure, and regulatory scrutiny
154
Smarter, faster machines will allow broader types of trades beyond high frequency
trading to reap the benefits of automation and sophistication
Smarter, faster machines’ capabilities may shape the future of algorithmic trading
 Access extensive real-time data sets through
specialised databases
 Uncover predictive insights on market
movements based on correlations mapping
 Update and access insights in real-time
through cloud-based analytics
 Process news feeds through algorithms in
real-time without human interpretation
(machine-readable news)
 Discover major events faster than the news
through social media / sentiment analysis
 Ask questions, discover and test hypotheses,
and make decisions automatically based on
advanced analytics on extensive data sets
 Self-correct and continuously improve
trading strategies with minimal human
interaction through machine learning and
prescriptive analytics
Machine Accessible Data Big Data Artificial Intelligence / Machine Learning
 Input for algorithmic trading will shift from
market information (i.e., movements in price)
to real-life events
 The race for low latency will also shift to the
access to real-life events leveraging faster
connection to and interpretation of traditional
and emerging news sources
Event-Driven
 The development of big data based analyses
will allow traders to leverage broader and
deeper sets of data in making trades
 More factors seemingly less relevant to the
market / stock performance will be
discovered and used for trading strategies
Comprehensive
 The involvement of humans in the overall
trading process may decrease as machines
automate a wide range of core activities from
hypothesising to decision making
 The accuracy, consistency and speed of
trades will improve through automation and
self-learning
Automated
Market Provisioning: Smarter Faster Machines
155
Proliferation of smarter and faster machines will further develop traders’
capabilities and transform the capital markets
Key characteristics of the future of trading
Agility
Real-life events will be reflected in the market
price at a much faster speed as traders gain
access to and act on news from new and
traditional sources more quickly
Accuracy
The room for human error will decrease as more
aspects of trading activities are automated. The
quality of trading decisions will also improve as
the machines used in researching, hypothesising
and decision making self learn
As smarter, faster machines improve the capabilities of traders, how will the capital markets
transform?
Market Provisioning: Smarter Faster Machines
Privileged
The gap between trading institutions and
individual investors will increase as the
increased infrastructure costs to compete in
collecting, analysing and acting on information
create barriers for individual investors
156
How will smarter and faster machines transform capital markets?
Market Provisioning: Smarter Faster Machines
Potential scenarios enabled by smarter, faster machines
 The race for speed transitions from
responding to price movements to the
development of strategy responding to
real-life events through big data
analysis and machine readable news
 Algorithmic trading strategies
become diversified as they access
different data sources and infer different
market outcomes
 As trading algorithms become more
intelligent and are able to access more
complete sets of market data, their
analyses converge toward a single
view of the market
 As trading and market-making
strategies converge, volume
decreases and spreads tighten
 Growing public discontent with
algorithmic trading leads to regulations
on the use of automated data feeds
and / or smart machines in executing
trades
 Some parts of market making activities
revert to old, manual processes,
tangibly reducing the trade volume and
the liquidity of the market
Diversification of trading strategies
and tactics
Convergence of trading strategies
and activities
1 2
3 Reverting to manual processes
Takes different
actions on different
set of stocks
Reacts to real-time
events from diverse
data sources
Data Sources Traders Market
Takes a similar
action on any
stock
Analyses various data
and predicts market
outlook in similar ways
Self-learning
machines
Data Sources Market
Regulations require access to external data and /
or trade execution to be intervened manually
Data Sources Traders Market
 The following scenarios illustrate potential outcomes generated by the innovations discussed in this topic, particularly in response to the key
question above – they are not meant to be future predictions
 These scenarios are illustrations of particular aspects of the potential future and are not meant to represent a complete view of the market and
competitive landscape – in many cases, some or all scenarios could be realised at the same time
157
Narrative Summary of impact
As the benefits that can be earned from incremental investments in high
frequency trading decrease, algorithmic traders will shift their focus to
real-life events by connecting to new data sources available from social
media feeds to machine readable news. (1) Due to the vast amount of
data available, most algorithmic traders will focus on different events and
triggers. (2) Unlike most high frequency trading strategies, the market
reaction to real-life events is not certain and traders with different views,
skills and analytical tools will make different decisions in face of the same
data. As the result, the trading strategies and tactics of algorithmic traders
will vastly diversify.
Case studies
 The focus of a race for speed moves from chasing price movements to
responding to real-life events through big data analysis and machine
accessible news
 Market makers’ trading strategies become diversified as they access
different data sources and infer different market outcomes
 Diversification leads to increase in intraday volatility and wider ask-bid
spread
Market Provisioning: Smarter Faster Machines
New innovative services like Dataminr and SNTMNT enable traders to gain access to events and news that
may trigger market movement (e.g., breaking news, M&A speculation) faster than the competition by utilising
non-traditional data sources like social media / market sentiment and real-time analytics.
Leveraging these platforms, algorithmic traders can leverage their infrastructure to shift focus from reacting to
stock price movements to monitoring and reacting to real-life events faster than other traders and investors in
the market.
Traders
Takes similar actions on
the same stock
Reacts to price movement of
a single stock
Market
Scenario 1: Diversification of trading strategies and tactics (1 / 2)
Today Future
Traders
Takes different actions on
different sets of stocks
Reacts to real-time events from
diverse data sources
Data Market
Sources
158
Scenario 2: Convergence of trading strategies and activities
Narrative Summary of impact
As access to a universe of real-time data feeds becomes essential to the
execution of successful algorithmic trading strategies, the set of data used
by traders converges with every trader using almost every available data
source. At the same time algorithms become smarter incorporating
machine learning and improving the accuracy of projections.
With algorithmic traders connected to similar data sources and smarter
machines generating similar projections from those data, the variances
among algorithmic traders’ activities will decrease.
Case studies
 Accuracy of market projections by trading algorithms gradually
improves as market makers gain access to broader sets of big data
and more sophisticated machines
 Since each market maker’s system accurately predicts the market
movement, differences among various market makers’ projections and
trading strategies are eliminated
 As trading strategies converge, volume decreases and arbitrage
opportunities effectively disappear
Market Provisioning: Smarter Faster Machines
Ayasdi leverages topological data analysis to process big data sets to unveil patterns within the network of data. In capital
markets, Ayasdi’s technology can be used to understand the relationships between various real-life events and market
performance to derive trading hypotheses. Over time, additional historical data and trading outcomes can be added back to the
analysed big data to continuously sophisticate and automatically correct the trading hypotheses.
Neuro Dimension’s TradingSolutions combines technical analysis with artificial intelligence using neural networks and genetic
algorithms to learn patterns from historical data and optimise system parameters.
As these types of systems become more sophisticated, algorithmic traders will simultaneously predict the market performance
with a greater degree of accuracy and their trading activities will converge.
Selflearning
machines
Takes a similar action on
any stock
Analyses various data and
predicts market outlook in
similar ways
Data Market
Sources
159
Scenario 3: Reverting to manual processes
Narrative Summary of impact
The utilisation of new data sources like machine readable news and
advanced computing in trading activities increases the gap in the level of
sophistication between professional algorithmic traders and individual,
retail investors. The public may perceive some of these innovations to be
an “unfair” advantage; similar to how infrastructures costs associated with
high frequency trading have been scrutinised.
Reacting to public sentiment, policy makers and regulatory agencies may
impose restrictions on what automated data streams and trading
machines can and cannot be used for various activities. Potential
misinterpretation of data by smart machines triggering systemic losses
might accelerate such movements toward regulation.
Case studies
 Growing public discontent with algorithmic trading leads to regulations
on the use of automated data feeds and / or smart machines in
obtaining information or executing trades
 At least some parts of market-making activities revert to old, manual
processes, tangibly reducing the trade volume and the liquidity of the
market
 As a result, the liquidity of the market will decrease. As traders cannot
react to fact-based price arbitrage as quickly, they may also increase
their spread to mitigate their risks, resulting in unfavourable price
formation for both buyers and sellers
Market Provisioning: Smarter Faster Machines
On 23 April 2013, a false report of explosions at the White House was posted on the hacked Twitter account of Associated
Press. With many algorithmic traders’ systems linked to key Twitter feeds, algorithmic trades caused a selling spree nearly
immediately after the posting. As the result, $136 billion was wiped out from the S&P 500 index within two minutes of the
tweet’s posting. While the market quickly recovered three minutes after the correcting announcement, many industry
experts and regulatory agencies perceive the event as something that would not have been caused by human traders as
humans would have second-guessed the validity of the tweet.
Data Traders Market
Sources
Regulations require access to external data and /
or trade execution to be intervened manually
160
What does this mean for financial institutions?
 Reduced role of humans: As the adoption of smarter and faster machines accelerates the competition for speed in gathering, analysing and acting
on data, the role of humans in trade execution will diminish and intelligent machines will replace largely human activities today, such as trading
strategy development
 Larger impact of errors: Even small errors in data integrity, trade strategy, and trade execution will lead to much larger impact as end-to-end
trading activities are automated via smarter, faster machines, with limited human intervention
 What role will human traders play as end-to-end trading activities become automated through smarter, faster machines?
 How will financial institutions effectively sort out erroneous data, algorithms and execution to avoid resulting in enormous losses, while maintaining
execution speed?
Key implications and remaining questions
Scenario 1: Diversification of trading
strategies and tactics
Scenario 2: Convergence of trading strategies
and activities Scenario 3: Reverting to manual processes
“Safe Bets” – Likely implications under all scenarios
 Competition for data sources:
Competition to discover new data sources
and gain exclusivity will intensify as the
focus of algorithmic trading shifts from price
movements to real-life events
 Increased specialisation: Traders with a
deeper understanding of specific
companies, sectors and real-life events will
gain advantage over firms with broader
approaches as trading strategies diversify
 How will financial institutions gain exclusive
or faster access to data without appearing
as having an unfair advantage?
 Marginalised returns: As trading strategies
converge through big data and machine
learning, competition for each trade
triggered by real-life events will intensify
and marginal returns will diminish
 Competition for speed: When most
players in the market rely on similar trading
strategies, the basis for competition will shift
again from discovery of new insights to
faster execution via infrastructure
investments
 How will each institution differentiate from
one another as the convergence of trading
strategies via smarter, faster machines
lower the margin?
 Competitive uncertainty: Capabilities
required to be competitive in the market
(e.g., faster computation, faster access,
advanced analytics) will change drastically
and rapidly depending on regulatory
changes, leading to uncertainty in traders’
long-term strategies
 Impetus for agility: In order to react timely
to those competitive uncertainties generated
by potential regulations, traders’
organisational agility will become critical
amidst the current shift toward replacement
of workforce with smarter, faster machines
!
!
!
?
!
?
!
! Implications Remaining questions ?
?
!
Market Provisioning: Smarter Faster Machines
! !
?
161
Market Provisioning
What impact will better connected
buyers and sellers have on capital
markets?
162
Executive Summary
Context / Innovation
 Many illiquid financial assets remain highly dependent on intermediating institutions to discover and connect buyers and sellers, often based on
networks of pre-existing relationships with other institutions
 However, following the financial crisis, traditional capital market intermediaries’ risk appetite has been reduced while their capital requirements
increased, limiting their ability to take positions on financial assets to create liquidity; this has resulted in reduced liquidity mainly for non exchange
traded assets
 Leveraging automation and standardisation of information flow, a number of platforms (information/connection platforms) have emerged with an aim
to redefine how buyers and sellers are connected in a variety of markets
Future of Market Making / Intermediation
 As these platforms proliferate, the market landscape may change for many financial products and assets
‒ New information/connection platforms will allow demand and supply represented by smaller intermediaries to be more readily and objectively
discovered by counterparties, Levelling the playing field between them and larger institutions
‒ Alternatively, these platforms could be developed for a “group” of larger institutions to improve connectivity among themselves, reducing their
need to connect with smaller intermediaries and stabilising the current market framework for existing institutions
‒ Information/connection platforms may also choose to extend the connections to individual investors, acting as a market for specific assets and
products and opening doors for sellers to easily broaden their buyer base to the broader public
Key Implications
 Improving information flow among market participants through new information/connection platforms will create tangible benefits to the industry by
empowering intermediating institutions to optimise their ability to make the best decisions for their clients; however, it will also require behaviour
changes within those institutions
Market Provisioning: Connecting Buyers and Sellers
163
Over-the-counter activities depend on intermediating institutions to discover and
connect buyers and sellers
How do financial institutions facilitate financial markets liquidity today?
 For a wide range of assets and financial products, financial institutions play a role as an
intermediary to connect and act on behalf of buyers and sellers
 For some assets (e.g., public stocks, liquid bonds), formal markets exist to facilitate the
connection between buyers and sellers, typically in the form of exchanges
 For less liquid and less standardised assets and products, demand and supply is often
dispersed, making direct discovery and connection among buyers and sellers highly
inefficient
 For these assets and products, financial institutions aggregate demand and supply, and
build relationships with one another to effectively create a market, the so called over-thecounter
(OTC) market
 As an intermediary, financial institutions sometimes take positions in the assets traded to
provide liquidity or offer advisory services to the buyers and sellers they represent
Evolution of OTC driven activities Key limitations of today’s model
 Over the years, the markets for standardised assets with high
transaction volume have greatly improved their efficiency by adopting
technologies to improve connectivity among buyers and sellers
 However, OTC markets still rely on relationship-based intermediaries
and non standardised processes to connect buyers and sellers
 Since the 2008 financial crisis, increased capital requirements and
reduced risk appetite among intermediary institutions have limited the
desirability of acting as a market maker, reducing liquidity for many
financial assets and products
Operational Inefficiency
Highly manual discovery process
for the counterparties makes
transactions time consuming,
costly and complex
Suboptimal Pricing
No intermediaries, regardless of
their size, have a full view of the
demand and supply, making the
best price discovery difficult
Limited Liquidity
Not all buyers and sellers at a
given moment are discovered by
one another, limiting liquidity
Limited Visibility
Buyers and sellers have imperfect
visibility into the market supply,
demand and counterparties,
limiting their ability to exert control
over transactions
1
2
3
Limited Access
Buyers’ ability to access assets is limited by their
intermediaries’ connections with sellers’ intermediaries
B
C
Buyers Intermediaries
D
E
F
Sellers
Buyer 1 can be connected with Seller 2, but not with Seller
3 because their intermediaries do not have contact
Result: When 1 is buying from 3 trade is not executed at
the optimal price
Market Provisioning: Connecting Buyers and Sellers
Intermediaries
A
164
New platforms are emerging to connect intermediaries of buyers and sellers to
facilitate the flow of market information and the discovery of counterparties
Key characteristics of the platforms improving connection between buyers and sellers
These platforms typically standardise what data
points are collected and analysed through a set
of sophisticated metrics to allow buyers to
evaluate sellers more critically
These platforms embed the elements of social
networks to facilitate the interaction among
buyers, sellers and intermediaries and improve
how buyers and sellers are evaluated
These platforms automatically collect and
analyse data to help buyers and sellers make
more informed decisions and make the
discovery process less relationship-driven
Social Standardisation Automation
Examples of platforms improving connection between buyers, sellers and intermediaries
Fixed Income Funds / Fund of Funds Private Equity /
Venture Capital Shares
Private Company
Shares
Private Company
Tenders
Commodities &
Derivative Contracts
Market Provisioning: Connecting Buyers and Sellers
What are the new platforms?
 Leveraging technological innovations, a number of platforms have emerged
to redefine how buyers and sellers are connected for various financial assets
and products, improving the efficiency of those markets
 These platforms automate and standardise collection of demand / supply
data from intermediaries or buyers and sellers to create an aggregated view
of the market and facilitate discovery of the most suitable counterparties
 Some platforms provide additional analyses on the data collected to better
inform buyers / sellers and their intermediaries in choosing their
counterparties
1 2
3
A
B
C
E
F
B
Buyers Intermediaries Sellers Intermediaries
Buyer 1, Seller 2 and Seller 3 connected through new platform can
exchange information
Result: All transactions are likely to be executed at an optimal price
Platform
165
How do market connection platforms differ from traditional models of market making?
Value Chain
Key Characteristics
Advantages
Shortcomings
Traditional Model Market Information/Connection Platforms
 Information about buyers and sellers (e.g., current
inventory / demand, historical performance) is distributed
via relationships / awareness existing among their
intermediaries
 Intermediaries collect, analyse and act on the information
about the counterparties and the market
 Intermediaries of buyers and sellers in some cases, are
directly discovered and connected via a central platform
 Information on counterparties and the market is
aggregated and analysed by the central platform for all
constituents in the market
 Reduced chance of counterparty failure by transacting
through established, trusted intermediary relationships
 Reduced exposure to arbitrage attempts as demand and
supply is only visible to a small number of intermediaries
 More efficient discovery and assessment of demand and
supply in the market leading to more accurate price
formation
 Reduced need for financial institutions to take position in
assets and products to generate liquidity
 Increased visibility and control over transactions by buyers
and sellers
 Highly manual, relationship-based discovery and
assessment of demand and supply leading to inefficiency
 Potential to overlook the best price available due to the
limitation in the scale of each intermediary’s network
 Limited visibility of the transaction process to buyers and
sellers
 Need to balance adequate price formation with potential
price discovery and arbitrage attempts
 Potential counterparty risks when dealing with
intermediaries (or buyers / sellers) without an established
relationship or reputation
A
B
C
D
E
F
Buyers Sellers Intermediaries Intermediaries
These market connection platforms do not replace the traditional market-making
activities of intermediaries, but rather help them broaden their connections
Market Provisioning: Connecting Buyers and Sellers
A
B
C
D
E
F
Buyers Sellers Intermediaries Intermediaries
Platform
166
As buyers, sellers and intermediaries become better connected via these
platforms, the overall efficiency of the market will improve
Key characteristics of the future markets enabled by improved market connections
Increased Liquidity
More intermediaries, and buyers and sellers,
will be connected with one another to enable
more accurate assessment of demand and
supply in the market, leading to improved
liquidity in the market
Improved Price Accuracy
As the aggregate demand and supply can be
assessed more accurately, intermediaries
and buyers / sellers will be able to determine
the best price more accurately without
revealing undesired information to the market
Transparency
Buyers and sellers will gain more visibility
into the transaction process and therefore
will be able to exert greater control over the
transactions and reduce the opportunities for
suboptimal transactions by intermediaries
(e.g., agent conflict of interest)
Improved Access
The ability to buy / sell financial assets and
products will be less dependent on the scale
or the size of the intermediaries’ network,
improving access to the market by more
buyers, sellers, and intermediaries
Faster, Cheaper Transactions
As the discovery and assessment of
counterparties become more streamlined
and automated, the efficiency of
intermediaries will improve, leading to faster
turnaround and lower cost to complete
transactions for buyers and sellers
How will the market landscape change for various financial assets and products as buyers and
sellers are better connected in the future?
Market Provisioning: Connecting Buyers and Sellers
167
Levelling the playing field for newer,
smaller institutions
How will the market landscape change for various financial assets and products as
buyers and sellers are better connected in the future?
Potential impact of buyer / seller connection
1 2 3
Best Match  Large
Large
Small
Large
Large
Small
Best Match  Large
Large
Small
Large
Large
Small
 Unlike relationship-driven market making,
where larger institutions have an advantage
over smaller institutions, new platforms will
allow demand and supply represented by
smaller institutions to be more readily
discovered by counterparties
 These platforms will also provide factbased
measures to make counterparty
comparison and selection to be more
objective, enabling smaller institutions with
less developed networks of relationships to
compete
 Platforms are developed and used by larger
institutions to improve connectivity and
efficiency among a “group” of large
players
 As connections among larger intermediaries
are strengthened by information/connection
platforms, the need for larger institutions to
connect with smaller intermediaries to
generate liquidity will decrease, effectively
building barriers of entry for smaller,
newer institutions
 As platforms grow, they may choose to
extend connections to individual
investors (e.g., acting as brokerages)
 When sufficient volume from individual
investors can be aggregated, these
platforms can act as a market for specific
assets and products and open doors for
sellers to easily broaden their buyer base to
the broader public
Stabilising market framework for
existing institutions
Opening the doors to individual
investors
Best Match  Large
Small
Large
Small
 The following scenarios illustrate potential outcomes generated by the innovations discussed in this topic, particularly in response to the key
question above – they are not meant to be future predictions
 These scenarios are illustrations of particular aspects of the potential future and are not meant to represent a complete view of the market and
competitive landscape – in many cases, some or all scenarios could be realised at the same time
Market Provisioning: Connecting Buyers and Sellers
Platform
Platform
Platform
Buyers Intermediaries Sellers Buyers Intermediaries Sellers Buyers Intermediaries Sellers
168
Narrative Summary of impact
Market information / connection platforms open their doors to
intermediating institutions of all sizes. Smaller institutions are particularly
incentivised to join such platforms as the platforms significantly expand
the intermediaries’ access to market information and connect them to a
universe of potential counterparties.
As these platforms grow in scale, so will the pressure for greater trade
transparency and the use of more quantitative metrics for best execution.
As large intermediaries yield to client pressure to adopt these metrics,
they will be more likely to interact with smaller intermediaries with whom
they may not have previously established working relationships.
Case studies
 Standardised platforms facilitate connections between large and small
intermediating institutions to help them find counterparties;
considerably expanding the number of trading options for smaller
intermediaries, whose ability to connect with other institutions was
previously limited by scale
 These platforms provide fact-based measures to improve the
objectivity of counterparty comparison and selection, enabling smaller
intermediaries to compete based on the interests of their clients and
their merits, instead of scale and reputation
Scenario 1: Levelling the playing field for newer, smaller institutions (1 / 2)
Novus is a portfolio intelligence platform that automatically gathers and analyses data on various funds’ performance to
provide visibility and transparency to fund-of-funds managers. Traditionally, fund-of-funds managers discovered and
researched investment opportunities manually by contacting target funds. As a result, the ability of fund-of-funds to
source investment opportunities was dependent on their scale, reputation and network. Through Novus’ automated
platform, nearly all funds operating across the world and their performance are catalogued and analysed based on an
automated collection of regulatory reporting data. This allows smaller fund-of-funds to independently identify lucrative
investment opportunities without being limited by their reputation and the size of their networks.
Market provisioning: connecting buyers and sellers
Best Match 
Large
Large
Small
Large
Large
Small
Buyers Intermediaries Sellers
Platform
169
 Traders are required to adapt to new behaviours
 Need to establish new processes to support the new
business model (in particular small institutions who might
need to improve their transparency and best execution
policies)
Scenario 1: Levelling the playing field for newer, smaller institutions (2 / 2)
Necessary conditions for the scenario Implications of the scenario on…
 Top-level and line-level buy-in from large and small institutions for
adopting the information/connection platforms
 Intermediating institutions’ are comfortable with managing the risks
associated with transacting with less familiar, less pre-defined
counterparties
 Incentivise deeper specialisation of intermediaries by creating higher
returns to specialization
 Potential increase in systemic resilience as the result of diversification
of related parties
 Higher chance of achieving the best execution of
trades
 Customers’ ability to achieve optimal results is no longer
constricted by the size of their intermediaries
 Sources liquidity from the broadest group of counterparties
without risking discovery of demand / supply
Opportunities and risks associated with the scenario
Clients
Incumbents
Overall
Ecosystem
 Supports diversification of counterparties based on
asset specialisation
Opportunities
 Transparency of counterparty selection is dependent on the
transparency of the information/connection platforms
 Increased counterparty risks when dealing with newer, smaller
counterparties without standing reputation or relationships
Risks
Market Provisioning: Connecting Buyers and Sellers
170
Scenario 2: Stabilising market framework for existing institutions (1 / 2)
Narrative Summary of impact
As standardised information/connection platforms gain popularity, a
“group” of large intermediaries may explore adopting the techniques
behind these platforms to create a streamlined, exclusive network among
themselves. These large institutions may acquire or partner with
standardised platforms to set up artificial barriers against smaller and
newer institutions.
As these exclusive networks grow, it will become more difficult for smaller
institutions to find trading counterparties or compete with the efficiency
delivered by those networks.
 As connections among larger intermediaries are strengthened by
platforms, the need for larger institutions to connect with smaller
intermediaries may decrease, effectively building barriers of entry for
smaller, newer institutions
 Smaller companies lack economies of scale to set up their own liquidity
network and may lose their customers to the larger institutions
Best Match 
Large
Large
Small
Large
Large
Small
Buyers Intermediaries Sellers
Platform
Market Provisioning: Connecting Buyers and Sellers
171
Scenario 2: Stabilising market framework for existing institutions (2 / 2)
Necessary conditions for the scenario Implications of the scenario on…
 Regulatory tolerance of exclusive networks (e.g., no collusion or
anti-trust concerns)
 Large institutions participating in exclusive networks do not
experience significant loss in liquidity by excluding smaller
institutions
 Continued customer confidence in large institutions to fulfill their
orders at a reasonably fair price
 Opportunities for large institutions to continue to be highly influential in
the market landscape
 Shifting transactions from obscure internal execution facilities to more
transparent standardised platforms
 Liquidity may increase relative to the current state,
but could be less than under an open platform
Opportunities and risks associated with the scenario
Clients
Incumbents
Overall
Ecosystem
 Large institutions retain strategic advantages over
smaller institutions
 Increased concentration of trades among a small
number of intermediaries
 Increased difficulty for small intermediaries to
compete outside of niche specialties
 Creates barriers of entry for new intermediaries
Opportunities
 Encouraging concentration of transactions among few large institutions
 Public and regulatory agencies may perceive exclusive networks as an
unfair, colluding activity
Risks
Market Provisioning: Connecting Buyers and Sellers
172
Scenario 3: Opening the doors to individual investors (1 / 2)
Narrative Summary of impact
Under the current market structure individual investors cannot directly
participate in markets for many assets because information about supply
and demand is disparate and disorganised. As the growth of
information/connection platforms improves visibility into these asset
classes, the platforms may choose to expand their offerings to provide
access for qualified individual investors.
Using these platforms, individual investors are able to transact directly
with one another or can aggregate their demand/supply to interact with
institutional investors. As engagement with individual investors grows,
some platforms may choose to evolve to play the role of a broker.
Case studies
 As platforms grow, they choose to extend their connections to
individual investors, enabling them to bypass traditional intermediaries
and transact with one another
 These information/connection platforms may help individual investors
represent their aggregate demand and supply more effectively to
institutional buyers and sellers
 If sufficient volume can be aggregated from individual investors, these
platforms can effectively act as a market for specific assets and
products, and open doors for sellers to broaden their buyer base
Liquity provides private company directors with a comprehensive suite of shareholder and equity management services
and match investors with private company shareholders who want to sell some or all of their equity. Liquity facilitates
complete deals, from introduction to transaction completion including escrow and custodial services.
Best Match 
Large
Small
Large
Small
Buyers Intermediaries Sellers
Platform
Market Provisioning: Connecting Buyers and Sellers
173
Scenario 3: Opening the doors to individual investors (2 / 2)
Necessary conditions for the scenario Implications of the scenario on…
 Appetite for individual investors with high degree of financial
sophistication to directly participate in trades
 Development of execution infrastructure to facilitate trades with
individual investors who do not possess over-the-counter capabilities
 Ability to aggregate sufficient demand and supply volume among
individual investors to transact with institutional investors
 Opportunities to separate transactional services from high-value,
advisory offerings
 Opportunities to engage new buyers and sellers in the market,
increasing liquidity and diversifying the needs and opinions of market
participants
 Ability to make direct connections with trade
counterparties
 Access to new asset classes for individual investors
 Improved transparency and control over the transaction
process
Opportunities and risks associated with the scenario
Clients
Incumbents
Overall
Ecosystem
 Erosion of market shares to brokers and groupings of
groups of high net worth individuals
 Impetus for intermediaries to strengthen values they
provide to clients beyond transaction facilitation
 Increased liquidity on standardised platforms
Opportunities
 Potential for sophisticated individual investors to make errors due to
lack of specialised knowledge (relative to professional intermediaries)
 Increased burden on regulatory agencies as more parties are directly
involved in the market
Risks
Market Provisioning: Connecting Buyers and Sellers
174
What does this mean for financial institutions?
 Less differentiation among intermediaries: As the ability to fulfill the transaction needs of customers become commoditised by market
connection platforms, financial intermediaries will be less differentiated by their capabilities
 Redistributed negotiating power: With both counterparties and their intermediaries gaining improved visibility into market demand and supply,
negotiating power will be redistributed based on actual demand and supply resulting in more efficient pricing
 Shift to advisory models: As the financial intermediaries’ role in counterparty discovery and negotiation diminishes, their ability to build customer
relationships based on advice will become more important to their competitiveness
 How will financial intermediaries differentiate from one another as improved information flow and trading connections reduce the gaps in institutions’
ability to find counterparties for their customers?
Key implications and remaining questions
Scenario 1: Levelling the playing field for
newer, smaller institutions
Scenario 2: Stabilising market framework for
existing institutions
Scenario 3: Opening the doors to individual
investors
“Safe Bets” – Likely implications under all scenarios
 Reduced fee structure: As the cost of
fulfilling transactions falls, the fee structure
of intermediation services, as well as actual
products themselves (e.g., carry on funds),
may be reduced regardless of client size
 How will larger financial institutions continue
to maintain advantage over smaller players
when economies of scale are eroded and
smaller players can gain access the same
information and counterparties?
 Direct investments by established
institutions: Established intermediaries will
become more active in investing,
implementing, and acquiring market
connection platforms to stablise the current
market framework
 How will established intermediaries gain
exclusive access to market connection
platforms while avoiding conflict-of-interest
(i.e., best execution) and anti-trust issues?
 Reduced value proposition to
institutional customers: As some
institutional customers choose to directly
discover and transact with counterparties
via market connection platforms, their
stickiness on other institutional services,
such as asset management and investment
banking, may decrease
 What additional value will financial
intermediaries provide high net worth
individuals to prevent the erosion of their
businesses by direct access to
counterparties via market connection
platforms?
!
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! Implications Remaining questions ?
?
!
Market Provisioning: Connecting Buyers and Sellers
175
Contact Details
176
World Economic Forum Core Project Team
R. Jesse McWaters
Project Manager, Financial Services – Project Lead
World Economic Forum
Jesse.McWaters@weforum.org
Giancarlo Bruno
Senior Director, Head of Financial Services
World Economic Forum
Giancarlo.Bruno@weforum.org
Abel Lee
Director, Head of Insurance and Asset Management
World Economic Forum
Abel.Lee@weforum.org
Matthew Blake
Director, Head of Banking and Capital Markets
World Economic Forum
Matthew.Blake@weforum.org
For additional information please contact:
Professional Services Support From Deloitte
Rob Galaski
Deloitte Canada
Rgalaski@deloitte.ca
Hwan Kim
Deloitte Canada
Hwankim@deloitte.ca

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