Strategies to Harness the Technology Forces Impacting Finance
By Tod McKenna, COO, Prudential Portfolio Management Group
Tod McKenna, COO, Prudential Portfolio Management Group
The Technology Forces Impacting Finance
In their book, Machine Platform Crowd, Andrew McAfee and Erik Brynjolfsson explain the significance of being able to make perfect digital copies at scale with almost zero cost. These are the new information economics. Look no further than music distribution for an ideal case study. In finance, the Nakamoto Blockchain and the subsequent growth of cryptocurrencies provide a more relevant example. Blockchain technology has the potential to reduce costs and improve efficiency in several areas including asset management, payment processing, and contract governance.
Platforms facilitate the interaction between two or more market segments – often producers and consumers – leading to greater value potential and new data monetisation opportunities through network effects. Amazon, Alibaba, Uber, Facebook, YouTube, and WeChat are examples of platform businesses. FinTech platforms such as Credit Karma, Square, Stripe, CircleUp, and Prosper are actively challenging the financial services status quo.
Significant advances in technology are also driving change, including improvements in cloud computing, processing power, identity management, robotics, artificial intelligence (AI), machine learning, natural language processing, wearables, virtual reality, and augmented reality. Powered by specialised machines through Application Programming Interfaces(APIs), these advances have led to progress in areas such as product design, customer experience, mobile application development, data science, and cognitive computing. Smarter and better-interconnected machines are automating and improving lives across several dimensions.
Wealth management (robo advice), transportation (self-driving cars), fitness (wearables), and assisting those with disabilities (adaptive and assistive technologies) are but a few examples.
Strategies to Harness
Experts in finance are very good at what they do, having developed a deep understanding of their customers, the financial markets, and the regulatory environment. But finance often suffers from institutionalised "curse of knowledge" and "status quo" biases. The industry as a whole is notorious for being slow to adapt. It also tends to lack the right mix of skills and mindsets that would allow it to harness the forces at play. Generalisations aside, without dramatic change, the industry might not be ready for the “new collar” jobs that will dominate the future.
Fortunately, several tools and techniques are available to help finance with the changes needed. Firstly, fostering innovation is essential. But innovation does not mean investing blindly in an innovation lab and hoping for the best. Setting off on random experiments and aimlessly tinkering with emerging technologies will not cut it. Finance needs to think and act differently. Bringing in broad and diverse perspectives to supplement existing teams is one approach (e.g., hire a technologist from an entirely different industry).
Secondly, individuals within finance need to adopt new mindsets. Too often, leadership falls in love with solutions and becomes enamoured with technology. Digital transformation is not about applying specific solutions or installing new technologies. Instead, falling in love with the problem – not a solution – leads to real customer-centric innovative strategies that are sustainable. Creating genuine learning opportunities, putting in place feedback loops, adopting a "fail safe and fast" mentality, and instilling a sense that improvement is continuous, are great ways to develop new skills and shift mindsets.
Collecting more data, and data about that data comes third. There are many examples in finance where large amounts of data are utilised and applied to specific problems such as fraud detection, underwriting, and portfolio optimisation. Actuaries and quants push the limits of mathematics, economics, psychology, physics, and data science every day. These activities are often conducted in silos, with specific machines built for specific problems. Datasets are not nearly as connected as they could be, with hidden knowledge and meta-relationships going unnoticed. There are increasing opportunities to collect even more data about customers and markets through sensors and feedback loops. APIs can enhance consistent data exchange through platforms, networks, and devices in novel ways.
And finally, collaboration with FinTech companies may still be the best strategy. It may make sense to invest or partner with a FinTech that already provides capabilities to address existing problems. In fact, thousands of financial and FinTech firms are already engaged at various levels. Finance can provide mountains of data and a deep understanding of the marketplace. The FinTech organisations can provide an understanding of the digital native, superior agility, and cutting-edge technical knowledge. The challenge is finding the right partnerships. A great deal of innovation in the FinTech community is already addressing the customer journey, security, and privacy. Creative mobile apps, smart contract solutions, and new uses for AI are rolling out continuously.
Finance has an opportunity to harness the forces impacting the industry using a variety of strategies. Fostering an innovative culture will open new pathways as fresh ideas emerge to address business problems. Bringing in broad and diverse people to supplement core staff, collecting and utilising data more holistically, and strategic partnering may lead to some exciting outcomes.
Creating genuine learning opportunities, putting in place feedback loops, adopting a "fail safe and fast" mentality, and instilling a sense that improvement is continuous, are great ways to develop new skills and shift mindsets.
Strategies to Harness
Experts in finance are very good at what they do, having developed a deep understanding of their customers, the financial markets, and the regulatory environment. But finance often suffers from institutionalised "curse of knowledge" and "status quo" biases. The industry as a whole is notorious for being slow to adapt. It also tends to lack the right mix of skills and mindsets that would allow it to harness the forces at play. Generalisations aside, without dramatic change, the industry might not be ready for the “new collar” jobs that will dominate the future.
Fortunately, several tools and techniques are available to help finance with the changes needed. Firstly, fostering innovation is essential. But innovation does not mean investing blindly in an innovation lab and hoping for the best. Setting off on random experiments and aimlessly tinkering with emerging technologies will not cut it. Finance needs to think and act differently. Bringing in broad and diverse perspectives to supplement existing teams is one approach (e.g., hire a technologist from an entirely different industry).
Secondly, individuals within finance need to adopt new mindsets. Too often, leadership falls in love with solutions and becomes enamoured with technology. Digital transformation is not about applying specific solutions or installing new technologies. Instead, falling in love with the problem – not a solution – leads to real customer-centric innovative strategies that are sustainable. Creating genuine learning opportunities, putting in place feedback loops, adopting a "fail safe and fast" mentality, and instilling a sense that improvement is continuous, are great ways to develop new skills and shift mindsets.
Collecting more data, and data about that data comes third. There are many examples in finance where large amounts of data are utilised and applied to specific problems such as fraud detection, underwriting, and portfolio optimisation. Actuaries and quants push the limits of mathematics, economics, psychology, physics, and data science every day. These activities are often conducted in silos, with specific machines built for specific problems. Datasets are not nearly as connected as they could be, with hidden knowledge and meta-relationships going unnoticed. There are increasing opportunities to collect even more data about customers and markets through sensors and feedback loops. APIs can enhance consistent data exchange through platforms, networks, and devices in novel ways.
And finally, collaboration with FinTech companies may still be the best strategy. It may make sense to invest or partner with a FinTech that already provides capabilities to address existing problems. In fact, thousands of financial and FinTech firms are already engaged at various levels. Finance can provide mountains of data and a deep understanding of the marketplace. The FinTech organisations can provide an understanding of the digital native, superior agility, and cutting-edge technical knowledge. The challenge is finding the right partnerships. A great deal of innovation in the FinTech community is already addressing the customer journey, security, and privacy. Creative mobile apps, smart contract solutions, and new uses for AI are rolling out continuously.
Finance has an opportunity to harness the forces impacting the industry using a variety of strategies. Fostering an innovative culture will open new pathways as fresh ideas emerge to address business problems. Bringing in broad and diverse people to supplement core staff, collecting and utilising data more holistically, and strategic partnering may lead to some exciting outcomes.
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