Are you safe from digital disruption?

Market insights

Tuesday 01 December 2015

Everything you need to know to survive and prosper in the era of digital disruption.

It's rare to attend a business conference these days and not hear some mention of digital disruption.

The rapid emergence of internet-based companies such as Uber and Airbnb has raised questions regarding the long-term futures of the incumbent organisations they challenge. And if technology-backed start-ups can disrupt industries as old as taxis and accommodation, where else might we see disruption take place?

Recent history is littered with examples of disrupted industries, such as music and book retailing and photographic processing, along with their diminished or dead stalwarts. No organisation wants to be the next Kodak.

The financial services sector is no stranger to digital disruption, stretching back to the emergence of the first online-only bank, ING Direct, in 1999.

Modern times have seen a raft of digital start-ups emerge to secure a small but growing foothold in the financial services ecosystem. One example is the peer-to-peer lending service SocietyOne, which has created a private marketplace linking lenders to borrowers with interest rates set by the borrower's specific profile.

And there are many, many more.

According to Macquarie Wealth Management's Head of Client Development, Shaun Kamler, digital disruption has the potential to transform the wealth management value stream.

"The value stream is transforming in terms of generating new clients and being able to grow, and where it is really playing out is in fulfilment," Kamler says. "We are in the middle of a really dynamic point in the industry's history. There is a lot of discussion, a lot of different models, but no clear winner at this point."

What is digital disruption?

What makes digital disruption noteworthy is the confluence of several factors that are enabling this period of change to proceed at an accelerated rate.

Firstly, digital disruption is being driven by outsiders - either new start-ups, or existing businesses with no traditional ties to the market they are disrupting, such as Apple entering into the payments market. These organisations generally have no pre-existing income from the activity they are disrupting, so they can move quickly to establish a position without undercutting existing revenue streams.

Many have raised significant funds from venture capital investors, enabling massive investment in technology and customer acquisition long before they are ever expected to be profitable. For example, the US-based robo-adviser Betterment raised US$60 million from venture investors in February 2015 on top of the US$45 million raised previously. Start-ups are also skilled at using technology to accelerate business development, such as by forgoing traditional offices or branches and engaging with customers via smartphone apps. And they are also adept at using new analytics tools to crunch through vast volumes of data to find actionable insights (an activity often referred to as 'Big Data'), to identify and attract new customers with targeted offers.

Start-ups innovate at a faster rate thanks to their adoption of agile processes based on the lean manufacturing techniques developed by the Japanese car industry in the last decade, which cut down on wastage in processes. Rapid prototyping and testing are also hallmarks of successful start-ups.

"The culmination of those things has resulted in the emergence of a lot of really interesting ideas that have been brought to market in a fast way using data, and are being measured much more effectively than traditional models have ever been able to do," Kamler says. But underlying these capabilities is a more fundamental shift in society itself. In the last two decades our increasing familiarity with the internet has fostered trust with online service providers, and a greater willingness to transact online for convenience.

At the same time, the proliferation of smartphones has led consumers to assume they can access any piece of information or service any time they want. This expectation of instant gratification is seen most clearly in younger generations – Gen Ys and Millennials – many of whom have never known a time before the internet and smartphones.

These generations also have higher expectations of customer service than their elders. A survey of American consumers released in April 2015 by Aspect Software found 55 per cent of millennial respondents' expectations for customer service had risen in the past three years, and that millennials were also most willing to self-serve.

Industry Development Officer at Optus, Allan Burdekin, says he is confident that the current generation of clients will want to retain human advisers, he is less certain about the next generation.

"The Gen Ys and millennials go directly to the internet and are happy to have a digital relationship," Burdekin says. "And they are more comfortable with it in many instances. So by the time we have reached into 2035, when these younger people are really starting to think about taking advice, they are going to be very comfortable in a digital world."

Who gets disrupted?

There are several factors that make an industry ripe for disruption. The first is having a group of incumbent providers who have grown complacent about the experience of their customers. Loyalty breaks down and they become willing to switch to new – even unusual – service models for a better experience. This behaviour can be seen in Uber's fight against the taxi industry.

Another necessity is having the means to easily reach consumers. Generally the key point of interaction for a digital disruptor is via an app on their customer's smartphone. Providing greater convenience can overcome any dissatisfaction felt through lack of human interaction, and cuts the cost of service.

Finally, the industry being targeted must also have sufficient margin to be worth attacking - even start-ups have to make money eventually. However, the low cost models pioneered by some start-ups are razor thin.

According to Nick Abrahams, partner at legal firm Norton Rose Fulbright and author of the book Digital Disruption in Australia: A guide for Entrepreneurs, Investors and Corporates, all of these factors have conspired to enable digital disruption to take place at a much faster pace than is traditionally seen in business.

"Uber is five years old, and look at the massive impact that it has had," Abrahams says. "So it is the speed at which change can occur which makes it disruptive."

It is the speed at which change can occur which makes it disruptive.

Disruption in financial advice

The most prominent example of disruption in financial services is so-called robo-advisers, who use software algorithms to make recommendations and manage portfolios with minimal human intervention. One of the attributes of robo-advice is that it enables product owners to effectively bypass advisers as their channel to investors.

Estimates of robo-advice's impact vary. A study by US-based researcher Corporate Insight is pegging funds under management as of December 2014 at US$19 billion, while MyPrivateBanking Research estimates this will grow to US$255 billion by 2020. No estimates are available for Australia.

And while it is easy to assume that disruptive ideas such as robo-advice might only appeal to younger customers, the partner in the Actuaries and Consultants division at Deloitte Stephen Huppert says this is not the case.

"It also includes high net worth individuals who want a bit more control and are putting in some of their money and dabbling," Huppert says.

According to Huppert, robo-advisers have proven particularly effective in servicing the large group of potential clients who do not currently have a human adviser.

"If you look at disruption theory, it is all about accessing parts of the market that traditional players don't access," Huppert says. "At the moment we have a lot of people with superannuation that are disengaged, and the traditional methods aren't working. And people are looking for different ways of engaging."

So while it is possible to see robo-advisers as competitors, according to Kamler they are more likely to play a role as decision-support tools for advisers.

"80 per cent of potential clients in the Australian market really don't have a relationship, so how do you engage with that population that aren't currently engaging with the industry at all?" Kamler asks "And potentially that is a place for robo-advice."

Macquarie Bank will soon launch its own robo-advice capability, Owners Advisory, which Kamler says can complement adviser's traditional services, or become the basis for new services that are delivered via non-traditional channels, such as mobile devices.

"It's about being able to attract a broader range of clients who aren't currently receiving advice - that's where I see the real opportunity within the space," Kamler says.

Robo-advisers today are relatively simple, but there is potential for more sophisticated systems to emerge thanks to rapid advances in the fields of machine learning and artificial intelligence.

One example is IBM's Watson platform, which uses a cognitive computing system that can absorb vast amounts of unstructured data and then use this to reach conclusions. Watson demonstrated this ably in 2011 when it beat the former champions of the US television quiz show Jeopardy!, and the platform has now been adopted in ANZ's Wealth Management division as a decision support tool.

According to IBM's Global Banking Leader for IBM Cognitive Solutions, Allan Harper, wealth managers face new challenges from the increase of information and growing demands of digitally-savvy clients. "Each day around 2.5 quintillion bytes of data are created – from financial reports and portfolio news to images and social media updates – and with that grows the challenge of finding the truly meaningful insights," Harper says. "To provide financial advice, wealth managers need to identify and act on emerging trends, spot opportunities and proactively serve their clients."

Harper says Watson's cognitive technologies can help wealth managers quickly assess vast volumes of evidence-based data and readily access relevant information. When coupled with wealth managers' experience and insights, he says Watson can enhance and help inform timely decision making.

Financial advice is also facing disruption through the growing number of asset classes that investors can participate in. One example is equity crowd funding, where sophisticated investors are able to pool funds to invest in venture capital-style rounds with early stage companies, through services such as VentureCrowd, Equitise and OurCrowd. In the US this model has also extended to property development, through startups such as Fundrise.

Responding to disruption

While the threat of disruption sounds daunting, Kamler says there are many factors working in the favour of traditional advisers. The first is the sheer experience they bring to the table, followed by the strength of the client relationships – something he says advisers will have to obsess about to create a differentiated client experience.

"Having a close proximity with their best clients, to help them shape their business model, is really key," Kamler says. "It is definitely an anchor of the model, and it is about moving from 'customer segments' of clients to a 'segment of one'."

He adds that the business model needs to be built in such a way that if the market shifts over the next 15 years the business can drift with it.

Another opportunity lies in the data that many advisers collect on clients, but which Kamler says is underutilised in many instances. "There is a lot of data that they can use to create additional opportunities to interact with clients," he says. "A simple tax return gives you massive insight into a client's situation, where you can actually ask some really great questions."

According to Deloitte's Partner in Assurance & Advisory, Andy Abeya, greater analysis of data can uncover new opportunities for service relationships. "When people are transacting through digital channels there is a lot more data and hopefully a lot better quality of data, and with that is the expectation that you will get more personalised services," Abeya says. "When you think about the evolution around behavioural economics, where you are collecting information around a customer’s personality and how that influences someone’s financial decisions, or segmenting them based on personality profiles, organisations haven't yet set up ways to collect that data."

Underlying all of this talk of change however is the truth for many advisers that if they want to continue to grow, they have to adapt.

According to Optus' Burdekin, it comes down to two choices, and both mean embracing disruption.

"Financial advisers have got to build applications and capabilities that meet the business need in always-on environments," Burdekin says. "They can ask how do they grow their legacy business into a digital business, or look at it the other way and keep the legacy business as the status quo, but build a brand new business focused on a digital model servicing new customers in a different way, and allow that to be their focus for that area of the market.

"And the other piece is an obsession around cost to service. It is about trying to drive efficiency gains and realise those in their business, and that is really about profitable growth."

Whatever path an adviser takes, it will most likely be better than taking no path at all, as Kamler says there is no going back. "The market will continue to evolve, so structuring your business to be adaptive is much more important than a traditional waterfall approach to change."


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