If you’re old enough, think back to telecommunications and media in the 1990s. Everything was purchased separately: local calls, long distance calls, cellular phones, dial-up Internet, cable or satellite TV feeds and content.
Back then, there were separate distinct industries for telco, cable, Internet service providers and content. And then the world changed; technology developments and changing regulation contributed to the industries converging.
In fact a new sector was launched in the US S&P 500 at the beginning of October. The “Communication Services” sector now represents what were once three separate, distinct areas: telecommunications (with AT&T and Verizon), technology (with Facebook, Google) and consumer discretionary/content (with Disney and Netflix) – all in the same basket. This would have been unthinkable 25 years ago!
The same transformative change that resulted in Communications Services is now happening in financial services and technology. Financial services companies have long dedicated huge parts of their budgets to IT. According to Citi, banks have one of the highest median IT expenses as a percentage of revenues – almost two to three times that of other major industries.
So it’s no surprise when financial services firms claim being a tech company.
Of course, when we look at tech companies, we see the reverse image. These companies function as platforms with capabilities spanning across countries, segments, businesses, services and goods. They have large user bases with volumes of data that is voluntarily offered up. They are digitally native platforms that have been developed to facilitate the analysis of data so that it can be acted on. And while they haven’t declared it, or secured banking licenses, big tech has been moving into banking for a couple years now.
And together with challenger banks and fintechs, big tech companies are focused directly on the soft underbelly of banking – origination and – the tasty, profitable pieces that subsidize the more commoditized pieces of traditional banking business.
Naturally, these challenges are identified by global FSI executives as disruptive factors facing the industry today. According to the World Retail Banking Report 2018 by Efma and Capgemini , close to 50% of executives surveyed identified fintechs and big techs as a competitive threat.
Almost an additional 30% identified other non-traditional banking competitors from telcos and retailers as threats to the traditional banking value chain. Emerging technologies like blockchain & AI concern half of the executives. But it is the impact made by blurring industry lines, together with emerging technologies, that result in the biggest concern: over 70% of executives identify meeting customer expectations as a competitive threat. These worries are in addition to the perennial concerns in FSI: regulation, demand for digital, costs and margin pressures and the overall macro environment.
In my next blog, we’ll consider the implications of industry convergence & the actions required to be successful for when worlds collide.