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03 DECEMBER 2018
Preparing for time zero events

by Rita Gunther Mcgrath: Associate professor at Columbia Business School.

We cannot predict the future, but we can prepare in advance. So how do you develop early warning signs that things are about to change in an industry? One technique for identifying leading indicators is envisioning time zero events - concrete events that represent things that could have a big impact on a business.

As an example, let’s look at potential time zero events in financial services:

Event 1: Traditional consumer banking services become irrelevant for 50% of consumers

Imagine a self-driving, autonomous, financial life - a money-enabled life - with your personal financial advisor accessible wherever and whenever you want through your screen-based (mobiles, tablets) and voice enabled (like Amazon Echo and Google Home) technology.

As a result, banks are not needed anymore for traditional consumer banking. There will be almost no bank branches because mobile phone apps and online account management take their place. New fintech solutions to consumer banking services (a combination of bank/financial advisor applications) with the convergence of technology will allow companies such as Amazon to be able to access your accounts and buy products for you without your having to think about it (e.g. daily goods that are usually bought on a frequent basis—food, toilet paper, detergent, others), or buying other products through voice-enabled technology.

Meanwhile, crowd-lending platforms and fintechs become so powerful in credit default prediction that they become the cheapest and easiest platform for lending.

Event 2: AI creates radical transparency across 50% of the business

Imagine a world in which AI-enabled financial advisors can help you manage your money in ways that are difficult or inconvenient today. Such systems will tell you, for instance, that it’s time to move your utility provider because it is actively comparing offers by providers with your usage and expenditure patterns. It could tell you that it is time to change your credit card to save you X amount on interest. It could tell you the least expensive way to send money overseas.

As a recent Accenture report on trends in banking says:

“While customers trust banks to hold their money and personal data, they are skeptical about banks always providing advice and services that benefit them. One of the promises of artificial intelligence (AI) in banking is to reverse this erosion in customer trust and start providing contextual, holistic advice that is truly in customers’ best interest. Simple to say, but tough to do. It will mean material cannibalisation of existing revenue streams, the end of product silos, and a level of radical transparency unfamiliar to most banks. Yet, if banks fail to use digital technology to replicate the banking intimacy in the fictional town of Bedford Falls, then someone else will do it for them and, in the process, bypass banks altogether.

We are therefore likely to see the first concerted attempts by banks to secure their own long-term future by using AI to always do the right thing for their customers, regardless of the short-term impact on profit.”

Event 3: Technology companies capture 25% of traditional “banking” revenue

In this scenario, non-bank tech giants such as Google, Apple, Tencent, and Alibaba and fintechs such as Revolut attack banks in payments, lending, or foreign exchange for retail clients. These new competitors will open up entirely new kinds of services and enjoy substantial growth, while traditional banks will cannibalise themselves on constantly shrinking revenue pools.

An Amazon bank account offering, for example, lending and deposit as well as easy payment solutions when ordering from Amazon online could attract lots of customers from the incumbent banks. Would customers consider this as an option?

In addition to the big players, more and more so-called fintechs appear on the market, fulfilling the customer preferences of simplicity, convenience, availability, speed, transparency, and reliability by offering banking products such as online-only bank accounts. Some of these challenger banks have already obtained a banking license and are also able to run business models with free bank accounts and free payments abroad. Customers compare their experiences in this online world with the services of the traditional banks.

Event 4: Open banking arrives and more than 50% of customers give their permission to share their data with third parties

In 2018, the UK put into place the PSD2 (Second Payment Services Directive) to require the UK’s 9 largest banks to share information outside their walls in a secure, standardised format. This initiative was motivated by several perceptions among regulators: that there was insufficient competition for customers, that customers were over-paying for things like overdraft fees, and that money was just sitting in accounts failing to reward the consumer with interest on savings.

While it is not clear yet what services will be developed as a result of the move toward open banking, the potential to completely rewire the banking sector is significant. As an analogy, who could have predicted that Google’s mapping project would facilitate the founding and growth of geolocation dependent services such as Uber?

Open banking has the potential to create a massive shift of power to consumers, as their data is no longer locked away in legacy transaction systems. For example, data that would support giving loans to people with “thin files” of conventional information could potentially open up entirely new customer segments for related services.

As McKinsey defines it, “Open banking can be defined as a collaborative model in which banking data is shared through APIs between two or more unaffiliated parties to deliver enhanced capabilities to the marketplace.”

Among the practices that open banking is likely to change is the current model employed by many fintech firms of “screen scraping,” in which users provide their actual logon credentials to a third party, which gives them far broader access to user information than is necessary and creates a major security risk.

After we identify time zero events like these, we can start to work backward: What would have to be true six months before time zero for that to occur? Twelve months before time zero? Eighteen months before time zero? By doing this exercise, you can gather relevant data and begin to create a bigger picture.

If you’re right about these time zero events and you’re able to prepare before anyone else in the industry, you will gain a major competitive advantage.
Useful resources:

Rita Gunther McGrath
Rita McGrath works extensively with leadership teams in Global 1000 companies who wish to develop their capability to drive growth. Visit our InfoCentre or website.

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