Have you watched video on demand this week? Have you watched a game show being broadcasted this month? Have you sent an instant message this week? Have you sent and SMS this month? Have you opened a banking app this week? Have you gone to a banking branch this month?
Chances are high your answers are yes, no, yes, no, yes and no. Your habits have changed due to the digital revolution we are currently in the middle of. Thomas Cook is a symbol of this revolution. We book travel online and no longer through a travel agent. At least many of us. Traditions are changing and companies over a hundred years old can disappear overnight.
An industry who has not seen any major bankruptcies due to the digital revolution is financial services. This is about to change. Challenger banks are starting to occupy a sizeable part of the market. They are moving on from subsiding international payments to revenue generating loan and other products. Retail is being supplemented by business accounts. Mortgages are next on the disruption list. Will we soon see an over-a-century-old retail bank running into trouble? The unfortunate answer is yes. Will the digital revolution end there? The answer is no.
Let’s look at insurance for instance. Home insurance has the first disrupter, e.g. Lemonade, who has come up with digital business model which can drive incumbents out of the market. However car insurance is most likely to be affected because of a technology and habit change. The latest electric cars are computers on wheels and manufacturers, especially one, know exactly how you drive them and more importantly every day, how they drive you. Given that actuaries have no 30 years of data on self-driving cars, they come up with a pricing model which is on the overestimating risk side. This means that insurance for self-driving electric cars are on the high side and as such already one car manufacturer has decided to become a car insurer themselves. When cars transform into totally autonomous, they will move away from being owned by families to a subscription model. This will be the moment the car insurance market will implode and this new reality is not that many years away.
In general, selling retail insurance is a hard business in the GDPR era and it would be unsurprising if online retailers who sell us most of our current products would become insurance comparison websites as part of one of the many product categories they have disrupted in the last years.
Commercial insurance is likely going to become an artificial intelligence and big data victim, given that better data can predict and model risk better, there is room for high tech giants and other big data players to come and disrupt. Digital security cameras are especially vital in this new era; so is satellite data and the Internet of Industrial Things.
Financial services is full of intermediary firms who are most at risk of being made irrelevant through digital transformation, smart contracts and Uberization.
Also our workplace habits are changing. Decades of working for the same company is now the exception instead of the rule. Working for a different company in the morning compared to in the afternoon or evening will be the new normal. This will have profound effects on retirement savings and protection insurance products.
Investment management is changing as well. More and more companies are playing with new ways of raising money from crowdfunding through crypto currencies offerings. The amount of publicly traded companies is going down. Passive index funds are on a race to zero management fees. Social networks are trying to exchange physical money by stable crypto coins. If they succeed, which is a major if for now, we will see new players entering at unseen speeds.
Traditional actuaries, compliance and risk officers will be quick to point out that disrupting a regulated industry is not easy. Lots of disrupters will struggle with the vast amount of rules, we have seen some challenger banks run in trouble with. (Un)Fortunately the era of spreadsheet risk and compliance tracking is about to come to an end. Continuous deployment automation and launching of new features every day instead of every year, will transform this part of the industry and open up a path for disruption.
Should incumbents just sit back and relax? If they want to be Thomas Cooked, that would be a great move. Is agile and digital transformation going to be the answer? It is not helping retail banks fight the challenger banks, so why should it help the rest? The only answer is for financial institutions to become innovative tech companies themselves and to launch hundreds of new revenue generating products that are super targeted before others do. We need the Netflixes of financial services, no more digital blockbusters…
