Claudio Scardovi Digital Transformation in Financial Services Digital Transformation in Financial Services Claudio Scardovi Digital Transformation in Financial Services 123 Claudio Scardovi AlixPartners London UK ISBN 978-3-319-66944-1 ISBN 978-3-319-66945-8 (eBook) DOI 10.1007/978-3-319-66945-8 Library of Congress Control Number: 2017951149 © Springer International Publishing AG 2017 This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. 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Printed on acid-free paper This Springer imprint is published by Springer Nature The registered company is Springer International Publishing AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland Foreword Everywhere we look, digital transformation is at the top of the agenda. Publications, think tanks, consulting firms (including the one I lead) all have views on how digital transformation will rewrite the future of industries—and especially the future of the financial services industry. Most agree, generally, on what digital transformation is: the profound impact of digital technologies on business activities, processes, and models. But they often disagree on how best to address it. How can organizations meet the challenges and seize the opportunities that digital transformation presents? How can companies develop the methods and tools they need to evolve their businesses in the right ways to truly become “digital”? These are the questions that Claudio seeks to answer in this book. To do so, he offers an approach that he argues could help banking and financial services insti- tutions to digitally transform while also becoming more stable and more profitable. Specifically, he says these companies should: • take advantage of the dramatically increased availability of data and real-time information; • use machine learning/AI to build more organizational intelligence; • evolve a more inclusive, interconnecting intermediation model; • develop solutions that add value to the overall economic ecosystem rather than playing a zero-sum game; and finally • earn and trade on the trust that is central to the stability of the overall global financial system but that is often much more readily given to purely digital players. Companies that take this approach could evolve into a new, digital breed of financial services institution: what he calls the “synapses bank”. The “synapses bank” connects its various activities and partners in mutually beneficial ways, in much the same way that synapses connect neurons in a human brain. And in doing so, the “synapses bank”, like the human brain, forms a whole that is greater than the sum of its parts. In Claudio’s vision, financial services institutions that use digital v vi Foreword technology to find new ways to add value rather than just extract it would become both more stable and more profitable. Claudio does not predict that this “synapses bank” is the future of the financial services industry. But he does argue that it is an ambition worth considering. And he offers it as a lens through which to understand the financial services industry’s successful and failed attempts at innovation and transformation—from payments to lending to risk management and insurance. And in doing so, he invites us to have a glimpse of what might be possible along the digital transformation journey. Simon Freakley CEO AlixPartners Acknowledgements With special thanks to Daniele Del Maschio and Andrea Rossi for their continued support and help in the development of this book. vii Contents 1 Unbearable Lightness of Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 Unbearable Lightness, and Leverage. . . . . . . . . . . . . . . . . . . . . 1 1.2 Time (and Space) Lapses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.3 Capital Velocity (and Density) . . . . . . . . . . . . . . . . . . . . . . . . . 6 1.4 Intangible like Money. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 1.5 Unsafe as a House . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 1.6 Imbalanced, Disrupted and Dislocated . . . . . . . . . . . . . . . . . . . 14 2 Synapses in the Global Financial System. . . . . . . . . . . . . . . . . . . . . . 19 2.1 Synapses and Syndesis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 2.2 Five Senses: One . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 2.3 Five Senses: Two . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 2.4 Five Senses: Three . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 2.5 Five Senses: Four . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 2.6 Five Senses: Five . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 2.7 Data, Going Open. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 3 In Transformation We Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 3.1 The Risk of the Frog . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 3.2 Death by a Hundred Technologies . . . . . . . . . . . . . . . . . . . . . . 34 3.3 BBVA: Rebooting Digital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 3.4 Conquistadores, Bit by Bit . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 3.5 Goldman Sachs: The Remaining 99 . . . . . . . . . . . . . . . . . . . . . 42 3.6 Digital Goldman . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 4 Cyber Capital at Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 4.1 Credibility to Gain, Trust to Lose . . . . . . . . . . . . . . . . . . . . . . . 47 4.2 War on Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 4.3 Cybergeddon: Watch Your Bytes . . . . . . . . . . . . . . . . . . . . . . . 51 4.4 Quantum Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 4.5 Cyber Trust as Scarce Resource . . . . . . . . . . . . . . . . . . . . . . . . 55 4.6 CISO in Cyberspace . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 4.7 Banking on the Basics: One . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 4.8 Banking on the Basics: Two. . . . . . . . . . . . . . . . . . . . . . . . . . . 62 ix x Contents 5 Digital Transformation in Payments . . . . . . . . . . . . . . . . . . . . . . . . . 65 5.1 Payments in Paper-Less Societies . . . . . . . . . . . . . . . . . . . . . . . 65 5.2 Breaking up the Payments Value Chain . . . . . . . . . . . . . . . . . . 68 5.3 Closed Loop . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 5.4 The Opportunities for a Synapses Bank . . . . . . . . . . . . . . . . . . 74 5.5 Distributed, Therefore Exists. . . . . . . . . . . . . . . . . . . . . . . . . . . 75 5.6 If the Bank Wears Prada. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 5.7 Loyalty for the Public Good . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 6 Transformation in Funding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 6.1 People’s Cyber Capitalism . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 6.2 Artificial Investing and Real Life . . . . . . . . . . . . . . . . . . . . . . . 88 6.3 Dealing Digital for Digital Dealing. . . . . . . . . . . . . . . . . . . . . . 90 6.4 Everybody Is a Dealer Now . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 6.5 Artificial Retail, Banking on Intelligence . . . . . . . . . . . . . . . . . 94 6.6 Understanding Customers’ Customers. . . . . . . . . . . . . . . . . . . . 97 6.7 Shifting Channels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 7 Transformation in Investment Management . . . . . . . . . . . . . . . . . . . 105 7.1 Money Management, Power to People . . . . . . . . . . . . . . . . . . . 105 7.2 Better Mouse Trap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 7.3 Investment Synapses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 7.4 Wine and Dine 2.0 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 7.5 Ex-Ex: Extended Externalisers . . . . . . . . . . . . . . . . . . . . . . . . . 114 7.6 Trading Machines: Faster, Smarter, Richer? . . . . . . . . . . . . . . . 117 7.7 Capitally Connected Markets . . . . . . . . . . . . . . . . . . . . . . . . . . 119 7.8 Market Utilities: Clubbing Together . . . . . . . . . . . . . . . . . . . . . 122 8 Transformation in Lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127 8.1 Lending: A Social Business . . . . . . . . . . . . . . . . . . . . . . . . . . . 127 8.2 Creditworthy: A “Witticism” . . . . . . . . . . . . . . . . . . . . . . . . . . 128 8.3 Alternative Lending Models . . . . . . . . . . . . . . . . . . . . . . . . . . . 131 8.4 From Retail Banking to Retailers Banking . . . . . . . . . . . . . . . . 134 8.5 Alternative Models of Deposit Taking . . . . . . . . . . . . . . . . . . . 137 8.6 Buying and Selling Money—Like a Brain . . . . . . . . . . . . . . . . 138 8.7 The Future of Buying and Selling Money . . . . . . . . . . . . . . . . 140 9 Transformation in Risk Management . . . . . . . . . . . . . . . . . . . . . . . . 143 9.1 At the Core: Holistic, Proactive, Integrated. . . . . . . . . . . . . . . . 143 9.2 Credit Scoring: Mind the Present . . . . . . . . . . . . . . . . . . . . . . . 145 9.3 Granting Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148 9.4 Credit Work Out: Getting Digital . . . . . . . . . . . . . . . . . . . . . . . 151 9.5 Digital Risk Management: Optimizing the Trade off. . . . . . . . . 154 Contents xi 9.6 Shifting the Isoquant. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156 9.7 Bricks After the Storm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157 9.8 Real Estate, in Real Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160 10 Transformation in Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163 10.1 Next “In-Line” or Next “On-Line”? . . . . . . . . . . . . . . . . . . . . . 163 10.2 Beyond the “On-Line” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166 10.3 Digital-Insuring, at Your Peril. . . . . . . . . . . . . . . . . . . . . . . . . . 169 10.4 Mutually Insured, Completely Electronic . . . . . . . . . . . . . . . . . 174 10.5 Healthy as an Insurer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177 10.6 Claim What?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181 10.7 Synapses in Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183 11 Digital for the Greater Good . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187 11.1 Innovation, Here to Stay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187 11.2 Digital for Good . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189 11.3 A New Way of Digital Living . . . . . . . . . . . . . . . . . . . . . . . . . 192 11.4 A “Digitally” Inverted Pyramid . . . . . . . . . . . . . . . . . . . . . . . . 194 11.5 Data Divide (et Impera) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196 11.6 Data Addicted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199 11.7 Synapse Yourself and Break Free . . . . . . . . . . . . . . . . . . . . . . . 201 11.8 (Block) Chain Reaction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202 12 The Synapses Challenge Ahead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207 12.1 The Sky Is the Limit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207 12.2 Bank, Alexa Bank Is My Name . . . . . . . . . . . . . . . . . . . . . . . . 208 12.3 The “Next” Amazon in Financial Services . . . . . . . . . . . . . . . . 211 12.4 From Wall Street to Chinese Walls. . . . . . . . . . . . . . . . . . . . . . 215 12.5 Building Tunnels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216 12.6 Digital “In a Box” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 218 12.7 Digital Minds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222 12.8 Digital Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224 12.9 I, Robot. You, Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 226 12.10 Out-of-the-Box: Getting IT and Business Together. . . . . . . . . . 229 12.11 Synapsezation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231 Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235