The Centre for Financial Services (CFS) of Vlerick Business School with the focus on the financial services sector is now up and running since a few years, and is increasingly focusing on two domains, first covering the regulatory changes and the impact on the strategies and business models of the financial institutions and second technological developments, digitalization and innovation in the financial services industry. Indeed, the financial services industry had first to deal with the fallout of the financial crisis including the regulatory changes, restructurings of businesses and balance sheet deleveraging. More recently, financial institutions are now realizing, while their structural profitability is severely affected by market conditions and risk containment, that the world around them is changing. Digitization has a profound impact on their customers, and new entrants are coming into their market particularly in domains where services can be improved without the regulatory constraints financial institutions have to face.
Through research, education and events and workshops, the CFS’s objectives as an expertise center are to help the financial industry to face the changing environment and evolve their business models to take advantage of these changes to better service their target customer base. Dialogue is an important part of the deliverables of the CFS expertise center to foster an interactive dialogue between stakeholders with contributions from academics, market practitioners and other stakeholders such as regulators. This edition of Dialogue is now already the 8th edition and the second one focusing on innovation, technological developments and FinTech.
After “Increased Regulations” the last few years, “Innovation” is now becoming the key word in the financial institutions strategies. A question that can be raised is: are financial institutions focusing on external innovation because of the fear they may (at least for part of the service chain) be disintermediated or because it offers opportunities to take advantage of customer changes? Indeed internal risk averse cultures, heavy legacy systems and regulatory constraints often stand in the way of new service developments. It is important for financial institutions to understand from that broad, diverse and complex FinTech world, how certain initiatives would affect them and their market. Insights in the FinTech world are important not only to understand possible impacts on the business model of the financial institution but also to provide interesting insights as reflection for possible new business models. Financial institutions also fear disruptive innovation from outside. Here it is key to understand how these initiatives may affect the offering of a financial institution, not only now but also over time. Indeed, disruptive innovation may start to attack a weak spot of the service offering of a financial institution such as a market segment that is considered as not strategically important. However, once the external potential disrupter has secured its place in that neglected market segment, it may expand into the core market segments of the financial institution leveraging capabilities for which it may become too late for that financial institution to adjust its service offering. Therefore, external innovation has to be part of the strategic agenda of a financial institution, it has to go beyond better understanding that market into:
- How it is linked to the financial institution’s current business model but also to what extent it can create insights of how the existing business model should be adapted to the new world.
- What is the best way to take advantage of strategically interesting innovation through partnerships (open or exclusive), acquisition, investment or simply support of the initiative to learn from it.
- Finally how to co-exist, adjust or integrate with the internal more risk averse and more internal focused culture.
In this edition, we have again informative contributions from different angles. Almost all financial institutions have undertaken initiatives to better understand and take advantage of the technological developments in the external world ranging from setting up infrastructures to support start up’s, going into partnerships with platforms which can help to accelerate moving into new services or improving existing ones, to investing in funds with a focus on FinTech companies to identify possible disrupters and possibly becoming interesting targets to acquire or partner with.
- The academic article from Steve Muylle, professor at the Vlerick Business School sets the stage distinguishing in the FinTech space between companies focusing on weak parts of the financial service chains with open platforms without having to be regulated and companies that do have banking licenses but with the objective to come up with new business models taking advantage of new technologies without having to deal with complex legacy banking systems incumbents have to face. He strongly makes the point that financial institutions have to become much more outside-in firms, that they will need to adapt to new partnerships where the customer relationship is disintermediated by a platform with all different types of stakeholders and that they will need to change their internal risk averse culture to become more entrepreneurs with an open mind. Freddy Van den Spiegel professor at the Vlerick Business School draws a parallel between the 60’s and now. Besides the lessons we should learn from that period, it is also important, Freddy states, to recognize that there also are important differences. Clients are now much more mobile, disrupters want to become owner of the client at least for certain services and finally the economic climate challenging the profitability of financial institutions in an overcrowded market.
- We have also two testimonies from CEO’s one from Max Jadot of BNParibasFortis and one from Bart Desmet from Ageas, showing the strategic importance of innovation for their companies. Max indicates that BNPParibasFortis wants to be a catalyst for innovation, on one hand through initiatives such as Co.Station to help entrepreneurs as a (potential) client to improve and expand their services and on the other hand through partnerships with platforms such as MyMicroInvest to broaden their transformation model to markets where otherwise they would not be competitive. Bart shows that given the increased sophistication and specialization, third-party partnerships, even non-conventional ones (beyond the more traditional ones like banks), will have to be embraced in order to take advantage of new technological and social developments in domains such as healthcare with wearable sensors and mobility with autonomous cars and others. Use of intelligent data will be key. Making it happen, he says, will require new partnerships to which he adds that this is in the DNA of insurers.
- We have two testimonies from executives who are leading the innovation efforts in their firms. While stating the fact that innovation is a must, they also focus on the challenges to foster change and openness to innovation. Erik Luts from KBC makes the point that performance and innovation have to go hand-in-hand. At KBC, he states, innovative projects driven by technology account for 40% and change-driven projects for 60% . Depending on the project, innovation can be done internally or if internal constraints or challenges are too difficult to face can be done from outside such as Mobile Vikings. Erik is a bit more relaxed about the possible impact of disrupters as long as the company focuses on performance and acts swiftly and pro-actively to move into relevant external partnerships. Peter De Wit and Guy Roosen from BeoBank give some examples whereby partnerships help to broaden customer solutions beyond the pure financial need. They also make the point that to fully leverage the potential of innovation, large scale and international reach may be a must to move from an interesting idea to a successful performing service.
- Technological development and the FinTech world is a very complex and rapidly changing world and if each financial institution wants to tackle these opportunities exclusively through its own individual initiatives, it is clear that mistakes will be made and investments be wasted. Wim de Waele, former CEO of i-Minds and now CEO of Eggsplore, sets out that the development of an ecosystem through a collaborative effort across all stakeholders (entrepreneurs, investors, financial institutions and academic institutions like business schools) is key to provide a better insight into the FinTech world. The ecosystem will help support the development of start-ups, create a productive environment for partnerships and finally link with international FinTech hubs to accelerate the expansion of FinTech companies. Lazaro Campos, as advisor on FinTech innovation, makes a similar point and talks about the creation of FinTechStage with as objective to bring entrepreneurs and stakeholders together to better understand the FinTech market and its trends and drivers and to create and link into FinTech ecosystems in all financial centers.
- In the overall FinTech context, legal issues surrounding external innovation cannot be disregarded such as concerning intellectual property in partnership structures, data privacy and such as concerning cybersecurity. Peter Van Elsen and Peter Van Dyck discuss these issues.
It is encouraging to see the financial institutions undertaking so many initiatives to better understand, support and hopefully medium to long term leverage these opportunities. However, the financial institutions should also ask themselves to what extent a silo approach is the best way forward and whether under the right conditions and for which scope cross-collaboration will not be a more optimal answer to create the right environment and develop open platforms to the benefit of the industry overall.
As can be drawn fro mthe above testimonies, education and knowledge are key to a better understanding of the Fintech market and transform these developments into successful opportunities to improve existing services or create new business models. The Vlerick Business School in general and through its financial services sector approach is committed to support these developments with relevant research and up-to-date education. Programs like Digital Strategy, Digital Leadership (both executive programs) and our Fintech Bootcamp (for master students) all enable participants to reflect, analyze and act on these new challenges.
Vlerick takes up its talent development role, working directly with both the stakeholders and new ecosystems which are part of the changing financial services landscape.
We appreciate receiving feedback and views.
Ignace R. Combes
Chairman Centre for Financial Services (Vlerick Business School)